What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-04-29 · 131 added, 167 removed, 243 unchanged (55% of the section changed)

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

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

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

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

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

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

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

competitive conditions;

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

and supply-chain disruptions.

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

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EXECUTIVE OVERVIEW

Highlights from the nine months ended March 31, 2022 include:

Highlights from the three months ended September 30, 2022 include:

10% 50 basis points

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6% Employer Services

Pays Per Control 16% PEO Services

Pays Per Control Growth 12% PEO Services

Average Worksite Employee Growth

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

The business environment for our clients has evolved continuously since our founding, and the current global pandemic has come to represent yet another factor adding complexity to that environment.

The business environment for our clients has evolved continuously since our founding.

Our HCM solutions, which include both software and outsourcing services, are designed to help our clients manage their workforces through this dynamic landscape and the changing world of work.

We are continuously seeking to enhance our leading HCM solutions to further support our clients.

During the third quarter, we continued our roll-out of a new unified user experience ("UX") across our key platforms.

Clients across our RUN, iHCM, and Next Gen HCM client bases have transitioned over to the new UX and we believe will now benefit from more intuitive HCM workflows within these key platforms.

This quarter we made progress on the roll-out of the new UX to Workforce Now, and also began the roll-out of the new UX to the ADP Mobile app, used by over 10 million active users.

We also enhanced our data offerings during the quarter.

Data continues to be one of ADP’s differentiators, and this quarter we began piloting our new Global Insight Dashboard powered by DataCloud, enabling clients outside the US to leverage the same award-winning analytics platform we have scaled in the US .

For the nine months ended March 31, 2022, 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 nine months ended March 31, 2022 as compared to the nine months ended March 31, 2021.

PEO average worksite employees increased 16% for the nine months ended March 31, 2022, as compared to the nine months ended March 31, 2021.

During the first quarter, we continued our roll-out of a new unified user experience ("UX") across our strategic products and solutions, which we believe will position our clients to benefit from a more intuitive design and set of HCM workflows.

This quarter we continued with the roll-out of the new UX to Workforce Now, one of our most critical platforms.

We also re-launched the ADP RUN mobile app, which is designed for HR practitioners running payroll and HR for our U.S.

small business clients.

In addition, this quarter we won Top HR Product for the 8th year in a row at the annual HR Tech conference, recognized for our new Intelligent Self-Service offering.

This award highlights our track record of continuously innovating solutions that enhance the HCM experience of our clients and their workers, and we believe our Intelligent Self-Service further eliminates work for our clients by preventing, solving, and/or better tracking HR matters with their workers.

For the three months ended September 30, 2022, we delivered solid revenue growth of 10%, 11% organic constant currency.

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 6% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

PEO average worksite employees increased 12% for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

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 re-investments, our longer term strategy, and our commitments to shareholder friendly actions.

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 re-investments, longer term strategy, and 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.

ADP was recently named one of Fortune’s Most Admired Companies for the 16th year in a row, which highlights our culture of continuous improvement, our consistency, and our focus on being a true partner to our clients as the world continues to change.

Our financial condition remains solid at March 31, 2022 and we remain well positioned to support our associates and our clients.

Our financial condition remains solid at September 30, 2022 and we remain well positioned to support our associates and our clients.

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

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

Total Revenues Total Revenues

10% YoY Growth

For the three months ended September 30, respectively:

Three Months Ended

September 30,

Total Revenues 4,215.6 3,832.3

YoY Growth 10 % 10 %

YoY Growth, Organic Constant Currency 11 % 10 %

10% YoY Growth, Organic Constant Currency

Revenues for the three months ended March 31, 2022 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, partially offset by one percentage point of pressure from foreign currency.

Revenues for the nine months ended March 31, 2022 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 March 31, 2022 include interest on funds held for clients of $118.0 million, as compared to $107.4 million for the three months ended March 31, 2021.

The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 15.0% to $38.1 billion for the three months ended March 31, 2022, partially offset by the decrease in our average interest rate earned to 1.2% for the three months ended March 31, 2022, as compared to 1.3% for the three months ended March 31, 2021.

Total revenues for the nine months ended March 31, 2022 include interest on funds held for clients of $325.0 million, as compared to $319.2 million for the nine months ended March 31, 2021.

The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 21.2% to $32.4 billion for the nine months ended March 31, 2022, partially offset by the decrease in our average interest rate earned to 1.3% for the nine months ended March 31, 2022, as compared to 1.6% for the nine months ended March 31, 2021.

Revenues for the three months ended September 30, 2022 increased due to strong client retention, new business started from New Business Bookings in prior quarters, an increase in zero-margin benefits pass-throughs, and an increase in our pays per control, partially offset by an unfavorable impact of one percentage point from foreign currency.

Total revenues for the three months ended September 30, 2022 include interest on funds held for clients of $141.0 million, as compared to $101.1 million for the three months ended September 30, 2021.

The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 9.5% to $29.4 billion for the three months ended September 30, 2022, and an increase in our average interest rate earned to 1.9% for the three months ended September 30, 2022, as compared to 1.5% for the three months ended September 30, 2021.

Total Expenses

Three Months Ended Nine Months Ended

March 31, March 31,

Change 2022 2021 %

Three Months Ended

September 30,

Costs of revenues:

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Total expenses $ 3,245.1 $ 2,960.3 10 %

For the three and nine months ended March 31, 2022, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-throughs to $897.2 million from $784.7 million for the three months ended March 31, 2022 and 2021, respectively, and to $2,600.6 million from $2,291.7 million for the nine months ended March 31, 2022 and 2021, respectively.

For the three months ended September 30, 2022, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-throughs to $945.8 million from $839.5 million for the three months ended September 30, 2022 and 2021, 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 nine months ended March 31, 2022 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 March 31, 2022 due to increased selling expenses as a result of investments in our sales organization, partially offset by decreased amortization of costs to obtain a contract under ASC 606, and a decrease in our allowance for doubtful accounts of $26.0 million as a result of a decrease in estimated credit losses related to the impact of COVID-19 on our clients ("the decrease in our allowance for doubtful accounts").

Selling, general and administrative expenses increased for the nine months ended March 31, 2022 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses and increased travel expenses, partially offset by the decrease in our allowance for doubtful accounts, and decreased amortization of costs to obtain a contract under ASC 606.

Interest expense increased for the three and nine months ended March 31, 2022 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 nine months ended March 31, 2021.

Systems development and programming costs increased for the three months ended September 30, 2022 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 September 30, 2022 due to increased selling expenses as a result of investments in our sales organization, increased travel expenses, and increased marketing expenses.

Interest expense increased for the three months ended September 30, 2022 due to the increased interest rates on commercial paper issuances coupled with a higher volume of average commercial paper borrowings, as compared to the three months ended September 30, 2021.

Other (Income)/Expense, net

Three Months Ended Nine Months Ended

March 31, March 31,

2022 2021 $ Change 2022 2021 $ Change

Three Months Ended

September 30,

2022 2021 $ Change

Interest income on corporate funds $ (29.7) $ (9.7) $ 20.0

Realized (gains)/losses on available-for-sale securities, net 0.3 0.4 0.1 (0.2) (7.6) (7.4)

Realized losses/(gains) on available-for-sale securities, net 1.5 (0.1) (1.6)

Impairment of assets 0.3 — (0.3)

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Other (income)/expense, net $ (39.5) $ (28.8) $ 10.7

The increase is primarily driven by increases in our corporate funds, coupled with an increase in average interest rates to 1.7%, as compared to 0.9% at September 30, 2021.

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:

Earnings Before Income Taxes Margin

12% YoY Growth

40 bps YoY Increase

For the nine months ended March 31:

Earnings Before Income Taxes Margin

13% YoY Growth

60 bps YoY Increase

Earnings before income taxes increased for the three and nine months ended March 31, 2022, respectively, due to the components discussed above.

Margin increased for the three and nine months ended March 31, 2022 due to increases in revenues discussed above, and the decrease in our allowance for doubtful accounts, 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 March 31:

Adjusted EBIT Adjusted EBIT Margin

12% YoY Growth

50 bps YoY Increase

For the nine months ended March 31:

Adjusted EBIT Adjusted EBIT Margin

Earnings Before Income Taxes ("EBIT") and Adjusted EBIT

For the three months ended September 30:

Three Months Ended

September 30,

2022 2021 YoY Growth

70 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 strate gy, and net charges, including gain on sale of assets, related to our broad-based transformation initiatives and the impact of the net severance charges, as applicable, in the respective periods.

EBIT $ 1,010.0 $ 900.8 12 %

EBIT Margin 24.0 % 23.5 % 50 bps

Adjusted EBIT $ 1,017.5 $ 915.2 11 %

Adjusted EBIT Margin 24.1 % 23.9 % 30 bps

Earnings before income taxes increased for the three months ended September 30, 2022 due to the components discussed above.

Margin increased for the three months ended September 30, 2022 due to increases in revenues discussed above, and operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased interest expense, increased selling expense, and incremental pressure from growth in our zero-margin benefits pass-throughs.

Adjusted EBIT and Adjusted EBIT margin exclude interest income and interest expense that are not related to our client funds extended investment strate gy, legal settlements, and net charges related to our broad-based transformation initiatives and the impact of net severance charges, as applicable, in the respective periods.

Provision for Income Taxes

The effective tax rate for the three months ended March 31, 2022 and 2021 was 22.0% and 24.0%, respectively.

The decrease in the effective tax rate is primarily due to an intercompany transfer of certain assets, a lower state income tax rate and a favorable earnings mix in the three months ended March 31, 2022.

The effective tax rate for the nine months ended March 31, 2022 and 2021 was 22.6% and 22.7%, respectively.

The decrease in the effective tax rate is primarily due to a favorable earnings mix, an increase in the excess tax benefits on stock-based compensation and an intercompany transfer of certain assets in the nine months ended March 31, 2022, partially offset by combined benefits from adjustments to prior year tax liabilities and a foreign tax election in the nine months ended March 31, 2021.

The effective tax rate for the three months ended September 30, 2022 and 2021 was 22.9% and 22.2%, respectively.

The increase in the effective tax rate is primarily due to lower reserves for uncertain tax positions and a valuation allowance release 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, 2022 and 2021 was 22.0% and 23.9%, respectively.

The adjusted effective tax rate for the nine months ended March 31, 2022 and 2021 was 22.6% and 22.7%, respectively.

The adjusted effective tax rate for the three months ended September 30, 2022 and 2021 was 22.9% and 22.2%, 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:

Net Earnings Diluted EPS

15% YoY Growth

16% YoY Growth

For the nine months ended March 31:

Net Earnings Diluted EPS

13% YoY Growth

15% YoY Growth

For the three and nine months ended March 31, 2022, 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, 2022, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 2.3 million shares during the three months ended March 31, 2022 and 2.5 million shares during the three months ended March 31, 2021, partially offset by the issuances of shares under our employee benefit plans.

For the nine months ended March 31, 2022, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 7.0 million shares during the nine months ended March 31, 2022 and 5.7 million shares during the nine months ended March 31, 2021, 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:

Adjusted Net Earnings Adjusted Diluted EPS

15% YoY Growth

17% YoY Growth

For the nine months ended March 31:

Adjusted Net Earnings Adjusted Diluted EPS

13% YoY Growth

Net Earnings and Diluted EPS, Unadjusted and Adjusted

For the three months ended September 30:

Three Months Ended

September 30,

2022 2021 YoY Growth

For the three and nine months ended March 31, 2022, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

Net earnings $ 779.0 $ 700.5 11 %

Diluted EPS $ 1.87 $ 1.65 13 %

Adjusted net earnings $ 775.4 $ 699.0 11 %

Adjusted diluted EPS $ 1.86 $ 1.65 13 %

For the three months ended September 30, 2022, 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, 2022, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 1.4 million shares during the three months ended September 30, 2022, and 2.6 million shares during the three months ended September 30, 2021, partially offset by the issuances of shares under our employee benefit plans.

For the three months ended September 30, 2022, adjusted net earnings and adjusted diluted EPS reflect the changes in the components described above.

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended % Change Nine Months Ended

March 31, March 31, % Change

Reported Organic constant currency 2022 2021 As

Three Months Ended % Change

September 30,

Reported Organic constant currency

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PEO Services 1,429.4 1,264.1 13 % 13 %

Other (2.8) (2.1) n/m n/m (10.9) (5.1) n/m n/m

Other (4.0) (3.3) n/m n/m

$ 4,215.6 $ 3,832.3 10 % 11 %

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Three Months Ended %

Change Nine Months Ended %

March 31, March 31,

2022 2021 As Reported 2022 2021 As

September 30,

2022 2021 As Reported

Employer Services $ 863.5 $ 784.0 10 %

PEO Services 230.3 193.0 19 %

Other (133.0) (112.5) n/m (329.2) (309.2) n/m

Other (83.8) (76.2) n/m

$ 1,010.0 $ 900.8 12 %

Three Months Ended

September 30,

2022 2021 YoY Growth

Employer Services 30.9 % 30.5 % 50 bps

PEO Services 16.1 % 15.3 % 80 bps

n/m - not meaningful

Employer Services

Revenues increased for the three months ended March 31, 2022 due to strong retention and new business started from New Business Bookings, an increase in our pays per control of 7%, and an increase in interest earned on funds held for clients, partially offset by one percentage point of pressure from foreign currency.

Revenues increased for the nine months ended March 31, 2022 due to strong retention and new business started from New Business Bookings, and an increase in our pays per control of 7%.

Revenues increased for the three months ended September 30, 2022 due to strong retention and new business started from New Business Bookings in prior quarters, an increase in our pays per control of 6%, and an increase in interest earned on funds held for clients, partially offset by an unfavorable impact of two percentage points from foreign currency.

Earnings before Income Taxes

Employer Services' earnings before income taxes increased for the three and nine months ended March 31, 2022 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, partially offset by the decrease in our allowance for doubtful accounts.

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

ES Margin ES Margin

120 bps YoY Increase

100 bps YoY Increase

Employer Services' margin increased for the three and nine months ended March 31, 2022 due to increases in revenues discussed above, and the decrease in our allowance for doubtful accounts, partially offset by increased costs to service our client base in support of our growing revenue.

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, 2022 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 continued investments and costs to develop, support, and maintain our new and existing products.

Employer Services' margin increased for the three months ended September 30, 2022 due to the increases in revenues discussed above, and operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased selling expenses.

Three Months Ended Change

September 30,

2022 2021 $ %

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PEO Services' revenues excluding zero-margin benefits pass-throughs $ 483.6 $ 424.6 $ 59.0 14 %

PEO Services' revenue increased 14% and 15% for the three and nine months ended March 31, 2022, respectively, due to increases in average worksite employees of 16% for the three and nine months ended March 31, 2022, respectively, as compared to the three and nine months ended March 31, 2021, and due to an increase in zero-margin benefits pass-throughs.

PEO Services' revenue increased 13% for the three months ended September 30, 2022 due to increases in average worksite employees of 12%, as compared to the three months ended September 30, 2021, and due to an increase in zero-margin benefits pass-throughs.

Earnings before Income Taxes

PEO Services' earnings before income taxes increased 14% and 16% for the three and nine months ended March 31, 2022, respectively, due to increased revenues discussed above, partially offset by the increases in zero-margin benefits pass-throughs of $112.5 million and $308.9 million for the three and nine months ended March 31, 2022, respectively.

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

PEO Margin PEO Margin

Flat 20 bps YoY Increase

PEO Services' margin was flat for the three months ended March 31, 2022 due to increase in revenues discussed above, offset by increases in selling expenses, changes in our estimated losses related to ADP Indemnity, and increases in zero-margin benefits pass-throughs.

PEO Services' margin increased for the nine months ended March 31, 2022 due to increase in revenues discussed above, partially offset by changes in our estimated losses related to ADP Indemnity, and increases in zero-margin benefits pass-throughs.

PEO Services' earnings before income taxes increased 19% for the three months ended September 30, 2022 due to the increased revenues discussed above and a favorable impact from operating efficiencies, partially offset by increased selling expense and an increase in zero-margin benefits pass-through costs of $106.3 million for the three months ended September 30, 2022.

PEO Services' margin increased for the three months ended September 30, 2022 due to the increase in revenues discussed above, a favorable impact of zero-margin benefits pass-throughs and operating efficiencies, partially offset by increases in selling expenses.

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

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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 $6.9 million and $21.5 million for the three and nine months ended March 31, 2022, as compared to approximately $12.0 million and $27.2 million for the three and nine months ended March 31, 2021, which were primarily a result of changes in our estimated actuarial losses.

ADP Indemnity recorded a pre-tax benefit of approximately $14.5 million for the three months ended September 30, 2022, as compared to approximately $10.8 million for the three months ended September 30, 2021, which was primarily a result of changes in our estimated actuarial losses.

In July 2022, ADP Indemnity paid a premium of $284 million t o enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2023 policy year on terms substantially similar to the fiscal 2022 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,

2022 2021 As Reported 2022 2021 As Reported

Three Months Ended % Change

September 30,

2022 2021 As Reported

Net earnings $ 779.0 $ 700.5 11 %

3 unchanged sentences

Transformation initiatives (b) (1.0) (2.1)

Excess capacity severance charges — — — 2.9

Legal settlements (c) (3.8) —

Adjusted EBIT $ 1,017.5 $ 915.2 11 %

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Provision for income taxes $ 231.0 $ 200.3 15 %

Transformation initiatives (c) 0.3 (0.3) 0.5 0.7

Excess capacity severance charges (c) — — 0.7

Transformation initiatives (d) (0.2) (0.6)

Legal settlements (d) (1.0) —

Adjusted provision for income taxes $ 229.8 $ 199.7 15 %

Adjusted effective tax rate (d) 22.0 % 23.9 % 22.6 % 22.7 %

Adjusted effective tax rate (e) 22.9 % 22.2 %

Net earnings $ 779.0 $ 700.5 11 %

Transformation initiatives (b) (1.0) (2.1)

Income tax provision/(benefit) for transformation initiatives (c) (0.3) 0.3 (0.5) (0.7)

Excess capacity severance charges — — — 2.9

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

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

Legal settlements (c) (3.8) —

Income tax provision/(benefit) for legal settlements (d) 1.0 —

Adjusted net earnings $ 775.4 $ 699.0 11 %

Diluted EPS $ 1.87 $ 1.65 13 %

Transformation initiatives (b) (c) — — — 0.01

Excess capacity severance charges (c) — — — 0.01

Transformation initiatives (b) (d) — —

Legal settlements (c) (d) (0.01) —

Adjusted diluted EPS $ 1.86 $ 1.65 13 %

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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 March 31, 2022, transformation initiatives include consulting costs relating to our company wide transformation initiatives.

In the nine months ended March 31, 2022, the charges include consulting costs relating to our company wide transformation initiatives, partially offset by net reversals relating to severance, and gain on sale of assets.

(b) In the three months ended September 30, 2022, transformation initiatives include net reversals relating to severance, partially offset by consulting costs relating to our company wide transformation initiatives.

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.

(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.

(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.

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

At March 31, 2022, cash and cash equivalents were $1.6 billion, which were primarily invested in time deposits and money market funds.

At September 30, 2022, cash and cash equivalents were $1.2 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, 2022 and we have sufficient liquidity.

Our financial condition remains solid at September 30, 2022 and we have sufficient liquidity.

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

short-term commercial paper program and our U.S., Canadian and United Kingdom short-term reverse repurchase agreements, together with our $9.7 billion of committed credit facilities and our ability to use corporate liquidity when necessary to meet short-term funding requirements related to client funds obligations.

Please see “Quantitative and Qualitative Disclosures about Market Risk” for a further discussion of the risks, including with respect to the COVID-19 pandemic, related to our client funds extended investment strategy.

Please see “Quantitative and Qualitative Disclosures about Market Risk” for a further discussion of the risks related to our client funds extended investment strategy.

See Note 9 of our Consolidated Financial Statements for a description of our short-term financing including commercial paper.

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, 2022 and 2021, 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, 2022 and 2021, respectively, are summarized as follows:

Three Months Ended

September 30,

2022 2021 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ (17,207.0) $ 10,049.1 $ (27,256.1)

Net cash flows provided by operating activities decreased due to a net unfavorable change in the components of operating assets and liabilities, which includes timing on collections of accounts receivable and an increase in incentive compensation payments, offset by the growth in our underlying business (net income adjusted for non-cash adjustments), as compared to the nine months ended March 31, 2021.

Net cash flows used in investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $3,588.4 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 nine months ended March 31, 2022.

Net cash flows provided by financing activities changed due to a net increase in the cash flow from client funds obligations of $10,028.8 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 nine months ended March 31, 2021.

These were partially offset by an increase in repurchases of common stock in the nine months ended March 31, 2022.

We purchased approximately 7.0 million shares of our common stock at an average price per sha re o f $213.17 duri ng the nine months ended March 31, 2022, as compared to purchases of 5.7 million shares at an average price per share of $159.72 during the nine months ended March 31, 2021.

Net cash flows provided by operating activities increased due to a net favorable change in the components of operating assets and liabilities, primarily due to timing on collections of accounts receivable and a decrease in incentive compensation payments, as compared to the three months ended September 30, 2021.

Net cash flows used in investing activities changed due to the timing of purchases and proceeds of corporate and client funds marketable securities of $312.4 million.

Net cash flows used in financing activities changed due to a net decrease in the cash flow from client funds obligations of $27,692.6 million , which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, and an increase in dividends paid.

These were partially offset by a decrease in repurchases of common stock in the three months ended September 30, 2022.

We purchased approximately 1.4 million shares of our common stock at an average price per sha re o f $230.13 duri ng the three months ended September 30, 2022, as compared to purchases of 2.6 million shares at an average price per share of $205.66 during the three months ended September 30, 2021.

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

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See Note 10 of our Consolidated Financial Statements for a description of our long-term financing.

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

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

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

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

At March 31, 2022 and June 30, 2021, the Compa ny had no comm ercial paper borrowing outstanding.

At September 30, 2022 and June 30, 2022, the Compa ny had no comm ercial 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,

2022 2021 2022 2021

Three Months Ended

September 30,

Average daily borrowings (in billions) $ 4.6 $ 2.0

Weighted average interest rates 2.3 % 0.1 %

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

Weighted average maturity (approximately in days) 2 days 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 March 31, 2022 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.

At September 30, 2022 and June 30, 2022, the Company had $167.6 million and $136.4 million, respectively, of outstanding obligations related to reverse repurchase agreements.

Details of the reverse repurchase agreements are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2022 2021 2022 2021

Three Months Ended

September 30,

Average outstanding balances $ 1,119.4 $ 195.1

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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, 2022 under the credit facilities.

We had no borrowings through September 30, 2022 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 has performed as expected through March 31, 2022.

All collateral on asset-backed securities has performed as expected through September 30, 2022.

In addition, we own U.S.

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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, 2022 were $126.3 million, as compared to $144.4 million for the nine months ended March 31, 2021.

Capital expenditures for the three months ended September 30, 2022 were $41.5 million, as compared to $34.6 million for the three months ended September 30, 2021.

We expect capital expenditures in fiscal 2023 to be between $200 million and $225 million, as compared to $177.1 million in fiscal 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $9.7 billion commercial paper program (rated A-1+ by Standard and Poor’s, P-1 by Moody’s, and F1+ by Fitch, the highest possible short-term credit ratings), and our ability to engage in reverse repurchase agreement transactions and available borrowings under our $9.7 billion committed credit facilities.

The reduced availability of financing during periods of economic turmoil, including the COVID-19 pandemic, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business.

The reduced availability of financing during periods of economic turmoil, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business.

In addition to liquidity risk, our investments are subject to interest rate risk and credit risk, as discussed below.

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Details regarding our overall investment portfolio are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2022 2021 2022 2021

Three Months Ended

September 30,

Average investment balances at cost:

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Net realized losses/(gains) on available-for-sale securities $ 1.5 $ (0.1)

March 31, 2022 June 30, 2021

September 30, 2022 June 30, 2022

Net unrealized pre-tax (losses)/gains on available-for-sale securities $ (2,555.0) $ (1,721.4)

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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 p ortfolio decreased from 1.5% for the nine months ended March 31, 2021 to 1.3% for the nine months ended March 31, 2022.

A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-ter m interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $19 million impact to earnings before income taxes over the ensuing twelve-month period ending March 31, 2023.

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, 2023.

The annu alized interest rate earned on our entire p ortfolio increased from 1.4% for the three months ended September 30, 2021 to 1.9% for the three months ended September 30, 2022.

A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-ter m interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $14 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 2023.

A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances and any related short-term borrowings would result in approximately a $6 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 2023.

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.

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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