Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(Tabular dollars are presented in millions, except per share amounts)

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by Automatic Data Processing, Inc., its subsidiaries and variable interest entity (“ADP” or the “Company”) may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could”, "is designed to" and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements or that could contribute to such difference include: ADP's success in obtaining and retaining clients, and selling additional services to clients; the pricing of products and services; the success of our new solutions; our ability to respond successfully to changes in technology, including artificial intelligence; compliance with existing or new legislation or regulations; changes in, or interpretations of, existing legislation or regulations; overall market, political and economic conditions, including interest rate and foreign currency trends and inflation; competitive conditions; our ability to maintain our current credit ratings and the impact on our funding costs and profitability; security or cyber breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; availability of skilled 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; and supply-chain disruptions. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. These risks and uncertainties, along with the risk factors discussed under “Item 1A. - Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“fiscal 2023”), 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

We are a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions to employers around the world. Our HCM solutions, which include both software and outsourcing services, are designed to help our clients manage their workforce through a dynamic business and regulatory landscape and the changing world of work. We continuously seek to enhance our leading HCM solutions to further support our clients. We see tremendous opportunity ahead as we focus on our three key Strategic Priorities: Leading with Best-in-Class HCM technology, Providing Unmatched Expertise and Outsourcing Solutions, and Leveraging our Global Scale for the Benefit of our Clients. Executing on our Strategic Priorities will be critical to enabling our growth in the years ahead.

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

• Revenue growth of 7% to $4,512.4 million; 7% organic constant currency

• Earnings before income taxes margin expansion of 30 bps, and adjusted EBIT margin expansion of 10 bps

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

• Cash returned via shareholder friendly actions of $0.8B, including $0.5B of dividends and $0.3B share repurchases

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

During the first quarter we made meaningful progress in pursuit of our key Strategic Priorities. We took actions to lead with Best-in-Class HCM Technology by embedding generative AI (gen AI) features into our products, including the integration of gen AI into Roll to further enhance its conversational user interface, as well as the launch of ADP Assist, our embedded smart support AI designed to help make HR work easier, smarter and ultimately, more human. We continued to provide Unmatched Expertise and Outsourcing Solutions with the launch of Agent Assist, which embeds gen AI in the flow of work for ADP implementation and service associates to increase their agility and expertise in order to help them deliver a better client experience. And we continued to Leverage our Global Scale to Benefit our Clients by acquiring the payroll business of BTR, our long-time partner in Sweden, and by launching Roll in Ireland to expand our SMB business outside of the U.S.

For the three months ended September 30, 2023, we delivered solid revenue growth of 7%, 7% organic constant currency. Our pays per control metric, which represents the number of employees on ADP clients' payrolls in the United States when measured on a same-store-sales basis for a subset of clients ranging from small to large businesses, grew 2% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. PEO average worksite employees increased 2% for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

We have a strong business model, generating significant cash flows with low capital intensity, and offer a suite of products that provide critical support to our clients’ HCM functions. We generate sufficient free cash flow to satisfy our cash dividend and our modest debt obligations, which enables us to absorb the impact of downturns and remain steadfast in our re-investments, longer term strategy, and commitments to shareholder friendly actions. We are committed to building upon our past successes by investing in our business through enhancements in research and development and by driving meaningful transformation in the way we operate. Our financial condition remains solid at September 30, 2023 and we remain well positioned to support our clients and our associates.

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

For the three months ended September 30, respectively:

			Three Months Ended
			September 30,
			2023						2022
Total Revenues			4,512.4						4,215.6
YoY Growth			7		%				10		%
YoY Growth, Organic Constant Currency			7		%				11		%

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

Total revenues for the three months ended September 30, 2023 include interest on funds held for clients of $201.7 million, as compared to $141.0 million for the three months ended September 30, 2022. The increase in the interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.6% for the three months ended September 30, 2023, as compared to 1.9% for the three months ended September 30, 2022, and an increase in our average client funds balances of 5.9% to $31.1 billion for the three months ended September 30, 2023.

Total Expenses

			Three Months Ended
			September 30,
			2023						2022						% Change
Costs of revenues:
Operating expenses			$	2,157.6					$	2,074.4					4		%
Research and development			236.5						209.8						13		%
Depreciation and amortization			121.3						109.4						11		%
Total costs of revenues			2,515.4						2,393.6						5		%
Selling, general and administrative expenses			880.3						800.3						10		%
Interest expense			91.6						51.2						79		%
Total expenses			$	3,487.3					$	3,245.1					7		%

For the three months ended September 30, 2023, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs of $30.9 million to $976.7 million for the three months ended September 30, 2023. Additionally, operating expenses increased $21.0 million due to increased service and implementation costs in support of our growing revenue, and an unfavorable impact of one percentage point from foreign currency.

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

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

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

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

Other (Income)/Expense, net

			Three Months Ended
			September 30,
			2023						2022						$ Change
Interest income on corporate funds			$	(46.5)					$	(29.7)					$	16.8
Realized losses/(gains) on available-for-sale securities, net			1.9						1.5						(0.4)
Gain on sale of assets			(14.6)						—						14.6
Impairment of assets			—						0.3						0.3
Non-service components of pension income, net			(8.5)						(11.6)						(3.1)
Other (income)/expense, net			$	(67.7)					$	(39.5)					$	28.2

Interest income on corporate funds increased due to higher average interest rates of 2.6% for the three months ended September 30, 2023, as compared to 1.7% for the three months ended September 30, 2022. In the three months ended September 30, 2023, the Company recognized a gain of $14.6 million in relation to the sale of a building. See Note 10 of our Consolidated Financial Statements for further details on non-service components of pension income, net.

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

For the three months ended September 30:

			Three Months Ended
			September 30,
			2023						2022						YoY Growth
EBIT			$	1,092.8					$	1,010.0					8		%
EBIT Margin			24.2		%				24.0		%				30 bps
Adjusted EBIT			$	1,093.3					$	1,017.5					7		%
Adjusted EBIT Margin			24.2		%				24.1		%				10 bps

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

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

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

Provision for Income Taxes

The effective tax rate for the three months ended September 30, 2023 and 2022 was 21.4% and 22.9%, respectively. The decrease is primarily due to lower reserves for uncertain tax positions and a valuation allowance release offset by a lower excess tax benefit on stock-based compensation in the three months ended September 30, 2023.

Adjusted Provision for Income Taxes

The adjusted effective tax rate for the three months ended September 30, 2023 and 2022 was 21.4% and 22.9%, respectively. The drivers of the adjusted effective tax rate are the same as the drivers of the effective tax rate discussed above.

Net Earnings and Diluted EPS, Unadjusted and Adjusted

For the three months ended September 30:

						Three Months Ended
						September 30,
						2023						2022						YoY Growth
Net earnings						$	859.4					$	779.0					10		%
Diluted EPS						$	2.08					$	1.87					11		%
Adjusted net earnings						$	859.9					$	775.4					11		%
Adjusted diluted EPS						$	2.08					$	1.86					12		%

For the three months ended September 30, 2023, net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For the three months ended September 30, 2023, in addition to the increase in net earnings, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 1.0 million shares during the three months ended September 30, 2023, and 1.4 million shares during the three months ended September 30, 2022, partially offset by the issuances of shares under our employee benefit plans.

ANALYSIS OF REPORTABLE SEGMENTS

			Revenues
			Three Months Ended												% Change
			September 30,
			2023						2022						As Reported						Organic constant currency
Employer Services			$	3,046.4					$	2,790.2					9		%				8		%
PEO Services			1,469.6						1,429.4						3		%				3		%
Other			(3.6)						(4.0)						n/m						n/m
			$	4,512.4					$	4,215.6					7		%				7		%

			Earnings before Income Taxes
			Three Months Ended												% Change
			September 30,
			2023						2022						As Reported
Employer Services			$	1,008.5					$	863.5					17		%
PEO Services			222.9						230.3						(3)		%
Other			(138.6)						(83.8)						n/m
			$	1,092.8					$	1,010.0					8		%

			Margin
			Three Months Ended
			September 30,
			2023						2022						YoY Growth
Employer Services			33.1		%				30.9		%				220 bps
PEO Services			15.2		%				16.1		%				(90) bps

n/m - not meaningful

Employer Services

Revenues

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

Earnings before Income Taxes

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

Margin

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

PEO Services

Revenues

			PEO Revenues
			Three Months Ended												Change
			September 30,
			2023						2022						$						%
PEO Services' revenues			$	1,469.6					$	1,429.4					$	40.2					3		%
Less: PEO zero-margin benefits pass-throughs			976.7						945.8						30.9						3		%
PEO Services' revenues excluding zero-margin benefits pass-throughs			$	492.9					$	483.6					$	9.3					2		%

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

Earnings before Income Taxes

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

Margin

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

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 $6.2 million for the three months ended September 30, 2023, as compared to approximately $14.5 million for the three months ended September 30, 2022, which was primarily a result of changes in our estimated actuarial losses. In July 2023, ADP Indemnity paid a premium of $269 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2024 policy year on terms substantially similar to the fiscal 2023 reinsurance policy.

Other

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

Non-GAAP Financial Measures

In addition to our U.S. GAAP results, we use the adjusted results and other non-GAAP metrics set forth in the table below to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods:

Adjusted Financial Measure			U.S. GAAP Measures
Adjusted EBIT			Net earnings
Adjusted provision for income taxes			Provision for income taxes
Adjusted net earnings			Net earnings
Adjusted diluted earnings per share			Diluted earnings per share
Adjusted effective tax rate			Effective tax rate
Organic constant currency			Revenues

We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations and against prior period, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. The nature of these exclusions is for specific items that are not fundamental to our underlying business operations. Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their corresponding U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.

						Three Months Ended												% Change
						September 30,
						2023						2022						As Reported
Net earnings						$	859.4					$	779.0					10		%
Adjustments:
Provision for income taxes						233.4						231.0
All other interest expense (a)						18.0						17.9
All other interest income (a)						(18.2)						(5.6)
Transformation initiatives (b)						0.7						(1.0)
Legal settlements						—						(3.8)
Adjusted EBIT						$	1,093.3					$	1,017.5					7		%
Adjusted EBIT Margin						24.2		%				24.1		%
Provision for income taxes						$	233.4					$	231.0					1		%
Adjustments:
Transformation initiatives (c)						0.2						(0.2)
Legal settlements (c)						—						(1.0)
Adjusted provision for income taxes						$	233.6					$	229.8					2		%
Adjusted effective tax rate (d)						21.4		%				22.9		%
Net earnings						$	859.4					$	779.0					10		%
Adjustments:
Transformation initiatives (b)						0.7						(1.0)
Income tax (benefit)/provision for transformation initiatives (c)						(0.2)						0.2
Legal settlements						—						(3.8)
Income tax (benefit)/provision for legal settlements (c)						—						1.0
Adjusted net earnings						$	859.9					$	775.4					11		%
Diluted EPS						$	2.08					$	1.87					11		%
Adjustments:
Transformation initiatives (b) (c)						—						—
Legal settlements (c)						—						(0.01)
Adjusted diluted EPS						$	2.08					$	1.86					12		%

(a) We include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model. The adjustments in the table above represent the interest income and interest expense that are not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”

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

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

(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
			September 30,
			2023
Consolidated revenue growth as reported			7		%
Adjustments:
Impact of acquisitions			—		%
Impact of foreign currency			—		%
Consolidated revenue growth, organic constant currency			7		%
Employer Services revenue growth as reported			9		%
Adjustments:
Impact of acquisitions			—		%
Impact of foreign currency			(1)		%
Employer Services revenue growth, organic constant currency			8		%

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

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

For corporate liquidity, we expect existing cash, cash equivalents, short-term and long-term marketable securities, cash flow from operations together with our $9.7 billion of committed credit facilities and our ability to access both long-term and short-term debt financing from the capital markets will be adequate to meet our operating, investing, and financing activities such as regular quarterly dividends, share repurchases, and capital expenditures for the foreseeable future. Our financial condition remains solid at September 30, 2023 and we have sufficient liquidity.

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

Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the three months ended September 30, 2023 and 2022, respectively, are summarized as follows:

						Three Months Ended
						September 30,
						2023						2022						$ Change
Cash provided by / (used in):
Operating activities						$	326.5					$	718.1					$	(391.6)
Investing activities						(216.1)						(1,577.6)						1,361.5
Financing activities						(1,903.7)						(16,302.6)						14,398.9
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents						(16.3)						(44.9)						28.6
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents						$	(1,809.6)					$	(17,207.0)					$	15,397.4

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

Net cash flows used in investing activities changed due to the timing of purchases and proceeds of corporate and client funds marketable securities of $1,367.7 million.

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

We purchased approximately 1.0 million shares of our common stock at an average price per share of $242.26 during the three months ended September 30, 2023, as compared to purchases of 1.4 million shares at an average price per share of $230.13 during the three months ended September 30, 2022. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

Capital Resources and Client Funds Obligations

We have $3.0 billion of senior unsecured notes with maturity dates in 2025, 2028 and 2030. We may from time to time revisit the long-term debt market to refinance existing debt, finance investments including acquisitions for our growth, and maintain the appropriate capital structure. However, there can be no assurance that volatility in the global capital and credit markets would not impair our ability to access these markets on terms acceptable to us, or at all. See Note 10 of our Consolidated Financial Statements for a description of our long-term financing.

Our U.S. short-term funding requirements primarily related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $9.7 billion in aggregate maturity value. Our commercial paper program is rated A-1+ by Standard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At September 30, 2023 and June 30, 2023, 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,
			2023						2022
Average daily borrowings (in billions)			$	4.1					$	4.6
Weighted average interest rates			5.3		%				2.3		%
Weighted average maturity (approximately in days)			2 days						2 days

Our U.S., Canadian, and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations. At September 30, 2023 and June 30, 2023, the Company had $343.8 million and $105.4 million, respectively, of outstanding obligations related to reverse repurchase agreements. Details of the reverse repurchase agreements are as follows:

			Three Months Ended
			September 30,
			2023						2022
Average outstanding balances			$	1,379.0					$	1,119.4
Weighted average interest rates			5.3		%				2.4		%

We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a $4.25 billion, 364-day credit agreement that matures in June 2024 with a one year term-out option. In addition, we have a five-year $3.2 billion credit facility and a five-year $2.25 billion credit facility maturing in June 2026 and June 2028, respectively, each with an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. We had no borrowings through September 30, 2023 under the credit facilities. We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder and we are not aware of any conditions that would prevent us from borrowing part or all of the $9.7 billion available to us under the revolving credit agreements. 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, and equipment lease receivables, secured predominantly by prime collateral. All collateral on asset-backed securities has performed as expected through September 30, 2023. In addition, we own U.S. government securities which primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations. See Note 6 of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients.

Capital expenditures for the three months ended September 30, 2023 were $42.2 million, as compared to $41.5 million for the three months ended September 30, 2022. We expect capital expenditures in fiscal 2024 to be between $200 million and $225 million, as compared to $206.0 million in fiscal 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary objectives. Consistent with those objectives, we also seek to maximize interest income and to minimize the volatility of interest income. Client funds assets are invested in highly liquid, investment-grade marketable securities, with a maximum maturity of 10 years at the time of purchase, and money market securities and other cash equivalents.

We utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. In circumstances where we experience a reduction in employment levels due to a slowdown in the economy, we may make tactical decisions to sell certain securities or not reinvest maturing securities in order to reduce the size of the funds held for clients to correspond to client funds obligations. We minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances, the client’s funds in advance of the timing of payment of such client’s obligation. As a result of this practice, we have consistently maintained the required level of client funds assets to satisfy all of our obligations.

There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets. Such risks include liquidity risk, including the risk associated with our ability to liquidate, if necessary, our available-for-sale securities in a timely manner in order to satisfy our client funds obligations. However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations. We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $9.7 billion commercial paper program (rated A-1+ by Standard and Poor’s, P-1 by Moody’s, and F1+ by Fitch, the highest possible short-term credit ratings), and our ability to engage in reverse repurchase agreement transactions and available borrowings under our $9.7 billion committed credit facilities. The reduced availability of financing during periods of economic turmoil, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business. In addition to liquidity risk, our investments are subject to interest rate risk and credit risk, as discussed below.

We have established credit quality, maturity, and exposure limits for our investments. The minimum allowed credit rating at time of purchase for Corporate, Canadian government agency and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A. The maximum maturity at time of purchase for BBB-rated securities is 5 years, for single A rated securities is 10 years, and for AA-rated and AAA-rated securities is 10 years. Time deposits and commercial paper must be rated A-1 and/or P-1. Money market funds must be rated AAA/Aaa-mf.

Details regarding our overall investment portfolio are as follows:

			Three Months Ended
			September 30,
			2023						2022
Average investment balances at cost:
Corporate investments			$	7,129.0					$	7,141.9
Funds held for clients			31,129.4						29,396.4
Total			$	38,258.4					$	36,538.3
Average interest rates earned exclusive of realized (gains)/losses on:
Corporate investments			2.6		%				1.7		%
Funds held for clients			2.6		%				1.9		%
Total			2.6		%				1.9		%
Net realized losses/(gains) on available-for-sale securities			$	1.9					$	1.5

			September 30, 2023						June 30, 2023
Net unrealized pre-tax (losses)/gains on available-for-sale securities			$	(2,355.6)					$	(2,206.9)
Total available-for-sale securities at fair value			$	29,600.4					$	29,764.9

We are exposed to interest rate risk in relation to securities that mature, as the proceeds from maturing securities are reinvested. Factors that influence the earnings impact of interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term investments. This mix varies during the fiscal year and is impacted by daily interest rate changes. The annualized interest rate earned on our entire portfolio increased from 1.9% for the three months ended September 30, 2022 to 2.6% for the three months ended September 30, 2023. A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-term interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $17 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 2024. A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances and any related short-term borrowings would result in approximately a $6 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 2024.

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. Refer to Note 2 of our Consolidated Financial Statements for changes to our accounting policies effective for the fiscal 2024.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 2, New Accounting Pronouncements, of Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.