What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-01 compared with 2023-11-02 · 121 added, 98 removed, 269 unchanged (45% of the section changed)

36 unchanged sentences

Executing on our Strategic Priorities will be critical to enabling our growth in the years ahead.

Highlights from the three months ended September 30, 2023 include:

Highlights from the six months ended December 31, 2023 include:

• Revenue growth of 7% to $9,180.3 million;

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• Earnings before income taxes margin expansion of 30 bps, and adjusted EBIT margin expansion of 20 bps

• Diluted earnings per share ("EPS") growth of 11% to $2.08, and adjusted diluted EPS growth of 12% to $2.08

• Diluted and adjusted diluted earnings per share ("EPS") growth of 10% to $4.20, respectively.

• Cash returned via shareholder friendly actions of $1.5B, including $1.0B of dividends and $0.5B share repurchases

• Acquisition of Sora, an intelligent workflow automation and data integration tool

During the first quarter we made meaningful progress in pursuit of our key Strategic Priorities.

We took actions to lead with Best-in-Class HCM Technology by embedding generative AI (gen AI) features into our products, including the integration of gen AI into Roll to further enhance its conversational user interface, as well as the launch of ADP Assist, our embedded smart support AI designed to help make HR work easier, smarter and ultimately, more human.

We continued to provide Unmatched Expertise and Outsourcing Solutions with the launch of Agent Assist, which embeds gen AI in the flow of work for ADP implementation and service associates to increase their agility and expertise in order to help them deliver a better client experience.

And we continued to Leverage our Global Scale to Benefit our Clients by acquiring the payroll business of BTR, our long-time partner in Sweden, and by launching Roll in Ireland to expand our SMB business outside of the U.S.

For the three months ended September 30, 2023, we delivered solid revenue growth of 7%, 7% 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 2% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

PEO average worksite employees increased 2% for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

During the second quarter we made continued progress on our strategy with several product enhancements and partnership expansions aimed at improving the overall experience for our clients.

We continued the rollout of ADP Assist, which utilizes generative AI (GenAI) technology to proactively surface insights that enhance HR productivity, aid decision-making with data-driven insights, and streamline day-to-day tasks for our clients and their employees.

We also extended GenAI powered capabilities to a greater portion of our service associates to support greater client engagement.

Additionally, we expanded on partnerships with other leading technology providers to further simplify the payroll experience and drive more personalized interactions.

For the six months ended December 31, 2023, we delivered solid revenue growth of 7%, 6% 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 2% for the six months ended December 31, 2023 as compared to the six months ended December 31, 2022.

PEO average worksite employees increased 2% for the six months ended December 31, 2023, as compared to the six months ended December 31, 2022.

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, 2023 and we remain well positioned to support our clients and our associates.

Our financial condition remains solid at December 31, 2023 and we remain well positioned to support our clients and our associates.

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,

2023 2022 2023 2022

Total Revenues $ 4,668.0 $ 4,391.0 $ 9,180.3 $ 8,606.6

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YoY Growth, Organic Constant Currency 6 % 10 % 6 % 11 %

Revenues for the three months ended September 30, 2023 increased due to new business started from New Business Bookings, strong client retention, an increase in zero-margin benefits pass-throughs, an increase in our pays per control, and an increase in pricing.

Total revenues for the three months ended September 30, 2023 include interest on funds held for clients of $201.7 million, as compared to $141.0 million for the three months ended September 30, 2022.

The increase in the interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.6% for the three months ended September 30, 2023, as compared to 1.9% for the three months ended September 30, 2022, and an increase in our average client funds balances of 5.9% to $31.1 billion for the three months ended September 30, 2023.

Revenues for the three months ended December 31, 2023 increased due to new business started from New Business Bookings, strong client retention, an increase in pricing, an increase in our pays per control, and an increase in zero-margin benefits pass-throughs.

Revenues for the six months ended December 31, 2023 increased due to new business started from New Business Bookings, strong client retention, an increase in pricing, an increase in our pays per control, an increase in zero-margin benefits pass-throughs, and a favorable impact of one percentage point from foreign currency.

Total revenues for the three months ended December 31, 2023 include interest on funds held for clients of $225.3 million, as compared to $187.2 million for the three months ended December 31, 2022.

The increase in the interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.8% for the three months ended December 31, 2023, as compared to 2.2% for the three months ended December 31, 2022, partially offset by a decrease in our average client funds balances of 2.3% to $32.6 billion for the three months ended December 31, 2023.

Total revenues for the six months ended December 31, 2023 include interest on funds held for clients of $427.1 million, as compared to $328.3 million for the six months ended December 31, 2022.

The increase in the interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.7% for the six months ended December 31, 2023, as compared to 2.1% for the six months ended December 31, 2022, and an increase in our average client funds balances of 1.6% to $31.9 billion for the six months ended December 31, 2023.

Total Expenses

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

Change 2023 2022 %

Costs of revenues:

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Total expenses $ 3,589.0 $ 3,363.4 7 % $ 7,076.2 $ 6,608.5 7 %

For the three months ended September 30, 2023, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs of $30.9 million to $976.7 million for the three months ended September 30, 2023.

Additionally, operating expenses increased $21.0 million due to increased service and implementation costs in support of our growing revenue, and an unfavorable impact of one percentage point from foreign currency.

Research and development expenses increased for the three months ended September 30, 2023 due to increased investments and costs to develop, support, and maintain our new and existing products.

Depreciation and amortization expenses increased for the three months ended September 30, 2023 due to the amortization of internally developed software products and new investments in purchased software.

Selling, general and administrative expenses increased for the three months ended September 30, 2023 due to increased selling expenses as a result of investments in our sales organization.

Interest expense increased for the three months ended September 30, 2023 due to the increase in average interest rates on commercial paper issuances and reverse repurchases to 5.3% and 5.3% for the months ended September 30, 2023, as compared to 2.3% and 2.4% for the months ended September 30, 2022, respectively, partially offset by lower volume of average commercial paper borrowings, as compared to the three months ended September 30, 2022.

For the three and six months ended December 31, 2023, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs of $944.2 million to $970.7 million for the three months ended December 31, 2023, and an increase of $1,890.0 million to $1,947.5 million for the six months ended December 31, 2023.

Additionally, for the three and six months ended December 31, 2023 operating expenses increased by $26.4 million and $47.1 million, respectively, due to increased service and implementation costs in support of our growing revenue.

Research and development expenses increased for the three and six months ended December 31, 2023 due to increased investments and costs to develop, support, and maintain our new and existing products, and increased investments for integration of generative AI (gen AI) in our existing products.

Depreciation and amortization expenses increased for the three months ended December 31, 2023 due to the amortization of new investments in purchased software.

Depreciation and amortization expenses increased for the six months ended December 31, 2023 due to the amortization of internally developed software products and new investments in purchased software.

Selling, general and administrative expenses increased for the three and six months ended December 31, 2023 due to increased selling expenses as a result of investments in our sales organization.

Interest expense increased for the three months ended December 31, 2023 due to the increase in average interest rates on commercial paper issuances and reverse repurchases to 5.4% and 5.4%, respectively, for the three months ended December 31, 2023, as compared to 3.5% and 3.4%, respectively, for the three months ended December 31, 2022, coupled with a higher volume of average commercial paper and reverse repurchases borrowings, as compared to the three months ended December 31, 2022.

Interest expense increased for the six months ended December 31, 2023 due to the increase in average interest rates on commercial paper issuances and reverse repurchases to 5.3% and 5.4%, respectively, for the six months ended December 31, 2023, as compared to 2.8% and 2.9%, respectively, for the six months ended December 31, 2022, coupled with a higher volume of average reverse repurchases borrowings, as compared to the six months ended December 31, 2022.

Other (Income)/Expense, net

Three Months Ended

September 30,

2023 2022 $ Change

Three Months Ended Six Months Ended

December 31, December 31,

2023 2022 $ Change 2023 2022 $ Change

Interest income on corporate funds $ (56.9) $ (28.9) $ 28.0 $ (103.4) $ (58.6) $ 44.8

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Other (income)/expense, net $ (64.8) $ (30.5) $ 34.3 $ (132.5) $ (70.0) $ 62.5

Interest income on corporate funds increased due to higher average interest rates of 2.6% for the three months ended September 30, 2023, as compared to 1.7% for the three months ended September 30, 2022.

In the three months ended September 30, 2023, the Company recognized a gain of $14.6 million in relation to the sale of a building.

Interest income on corporate funds increased due to higher average interest rates of 2.9% and 2.8% for the three and six months ended December 31, 2023, respectively, as compared to 2.0% and 1.8% for the three and six months ended December 31, 2022, respectively, coupled with higher average investment balances of $7.8 billion and $7.5 billion for the three and six months ended December 31, 2023, respectively, as compared to $5.7 billion and $6.4 billion for the three and six months ended December 31, 2022, respectively.

In the three months ended December 31, 2023, the Company recognized a gain of $1.4 million in relation to the sale of land.

In the six months ended December 31, 2023, the Company recognized a gain of $16.0 million in relation to the sale of a building and land.

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

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

For the three months ended September 30:

Three Months Ended

September 30,

2023 2022 YoY Growth

For the three and six months ended December 31:

Three Months Ended Six Months Ended

December 31, December 31,

2023 2022 YoY Growth 2023 2022 YoY Growth

EBIT $ 1,143.8 $ 1,058.1 8 % $ 2,236.6 $ 2,068.1 8 %

EBIT Margin 24.5 % 24.1 % 40 bps

24.4 % 24.0 % 30 bps

Adjusted EBIT $ 1,147.1 $ 1,069.0 7 % $ 2,240.4 $ 2,086.4 7 %

Adjusted EBIT Margin 24.6 % 24.3 % 20 bps

Earnings before income taxes increased for the three months ended September 30, 2023, due to the components discussed above.

Margin increased for the three months ended September 30, 2023, due to contributions from client funds interest revenues discussed above, operating efficiencies for costs of servicing our clients on growing revenue, and a gain on sale of assets, partially offset by increased investments and costs to develop, support and maintain our new and existing products, increased interest expense, and increased selling expense.

24.4 % 24.2 % 20 bps

Earnings before income taxes increased for the three and six months ended December 31, 2023, due to the components discussed above.

Margin increased for the three months ended December 31, 2023, due to contributions from client funds interest revenues discussed above, operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased interest expense, increased investments and costs to develop, support and maintain our new and existing products, and increased selling expense.

Margin increased for the six months ended December 31, 2023, due to contributions from client funds interest revenues discussed above, operating efficiencies for costs of servicing our clients on growing revenue, and a gain on sale of assets, partially offset by increased interest expense, increased investments and costs to develop, support and maintain our new and existing products, 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, 2023 and 2022 was 21.4% and 22.9%, respectively.

The decrease is primarily due to lower reserves for uncertain tax positions and a valuation allowance release offset by a lower excess tax benefit on stock-based compensation in the three months ended September 30, 2023.

The effective tax rate for the three months ended December 31, 2023 and 2022 was 23.2%.

The rate remained flat due to a lower state income tax rate and a lower benefit for adjustments to prior year tax liabilities in the three months ended December 31, 2023.

The effective tax rate for the six months ended December 31, 2023 and 2022 was 22.3% and 23.0%, respectively.

Adjusted Provision for Income Taxes

The adjusted effective tax rate for the three months ended September 30, 2023 and 2022 was 21.4% and 22.9%, respectively.

The adjusted effective tax rate for the three months ended December 31, 2023 and 2022 was 23.2%.

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

The adjusted effective tax rate for the six months ended December 31, 2023 and 2022 was 22.3% and 23.0%, 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, Unadjusted and Adjusted

For the three months ended September 30:

Three Months Ended

September 30,

2023 2022 YoY Growth

For the three and six months ended December 31:

Three Months Ended Six Months Ended

December 31, December 31,

2023 2022 YoY Growth 2023 2022 YoY Growth

Net earnings $ 878.4 $ 813.1 8 % $ 1,737.8 $ 1,592.2 9 %

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Adjusted diluted EPS $ 2.13 $ 1.96 9 % $ 4.20 $ 3.82 10 %

For the three months ended September 30, 2023, 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, 2023, 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 1.0 million shares during the three months ended September 30, 2023, and 1.4 million shares during the three months ended September 30, 2022, partially offset by the issuances of shares under our employee benefit plans.

For the three and six months ended December 31, 2023, 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, 2023, 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 1.1 million shares during the three months ended December 31, 2023, and 0.9 million shares during the three months ended December 31, 2022, partially offset by the issuances of shares under our employee benefit plans.

For the six months ended December 31, 2023, 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 2.1 million shares during the six months ended December 31, 2023, and 2.3 million shares during the six months ended December 31, 2022, 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 2023 2022 As

Reported Organic constant currency

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PEO Services 1,546.1 1,503.3 3 % 3 % 3,015.7 2,932.7 3 % 3 %

Other (3.6) (4.0) n/m n/m

Other (3.3) (4.2) n/m n/m (7.0) (8.3) n/m n/m

$ 4,668.0 $ 4,391.0 6 % 6 % $ 9,180.3 $ 8,606.6 7 % 6 %

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Three Months Ended %

September 30,

2023 2022 As Reported

Change Six Months Ended %

December 31, December 31,

2023 2022 As Reported 2023 2022 As

Employer Services $ 1,061.9 $ 934.6 14 % $ 2,070.4 $ 1,798.1 15 %

PEO Services 255.0 255.6 — % 477.9 485.9 (2) %

Other (138.6) (83.8) n/m

Other (173.1) (132.1) n/m (311.7) (215.9) n/m

$ 1,143.8 $ 1,058.1 8 % $ 2,236.6 $ 2,068.1 8 %

Three Months Ended

September 30,

2023 2022 YoY Growth

Three Months Ended Six Months Ended

December 31, December 31,

2023 2022 YoY Growth 2023 2022 YoY Growth

Employer Services 34.0 % 32.3 % 170 bps

33.5 % 31.6 % 190 bps

PEO Services 16.5 % 17.0 % (50) bps

15.8 % 16.6 % (70) bps

n/m - not meaningful

Employer Services

Revenues increased for the three months ended September 30, 2023 due to new business started from New Business Bookings, strong client retention, an increase in our pays per control of 2%, an increase in interest earned on funds held for clients, an increase in pricing, and a favorable impact of one percentage point from foreign currency.

Revenues increased for the three and six months ended December 31, 2023 due to new business started from New Business Bookings, strong client retention, an increase in pricing, an increase in interest earned on funds held for clients, an increase in our pays per control of 2%, respectively, and a favorable impact of one percentage point from foreign currency.

Earnings before Income Taxes

Employer Services' earnings before income taxes increased 17% for the three months ended September 30, 2023 due to contributions from client funds interest revenues discussed above, and operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased investments and costs to develop, support, and maintain our new and existing products.

Employer Services' margin increased for the three months ended September 30, 2023 due to contributions from client funds interest revenues discussed above, and operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased investments and costs to develop, support, and maintain our new and existing products.

Three Months Ended Change

September 30,

Employer Services' earnings before income taxes increased 14% and 15% for the three and six months ended December 31, 2023, respectively, due to contributions from client funds interest revenues discussed above, and operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased investments and costs to develop, support, and maintain our new and existing products, and increased selling expenses.

Employer Services' margin increased for the three and six months ended December 31, 2023 due to contributions from client funds interest revenues discussed above, and operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased investments and costs to develop, support and maintain our new and existing products, and increased selling expenses.

Three Months Ended Change Six Months Ended Change

December 31, December 31,

2023 2022 $ % 2023 2022 $ %

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PEO Services' revenues excluding zero-margin benefits pass-throughs $ 575.4 $ 559.1 $ 16.3 3 % $ 1,068.2 $ 1,042.7 $ 25.5 2 %

PEO Services' revenue increased for the three months ended September 30, 2023, due to increases in zero-margin benefits pass-throughs, an increase in pricing, and increases in average worksite employees of 2% for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

PEO Services' revenue increased for the three and six months ended December 31, 2023, due to increases in zero-margin benefits pass-throughs, and increases in average worksite employees of 2%, as compared to the three and six months ended December 31, 2022.

Earnings before Income Taxes

PEO Services' earnings before income taxes decreased 3% for the three months ended September 30, 2023 due to a change of $8.3 million in our estimated losses related to ADP Indemnity compared to prior year, increases in zero-margin benefits pass-through costs of $30.9 million, and increases in selling expenses for the three months ended September 30, 2023, partially offset by increased revenues discussed above.

PEO Services' margin decreased for the three months ended September 30, 2023 due to incremental pressure from growth in our zero-margin benefits pass-throughs, changes in our estimated losses related to ADP Indemnity, and increases in selling expenses, partially offset by increased revenues discussed above.

PEO Services' earnings before income taxes remained flat for the three months ended December 31, 2023 due to a change of $(2.3) million in our estimated losses related to ADP Indemnity compared to prior year, increases in zero-margin benefits pass-through costs of $26.5 million, and increases in selling expenses for the three months ended December 31, 2023, partially offset by increased revenues discussed above.

PEO Services' earnings before income taxes decreased 2% for the six months ended December 31, 2023 due to a change of $(10.7) million in our estimated losses related to ADP Indemnity compared to prior year, increases in zero-margin benefits pass-through costs of $57.5 million, and increases in selling expenses for the six months ended December 31, 2023, partially offset by increased revenues discussed above.

PEO Services' margin decreased for the three and six months ended December 31, 2023 due to increases in selling expenses, and changes in our estimated losses related to ADP Indemnity, partially offset by increased revenues discussed above.

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 $6.2 million for the three months ended September 30, 2023, as compared to approximately $14.5 million for the three months ended September 30, 2022, which was primarily a result of changes in our estimated actuarial losses.

In July 2023, ADP Indemnity paid a premium of $269 million t o enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2024 policy year on terms substantially similar to the fiscal 2023 reinsurance policy.

ADP Indemnity recorded a pre-tax (loss)/benefit of approximately $(1.7) million and $4.5 million for the three and six months ended December 31, 2023, respectively, as compared to approximately $0.6 million and $15.2 million for the three and six months ended December 31, 2022, respectively, which was primarily a result of changes in our estimated actuarial losses.

In July 2023, ADP Indemnity paid a premium of $269 million t o enter into a reinsurance arrangement with Chubb

Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2024 policy year on terms substantially similar to the fiscal 2023 reinsurance policy.

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

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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,

2023 2022 As Reported

Three Months Ended % Change Six Months Ended % Change

December 31, December 31,

2023 2022 As Reported 2023 2022 As Reported

Net earnings $ 878.4 $ 813.1 8 % $ 1,737.8 $ 1,592.2 9 %

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Adjusted diluted EPS $ 2.13 $ 1.96 9 % $ 4.20 $ 3.82 10 %

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

(a) In Adjusted EBIT, we include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model.

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

(b) In the three months ended September 30, 2023, transformation initiatives include consulting costs relating to our company wide transformation initiatives.

(b) In the three and six months ended December 31, 2023, transformation initiatives include consulting costs relating to our company wide transformation initiatives.

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

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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 6 % 7 %

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCE S

At September 30, 2023, cash and cash equivalents were $1.4 billion, which were primarily invested in time deposits and money market funds.

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

Our financial condition remains solid at September 30, 2023 and we have sufficient liquidity.

At December 31, 2023, cash and cash equivalents were $1.6 billion, which were primarily invested in time deposits and money market funds.

For corporate liquidity, we expect existing cash, cash equivalents, 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 December 31, 2023 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, 2023 and 2022, 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, 2023 and 2022, respectively, are summarized as follows:

Six Months Ended

2023 2022 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 5,107.8 $ (9,500.5) $ 14,608.3

Net cash flows provided by operating activities decreased due to a net unfavorable change in the components of operating assets and liabilities, primarily due to timing on collections of accounts receivable, offset by growth in our underlying business (net income adjusted for non-cash adjustments), as compared to the three months ended September 30, 2022.

Net cash flows used in investing activities changed due to the timing of purchases and proceeds of corporate and client funds marketable securities of $1,379.2 million.

Net cash flows used in financing activities changed due to a net decrease in the cash flow from client funds obligations of $14,217.1 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, a decrease in the repurchases of common stock, and an increase in the net proceeds related to reverse repurchase agreements.

Net cash flows provided by/used in financing activities changed due to a net increase in the cash flow from client funds obligations of $13,518.7 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, and a decrease in the net payments related to reverse repurchase agreements.

These were offset by an increase in dividends paid.

We purchased approximately 1.0 million shares of our common stock at an average price per sha re o f $242.26 duri ng the three months ended September 30, 2023, as compared to purchases of 1.4 million shares at an average price per share of $230.13 during the three months ended September 30, 2022.

We purchased approximately 2.1 million shares of our common stock at an average price per sha re o f $238.29 duri ng the six months ended December 31, 2023, as compared to purchases of 2.3 million shares at an average price per share of $234.87 during the six months ended December 31, 2022.

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, 2023 and June 30, 2023, the Compa ny had no comm ercial paper borrowing outstanding.

At December 31, 2023 and June 30, 2023, 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,

2023 2022 2023 2022

Average daily borrowings (in billions) $ 3.9 $ 3.4 $ 4.0 $ 4.0

Weighted average interest rates 5.4 % 3.5 % 5.3 % 2.8 %

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

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

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

1 unchanged sentence

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, 2023 and June 30, 2023, the Company had $343.8 million and $105.4 million, respectively, of outstanding obligations related to reverse repurchase agreements.

At December 31, 2023 and June 30, 2023, the Company had $21.6 million and $105.4 million, respectively, of outstanding obligations related to reverse repurchase agreement.

Details of the reverse repurchase agreements are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2023 2022 2023 2022

Average outstanding balances $ 2,423.3 $ 960.8 $ 1,901.1 $ 1,040.1

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, 2023 under the credit facilities.

We had no borrowings through December 31, 2023 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, and equipment lease receivables, secured predominantly by prime collateral.

All collateral on asset-backed securities has performed as expected through September 30, 2023.

All collateral on asset-backed securities has performed as expected through December 31, 2023.

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, 2023 were $42.2 million , as compared to $41.5 million for the three months ended September 30, 2022.

Capital expenditures for the six months ended December 31, 2023 were $94.0 million, as compared to $91.2 million for the six months ended December 31, 2022.

We expect capital expenditures in fiscal 2024 to be between $200 million and $225 million, as compared to $206.0 million in fiscal 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 overall investment portfolio is comprised of corporate investments (cash and cash equivalents, 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.

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The minimum allowed credit rating at time of purchase for Corporate, Canadian government agency and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A.

The maximum maturity at time of purchase for BBB-rated securities is 5 years, for single A rated securities is 10 years, and for AA-rated and AAA-rated securities is 10 years.

The maximum maturity at time of purchase for BBB-rated securities is 5 years, and for single A rated securities, AA-rated and AAA-rated securities is 10 years.

Time deposits and commercial paper must be rated A-1 and/or P-1.

1 unchanged sentence

Details regarding our overall investment portfolio are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2023 2022 2023 2022

Average investment balances at cost:

8 unchanged sentences

Net realized losses/(gains) on available-for-sale securities $ 2.0 $ 11.5 $ 4.0 $ 13.0

September 30, 2023 June 30, 2023

December 31, 2023 June 30, 2023

Net unrealized pre-tax (losses)/gains on available-for-sale securities $ (1,493.1) $ (2,206.9)

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 1.9% for the three months ended September 30, 2022 to 2.6% for the three months ended September 30, 2023.

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 $17 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 2024.

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, 2024.

The annu alized interest rate earned on our entire p ortfolio increased from 2.0% for the six months ended December 31, 2022 to 2.7% for the six months ended December 31, 2023.

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 $19 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 2024.

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 December 31, 2024.

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

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