Item 1. Financial Statements

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Item 1. Financial Statements

Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Earnings

(In millions, except per share amounts)

(Unaudited)

Three Months Ended
September 30,
20212020
REVENUES:
Revenues, other than interest on funds held for clients and PEO revenues$2,467.7$2,269.6
Interest on funds held for clients101.1106.5
PEO revenues (A)1,263.51,094.6
TOTAL REVENUES3,832.33,470.7
EXPENSES:
Costs of revenues:
Operating expenses1,930.81,762.1
Systems development and programming costs188.8168.7
Depreciation and amortization103.0103.5
TOTAL COSTS OF REVENUES2,222.62,034.3
Selling, general, and administrative expenses719.2681.0
Interest expense18.515.1
TOTAL EXPENSES2,960.32,730.4
Other (income)/expense, net(28.8)(24.9)
EARNINGS BEFORE INCOME TAXES900.8765.2
Provision for income taxes200.3163.1
NET EARNINGS$700.5$602.1
BASIC EARNINGS PER SHARE$1.66$1.40
DILUTED EARNINGS PER SHARE$1.65$1.40
Basic weighted average shares outstanding421.4428.6
Diluted weighted average shares outstanding423.8430.0

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $13,263.2 million and $10,925.8 million for the three months ended September 30, 2021 and 2020, respectively.

See notes to the Consolidated Financial Statements.

Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Comprehensive Income

(In millions)

(Unaudited)

Three Months Ended
September 30,
20212020
Net earnings$700.5$602.1
Other comprehensive (loss)/income:
Currency translation adjustments(35.1)50.4
Unrealized net (losses)/gains on available-for-sale securities(130.3)(24.6)
Tax effect29.35.5
Reclassification of net (gains)/losses on available-for-sale securities to net earnings(0.1)(0.3)
Tax effect—0.1
Unrealized (losses)/gains on cash flow hedging activities—(3.3)
Tax effect—0.8
Amortization of unrealized losses on cash flow hedging activities1.10.6
Tax effect(0.3)—
Reclassification of pension liability adjustment to net earnings2.22.5
Tax effect(0.3)(1.0)
Other comprehensive (loss)/income, net of tax(133.5)30.7
Comprehensive income$567.0$632.8

See notes to the Consolidated Financial Statements.

Automatic Data Processing, Inc. and Subsidiaries

Consolidated Balance Sheets

(In millions, except per share amounts)

(Unaudited)

September 30,June 30,
20212021
Assets
Current assets:
Cash and cash equivalents$1,602.1$2,575.2
Accounts receivable, net of allowance for doubtful accounts of $76.7 and $79.6, respectively2,769.72,727.4
Other current assets867.5533.4
Total current assets before funds held for clients5,239.35,836.0
Funds held for clients46,808.634,905.8
Total current assets52,047.940,741.8
Long-term receivables, net of allowance for doubtful accounts of $0.3 and $0.3, respectively10.111.5
Property, plant and equipment, net648.7684.5
Operating lease right-of-use asset462.4462.2
Deferred contract costs2,463.22,498.2
Other assets817.5825.8
Goodwill2,325.82,338.4
Intangible assets, net1,211.61,210.1
Total assets$59,987.2$48,772.5
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$77.8$141.1
Accrued expenses and other current liabilities1,796.11,963.3
Accrued payroll and payroll-related expenses552.7910.2
Dividends payable389.5390.8
Short-term deferred revenues191.6203.9
Obligations under reverse repurchase agreements (A)45.823.5
Income taxes payable179.358.2
Total current liabilities before client funds obligations3,232.83,691.0
Client funds obligations46,437.134,403.8
Total current liabilities49,669.938,094.8
Long-term debt2,985.52,985.0
Operating lease liabilities345.7343.2
Other liabilities813.6834.1
Deferred income taxes469.3482.9
Long-term deferred revenues352.5362.4
Total liabilities54,636.543,102.4
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $1.00 par value: authorized, 0.3 shares; issued, none——
Common stock, $0.10 par value: authorized, 1,000.0 shares; issued, 638.7 shares at September 30, 2021 and June 30, 2021; outstanding, 422.0 and 423.7 shares at September 30, 2021 and June 30, 2021, respectively63.963.9
Capital in excess of par value1,579.11,531.3
Retained earnings19,754.819,451.1
Treasury stock - at cost: 216.7 and 215.0 shares at September 30, 2021 and June 30, 2021, respectively(15,924.2)(15,386.8)
Accumulated other comprehensive (loss) income(122.9)10.6
Total stockholders’ equity5,350.75,670.1
Total liabilities and stockholders’ equity$59,987.2$48,772.5

(A) As of September 30, 2021, $45.8 million of short-term marketable securities have been pledged as collateral under the Company's reverse repurchase agreements. As of June 30, 2021, $23.5 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.

A****utomatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Cash Flows

(In millions)

(Unaudited)

Three Months Ended
September 30,
20212020
Cash Flows from Operating Activities:
Net earnings$700.5$602.1
Adjustments to reconcile net earnings to cash flows provided by operating activities:
Depreciation and amortization129.1131.1
Amortization of deferred contract costs237.3232.3
Deferred income taxes25.623.5
Stock-based compensation expense42.333.8
Net pension income(15.8)(11.1)
Net amortization of premiums and accretion of discounts on available-for-sale securities22.712.4
Impairment of assets—2.8
Gain on sale of assets(1.3)(0.2)
Other3.26.1
Changes in operating assets and liabilities:
Increase in accounts receivable(51.8)(78.7)
Increase in other assets(494.2)(454.8)
(Decrease)/Increase in accounts payable(61.9)5.7
Decrease in accrued expenses and other liabilities(413.8)(23.1)
Net cash flows provided by operating activities121.9481.9
Cash Flows from Investing Activities:
Purchases of corporate and client funds marketable securities(2,412.6)(812.8)
Proceeds from the sales and maturities of corporate and client funds marketable securities1,279.11,196.7
Capital expenditures(35.9)(43.5)
Additions to intangibles(93.2)(76.4)
Proceeds from sale of property, plant, and equipment and other assets26.20.2
Net cash flows (used in)/provided by investing activities(1,236.4)264.2
Cash Flows from Financing Activities:
Net increase in client funds obligations12,100.63,203.3
Payments of debt(0.2)(1,000.6)
Proceeds from the issuance of debt—991.1
Settlement of cash flow hedges—(43.6)
Repurchases of common stock(528.0)(213.6)
Net proceeds from stock purchase plan and stock-based compensation plans(16.7)(7.9)
Dividends paid(393.2)(391.0)
Net proceeds/(payments) related to reverse repurchase agreements22.3(13.6)
Net cash flows provided by financing activities11,184.82,524.1
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents(21.2)37.9
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents10,049.13,308.1
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period13,143.27,053.6
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period$23,192.3$10,361.7
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents$1,602.1$1,613.1
Restricted cash and restricted cash equivalents included in funds held for clients (A)21,590.28,748.6
Total cash, cash equivalents, restricted cash, and restricted cash equivalents$23,192.3$10,361.7
Supplemental disclosures of cash flow information:
Cash paid for interest$23.9$27.3
Cash paid for income taxes, net of income tax refunds$55.0$45.4

(A) See Note 6 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.

See notes to the Consolidated Financial Statements.

Automatic Data Processing, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(Tabular dollars in millions, except per share amounts or where otherwise stated)

(Unaudited)

Note 1. Basis 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, 2021 (“fiscal 2021”).

Note 2. New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

None.

Recently Issued Accounting Pronouncements

None.

Note 3. Revenue

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.

The following tables provide details of revenue by our strategic pillars, and include a reconciliation to the Company’s reportable segments. The Company made changes to certain allocation methodologies in both the current period and the prior

period in the tables below which did not materially affect our reporting of revenues by strategic pillar:

Three Months Ended
September 30,
Types of Revenues20212020
HCM$1,666.7$1,536.9
HRO, excluding PEO zero-margin benefits pass-throughs679.3581.4
PEO zero-margin benefits pass-throughs839.5741.0
Global545.7504.9
Interest on funds held for clients101.1106.5
Total Revenues$3,832.3$3,470.7

Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2021:

Types of RevenuesEmployer ServicesPEOOtherTotal
HCM$1,669.1$—$(2.4)$1,666.7
HRO, excluding PEO zero-margin benefits pass-throughs256.2424.0(0.9)679.3
PEO zero-margin benefits pass-throughs—839.5—839.5
Global545.7——545.7
Interest on funds held for clients100.50.6—101.1
Total Segment Revenues$2,571.5$1,264.1$(3.3)$3,832.3

Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2020:

Types of RevenuesEmployer ServicesPEOOtherTotal
HCM$1,538.6$—$(1.7)$1,536.9
HRO, excluding PEO zero-margin benefits pass-throughs228.1353.6(0.3)581.4
PEO zero-margin benefits pass-throughs—741.0—741.0
Global504.9——504.9
Interest on funds held for clients105.21.3—106.5
Total Segment Revenues$2,376.8$1,095.9$(2.0)$3,470.7

Contract Balances

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.

Changes in deferred revenue related to set up fees for the three months ended September 30, 2021 were as follows:

Contract Liability
Contract liability, July 1, 2021$516.1
Recognition of revenue included in beginning of year contract liability(40.8)
Contract liability, net of revenue recognized on contracts during the period29.8
Currency translation adjustments(6.2)
Contract liability, September 30, 2021$498.9

Note 4. Earnings per Share (“EPS”)

BasicEffect of Employee Stock Option SharesEffect of Employee Restricted Stock SharesDiluted
Three Months Ended September 30, 2021
Net earnings$700.5$700.5
Weighted average shares (in millions)421.41.21.2423.8
EPS$1.66$1.65
Three Months Ended September 30, 2020
Net earnings$602.1$602.1
Weighted average shares (in millions)428.60.60.8430.0
EPS$1.40$1.40

Stock Options to purchase 0.3 million and 2.1 million shares of common stock for the three months ended September 30, 2021 and 2020, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Note 5. Other (Income)/Expense, Net

Three Months Ended
September 30,
20212020
Interest income on corporate funds$(9.7)$(13.8)
Realized (gains)/losses on available-for-sale securities, net(0.1)(0.3)
Impairment of assets—2.8
Gain on sale of assets(1.3)(0.2)
Non-service components of pension income, net (see Note 11)(17.7)(13.4)
Other (income)/expense, net$(28.8)$(24.9)

Other (income)/expense, net, increased for the three months ended September 30, 2021 primarily as a result of an increase in non-service components of pension income.

Note 6. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at September 30, 2021 and June 30, 2021 were as follows:

September 30, 2021
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Market Value (A)
Type of issue:
Money market securities, cash and other cash equivalents$23,192.3$—$—$23,192.3
Available-for-sale securities:
Corporate bonds12,803.0275.7(62.5)13,016.2
U.S. Treasury securities4,053.952.9(14.6)4,092.2
Asset-backed securities2,259.149.9(2.1)2,306.9
Canadian government obligations and Canadian government agency obligations1,559.712.0(11.8)1,559.9
U.S. government agency securities1,466.417.9(12.4)1,471.9
Canadian provincial bonds871.419.0(6.5)883.9
Commercial mortgage-backed securities837.736.0(0.6)873.1
Other securities1,069.726.6(7.7)1,088.6
Total available-for-sale securities24,920.9490.0(118.2)25,292.7
Total corporate investments and funds held for clients$48,113.2$490.0$(118.2)$48,485.0

(A) Included within available-for-sale securities are corporate investments with fair values of $74.3 million and funds held for clients with fair values of $25,218.4 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

June 30, 2021
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Market Value (B)
Type of issue:
Money market securities, cash and other cash equivalents$13,143.2$—$—$13,143.2
Available-for-sale securities:
Corporate bonds11,732.3321.9(38.5)12,015.7
U.S. Treasury securities4,036.964.8(9.3)4,092.4
Asset-backed securities2,279.860.9(0.9)2,339.8
Canadian government obligations and Canadian government agency obligations1,542.315.0(9.0)1,548.3
U.S. government agency securities1,446.322.5(9.4)1,459.4
Canadian provincial bonds956.322.7(5.3)973.7
Commercial mortgage-backed securities793.441.2—834.6
Other securities1,082.230.9(5.3)1,107.8
Total available-for-sale securities23,869.5579.9(77.7)24,371.7
Total corporate investments and funds held for clients$37,012.7$579.9$(77.7)$37,514.9

(B) Included within available-for-sale securities are corporate investments with fair values of $33.9 million and funds held for clients with fair values of $24,337.8 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

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 2021. The Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company had no available-for-sale securities included in Level 1 or Level 3 at September 30, 2021.

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, 2021, are as follows:

September 30, 2021
Securities in Unrealized Loss Position Less Than 12 MonthsSecurities in Unrealized Loss Position Greater Than 12 MonthsTotal
Gross Unrealized LossesFair Market ValueGross Unrealized LossesFair Market ValueGross Unrealized LossesFair Market Value
Corporate bonds$(60.7)$5,522.8$(1.8)$50.5$(62.5)$5,573.3
U.S. Treasury securities(14.6)1,515.5——(14.6)1,515.5
Asset-backed securities(2.1)280.6——(2.1)280.6
Canadian government obligations and Canadian government agency obligations(11.8)944.4——(11.8)944.4
U.S. government agency securities(7.1)496.3(5.3)315.2(12.4)811.5
Canadian provincial bonds(6.5)299.5——(6.5)299.5
Commercial mortgage-backed securities(0.6)86.6——(0.6)86.6
Other securities(7.6)351.9(0.1)1.9(7.7)353.8
$(111.0)$9,497.6$(7.2)$367.6$(118.2)$9,865.2

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, 2021, are as follows:

June 30, 2021
Securities in Unrealized Loss Position Less Than 12 MonthsSecurities in Unrealized Loss Position Greater Than 12 MonthsTotal
Gross Unrealized LossesFair Market ValueGross Unrealized LossesFair Market ValueGross Unrealized LossesFair Market Value
Corporate bonds$(38.5)$3,539.6$—$—$(38.5)$3,539.6
U.S. Treasury securities(9.3)580.9——(9.3)580.9
Asset-backed securities(0.9)160.9——(0.9)160.9
Canadian government obligations and Canadian government agency obligations(9.0)721.3——(9.0)721.3
U.S. government agency securities(9.4)749.7——(9.4)749.7
Canadian provincial bonds(5.3)253.7——(5.3)253.7
Commercial mortgage-backed securities—16.7———16.7
Other securities(5.2)308.5(0.1)1.9(5.3)310.4
$(77.6)$6,331.3$(0.1)$1.9$(77.7)$6,333.2

At September 30, 2021, 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 2021 through September 2031.

At September 30, 2021, 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 $1,196.5 million, $806.0 million, $239.6 million, and $64.1 million, respectively. These securities are collateralized by the cash flows of the 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, 2021.

At September 30, 2021, U.S. government agency securities primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks with fair values of $822.0 million and $530.7 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 December 2021 through September 2031.

At September 30, 2021, U.S government agency commercial mortgage-backed securities of $873.1 million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.

At September 30, 2021, other securities primarily include municipal bonds, diversified with a variety of issuers, with credit ratings of A and above with fair values of $550.6 million and AA-rated United Kingdom Gilt securities of $237.0 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:

September 30,June 30,
20212021
Corporate investments:
Cash and cash equivalents$1,602.1$2,575.2
Short-term marketable securities (a)74.310.4
Long-term marketable securities (b)—23.5
Total corporate investments$1,676.4$2,609.1

(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.

Funds held for clients have been invested in the following categories:

September 30,June 30,
20212021
Funds held for clients:
Restricted cash and cash equivalents held to satisfy client funds obligations$21,590.2$10,568.0
Restricted short-term marketable securities held to satisfy client funds obligations4,044.53,743.3
Restricted long-term marketable securities held to satisfy client funds obligations21,173.920,594.5
Total funds held for clients$46,808.6$34,905.8

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 one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $46,437.1 million and $34,403.8 million at September 30, 2021 and June 30, 2021, 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, 2021 and June 30, 2021, $43,364.8 million and $31,092.3 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 ninety 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 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, 2021.

Expected maturities of available-for-sale securities at September 30, 2021 are as follows:

One year or less$4,118.8
One year to two years3,657.9
Two years to three years2,933.0
Three years to four years4,626.3
After four years9,956.7
Total available-for-sale securities$25,292.7

Note 7. Leases

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 eleven years.

The components of operating lease expense were as follows:

Three Months Ended
September 30,
20212020
Operating lease cost$35.9$39.1
Short-term lease cost0.30.4
Variable lease cost2.52.1
Total operating lease cost$38.7$41.6

The following table provides supplemental cash flow information related to the Company's leases:

Three Months Ended
September 30,
20212020
Cash paid for operating lease liabilities$33.1$45.3
Operating lease ROU assets obtained in exchange for new operating lease liabilities$19.5$23.2

Other information related to our operating lease liabilities is as follows:

September 30,June 30,
20212021
Weighted-average remaining lease term (in years)66
Weighted-average discount rate2.1%2.2%
Current operating lease liability$100.3$94.7

As of September 30, 2021, maturities of operating lease liabilities are as follows:

Nine months ending June 30, 2022$79.0
Twelve months ending June 30, 202396.8
Twelve months ending June 30, 202475.0
Twelve months ending June 30, 202560.0
Twelve months ending June 30, 202652.1
Thereafter111.4
Total undiscounted lease obligations474.3
Less: Imputed interest(28.3)
Net lease obligations$446.0

Note 8. Goodwill and Intangible Assets, net

Changes in goodwill for the three months ended September 30, 2021 are as follows:

Employer ServicesPEO ServicesTotal
Balance at June 30, 2021$2,333.6$4.8$2,338.4
Currency translation adjustments(12.6)—(12.6)
Balance at September 30, 2021$2,321.0$4.8$2,325.8

Components of intangible assets, net, are as follows:

September 30,June 30,
20212021
Intangible assets:
Software and software licenses$3,001.4$2,950.8
Customer contracts and lists1,081.31,062.2
Other intangibles241.0239.0
4,323.74,252.0
Less accumulated amortization:
Software and software licenses(2,138.3)(2,090.4)
Customer contracts and lists(744.1)(723.4)
Other intangibles(229.7)(228.1)
(3,112.1)(3,041.9)
Intangible assets, net$1,211.6$1,210.1

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 6 years (6 years for software and software licenses, 4 years for customer contracts and lists, and 3 years for other intangibles). Amortization of intangible assets was $86.2 million and $84.2 million for the three months ended September 30, 2021 and 2020, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:

Amount
Nine months ending June 30, 2022$240.7
Twelve months ending June 30, 2023$265.5
Twelve months ending June 30, 2024$215.8
Twelve months ending June 30, 2025$150.7
Twelve months ending June 30, 2026$99.1
Twelve months ending June 30, 2027$75.6

Note 9. Short-term Financing

The Company has a $3.75 billion, 364-day credit agreement that matures in June 2022 with a one year term-out option. The Company also has a $2.75 billion five year credit facility that matures in June 2024 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. In addition, the Company has a five year $3.2 billion credit facility maturing in June 2026 that also contains an accordion feature under which the aggregate commitment can be increased by $500 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 no borrowings through September 30, 2021 under the credit agreements.

The Company's U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $9.7 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 364 days. At September 30, 2021 and June 30, 2021, the Company had no commercial paper borrowing outstanding. Details of the borrowings under the commercial paper program are as follows:

Three Months Ended
September 30,
20212020
Average daily borrowings (in billions)$2.0$2.4
Weighted average interest rates0.1%0.1%
Weighted average maturity (approximately in days)1 day1 day

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, 2021 and June 30, 2021, the Company had $45.8 million and $23.5 million, respectively, of outstanding obligations related to the reverse repurchase agreements. Details of the reverse repurchase agreements are as follows:

Three Months Ended
September 30,
20212020
Average outstanding balances$195.1$152.4
Weighted average interest rates0.2%0.3%

Note 10. Debt

The Company issued three series of fixed-rate notes with staggered maturities of 7 and 10-years totaling $3.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.

The principal amounts and associated effective interest rates of the Notes and other debt as of September 30, 2021 and June 30, 2021, are as follows:

Debt instrumentEffective Interest RateSeptember 30, 2021June 30, 2021
Fixed-rate 3.375% notes due September 15, 20253.47%$1,000.0$1,000.0
Fixed-rate 1.250% notes due September 1, 20301.83%1,000.01,000.0
Fixed-rate 1.700% notes due May 15, 20281.85%1,000.01,000.0
Other6.76.9
3,006.73,006.9
Less: current portion (a)(1.2)(1.2)
Less: unamortized discount and debt issuance costs(20.0)(20.7)
Total long-term debt$2,985.5$2,985.0

(a) - Current portion of long-term debt as of September 30, 2021 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, 2021, the fair value of the Notes, based on Level 2 inputs, was $3,048.9 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 2021.

Note 11. Employee Benefit Plans

A. Stock-based Compensation Plans. Stock-based compensation consists of the following:

  • Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant. Stock options generally vest ratably over 4 years and have a term of 10 years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized on a straight-line basis over the vesting period. Stock options are generally forfeited if the employee ceases to be employed by the Company prior to vesting. The Company determines the fair value of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price, and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.

  • Restricted Stock.**

  • Time-Based Restricted Stock and Time-Based Restricted Stock Units.** Time-based restricted stock and time-based restricted stock units generally vest ratably over 3 years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock 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. Dividends are paid on shares awarded under the time-based restricted stock program.

Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock 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 remeasured at each reporting date during the vesting period based on the change in the ADP stock price. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.

  • Performance-Based Restricted Stock and Performance-Based Restricted Stock Units.** Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 38 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 0% to 150% 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 cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.

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 95% 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 2.6 million and 1.7 million shares in the three months ended September 30, 2021 and 2020, 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.

The following table represents pre-tax stock-based compensation expense for the three months ended September 30, 2021 and 2020, respectively:

Three Months Ended
September 30,
20212020
Operating expenses$4.8$3.6
Selling, general and administrative expenses31.325.3
System development and programming costs6.24.9
Total stock-based compensation expense$42.3$33.8

During the three months ended September 30, 2021, the following activity occurred under the Company’s existing plans.

Stock Options:

Number of Options (in thousands)Weighted Average Price (in dollars)
Options outstanding at July 1, 20213,705$135
Options granted792$207
Options exercised(292)$123
Options forfeited/cancelled(109)$166
Options outstanding at September 30, 20214,096$149

Time-Based Restricted Stock and Time-Based Restricted Stock Units:

Number of Shares (in thousands)Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 20211,141200
Restricted shares/units granted44874
Restricted shares/units vested(484)(99)
Restricted shares/units forfeited(27)(3)
Restricted shares/units outstanding at September 30, 20211,078172

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:

Number of Shares (in thousands)Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2021247700
Restricted shares/units granted114316
Restricted shares/units vested(114)(263)
Restricted shares/units forfeited(7)(46)
Restricted shares/units outstanding at September 30, 2021240707

The fair value for stock options granted was estimated at the date of grant using the following assumptions:

Three Months Ended
September 30,
20212020
Risk-free interest rate—%0.1%
Dividend yield1.8%2.6%
Weighted average volatility factor22.7%25.8%
Weighted average expected life (in years)4.95.4
Weighted average fair value (in dollars)$33.03$21.66

B. Pension Plans

The components of net pension income were as follows:

Three Months Ended
September 30,
20212020
Service cost – benefits earned during the period$1.4$1.2
Interest cost on projected benefits13.112.7
Expected return on plan assets(32.0)(30.4)
Net amortization and deferral1.72.5
Settlement charges and special termination benefits—2.9
Net pension (income)/expense$(15.8)$(11.1)

Note 12. Income Taxes

The effective tax rate for the three months ended September 30, 2021 and 2020 was 22.2% and 21.3%, respectively. The increase in the effective tax rate is primarily due to favorable adjustments to prior year tax liabilities in the three months ended September 30, 2020 partially offset by an increase in the excess tax benefit on stock-based compensation in the three months ended September 30, 2021.

Note 13. Commitments and Contingencies

In May 2020, two 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 earliest 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.

Note 14. Stockholders' Equity

Changes in stockholders' equity by component are as follows:

Three Months Ended
September 30, 2021
Common StockCapital in Excess of Par ValueRetained EarningsTreasury StockAOCITotal
Balance at June 30, 2021$63.9$1,531.3$19,451.1$(15,386.8)$10.6$5,670.1
Net earnings——700.5——700.5
Other comprehensive income————(133.5)(133.5)
Stock-based compensation expense—39.5———39.5
Issuances relating to stock compensation plans—8.3—60.0—68.3
Treasury stock acquired (2.6 million shares repurchased)——(597.4)—(597.4)
Dividends declared ($0.93 per share)——(396.8)——(396.8)
Balance at September 30, 2021$63.9$1,579.1$19,754.8$(15,924.2)$(122.9)$5,350.7
Three Months Ended
September 30, 2020
Common StockCapital in Excess of Par ValueRetained EarningsTreasury StockAOCITotal
Balance at June 30, 2020$63.9$1,333.8$18,436.3$(14,067.0)$(14.8)$5,752.2
Net earnings——602.1——602.1
Other comprehensive income————30.730.7
Stock-based compensation expense—35.1———35.1
Issuances relating to stock compensation plans—(20.5)—65.3—44.8
Treasury stock acquired (1.7 million shares repurchased)———(262.3)—(262.3)
Dividends declared ($0.91 per share)——(393.7)——(393.7)
Balance at September 30, 2020$63.9$1,348.4$18,644.7$(14,264.0)$15.9$5,808.9

Note 15. Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)

Changes in AOCI by component are as follows:

Three Months Ended
September 30, 2021
Currency Translation AdjustmentNet Gains/Losses on Available-for-sale SecuritiesCash Flow Hedging ActivitiesPension LiabilityAccumulated Other Comprehensive (Loss) /Income
Balance at June 30, 2021$(226.8)$390.9$(29.9)$(123.6)$10.6
Other comprehensive (loss)/income before reclassification adjustments(35.1)(130.3)——(165.4)
Tax effect—29.3——29.3
Reclassification adjustments to net earnings—(0.1)(A)1.1(C)2.2(B)3.2
Tax effect——(0.3)(0.3)(0.6)
Balance at September 30, 2021$(261.9)$289.8$(29.1)$(121.7)$(122.9)
Three Months Ended
September 30, 2020
Currency Translation AdjustmentNet Gains/Losses on Available-for-sale SecuritiesCash Flow Hedging ActivitiesPension LiabilityAccumulated Other Comprehensive (Loss) /Income
Balance at June 30, 2020$(322.2)$680.4$(30.3)$(342.7)$(14.8)
Other comprehensive (loss)/income before reclassification adjustments50.4(24.6)(3.3)—22.5
Tax effect—5.50.8—6.3
Reclassification adjustments to net earnings—(0.3)(A)0.6(C)2.5(B)2.8
Tax effect—0.1—(1.0)(0.9)
Balance at September 30, 2020$(271.8)$661.1$(32.2)$(341.2)$15.9

(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. Interim Financial Data by Segment

Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two 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.

Segment Results:

Revenues
Three Months Ended
September 30,
20212020
Employer Services$2,571.5$2,376.8
PEO Services1,264.11,095.9
Other(3.3)(2.0)
$3,832.3$3,470.7
Earnings before Income Taxes
Three Months Ended
September 30,
20212020
Employer Services$784.0$689.3
PEO Services193.0159.4
Other(76.2)(83.5)
$900.8$765.2

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