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” 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; 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. 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, 2021 (“fiscal 2021”), 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.

EXECUTIVE OVERVIEW

Highlights from the six months ended December 31, 2021 include:

10%						80 basis points						13%
Revenue Growth						Earnings Before Income Taxes Margin Expansion						Diluted EPS Growth
10%						80 basis points						13%
Organic Constant Currency Revenue Growth						Adjusted EBIT Margin Expansion						Adjusted Diluted EPS Growth

7%			Employer Services Pays Per Control						15%			PEO Services Average Worksite Employee Growth
$1.8B						Cash Returned via Shareholder Friendly Actions $0.8B Dividends | $1.0B Share Repurchases

We are a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions to employers around the world. The global COVID-19 pandemic has had a significant impact on the global business environment and on our clients and we continue to advance and offer our HCM services, including the processing of payroll and tax obligations, to our clients during this time. ADP's efforts have also been focused on providing information and tools throughout the pandemic to help clients understand and navigate the governmental relief that has been adopted globally. In addition, we continue to add features to our Return to Workplace solution that assists our clients in bringing their employees back to work safely through a comprehensive set of tools designed to streamline the entire process.

In the second quarter, we achieved new product milestones as we continue to invest in our portfolio. We made further progress towards the development of a new, unified user experience, and we introduced this modernization to our RUN Powered by ADP ® and Next Gen HCM client bases in the U.S. and to our iHCM client base in Europe. We reached a milestone of processing one million pay slips for a single client, on a single day, for the first time in our history. At the other end of the spectrum, we continued to see growth in our new Roll™ by ADP mobile application, which serves the micro segment. Innovation is inherent in ADP’s business, and we have a growing, agile research and development organization committed to delivering solutions in the market that redefine what HCM solutions can do for employers.

For the six months ended December 31, 2021, we delivered solid revenue growth of 10%. Our pays per control metric, which represents the number of employees on ADP clients' payrolls in the United States when measured on a same-store-sales basis for a subset of clients ranging from small to large businesses, grew 7% for the six months ended December 31, 2021 as compared to the six months ended December 31, 2020. PEO average worksite employees increased 15% for the six months ended December 31, 2021, as compared to the six months ended December 31, 2020. This remains a very dynamic and challenging business environment for our clients and prospects, but we believe the value of working with a leading, world class provider like ADP has become more compelling than ever. We see evidence of this reflected in our continued sales momentum, as well as our very high levels of client satisfaction and retention, which continue to drive our positive financial results.

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 reinvestments, our longer term strategy, and our 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 December 31, 2021 and we remain well positioned to support our associates and our clients.

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

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

Total Revenues			Total Revenues
9% YoY Growth			10% YoY Growth
9% YoY Growth, Organic Constant Currency			10% YoY Growth, Organic Constant Currency

Revenues for the three and six months ended December 31, 2021 increased due to strong client retention, new business started from New Business Bookings, an increase in zero-margin benefits pass-throughs, and an increase in our pays per control. Refer to “Analysis of Reportable Segments” for additional discussion of the changes in revenue for each of our reportable segments, Employer Services and Professional Employer Organization (“PEO”) Services.

Total revenues for the three months ended December 31, 2021 include interest on funds held for clients of $106.0 million, as compared to $105.4 million for the three months ended December 31, 2020. The increase in the interest earned on funds held for clients resulted from an increase in our average client funds balances of 28.4% to $32.2 billion for the three months ended December 31, 2021, partially offset by the decrease in our average interest rate earned to 1.3% for the three months ended December 31, 2021, as compared to 1.7% for the three months ended December 31, 2020.

Total revenues for the six months ended December 31, 2021 include interest on funds held for clients of $207.1 million, as compared to $211.9 million for the six months ended December 31, 2020. The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.4% for the six months ended December 31, 2021, as compared to 1.8% for the six months ended December 31, 2020, partially offset by an increase in our average client funds balances of 25.5% to $29.6 billion for the six months ended December 31, 2021.

Total Expenses

			Three Months Ended																								Six Months Ended
			December 31,																					December 31,
			2021						2020						% Change												2021						2020						% Change
Costs of revenues:
Operating expenses			$	2,040.7					$	1,847.8					10		%										$	3,971.5					$	3,610.0					10		%
Systems development and programming costs			199.7						174.5						14		%										388.5						343.2						13		%
Depreciation and amortization			100.8						100.1						1		%										203.8						203.6						—		%
Total costs of revenues			2,341.2						2,122.4						10		%										4,563.8						4,156.8						10		%
Selling, general and administrative expenses			782.3						755.8						4		%										1,501.5						1,436.9						4		%
Interest expense			18.4						13.9						32		%										36.9						29.0						27		%
Total expenses			$	3,141.9					$	2,892.1					9		%										$	6,102.2					$	5,622.7					9		%

For the three and six months ended December 31, 2021, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs to $863.9 million from $765.9 million for the three months ended December 31, 2021 and 2020, respectively, and to $1,703.4 million from $1,507.0 million for the six months ended December 31, 2021 and 2020, respectively. Additionally, operating expenses increased due to increased costs to service our client base in support of our growing revenue.

Systems development and programming costs increased for the three and six months ended December 31, 2021 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 December 31, 2021 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses, increased amortization of costs to obtain a contract under ASC 606, and increased travel expenses.

Selling, general and administrative expenses increased for the six months ended December 31, 2021 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses, increased amortization of costs to obtain a contract under ASC 606, and increased travel expenses.

Interest expense increased for the three and six months ended December 31, 2021 primarily due to the issuance of a 7-year fixed-rate note totaling $1.0 billion issued in the fourth quarter of fiscal 2021, as compared to the three and six months ended December 31, 2020.

Other (Income)/Expense, net

			Three Months Ended																		Six Months Ended
			December 31,																		December 31,
			2021						2020						$ Change						2021						2020						$ Change
Interest income on corporate funds			$	(8.5)					$	(10.4)					$	(1.9)					$	(18.2)					$	(24.3)					$	(6.1)
Realized (gains)/losses on available-for-sale securities, net			(0.4)						(7.7)						(7.3)						(0.5)						(8.0)						(7.5)
Impairment of assets			—						2.2						2.2						—						5.0						5.0
Gain on sale of assets			—						(1.6)						(1.6)						(1.3)						(1.8)						(0.5)
Non-service components of pension income, net			(17.7)						(11.5)						6.2						(35.4)						(24.9)						10.5
Other (income)/expense, net			$	(26.6)					$	(29.0)					$	(2.4)					$	(55.4)					$	(54.0)					$	1.4

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

Earnings Before Income Taxes

For the three months ended December 31:

Earnings Before Income Taxes			Margin
9% YoY Growth			10 bps YoY Increase

For the six months ended December 31:

Earnings Before Income Taxes			Margin
13% YoY Growth			80 bps YoY Increase

Earnings before income taxes increased for the three and six months ended December 31, 2021, respectively, due to the components discussed above.

Margin increased for the three and six months ended December 31, 2021 due to increases in revenues, discussed above, partially offset by increased costs to service our client base in support of our growing revenue, and incremental pressure from growth in our zero-margin benefits pass-throughs.

Adjusted Earnings before certain Interest and Taxes ("Adjusted EBIT")

For the three months ended December 31:

Adjusted EBIT			Adjusted EBIT Margin
10% YoY Growth			20 bps YoY Increase

For the six months ended December 31:

Adjusted EBIT			Adjusted EBIT Margin
13% YoY Growth			80 bps YoY Increase

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

Provision for Income Taxes

The effective tax rate for the three months ended December 31, 2021 and 2020 was 23.7% and 22.2%, respectively. The increase in the effective tax rate is primarily due to benefits from a foreign tax election in the three months ended December 31, 2020, partially offset by a favorable earnings mix in the three months ended December 31, 2021.

The effective tax rate for the six months ended December 31, 2021 and 2020 was 23.0% and 21.8%, respectively. The increase in the effective tax rate is primarily due to combined benefits from adjustments to prior year tax liabilities and a foreign tax election in the six months ended December 31, 2020, partially offset by an increase in the excess tax benefits on stock-based compensation and a favorable earnings mix in the six months ended December 31, 2021.

Adjusted Provision for Income Taxes

The adjusted effective tax rate for the three months ended December 31, 2021 and 2020 was 23.7% and 22.2%, respectively. The adjusted effective tax rate for the six months ended December 31, 2021 and 2020 was 23.0% and 21.8%, respectively. The drivers of the adjusted effective tax rate are the same as the drivers of the effective tax rate discussed above.

Net Earnings and Diluted EPS

For the three months ended December 31:

Net Earnings			Diluted EPS
7% YoY Growth			9% YoY Growth

For the six months ended December 31:

Net Earnings			Diluted EPS
12% YoY Growth			13% YoY Growth

For the three and six months ended December 31, 2021, net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For the three months ended December 31, 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 2.0 million shares during the three months ended December 31, 2021 and 1.6 million shares during the three months ended December 31, 2020, partially offset by the issuances of shares under our employee benefit plans.

For the six months ended December 31, 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 4.6 million shares during the six months ended December 31, 2021 and 3.2 million shares during the six months ended December 31, 2020, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted EPS

For the three months ended December 31:

Adjusted Net Earnings			Adjusted Diluted EPS
7% YoY Growth			9% YoY Growth

For the six months ended December 31:

Adjusted Net Earnings			Adjusted Diluted EPS
11% YoY Growth			13% YoY Growth

For the three and six months ended December 31, 2021, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

ANALYSIS OF REPORTABLE SEGMENTS

			Revenues
			Three Months Ended												% Change												Six Months Ended
			December 31,															December 31,												% Change
			2021						2020						As Reported						Organic constant currency						2021						2020						As Reported						Organic constant currency
Employer Services			$	2,671.3					$	2,510.6					6		%				7		%				$	5,242.8					$	4,887.4					7		%				7		%
PEO Services			1,358.8						1,186.1						15		%				15		%				2,622.9						2,282.0						15		%				15		%
Other			(4.7)						(1.0)						n/m						n/m						(8.0)						(2.9)						n/m						n/m
			$	4,025.4					$	3,695.7					9		%				9		%				$	7,857.7					$	7,166.5					10		%				10		%

			Earnings before Income Taxes
			Three Months Ended												% Change												Six Months Ended												% Change
			December 31,																					December 31,
			2021						2020						As Reported												2021						2020						As Reported
Employer Services			$	817.3					$	758.6					8		%										$	1,601.3					$	1,447.8					11		%
PEO Services			212.7						187.4						14		%										405.7						346.8						17		%
Other			(119.9)						(113.4)						n/m												(196.1)						(196.8)						n/m
			$	910.1					$	832.6					9		%										$	1,810.9					$	1,597.8					13		%

n/m - not meaningful

Employer Services

Revenues

Revenues increased for the three months ended December 31, 2021 due to strong retention and new business started from New Business Bookings, and an increase in our pays per control of 6%.

Revenues increased for the six months ended December 31, 2021 due to strong retention and new business started from New Business Bookings, and an increase in our pays per control of 7%, partially offset by a decrease in interest earned on funds held for clients.

Earnings before Income Taxes

Employer Services' earnings before income taxes increased for the three and six months ended December 31, 2021 due to increased revenues discussed above, partially offset by increases in expenses. The increases in expenses were due to increased costs to service our client base in support of our growing revenue, increases in selling expenses, and investments and costs to develop, support, and maintain our new and existing products.

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

ES Margin			ES Margin
40 bps YoY Increase			90 bps YoY Increase

Employer Services' margin increased for the three and six months ended December 31, 2021 due to increases in revenues, discussed above, partially offset by increased costs to service our client base in support of our growing revenue and investments and costs to develop, support, and maintain our products.

PEO Services

Revenues

			PEO Revenues
			Three Months Ended												Change												Six Months Ended												Change
			December 31,															December 31,
			2021						2020						$						%						2021						2020						$						%
PEO Services' revenues			$	1,358.8					$	1,186.1					$	172.7					15		%				$	2,622.9					$	2,282.0					$	340.9					15		%
Less: PEO zero-margin benefits pass-throughs			863.9						765.9						98.0						13		%				1,703.4						1,507.0						196.4						13		%
PEO Services' revenues excluding zero-margin benefits pass-throughs			$	494.9					$	420.2					$	74.7					18		%				$	919.5					$	775.0					$	144.5					19		%

PEO Services' revenue increased 15% and for the three and six months ended December 31, 2021, respectively, due to an increase in zero-margin benefits pass-throughs, and increases in average worksite employees of 16% and 15% for three and six months ended December 31, 2021, respectively, as compared to the three and six months ended December 31, 2020.

Earnings before Income Taxes

PEO Services' earnings before income taxes increased 14% and 17% for the three and six months ended December 31, 2021, respectively, due to increased revenues discussed above, partially offset by the increases in zero-margin benefits pass-through costs of $98.0 million and $196.4 million for the three and six months ended December 31, 2021, respectively.

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

PEO Margin			PEO Margin
10 bps YoY Decrease			30 bps YoY Increase

PEO Services' margin decreased for the three months ended December 31, 2021 due to increases in zero-margin pass through costs, partially offset by an increase in revenues, discussed above.

PEO Services' margin increased for the six months ended December 31, 2021 due to an increase in revenues, discussed above, partially offset by increases in zero-margin pass through costs.

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 $3.7 million and $14.6 million for the three and six months ended December 31, 2021, as compared to approximately $4.8 million and $15.2 million for the three and six months ended December 31, 2020, which were primarily a result of changes in our estimated actuarial losses. In July 2021, ADP Indemnity paid a premium of $260 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2022 policy year on terms substantially similar to the fiscal 2021 reinsurance policy.

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 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.

						Three Months Ended												% Change												Six Months Ended												% Change
						December 31,																					December 31,
						2021						2020						As Reported												2021						2020						As Reported
Net earnings						$	694.4					$	647.5					7		%										$	1,394.9					$	1,249.6					12		%
Adjustments:
Provision for income taxes						215.7						185.1																		416.0						348.2
All other interest expense (a)						17.8						13.2																		35.6						27.3
All other interest income (a)						(1.1)						(1.5)																		(2.4)						(3.3)
Transformation initiatives (b)						3.0						3.3																		0.9						4.1
Excess capacity severance charges						—						0.5																		—						2.9
Adjusted EBIT						$	929.8					$	848.1					10		%										$	1,845.0					$	1,628.8					13		%
Adjusted EBIT Margin						23.1		%				22.9		%																23.5		%				22.7		%
Provision for income taxes						$	215.7					$	185.1					17		%										$	416.0					$	348.2					19		%
Adjustments:
Transformation initiatives (c)						0.7						0.8																		0.1						1.0
Excess capacity severance charges (c)						—						0.1																		—						0.7
Adjusted provision for income taxes						$	216.4					$	186.0					16		%										$	416.1					$	349.9					19		%
Adjusted effective tax rate (d)						23.7		%				22.2		%																23.0		%				21.8		%
Net earnings						$	694.4					$	647.5					7		%										$	1,394.9					$	1,249.6					12		%
Adjustments:
Transformation initiatives (b)						3.0						3.3																		0.9						4.1
Income tax provision/(benefit) for transformation initiatives (c)						(0.7)						(0.8)																		(0.1)						(1.0)
Excess capacity severance charges						—						0.5																		—						2.9
Income tax benefit for excess capacity severance charges (c)						—						(0.1)																		—						(0.7)
Adjusted net earnings						$	696.7					$	650.4					7		%										$	1,395.7					$	1,254.9					11		%
Diluted EPS						$	1.65					$	1.51					9		%										$	3.30					$	2.91					13		%
Adjustments:
Transformation initiatives (b) (c)						0.01						0.01																		—						0.01
Excess capacity severance charges (c)						—						—																		—						0.01
Adjusted diluted EPS						$	1.65					$	1.52					9		%										$	3.30					$	2.92					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 December 31, 2021, transformation initiatives include consulting costs relating to our company wide transformation initiatives. In the six months ended December 31, 2021, the charges include consulting costs relating our company wide transformation initiatives offset by gain on sale of assets and net reversals relating to severance. Unlike other severance charges which are not included as an adjustment to get to adjusted results, these specific charges relate to actions taken as part of our broad-based, company-wide transformation initiative.

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

(d) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by the sum of our Adjusted net earnings plus our Adjusted provision for income taxes.

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.

			Three Months Ended												Six Months Ended
			December 31,												December 31,
			2021												2021
Consolidated revenue growth as reported			9		%										10		%
Adjustments:
Impact of acquisitions			—		%										—		%
Impact of foreign currency			—		%										—		%
Consolidated revenue growth, organic constant currency			9		%										10		%
Employer Services revenue growth as reported			6		%										7		%
Adjustments:
Impact of acquisitions			—		%										—		%
Impact of foreign currency			1		%										—		%
Employer Services revenue growth, organic constant currency			7		%										7		%

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCE****S

As of December 31, 2021, cash and cash equivalents were $1.7 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 December 31, 2021 and we have sufficient liquidity.

For client funds liquidity, we have the ability to borrow through our financing arrangements under our U.S. short-term commercial paper program and our U.S., Canadian and United Kingdom short-term reverse repurchase agreements, together with our $9.7 billion of committed credit facilities and our ability to use corporate liquidity when necessary to meet short-term funding requirements related to client funds obligations. Please see “Quantitative and Qualitative Disclosures about Market Risk” for a further discussion of the risks, including with respect to the COVID-19 pandemic, related to our client funds extended investment strategy. See Note 9 of our Consolidated Financial Statements for a description of our short-term financing including commercial paper.

Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the six months ended December 31, 2021 and 2020, respectively, are summarized as follows:

						Six Months Ended
						December 31,
						2021						2020						$ Change
Cash provided by / (used in):
Operating activities						$	1,215.6					$	1,188.3					$	27.3
Investing activities						(3,468.4)						(949.6)						(2,518.8)
Financing activities						9,664.7						8,751.5						913.2
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents						(20.9)						84.7						(105.6)
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents						$	7,391.0					$	9,074.9					$	(1,683.9)

Net cash flows provided by operating activities increased due to growth in our underlying business (net income adjusted for non-cash adjustments), offset by a net unfavorable change in the components of operating assets and liabilities which includes an increase in incentive compensation payments as compared to the six months ended December 31, 2020.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $2,504.1 million, and higher payments related to acquisitions of intangibles and a business, offset by proceeds from the sale of property, plant, and equipment in the six months ended December 31, 2021.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $1,379.4 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, and settlement of cash flow hedges in the six months ended December 31, 2020. These were partially offset by an increase in repurchases of common stock in the six months ended December 31, 2021.

We purchased approximately 4.6 million shares of our common stock at an average price per share of $213.79 during the six months ended December 31, 2021, as compared to purchases of 3.2 million shares at an average price per share of $149.39 during the six months ended December 31, 2020. 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 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 December 31, 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												Six Months Ended
			December 31,												December 31,
			2021						2020						2021						2020
Average daily borrowings (in billions)			$	1.9					$	1.8					$	1.9					$	2.1
Weighted average interest rates			0.1		%				0.1		%				0.1		%				0.1		%
Weighted average maturity (approximately in days)			1 day						1 day						1 day						1 day

Our U.S., Canadian, and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. 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 December 31, 2021 there were no outstanding obligations related to reverse repurchase agreements. At June 30, 2021, the Company had $23.5 million of outstanding obligations related to the reverse repurchase agreements. Details of the reverse repurchase agreements are as follows:

			Three Months Ended												Six Months Ended
			December 31,												December 31,
			2021						2020						2021						2020
Average outstanding balances			$	228.4					$	83.2					$	211.7					$	117.8
Weighted average interest rates			0.2		%				0.3		%				0.2		%				0.3		%

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 2022 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 December 31, 2021 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 December 31, 2021. 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 six months ended December 31, 2021 were $74.1 million, as compared to $79.7 million for the six months ended December 31, 2020. We expect capital expenditures in fiscal 2022 to be between $200 million and $225 million, as compared to $178.3 million in fiscal 2021.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Our corporate investments are invested in cash and cash equivalents and highly liquid, investment-grade marketable securities. These assets are available for our regular quarterly dividends, share repurchases, capital expenditures and/or acquisitions, as well as other corporate operating purposes. All of our short-term fixed-income securities are classified as available-for-sale securities.

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, including the COVID-19 pandemic, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business. 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.

Details regarding our overall investment portfolio are as follows:

			Three Months Ended												Six Months Ended
			December 31,												December 31,
			2021						2020						2021						2020
Average investment balances at cost:
Corporate investments			$	3,777.6					$	3,504.5					$	4,037.2					$	3,869.5
Funds held for clients			32,245.5						25,109.5						29,550.1						23,540.2
Total			$	36,023.1					$	28,614.0					$	33,587.3					$	27,409.7
Average interest rates earned exclusive of realized (gains)/losses on:
Corporate investments			0.9		%				1.2		%				0.9		%				1.3		%
Funds held for clients			1.3		%				1.7		%				1.4		%				1.8		%
Total			1.3		%				1.6		%				1.3		%				1.7		%
Net realized (gains)/losses on available-for-sale securities			$	(0.4)					$	(7.7)					$	(0.5)					$	(8.0)

			December 31, 2021						June 30, 2021
Net unrealized pre-tax gains on available-for-sale securities			$	123.8					$	502.2
Total available-for-sale securities at fair value			$	27,120.9					$	24,371.7

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 decreased from 1.7% for the six months ended December 31, 2020 to 1.3% for the six months ended December 31, 2021. 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 $23 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 2022. 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 $9 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 2022.

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.

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. In addition, as the duration and severity of the COVID-19 pandemic are uncertain, certain of our estimates could require further judgment or modification and therefore carry a higher degree of variability and volatility. As events continue to evolve, our estimates may change materially in future periods. 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.