What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-11-02 · 110 added, 98 removed, 276 unchanged (43% of the section changed)

17 unchanged sentences

changes in technology;

availability of skilled technical associates;

availability of skilled associates;

the impact of new acquisitions and divestitures;

11 unchanged sentences

EXECUTIVE OVERVIEW

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

Highlights from the six months ended December 31, 2022 include:

10% 100 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 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.

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

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

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.

During the second quarter, we have continued to deliver a broad array of product and service enhancements to our large and growing client base.

We continued to roll out our new user experience (“UX”) to additional experiences within our key platforms, further improving ease of use for RUN, Workforce Now, and other solutions.

We further extended the reach of our Next Gen payroll engine to a broader subset of clients and prospects in our midmarket.

We continued to introduce automation and process improvements throughout our organization, all while investing across sales, product, and client service to best position ourselves for the attractive and growing global opportunity in HCM.

For the six months ended December 31, 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 six months ended December 31, 2022 as compared to the six months ended December 31, 2021.

PEO average worksite employees increased 10% for the six months ended December 31, 2022, as compared to the six months ended December 31, 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.

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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, 2022 and we remain well positioned to support our associates and our clients.

Our financial condition remains solid at December 31, 2022 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:

Three Months Ended

September 30,

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

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 2022 2021

Total Revenues 4,391.0 4,025.4 8,606.6 7,857.7

1 unchanged sentence

YoY Growth, Organic Constant Currency 10 % 9 % 11 % 10 %

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.

Revenues for the three and six months ended December 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 an unfavorable impact of one percentage point from foreign currency.

Total revenues for the three months ended December 31, 2022 include interest on funds held for clients of $187.2 million, as compared to $106.0 million for the three months ended December 31, 2021.

The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 3.6% to $33.4 billion for the three months ended December 31, 2022, and an increase in our average interest rate earned to 2.2% for the three months ended December 31, 2022, as compared to 1.3% for the three months ended December 31, 2021.

Total revenues for the six months ended December 31, 2022 include interest on funds held for clients of $328.3 million, as compared to $207.1 million for the six months ended December 31, 2021.

The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 6.3% to $31.4 billion for the six months ended December 31, 2022, and an increase in our average interest rate earned to 2.1% for the six months ended December 31, 2022, as compared to 1.4% 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 2022 2021 %

Costs of revenues:

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Total expenses $ 3,363.4 $ 3,141.9 7 % $ 6,608.5 $ 6,102.2 8 %

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.

For the three and six months ended December 31, 2022, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-throughs of $80.3 million to $944.2 million for the three months ended December 31, 2022, and an increase of $186.6 million to $1,890.0 million for the six months ended December 31, 2022.

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 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.

Systems development and programming costs increased for the three and six months ended December 31, 2022 due to increased investments and costs to develop, support, and maintain our new and existing products.

Depreciation and amortization expenses increased for the three and six months ended December 31, 2022 due to the amortization of internally developed software for our Next Gen products and new investments in purchased software.

Selling, general and administrative expenses increased for the three and six months ended December 31, 2022 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses, and increased travel expenses.

Interest ex pense increased fo r the three months ended December 31, 2022 due to the increase of weighted average interest rates on commercial paper issuances to 3.5% from 0.1%, coupled with a higher volume of average commercial paper borrowings, as compared to the three months ended December 31, 2021.

Interest ex pense increased fo r the six months ended December 31, 2022 due to the increase of weighted average interest rates on commercial paper issuances to 2.8% from 0.1%, coupled with a higher volume of average commercial paper borrowings, as compared to the six months ended December 31, 2021.

Other (Income)/Expense, net

Three Months Ended

September 30,

2022 2021 $ Change

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 $ Change 2022 2021 $ Change

Interest income on corporate funds $ (28.9) $ (8.5) $ 20.4 $ (58.6) $ (18.2) $ 40.4

Realized losses/(gains) on available-for-sale securities, net 11.5 (0.4) (11.9) 13.0 (0.5) (13.5)

Impairment of assets 0.3 — (0.3)

Gain on sale of assets — — — — (1.3) (1.3)

Impairment of assets — — — 0.3 — (0.3)

Non-service components of pension income, net (13.1) (17.7) (4.6) (24.7) (35.4) (10.7)

Other (income)/expense, net $ (30.5) $ (26.6) $ 3.9 $ (70.0) $ (55.4) $ 14.6

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.

The increase is primarily driven by increases in our corporate funds, coupled with an increase in average interest rates to 2.0% for the three months ended December 31, 2022, as compared to 0.9% for the three months ended December 31, 2021, partially offset by realized losses on available for sale securities.

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

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

For the three months ended September 30:

Three Months Ended

September 30,

2022 2021 YoY Growth

For the three and six months ended December 31:

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 YoY Growth 2022 2021 YoY Growth

EBIT $ 1,058.1 $ 910.1 16 % $ 2,068.1 $ 1,810.9 14 %

EBIT Margin 24.1 % 22.6 % 150 bps

24.0 % 23.0 % 100 bps

Adjusted EBIT $ 1,069.0 $ 929.8 15 % $ 2,086.4 $ 1,845.0 13 %

Adjusted EBIT Margin 24.3 % 23.1 % 120 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.

24.2 % 23.5 % 80 bps

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

Margin increased for the three and six months ended December 31, 2022, respectively, 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, and increased selling expense.

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 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 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.

The effective tax rate for the three months ended December 31, 2022 and 2021 was 23.2% and 23.7%, respectively.

The decrease in the effective tax rate is primarily due to favorable adjustments to prior year tax liabilities partially offset by a decrease in the excess tax benefits on stock-based compensation in the three months ende d December 31, 2022.

The effective tax rate for the six months ended December 31, 2022 and 2021 was 23.0%.

The rate remained flat due to favorable adjustments to prior year tax liabilities in the six months ended December 31, 2022 offset by lower reserves for uncertain tax positions and a valuation allowance release in the six months ended December 31, 2021.

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 six months ended December 31:

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 YoY Growth 2022 2021 YoY Growth

Net earnings $ 813.1 $ 694.4 17 % $ 1,592.2 $ 1,394.9 14 %

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Adjusted diluted EPS $ 1.96 $ 1.65 19 % $ 3.82 $ 3.30 16 %

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.

For the three and six months ended December 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 December 31, 2022, in addition to the increase in net earnings, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 0.9 million shares during the three months ended December 31, 2022, and 2.0 million shares during the three months ended December 31, 2021, partially offset by the issuances of shares under our employee benefit plans.

For the six months ended December 31, 2022, in addition to the increase in net earnings, 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 six months ended December 31, 2022, and 4.6 million shares during the six months ended December 31, 2021, partially offset by the issuances of shares under our employee benefit plans.

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended % Change

September 30,

Three Months Ended % Change Six Months Ended % Change

December 31, December 31,

Reported Organic constant currency 2022 2021 As

Reported Organic constant currency

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PEO Services 1,503.3 1,358.8 11 % 11 % 2,932.7 2,622.9 12 % 12 %

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

Other (4.2) (4.7) n/m n/m (8.3) (8.0) n/m n/m

$ 4,391.0 $ 4,025.4 9 % 10 % $ 8,606.6 $ 7,857.7 10 % 11 %

1 unchanged sentence

Three Months Ended %

September 30,

2022 2021 As Reported

Change Six Months Ended %

December 31, December 31,

2022 2021 As Reported 2022 2021 As

Employer Services $ 934.6 $ 817.3 14 % $ 1,798.1 $ 1,601.3 12 %

PEO Services 255.6 212.7 20 % 485.9 405.7 20 %

Other (83.8) (76.2) n/m

Other (132.1) (119.9) n/m (215.9) (196.1) n/m

$ 1,058.1 $ 910.1 16 % $ 2,068.1 $ 1,810.9 14 %

Three Months Ended

September 30,

2022 2021 YoY Growth

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 YoY Growth 2022 2021 YoY Growth

Employer Services 32.3 % 30.6 % 170 bps

31.6 % 30.5 % 110 bps

PEO Services 17.0 % 15.7 % 130 bps

16.6 % 15.5 % 110 bps

n/m - not meaningful

Employer Services

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.

Revenues increased for the three months ended December 31, 2022 due to strong retention and new business started from New Business Bookings, an increase in our pays per control of 5%, and an increase in interest earned on funds held for clients, partially offset by an unfavorable impact of two percentage points from foreign currency.

Revenues increased for the six months ended December 31, 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 months ended September 30, 2022 due to increased revenues discussed above, partially offset by increases in expenses.

Employer Services' earnings before income taxes increased 14% and 12% for the three and six months ended December 31, 2022, respectively, 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,

Employer Services' margin increased for the three and six months ended December 31, 2022 due to the increases in revenues discussed above, operating efficiencies for costs of servicing our clients on growing revenue and costs to develop, support and maintain our products, partially offset by increased selling expenses.

Three Months Ended Change Six Months Ended Change

December 31, December 31,

2022 2021 $ % 2022 2021 $ %

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PEO Services' revenues excluding zero-margin benefits pass-throughs $ 559.1 $ 494.9 $ 64.2 13 % $ 1,042.7 $ 919.5 $ 123.2 13 %

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.

PEO Services' revenue increased for the three and six months ended December 31, 2022, due to increases in average worksite employees of 8% and 10% for the three and six months ended December 31, 2022, respectively, as compared to the three and six months ended December 31, 2021 and due to an increase in zero-margin benefits pass-throughs.

Earnings before Income Taxes

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.

PEO Services' earnings before income taxes increased 20% for the three and six months ended December 31, 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 $80.3 million and $186.6 million for the three and six months ended December 31, 2022, respectively.

PEO Services' margin increased for the three and six months ended December 31, 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.

4 unchanged sentences

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

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.

ADP Indemnity recorded a pre-tax benefit of approximately $0.6 million and $15.2 million for the three and six months ended December 31, 2022, respectively, as compared to approximately $3.7 million and $14.6 million for the three and six months ended December 31, 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

September 30,

2022 2021 As Reported

Three Months Ended % Change Six Months Ended % Change

December 31, December 31,

2022 2021 As Reported 2022 2021 As Reported

Net earnings $ 813.1 $ 694.4 17 % $ 1,592.2 $ 1,394.9 14 %

23 unchanged sentences

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, 2022, transformation initiatives include net reversals relating to severance, partially offset by consulting costs relating to our company wide transformation initiatives.

(b) In the three and six months ended December 31, 2022, transformation initiatives include consulting costs relating to our company wide transformation initiatives, partially offset by 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 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

At September 30, 2022, cash and cash equivalents were $1.2 billion, which were primarily invested in time deposits and money market funds.

At December 31, 2022, cash and cash equivalents were $1.3 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, 2022 and we have sufficient liquidity.

Our financial condition remains solid at December 31, 2022 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, 2022 and 2021, 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, 2022 and 2021, respectively, are summarized as follows:

Six Months Ended

2022 2021 $ Change

5 unchanged sentences

Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ (9,500.5) $ 7,391.0 $ (16,891.5)

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 provided by operating activities increased due to growth in our underlying business (net income adjusted for non-cash adjustments), and 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 six months ended December 31, 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 $2,044.9 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.

Net cash flows used in financing activities changed due to a net decrease in the cash flow from client funds obligations of $19,512.6 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, net payments related to reverse repurchase agreements, and an increase in dividends paid.

These were partially offset by a decrease in repurchases of common stock in the six months ended December 31, 2022.

We purchased approximately 2.3 million shares of our common stock at an average price per sha re o f $234.87 duri ng the six months ended December 31, 2022, as compared to purchases of 4.6 million shares at an average price per share of $213.79 during the six months ended December 31, 2021.

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

At December 31, 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

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 2022 2021

Average daily borrowings (in billions) $ 3.4 $ 1.9 $ 4.0 $ 1.9

Weighted average interest rates 3.5 % 0.1 % 2.8 % 0.1 %

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

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

At December 31, 2022, there were no outstanding obligations related to repurchase agreements.

At June 30, 2022, the Company had $136.4 million of outstanding obligations related to 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,

2022 2021 2022 2021

Average outstanding balances $ 960.8 $ 228.4 $ 1,040.1 $ 211.7

4 unchanged sentences

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, 2022 under the credit facilities.

We had no borrowings through December 31, 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.

2 unchanged sentences

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 September 30, 2022.

All collateral on asset-backed securities has performed as expected through December 31, 2022.

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

Capital expenditures for the six months ended December 31, 2022 were $91.2 million , as compared to $74.1 million for the six months ended December 31, 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.

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Details regarding our overall investment portfolio are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2022 2021 2022 2021

Average investment balances at cost:

8 unchanged sentences

Net realized losses/(gains) on available-for-sale securities $ 11.5 $ (0.4) 13.0 $ (0.5)

September 30, 2022 June 30, 2022

December 31, 2022 June 30, 2022

Net unrealized pre-tax (losses)/gains on available-for-sale securities $ (2,301.3) $ (1,721.4)

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 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.

The annu alized interest rate earned on our entire p ortfolio increased from 1.3% for the six months ended December 31, 2021 to 2.0% for the six months ended December 31, 2022.

A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-term interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $13 million impact to earnings before income taxes over the ensuing twelve-month period ending December 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 $3 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 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.

17 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis