Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.75M
12: 10-Q 10-Q PDF -- q1fy2310q PDF 636K
2: EX-10.1 Material Contract HTML 92K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 28K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 25K
13: R1 Cover page HTML 75K
14: R2 Statements of Consolidated Earnings HTML 95K
15: R3 Statements of Consolidated Earnings HTML 25K
(Parenthetical)
16: R4 Statements of Consolidated Comprehensive Income HTML 71K
17: R5 Consolidated Balance Sheets HTML 153K
18: R6 Consolidated Balance Sheets (Parenthetical) HTML 52K
19: R7 Statements of Consolidated Cash Flows HTML 123K
20: R8 Basis of Presentation HTML 28K
21: R9 New Accounting Pronouncements HTML 35K
22: R10 Revenue HTML 74K
23: R11 Earnings per Share (Eps) HTML 45K
24: R12 Other (Income)/Expense, Net HTML 37K
25: R13 Corporate Investments and Funds Held For Clients HTML 175K
26: R14 Leases HTML 50K
27: R15 Goodwill and Intangible Assets, net HTML 53K
28: R16 Short-term Financing HTML 39K
29: R17 Debt HTML 43K
30: R18 Employee Benefit Plans HTML 83K
31: R19 Income Taxes HTML 27K
32: R20 Commitments and Contingencies HTML 28K
33: R21 Stockholders' Equity HTML 83K
34: R22 Reclassifications out of Accumulated Other HTML 67K
Comprehensive Income (Aoci)
35: R23 Interim Financial Data by Segment HTML 46K
36: R24 New Accounting Pronouncements (Policies) HTML 30K
37: R25 Revenue (Tables) HTML 72K
38: R26 Earnings per Share (Eps) (Tables) HTML 44K
39: R27 Other (Income)/Expense, Net (Tables) HTML 36K
40: R28 Corporate Investments and Funds Held For Clients HTML 174K
(Tables)
41: R29 Leases (Tables) HTML 55K
42: R30 Goodwill and Intangible Assets, net (Tables) HTML 61K
43: R31 Short-term Financing (Tables) HTML 37K
44: R32 Debt (Tables) HTML 38K
45: R33 Employee Benefit Plans (Tables) HTML 85K
46: R34 Stockholders' Equity (Tables) HTML 79K
47: R35 Reclassifications out of Accumulated Other HTML 66K
Comprehensive Income (Aoci) (Tables)
48: R36 Interim Financial Data by Segment (Tables) HTML 42K
49: R37 Revenue - Disaggregation of Revenue (Details) HTML 60K
50: R38 Revenue - Contract Liability (Details) HTML 32K
51: R39 Earnings per Share (Eps) (Details) HTML 60K
52: R40 Other (Income)/Expense, Net (Details) HTML 36K
53: R41 Corporate Investments and Funds Held For Clients HTML 81K
(Corporate Investments And Funds Held For Clients)
(Details)
54: R42 Corporate Investments and Funds Held For Clients HTML 60K
(Narrative) (Details)
55: R43 Corporate Investments and Funds Held For Clients HTML 75K
(Available-For-Sale Securities That Have Been In
An Unrealized Loss Position) (Details)
56: R44 Corporate Investments and Funds Held For Clients HTML 32K
(Classification Of Corporate Investments On The
Consolidated Balance Sheets) (Details)
57: R45 Corporate Investments and Funds Held For Clients HTML 37K
(Schedule Of Investment Of Funds Held For Clients)
(Details)
58: R46 Corporate Investments and Funds Held For Clients HTML 37K
(Expected Maturities Of Available-For-Sale
Securities) (Details)
59: R47 Leases - Narrative (Details) HTML 27K
60: R48 Leases - Lease Cost (Details) HTML 32K
61: R49 Leases - Right of Use Assets and Operating Lease HTML 35K
Liabilities (Details)
62: R50 Leases - Operating Lease Maturities (Details) HTML 41K
63: R51 Goodwill and Intangible Assets, net - Changes In HTML 34K
Goodwill (Details)
64: R52 Goodwill and Intangible Assets, net - Components HTML 39K
Of Finite-Lived Intangible Assets (Details)
65: R53 Goodwill and Intangible Assets, net - Narrative HTML 34K
(Details)
66: R54 Goodwill and Intangible Assets, net - Schedule Of HTML 37K
Finite-Lived Intangible Assets, Future
Amortization Expense (Details)
67: R55 Short-term Financing - Narrative (Details) HTML 54K
68: R56 Short-term Financing - Commercial Paper Program HTML 34K
and Reverse Repurchase Agreements (Details)
69: R57 Debt - Narrative (Details) HTML 33K
70: R58 Debt (Details) HTML 47K
71: R59 Employee Benefit Plans (Narrative) (Details) HTML 46K
72: R60 Employee Benefit Plans (Components Of Stock-Based HTML 32K
Compensation Expense) (Details)
73: R61 Employee Benefit Plans (Changes In Stock Options HTML 46K
Outstanding) (Details)
74: R62 Employee Benefit Plans (Time-Based Restricted HTML 39K
shares and units) (Details)
75: R63 Employee Benefit Plans (Performance based HTML 39K
restricted shares and units) (Details)
76: R64 Employee Benefit Plans (Assumptions Used To HTML 34K
Estimate Fair Value For Stock Options Granted)
(Details)
77: R65 Employee Benefit Plans (Components Of Net Pension HTML 42K
(Income)/Expense) (Details)
78: R66 Income Taxes (Details) HTML 25K
79: R67 Commitments and Contingencies (Details) HTML 25K
80: R68 Stockholders' Equity (Details) HTML 74K
81: R69 Reclassifications out of Accumulated Other HTML 56K
Comprehensive Income (Aoci) (Details)
82: R70 Interim Financial Data by Segment (Narrative) HTML 25K
(Details)
83: R71 Interim Financial Data by Segment (Financial Data HTML 41K
By Strategic Business Unit Segment) (Details)
86: XML IDEA XML File -- Filing Summary XML 158K
84: XML XBRL Instance -- adp-20220930_htm XML 2.22M
85: EXCEL IDEA Workbook of Financial Reports XLSX 129K
8: EX-101.CAL XBRL Calculations -- adp-20220930_cal XML 225K
9: EX-101.DEF XBRL Definitions -- adp-20220930_def XML 406K
10: EX-101.LAB XBRL Labels -- adp-20220930_lab XML 1.45M
11: EX-101.PRE XBRL Presentations -- adp-20220930_pre XML 835K
7: EX-101.SCH XBRL Schema -- adp-20220930 XSD 174K
87: JSON XBRL Instance as JSON Data -- MetaLinks 397± 595K
88: ZIP XBRL Zipped Folder -- 0000008670-22-000046-xbrl Zip 374K
Registrant's telephone number, including area code:(i973) i974-5000
__________________________
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.10 Par Value (voting)
iADP
iNASDAQ
Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No o
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Revenues,
other than interest on funds held for clients and PEO revenues
$
i2,646.5
$
i2,467.7
Interest
on funds held for clients
i141.0
i101.1
PEO
revenues (A)
i1,428.1
i1,263.5
TOTAL
REVENUES
i4,215.6
i3,832.3
EXPENSES:
Costs
of revenues:
Operating expenses
i2,074.4
i1,930.8
Systems
development and programming costs
i209.8
i188.8
Depreciation
and amortization
i109.4
i103.0
TOTAL
COSTS OF REVENUES
i2,393.6
i2,222.6
Selling,
general, and administrative expenses
i800.3
i719.2
Interest
expense
i51.2
i18.5
TOTAL
EXPENSES
i3,245.1
i2,960.3
Other
(income)/expense, net
(i39.5)
(i28.8)
EARNINGS
BEFORE INCOME TAXES
i1,010.0
i900.8
Provision
for income taxes
i231.0
i200.3
NET
EARNINGS
$
i779.0
$
i700.5
BASIC
EARNINGS PER SHARE
$
i1.88
$
i1.66
DILUTED
EARNINGS PER SHARE
$
i1.87
$
i1.65
Basic
weighted average shares outstanding
i414.6
i421.4
Diluted
weighted average shares outstanding
i416.9
i423.8
(A)
Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of$i15,534.2 million and $i13,263.2
million for the three months ended September 30, 2022 and 2021, respectively.
See notes to the Consolidated Financial Statements.
(A)
As of September 30, 2022, $i167.0 million of long-term marketable securities and $i0.6
million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements. As of June 30, 2022, $i14.3 million of short-term marketable securities and $i122.1
million of long-term marketable securities have been pledged as collateral under the Company's reverse repurchase agreements (see Note 9).
See notes to the Consolidated Financial Statements.
(Tabular dollars in millions, except per share amounts or where otherwise
stated)
(Unaudited)
Note 1. iiBasis
of Presentation/
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc., its subsidiaries and variable interest entity (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair
presentation of the Company’s interim financial results.
The Company has a grantor trust, which holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees. The Company is the sole beneficial owner of the trust. The trust meets the criteria in Accounting Standards Codification (“ASC”) 810, “Consolidation” to be characterized as a variable interest entity (“VIE”). The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct
the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and, therefore, consolidates the trust. Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 6, “Corporate Investments and Funds Held for Clients.”
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto.
Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (“fiscal 2022”). Certain amounts from the prior year's financial statements have been reclassified in order to conform to the current year's presentation.
Note 2. iiNew
Accounting Pronouncements/
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
None.
Note 3. iRevenue
Based
upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three strategic pillars: Human Capital Management (“HCM”), HR Outsourcing (“HRO”), and Global (“Global”) Solutions, with separate disaggregation for PEO zero-margin benefits pass-through revenues and client funds interest revenues. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
iThe
following tables provide details of revenue by our strategic pillars, and include a reconciliation to the Company’s reportable segments:
The timing of revenue recognition for HCM, HRO and Global Solutions is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.
iChanges
in short-term deferred revenues related to set up fees for the three months ended September 30, 2022 were as follows:
Stock
Options to purchase i0.3 million and i0.3
million shares of common stock for the three months ended September 30, 2022 and 2021, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Money market securities, cash and other cash equivalents
$
i5,576.0
$
—
$
—
$
i5,576.0
Available-for-sale
securities:
Corporate bonds
i16,156.5
i—
(i1,572.8)
i14,583.7
U.S.
Treasury securities
i6,756.6
i—
(i303.9)
i6,452.7
Asset-backed
securities
i1,716.7
i—
(i81.8)
i1,634.9
Canadian
government obligations and Canadian government agency obligations
i1,942.7
i—
(i149.9)
i1,792.8
U.S.
government agency securities
i1,723.2
i—
(i199.7)
i1,523.5
Canadian
provincial bonds
i940.6
i0.3
(i81.3)
i859.6
Commercial
mortgage-backed securities
i807.8
i—
(i54.0)
i753.8
Other
securities
i1,271.9
i0.1
(i112.0)
i1,160.0
Total
available-for-sale securities
i31,316.0
i0.4
(i2,555.4)
i28,761.0
Total
corporate investments and funds held for clients
$
i36,892.0
$
i0.4
$
(i2,555.4)
$
i34,337.0
(A) Included
within available-for-sale securities are corporate investments with fair values of $i191.4 million and funds held for clients with fair values of $i28,569.6
million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
Money market securities, cash and other cash equivalents
$
i22,783.0
$
—
$
—
$
i22,783.0
Available-for-sale
securities:
Corporate bonds
i16,183.1
i3.9
(i1,083.0)
i15,104.0
U.S.
Treasury securities
i5,003.6
i2.2
(i171.1)
i4,834.7
Asset-backed
securities
i1,995.7
i0.5
(i58.8)
i1,937.4
Canadian
government obligations and Canadian government agency obligations
i2,022.9
i0.1
(i123.5)
i1,899.5
U.S.
government agency securities
i1,728.2
i0.1
(i138.2)
i1,590.1
Canadian
provincial bonds
i994.3
i0.4
(i62.7)
i932.0
Commercial
mortgage-backed securities
i858.7
i0.3
(i29.9)
i829.1
Other
securities
i1,326.5
i2.2
(i63.9)
i1,264.8
Total
available-for-sale securities
i30,113.0
i9.7
(i1,731.1)
i28,391.6
Total
corporate investments and funds held for clients
$
i52,896.0
$
i9.7
$
(i1,731.1)
$
i51,174.6
/
(B)
Included within available-for-sale securities are corporate investments with fair values of $i169.1 million and funds held for clients with fair values of $i28,222.5
million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
10
For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2022. The Company concurred with and did not adjust the prices obtained from the independent pricing service. The
Company had iino/
available-for-sale securities included in Level 1 or Level 3 at September 30, 2022.
i
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2022, are as follows:
Securities in Unrealized Loss Position Less Than 12 Months
Securities in Unrealized Loss Position Greater Than 12 Months
Total
Gross Unrealized Losses
Fair Market Value
Gross Unrealized Losses
Fair Market Value
Gross Unrealized Losses
Fair Market
Value
Corporate bonds
$
(i876.9)
$
i9,807.2
$
(i695.9)
$
i4,775.7
$
(i1,572.8)
$
i14,582.9
U.S.
Treasury securities
(i131.7)
i5,103.6
(i172.2)
i1,344.7
(i303.9)
i6,448.3
Asset-backed
securities
(i48.2)
i1,363.3
(i33.6)
i248.6
(i81.8)
i1,611.9
Canadian
government obligations and Canadian government agency obligations
(i67.4)
i982.6
(i82.5)
i806.9
(i149.9)
i1,789.5
U.S.
government agency securities
(i104.4)
i795.7
(i95.3)
i727.8
(i199.7)
i1,523.5
Canadian
provincial bonds
(i41.0)
i605.9
(i40.3)
i232.5
(i81.3)
i838.4
Commercial
mortgage-backed securities
(i44.8)
i681.5
(i9.2)
i72.3
(i54.0)
i753.8
Other
securities
(i66.3)
i911.3
(i45.7)
i236.4
(i112.0)
i1,147.7
$
(i1,380.7)
$
i20,251.1
$
(i1,174.7)
$
i8,444.9
$
(i2,555.4)
$
i28,696.0
The
unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2022, are as follows:
Securities in Unrealized Loss Position Less Than 12 Months
Securities in Unrealized Loss Position Greater Than 12 Months
Total
Gross Unrealized Losses
Fair Market Value
Gross Unrealized Losses
Fair Market Value
Gross Unrealized Losses
Fair Market
Value
Corporate bonds
$
(i824.0)
$
i11,525.4
$
(i259.0)
$
i2,356.7
$
(i1,083.0)
$
i13,882.1
U.S.
Treasury securities
(i126.4)
i2,919.6
(i44.7)
i464.6
(i171.1)
i3,384.2
Asset-backed
securities
(i52.6)
i1,444.9
(i6.2)
i59.9
(i58.8)
i1,504.8
Canadian
government obligations and Canadian government agency obligations
(i110.0)
i1,782.6
(i13.5)
i113.3
(i123.5)
i1,895.9
U.S.
government agency securities
(i75.3)
i859.3
(i62.9)
i695.6
(i138.2)
i1,554.9
Canadian
provincial bonds
(i45.4)
i726.9
(i17.3)
i133.2
(i62.7)
i860.1
Commercial
mortgage-backed securities
(i29.5)
i802.8
(i0.4)
i4.3
(i29.9)
i807.1
Other
securities
(i42.6)
i737.3
(i21.3)
i178.2
(i63.9)
i915.5
$
(i1,305.8)
$
i20,798.8
$
(i425.3)
$
i4,005.8
$
(i1,731.1)
$
i24,804.6
/
At
September 30, 2022, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from October 2022 through September 2032.
At September 30, 2022, asset-backed securities include AAA-rated senior tranches of securities with predominantly prime collateral of fixed-rate auto loan, credit card, equipment lease, and rate reduction receivables with fair values of $i866.6
million, $i511.6 million, $i217.1 million, and $i39.3
million, respectively. These securities are collateralized by the cash flows of the
11
underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through September 30, 2022.
At September 30, 2022, U.S. government agency securities primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks with fair values of $i947.2
million and $i493.7 million, respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's, and AA+ by Standard & Poor's, with maturities ranging from November 2022 through March 2032.
At September 30, 2022, U.S government agency commercial mortgage-backed securities of $i753.8
million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.
At September 30, 2022, other securities primarily include municipal bonds, diversified with a variety of issuers, with credit ratings of A and above with fair values of $i518.8 million, AA-rated United Kingdom Gilt securities of $i252.6
million, and AAA-rated supranational bonds of $i230.2 million.
i
Classification of corporate investments on the Consolidated
Balance Sheets is as follows:
(a)
- Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.
(b) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.
/
Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.
iFunds
held for clients have been invested in the following categories:
Restricted
cash and cash equivalents held to satisfy client funds obligations
$
i4,368.3
$
i21,346.7
Restricted
short-term marketable securities held to satisfy client funds obligations
i3,329.0
i4,263.1
Restricted
long-term marketable securities held to satisfy client funds obligations
i25,240.6
i23,959.4
Total
funds held for clients
$
i32,937.9
$
i49,569.2
/
Client
funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will be repaid within ione year of the balance sheet date. The Company
has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $i35,471.7 million and $i51,285.5 million
at September 30, 2022 and June 30, 2022, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations. Of the Company’s funds held for clients at September 30, 2022 and June 30, 2022, $i30,130.7
million and $i46,201.2 million, respectively, are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and are eliminated in consolidation.
The Company has reported the cash flows related to the purchases of corporate and client funds
marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash and cash equivalents related to client funds investments with original maturities of ininety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. The Company
has reported the cash flows related to the
12
cash received from and paid on behalf of clients on a net basis within net increase / (decrease) in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.
All available-for-sale securities were rated as investment grade at September 30, 2022.
iExpected
maturities of available-for-sale securities at September 30, 2022 are as follows:
One year or less
$
i3,353.5
One
year to two years
i5,500.0
Two years to three years
i5,774.3
Three
years to four years
i6,549.4
After four years
i7,583.8
Total
available-for-sale securities
$
i28,761.0
/
Note 7. iLeases
The
Company records leases on the Consolidated Balance Sheets as operating lease right-of-use (“ROU”) assets, records the current portion of operating lease liabilities within accrued expenses and other current liabilities and, separately, records long-term operating lease liabilities. The difference between total ROU assets and total lease liabilities is primarily attributable to pre-payments of our obligations and the recognition of various lease incentives.
The Company has entered into operating lease agreements for facilities and equipment. The Company's leases have remaining lease terms of up to approximately iten
years.
iThe components of operating lease expense were as follows:
Other
intangibles consist primarily of purchased rights, trademarks and trade names (acquired directly or through acquisitions). All intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is i5 years (i6
years for software and software licenses, i3 years for customer contracts and lists, and i2 years for other intangibles). Amortization of intangible assets was $i92.3
million and $i86.2 million for the three months ended September 30, 2022 and 2021, respectively.
14
iEstimated
future amortization expenses of the Company's existing intangible assets are as follows:
The Company has a $i3.75
billion, i364-day credit agreement that matures in June 2023 with a ione year term-out option. The interest rate applicable to committed borrowings under each agreement is tied to SOFR, the effective funds rate, or the prime rate depending on the notification provided by the
Company to the syndicated financial institutions prior to borrowing. The Company also has a $i2.75 billion ifive
year credit facility that matures in June 2024 that contains an accordion feature under which the aggregate commitment can be increased by $i500 million, subject to the availability of additional commitments. In addition, the Company has a ifive
year $i3.2 billion credit facility maturing in June 2026 that also contains an accordion feature under which the aggregate commitment can be increased by $i500
million, subject to the availability of additional commitments. The interest rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate, depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. The Company had ino
borrowings through September 30, 2022 under the credit agreements.
The Company's U.S. 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 $i9.7
billion in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to i364 days. At September 30, 2022 and June 30, 2022, the Company had iino/
commercial paper borrowing outstanding. iDetails of the borrowings under the commercial paper program are as follows:
The
Company’s U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. At September 30, 2022 and June 30, 2022, the Company had $i167.6 million
and $i136.4 million, respectively, of outstanding obligations related to reverse repurchase agreements. iDetails of the reverse repurchase
agreements are as follows:
The Company issued three series of fixed-rate notes with staggered maturities of i7 and i10-years
totaling $i3.0 billion(collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
i
The
principal amounts and associated effective interest rates of the Notes and other debt as of September 30, 2022 and June 30, 2022, are as follows:
Less:
unamortized discount and debt issuance costs
(i17.0)
(i17.7)
Total
long-term debt
$
i2,987.6
$
i2,987.1
(a)
- Current portion of long-term debt as of September 30, 2022 is included within Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
/
The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.
As of September 30, 2022, the fair value of the Notes, based on Level 2 inputs, was $i2,594.9
million. For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2022.
Note 11. iEmployee
Benefit Plans
A. Stock-based Compensation Plans. Stock-based compensation consists of the following:
The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock units, performance-based restricted stock, and performance-based restricted stock units. The Company also offers an employee stock purchase plan for eligible employees. Beginning in September 2022, the Company discontinued
granting stock options, time-based restricted stock and performance-based restricted stock. Any such future awards will be grants of time-based restricted stock units and/or performance-based restricted stock units, depending on employee eligibility. Time-based restricted stock unit awards and performance-based restricted stock unit awards granted to employees with a home country of the United States are settled in stock, and for awards granted to employees with a home country outside the United States are generally settled in cash.
•Restricted Stock.
•Time-Based Restricted Stock Units. Time-based restricted stock units generally vest ratably
over i3 years. Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.
Time-based restricted stock unit awards granted to employees with a home country of the United States are settled in stock and cannot be transferred during the vesting period. Time-based restricted stock unit awards granted to employees with a
home country outside the United States are generally settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of share-settled units is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Compensation expense relating to the issuance of cash-settled units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently
16
remeasured at each reporting date during the vesting period based on the change in the ADP stock price. Dividend cash equivalents are paid on share-settled units, and dividend cash equivalents are not paid on cash-settled units.
•Performance-Based Restricted Stock Units. Performance-based restricted stock units generally vest over a one to ithree year performance period and a subsequent service period of up to i38
months. Under these programs, the Company communicates “target awards” at the beginning of the performance period with possible payouts at the end of the performance period ranging from i0% to i200%
of the “target awards.” Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.
Performance-based restricted stock units cannot be transferred and are settled in either cash or stock, depending on the employee's home country. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price. Compensation expense relating to the
issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards under the performance-based restricted stock unit program.
•Employee Stock Purchase Plan.The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to i95%
of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program. The Company repurchased i1.4
million and i2.6 million shares in the three months ended September 30, 2022 and 2021, respectively. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
i
The following table represents pre-tax stock-based compensation expense for the three and three months ended September 30, 2022 and 2021, respectively:
Settlement
charges and special termination benefits
i1.4
i—
Net
pension (income)/expense
$
(i9.3)
$
(i15.8)
/
Note
12. iIncome Taxes
The effective tax rate for the three months ended September 30, 2022 and 2021 was i22.9%
and i22.2%, 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.
Note 13. iCommitments
and Contingencies
In May 2020, itwo potential class action complaints were filed against ADP, TotalSource and related defendants in the U.S. District Court, District of New Jersey. The complaints assert violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with the ADP TotalSource Retirement Savings Plan’s fiduciary administrative and investment decision-making. The complaints seek statutory and other unspecified monetary damages, injunctive
relief and attorney’s fees. These claims are still in their early stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to these matters. The Company intends to vigorously defend against these lawsuits.
The Company is subject to various claims, litigation, and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims,
litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.
It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services
and products. The Company does not expect any material losses related to such representations and warranties.
19
Note 14. iStockholders'
Equity
i
Changes in stockholders' equity by component are as follows:
(A)
Reclassification adjustments out of AOCI are included within Other (income)/expense, net, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included in net pension (income)/expense (see Note 11).
(C) Reclassification adjustments out of AOCI are included in Interest expense on the Statements of Consolidated Earnings (see Note 10).
/
Note 16. iInterim
Financial Data by Segment
Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following itwo reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment 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 interest expense. Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular dollars are presented in millions, except per share amounts)
FORWARD-LOOKING STATEMENTS
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”, "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. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements or that could contribute to such difference include: ADP's success in obtaining and retaining clients, and selling additional services to clients; the pricing of products and services; the success of our new solutions; compliance with existing or new legislation or regulations; changes in, or interpretations of, existing legislation or regulations; overall market, political
and economic conditions, including interest rate and foreign currency trends and inflation; competitive conditions; our ability to maintain our current credit ratings and the impact on our funding costs and profitability; security or cyber breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; the impact of new acquisitions and divestitures; the adequacy, effectiveness and success of our business transformation initiatives; 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. These risks and uncertainties, along with the risk factors discussed under “Item 1A. - Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (“fiscal 2022”), and in other written or oral statements made from time to time by ADP, should be considered in evaluating any forward-looking statements contained herein.
NON-GAAP FINANCIAL MEASURES
In addition to our U.S. GAAP results, we use adjusted results and other non-GAAP metrics to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods. Adjusted EBIT, adjusted EBIT margin, adjusted net earnings, adjusted diluted earnings per share, adjusted effective tax rate and organic constant currency are all non-GAAP financial measures. Please refer to the accompanying financial tables in the “Non-GAAP Financial Measures” section for a discussion of why
ADP believes these measures are important and for a reconciliation of non-GAAP financial measures to their comparable GAAP financial measures.
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. 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.
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, 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. Our financial condition remains solid at September 30, 2022 and we remain well positioned to support our associates and our clients.
24
RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS
Total Revenues
For the three months ended September 30, respectively:
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.
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 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.
25
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.
Realized
losses/(gains) on available-for-sale securities, net
1.5
(0.1)
(1.6)
Impairment of assets
0.3
—
(0.3)
Gain
on sale of assets
—
(1.3)
(1.3)
Non-service components of pension income, net
(11.6)
(17.7)
(6.1)
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 ("EBIT") and Adjusted EBIT
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 strategy, 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.
26
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.
Net Earnings and Diluted EPS, Unadjusted and Adjusted
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.
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 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.
28
Margin
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.
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 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.
Margin
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. PEO Services has secured a workers’ compensation and employer’s liability insurance policy that caps the exposure for each claim at $1 million per occurrence and has also secured aggregate stop loss insurance that caps aggregate losses at a certain level in fiscal years 2012 and prior from an admitted and licensed insurance company of AIG. We utilize historical loss experience and actuarial judgment to determine the estimated
claim liability, and changes in estimated ultimate incurred losses are included in the PEO segment.
Additionally, starting in fiscal year 2013, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited (“Chubb”), to cover substantially all losses incurred by the Company up to the $1 million per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' worksite employees. Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit. 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. In July 2022, ADP Indemnity paid a premium of $284 million to 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.
29
Other
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.
Non-GAAP Financial Measures
In addition to our U.S. GAAP results, we use the adjusted results and other non-GAAP metrics set forth in the table below to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods:
Adjusted
Financial Measure
U.S. GAAP Measures
Adjusted EBIT
Net earnings
Adjusted provision for income taxes
Provision for income taxes
Adjusted net earnings
Net earnings
Adjusted diluted earnings per share
Diluted earnings per share
Adjusted
effective tax rate
Effective tax rate
Organic constant currency
Revenues
We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations and against prior period, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a
manner similar to the method used by management and improves their ability to understand and assess our operating performance. The nature of these exclusions is for specific items that are not fundamental to our underlying business operations. Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their corresponding U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.
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
%
Adjustments:
Transformation
initiatives (b) (d)
—
—
Legal
settlements (c) (d)
(0.01)
—
Adjusted
diluted EPS
$
1.86
$
1.65
13
%
(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. 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. 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) Represents insurance recovery from a legal settlement charge previously recorded.
(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.
31
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 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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 committed 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.
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 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.
32
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:
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
(44.9)
(21.2)
(23.7)
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 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 share of $230.13
during 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. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
Capital Resources and Client Funds Obligations
We
have $3.0 billion of senior unsecured notes with maturity dates in 2025, 2028 and 2030. We may from time to time revisit the long-term debt market to refinance existing debt, finance investments including acquisitions for our growth, and maintain the appropriate capital structure. However, there can be no assurance that volatility in the global capital and credit markets would not impair our ability to access these markets on terms acceptable to us, or at all. See Note 10 of our Consolidated Financial Statements for a description of our long-term financing.
Our U.S. 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. Our commercial paper program is rated A-1+ by Standard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At September 30, 2022 and June 30, 2022, the Company had no commercial paper borrowing outstanding. Details of the borrowings under the commercial paper program are as follows:
Our U.S., Canadian, and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis
through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations. At 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:
We vary the maturities of our committed credit facilities
to limit the refinancing risk of any one facility. We have a $3.75 billion, 364-day credit agreement that matures in June 2023 with a one year term-out option. In addition, we have a five-year $2.75 billion credit facility and a five-year $3.2 billion credit facility maturing in June 2024 and June 2026, respectively, each with an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. 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 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. See Note 9 of our Consolidated Financial Statements for a description of our short-term financing including credit facilities.
Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities. We own AAA-rated senior tranches of 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. In addition,
we own U.S. government securities which primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations. 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. We expect capital expenditures in fiscal 2023 to be between $200 million and $225 million,as compared to $177.1 million in fiscal 2022.
34
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
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 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. Consistent with those objectives, we also seek to maximize interest income and to minimize the volatility of interest income. Client funds assets are invested in highly liquid, investment-grade marketable securities, with a maximum maturity of 10 years at the time of purchase, and money market securities and other cash equivalents.
We
utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. In circumstances where we experience a reduction in employment levels due to a slowdown in the economy, we may make tactical decisions to sell certain securities or not reinvest maturing securities
in order to reduce the size of the funds held for clients to correspond to client funds obligations. We minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances, the client’s funds in advance of the timing of payment of such client’s obligation. As a result of this practice, we have consistently maintained the required level of client funds assets to satisfy all of our obligations.
There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets. Such risks include liquidity risk, including the risk associated with our ability to liquidate, if necessary, our available-for-sale securities in a timely manner in order to satisfy our client funds obligations. However, our investments are made with the safety of principal, liquidity, and diversification as the
primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations. 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, 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.
We have established credit quality, maturity, and exposure limits for our investments. 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. Time deposits and commercial paper must be rated A-1 and/or P-1. Money market funds must be rated AAA/Aaa-mf.
35
Details regarding our overall investment portfolio are as follows:
Net unrealized pre-tax (losses)/gains on available-for-sale securities
$
(2,555.0)
$
(1,721.4)
Total available-for-sale securities at fair value
$
28,761.0
$
28,391.6
We
are exposed to interest rate risk in relation to securities that mature, as the proceeds from maturing securities are reinvested. Factors that influence the earnings impact of interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term investments. This mix varies during the fiscal year and is impacted by daily interest rate changes. The annualized interest rate earned on our entire portfolio 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-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 $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. We limit credit risk by investing in investment-grade securities, primarily AAA-rated and AA- rated securities, as
rated by Moody’s, Standard & Poor’s, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial-mortgage-backed securities. In addition, we limit amounts that can be invested in any security other than U.S. government and government agency, Canadian government, and United Kingdom government securities.
We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of operations, financial position, or cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We may use derivative financial instruments as risk management tools and not for trading purposes.
36
CRITICAL
ACCOUNTING POLICIES
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and other comprehensive income. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Refer to Note 2 of our Consolidated Financial Statements for changes to our accounting policies effective for the fiscal 2022.
NEW
ACCOUNTING PRONOUNCEMENTS
See Note 2, New Accounting Pronouncements, of Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures about Market Risk” under Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls
and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “evaluation”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022 in ensuring that (i) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There was no change in the Company's internal control over financial reporting that occurred during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Except as noted below, all other items are either inapplicable or would result in negative responses and, therefore, have been omitted.
Item 1. Legal Proceedings
In the normal course of business, the Company is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, the
Company believes it has valid defenses with respect to the legal matters pending against it and the Company believes that the ultimate resolution of these matters will not have a material adverse impact on its financial condition, results of operations, or cash flows.
With respect to the disclosure of administrative or judicial proceedings arising under any Federal, State, or local provisions regulating the discharge of materials into the environment or that are primarily for the purpose of protecting the environment, the Company has determined that the following threshold is reasonably designed to result in disclosure of any such proceeding that is material to its business or financial condition: any proceeding when the potential monetary sanctions
exceed $1 million.
37
Item 1A. Risk Factors
There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Total
Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of the Publicly Announced Common Stock Repurchase Plan (2)
Maximum Approximate Dollar Value of Shares that may yet be Purchased under the Common Stock Repurchase Plan (2)
Period
July 1 to 31, 2022
697,683
$
216.74
696,317
$
954,803,421
August
1 to 31, 2022
359,839
$
251.38
359,743
$
864,371,104
September
1 to 30, 2022
662,324
$
230.90
357,599
$
780,366,639
Total
1,719,846
1,413,659
(1) During
the three months ended September 30, 2022, pursuant to the terms of our restricted stock program, the Company purchased 306,187 shares at the then-market value of the shares to satisfy certain tax withholding requirements for employees upon the vesting of their restricted shares.
(2) The Company received the Board of Directors' approval to repurchase the shares of our common stock included in the table above as follows:
Date of Approval
November
2019
$5 billion
There is no expiration date for the common stock repurchase authorization.
Certification by Don McGuire pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Instance
Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.