What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-01-31 compared with 2021-10-29 · 144 added, 102 removed, 270 unchanged (48% of the section changed)

30 unchanged sentences

EXECUTIVE OVERVIEW

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

Highlights from the six months ended December 31, 2021 include:

10% 80 basis points

9 unchanged sentences

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.

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.

The global COVID-19 pandemic has had a significant impact on the global business environment and on our clients and we continue to advance and offer our 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 throughout the pandemic to help clients understand and navigate the governmental relief that has been adopted globally.

In addition, we continue to add features to our 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.

In the second quarter, we achieved new product milestones as we continue to invest in our portfolio.

We made further progress towards the development of a new, unified user experience, and we introduced this modernization to our RUN Powered by ADP ® and Next Gen HCM client bases in the U.S.

and to our iHCM client base in Europe.

We reached a milestone of processing one million pay slips for a single client, on a single day, for the first time in our history.

At the other end of the spectrum, we continued to see growth in our new Roll™ by ADP mobile application, which serves the micro segment.

Innovation is inherent in ADP’s business, and we have a growing, agile research and development organization committed to delivering solutions in the market that redefine what HCM solutions can do for employers.

For the six months ended December 31, 2021, we delivered solid revenue growth of 10%.

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 six months ended December 31, 2021 as compared to the six months ended December 31, 2020.

PEO average worksite employees increased 15% for the six months ended December 31, 2021, as compared to the six months ended December 31, 2020.

This remains a very dynamic and challenging business environment for our clients and prospects, but we believe the value of working with a leading, world class provider like ADP has become more compelling than ever.

We see evidence of this reflected in our continued sales momentum, as well as our very high levels of client satisfaction and retention, which continue to drive our positive financial results.

We have a strong business model, generating significant cash flows 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.

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

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

For the three months ended September 30, respectively:

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

Total Revenues Total Revenues

9% YoY Growth

10% YoY Growth

9% 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 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.

10% YoY Growth, Organic Constant Currency

Revenues for the three and six months ended December 31, 2021 increased due to strong client 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 each of our reportable segments, Employer Services and Professional Employer Organization (“PEO”) Services.

Total revenues for the three months ended December 31, 2021 include interest on funds held for clients of $106.0 million, as compared to $105.4 million for the three months ended December 31, 2020.

The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 28.4% to $32.2 billion for the three months ended December 31, 2021, partially offset by the decrease in our average interest rate earned to 1.3% for the three months ended December 31, 2021, as compared to 1.7% for the three months ended December 31, 2020.

Total revenues for the six months ended December 31, 2021 include interest on funds held for clients of $207.1 million, as compared to $211.9 million for the six months ended December 31, 2020.

The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.4% for the six months ended December 31, 2021, as compared to 1.8% for the six months ended December 31, 2020, partially offset by an increase in our average client funds balances of 25.5% to $29.6 billion for the six months ended December 31, 2021.

Total Expenses

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

Change 2021 2020 %

Costs of revenues:

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Total expenses $ 3,141.9 $ 2,892.1 9 % $ 6,102.2 $ 5,622.7 9 %

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.

For the three and six months ended December 31, 2021, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs to $863.9 million from $765.9 million for the three months ended December 31, 2021 and 2020, respectively, and to $1,703.4 million from $1,507.0 million for the six months ended December 31, 2021 and 2020, respectively.

Additionally, operating expenses increased due to increased costs to service our client base in support of our growing revenue.

Systems development and programming costs increased for the three and six months ended December 31, 2021 due to increased investments and costs to develop, support, and maintain our new and existing products.

Selling, general and administrative expenses increased for the three months ended December 31, 2021 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses, increased amortization of costs to obtain a contract under ASC 606, and increased travel expenses.

Selling, general and administrative expenses increased for the six months ended December 31, 2021 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses, increased amortization of costs to obtain a contract under ASC 606, and increased travel expenses.

Interest expense increased for the three and six months ended December 31, 2021 primarily due to the issuance of a 7-year fixed-rate note totaling $1.0 billion issued in the fourth quarter of fiscal 2021, as compared to the three and six months ended December 31, 2020.

Other (Income)/Expense, net

Three Months Ended

September 30,

2021 2020 $ Change

Three Months Ended Six Months Ended

December 31, December 31,

2021 2020 $ Change 2021 2020 $ Change

Interest income on corporate funds $ (8.5) $ (10.4) $ (1.9) $ (18.2) $ (24.3) $ (6.1)

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Other (income)/expense, net $ (26.6) $ (29.0) $ (2.4) $ (55.4) $ (54.0) $ 1.4

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 September 30, respectively:

For the three months ended December 31:

Earnings Before Income Taxes Margin

9% 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.

10 bps YoY Increase

For the six months ended December 31:

Earnings Before Income Taxes Margin

13% YoY Growth

80 bps YoY Increase

Earnings before income taxes increased for the three and six months ended December 31, 2021, respectively, due to the components discussed above.

Margin increased for the three and six months ended December 31, 2021 due to increases in revenues, discussed above, partially offset by increased costs to service our client base in support of our growing revenue, and incremental pressure from growth in our zero-margin benefits pass-throughs.

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

For the three months ended September 30, respectively:

For the three months ended December 31:

Adjusted EBIT Adjusted EBIT Margin

10% YoY Growth

á 140 bps YoY Growth

20 bps YoY Increase

For the six months ended December 31:

Adjusted EBIT Adjusted EBIT Margin

13% YoY Growth

80 bps YoY Increase

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 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.

The effective tax rate for the three months ended December 31, 2021 and 2020 was 23.7% and 22.2%, respectively.

The increase in the effective tax rate is primarily due to benefits from a foreign tax election in the three months ended December 31, 2020, partially offset by a favorable earnings mix in the three months ended December 31, 2021.

The effective tax rate for the six months ended December 31, 2021 and 2020 was 23.0% and 21.8%, respectively.

The increase in the effective tax rate is primarily due to combined benefits from adjustments to prior year tax liabilities and a foreign tax election in the six months ended December 31, 2020, partially offset by an increase in the excess tax benefits on stock-based compensation and a favorable earnings mix in the six months ended December 31, 2021.

Adjusted Provision for Income Taxes

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

The adjusted effective tax rate for the three months ended December 31, 2021 and 2020 was 23.7% and 22.2%, respectively.

The adjusted effective tax rate for the six months ended December 31, 2021 and 2020 was 23.0% and 21.8%, respectively.

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

Net Earnings and Diluted EPS

For the three months ended September 30, respectively:

For the three months ended December 31:

Net Earnings Diluted EPS

7% YoY Growth

9% 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.

For the six months ended December 31:

Net Earnings Diluted EPS

12% YoY Growth

13% YoY Growth

For the three and six months ended December 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 December 31, 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 2.0 million shares during the three months ended December 31, 2021 and 1.6 million shares during the three months ended December 31, 2020, partially offset by the issuances of shares under our employee benefit plans.

For the six months ended December 31, 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 4.6 million shares during the six months ended December 31, 2021 and 3.2 million shares during the six months ended December 31, 2020, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted EPS

For the three months ended September 30, respectively:

For the three months ended December 31:

Adjusted Net Earnings Adjusted Diluted EPS

7% YoY Growth

9% YoY Growth

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

For the six months ended December 31:

Adjusted Net Earnings Adjusted Diluted EPS

11% YoY Growth

13% YoY Growth

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

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended

September 30, % Change

Three Months Ended % Change Six Months Ended

December 31, December 31, % Change

Reported Organic constant currency 2021 2020 As

Reported Organic constant currency

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PEO Services 1,358.8 1,186.1 15 % 15 % 2,622.9 2,282.0 15 % 15 %

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

Other (4.7) (1.0) n/m n/m (8.0) (2.9) n/m n/m

$ 4,025.4 $ 3,695.7 9 % 9 % $ 7,857.7 $ 7,166.5 10 % 10 %

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Three Months Ended %

September 30,

Change Six Months Ended %

December 31, December 31,

2021 2020 As Reported 2021 2020 As

Employer Services $ 817.3 $ 758.6 8 % $ 1,601.3 $ 1,447.8 11 %

PEO Services 212.7 187.4 14 % 405.7 346.8 17 %

Other (76.2) (83.5) n/m

Other (119.9) (113.4) n/m (196.1) (196.8) n/m

$ 910.1 $ 832.6 9 % $ 1,810.9 $ 1,597.8 13 %

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Employer Services

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.

Revenues increased for the three months ended December 31, 2021 due to strong retention and new business started from New Business Bookings, and an increase in our pays per control of 6%.

Revenues increased for the six months ended December 31, 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 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,

Employer Services' earnings before income taxes increased for the three and six months ended December 31, 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 investments and costs to develop, support, and maintain our new and existing products.

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

ES Margin ES Margin

40 bps YoY Increase

90 bps YoY Increase

Employer Services' margin increased for the three and six months ended December 31, 2021 due to increases in revenues, discussed above, partially offset by increased costs to service our client base in support of our growing revenue and investments and costs to develop, support, and maintain our products.

Three Months Ended Change Six Months Ended Change

December 31, December 31,

2021 2020 $ % 2021 2020 $ %

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PEO Services' revenues excluding zero-margin benefits pass-throughs $ 494.9 $ 420.2 $ 74.7 18 % $ 919.5 $ 775.0 $ 144.5 19 %

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.

PEO Services' revenue increased 15% and for the three and six months ended December 31, 2021, respectively, due to an increase in zero-margin benefits pass-throughs, and increases in average worksite employees of 16% and 15% for three and six months ended December 31, 2021, respectively, as compared to the three and six months ended December 31, 2020.

Earnings before Income Taxes

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.

PEO Services' earnings before income taxes increased 14% and 17% for the three and six months ended December 31, 2021, respectively, due to increased revenues discussed above, partially offset by the increases in zero-margin benefits pass-through costs of $98.0 million and $196.4 million for the three and six months ended December 31, 2021, respectively.

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

PEO Margin PEO Margin

10 bps YoY Decrease

30 bps YoY Increase

PEO Services' margin decreased for the three months ended December 31, 2021 due to increases in zero-margin pass through costs, partially offset by an increase in revenues, discussed above.

PEO Services' margin increased for the six months ended December 31, 2021 due to an increase in revenues, discussed above, partially offset by increases in zero-margin pass through costs.

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

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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.

ADP Indemnity recorded a pre-tax benefit of approximately $3.7 million and $14.6 million for the three and six months ended December 31, 2021, as compared to approximately $4.8 million and $15.2 million for the three and six months ended December 31, 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

September 30,

2021 2020 As Reported

Three Months Ended % Change Six Months Ended % Change

December 31, December 31,

2021 2020 As Reported 2021 2020 As Reported

Net earnings $ 694.4 $ 647.5 7 % $ 1,394.9 $ 1,249.6 12 %

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

(b) In the three months ended September 30, 2021, transformation initiatives include gain on sale of assets and net reversals of charges related to other transformation initiatives, including severance.

(b) In the three months ended December 31, 2021, transformation initiatives include consulting costs relating to our company wide transformation initiatives.

In the six months ended December 31, 2021, the charges include consulting costs relating our company wide transformation initiatives offset by gain on sale of assets and net reversals relating to severance.

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

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The 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

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

Consolidated revenue growth as reported 9 % 10 %

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCE S

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

As of December 31, 2021, cash and cash equivalents were $1.7 billion, which were primarily invested in time deposits and money market funds.

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

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

Our financial condition remains solid at December 31, 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 three months ended September 30, 2021 and 2020, respectively, are summarized as follows:

Three Months Ended

September 30,

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

Six Months Ended

2021 2020 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 7,391.0 $ 9,074.9 $ (1,683.9)

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.

Net cash flows provided by operating activities increased due to growth in our underlying business (net income adjusted for non-cash adjustments), offset by a net unfavorable change in the components of operating assets and liabilities which includes an increase in incentive compensation payments as compared to the six months ended December 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 $2,504.1 million, and higher payments related to acquisitions of intangibles and a business, offset by proceeds from the sale of property, plant, and equipment in the six months ended December 31, 2021.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $1,379.4 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, and settlement of cash flow hedges in the six months ended December 31, 2020.

These were partially offset by an increase in repurchases of common stock in the six months ended December 31, 2021.

We purchased approximately 4.6 million shares of our common stock at an average price per sha re of $213.79 duri ng the six months ended December 31, 2021, as compared to purchases of 3.2 million shares at an average price per share of $149.39 during the six months ended December 31, 2020.

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

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

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

At December 31, 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

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2021 2020 2021 2020

Average daily borrowings (in billions) $ 1.9 $ 1.8 $ 1.9 $ 2.1

Weighted average interest rates 0.1 % 0.1 % 0.1 % 0.1 %

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

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

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

At December 31, 2021 there were no outstanding obligations related to reverse repurchase agreements.

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

Details of the reverse repurchase agreements are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2021 2020 2021 2020

Average outstanding balances $ 228.4 $ 83.2 $ 211.7 $ 117.8

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

We had no borrowings through September 30, 2021 under the credit facilities.

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

We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder and we are not aware of any conditions that would prevent us from borrowing part or all of the $9.7 billion available to us under the revolving credit agreements.

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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.

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

In addition, we own U.S.

3 unchanged sentences

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

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

Capital expenditures for the six months ended December 31, 2021 were $74.1 million, as compared to $79.7 million for the six months ended December 31, 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.

10 unchanged sentences

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 or not reinvest maturing 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.

12 unchanged sentences

Details regarding our overall investment portfolio are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2021 2020 2021 2020

Average investment balances at cost:

8 unchanged sentences

Net realized (gains)/losses on available-for-sale securities $ (0.4) $ (7.7) $ (0.5) $ (8.0)

September 30, 2021 June 30, 2021

December 31, 2021 June 30, 2021

Net unrealized pre-tax gains on available-for-sale securities $ 123.8 $ 502.2

3 unchanged sentences

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

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.

The annu alized interest rate earned on our entire p ortfolio decreased from 1.7% for the six months ended December 31, 2020 to 1.3% for the six months ended December 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 $23 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 2022.

We are exposed to credit risk in connection with our available-for-sale securities through the possible inability of the borrowers to meet the terms of the securities.

19 unchanged sentences

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