AUTOMATIC DATA PROCESSING INC (ADP) FY 2024 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Tabular dollars are presented in millions, except per share amounts

The following section discusses our year ended June 30, 2024 (“fiscal 2024”), as compared to year ended June 30, 2023 (“fiscal 2023”). A detailed review of our fiscal 2023 performance compared to our fiscal 2022 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year ended June 30, 2023.

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 “outlook,” “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

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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; 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”, 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.

During the fiscal year we made meaningful progress on our strategic priorities. We took action to lead with best-in-class HCM technology by launching ADP Assist, our cross-platform solution powered by generative AI ("GenAI") that empowers employees and HR professionals through smart, user-centric solutions. To lean into our unmatched expertise, we provided our service and implementation associates with new GenAI capabilities to help them deliver even better client experiences. Finally, we leveraged our global scale by extending our global footprint and deepening our partnerships with other leading technology providers to simplify HCM processes for our clients.

Highlights from the year ended June 30, 2024 include:

•Revenue growth of 7% to $19,202.6 million; 6% organic constant currency

•Earnings before income taxes margin expansion of 70 bps, and adjusted EBIT margin expansion of 70 bps

•Diluted and adjusted diluted earnings per share ("EPS") growth of 11% and 12%, to $9.10 and $9.18, respectively

•Cash returned via shareholder friendly actions of $3.4B, including $2.2B of dividends and $1.2B of share repurchases

For fiscal 2024, we delivered solid revenue growth of 7%, 6% on 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 year ended June 30, 2024 as compared to the year ended June 30, 2023. PEO average worksite employees increased 2% for the year ended June 30, 2024, as compared to the year ended June 30, 2023. Additionally, our strong ES new business bookings performance resulted in growth of 7% in fiscal 2024, and ES client revenue retention was 92% driven by continued improvement in our client satisfaction scores. We believe these results are largely attributable to improvements made to our platforms and service over multiple years.

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 long 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 June 30, 2024 and we remain well positioned to support our associates and our clients.

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RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

For the year ended June 30, respectively:

Revenues in fiscal 2024 increased due to new business started from New Business Bookings, an increase in zero-margin benefits pass-throughs, an increase in our pays per control, continued strong client retention, an increase in interest on funds held for clients, and an increase in pricing. 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 in fiscal 2024 include interest on funds held for clients of $1,024.7 million, as compared to $813.4 million in fiscal 2023. The increase in interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.9% in fiscal 2024, as compared to 2.4% in fiscal 2023, coupled with an increase in our average client funds balances of 3.6% to $35.4 billion in fiscal 2024 as compared to fiscal 2023.

Total Expenses

For the year ended June 30:

Operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs to $3,975.9 million from $3,800.9 million for the years ended June 30, 2024 and 2023, respectively. Additionally, operating expenses increased by $68.5 million due to increased service and implementation costs in support of our growing revenue, and increased $70.0 million due to less favorable actuarial loss development in workers’ compensation reserves in ADP Indemnity as compared to prior year.

Research and development expenses increased for fiscal 2024 due to increased investments and costs to develop, support, and maintain our new and existing products, and increased investments in GenAI, including the integration of GenAI in our existing products.

Depreciation and amortization expenses increased for fiscal 2024 due to the amortization of new investments in purchased software and internally developed software primarily for our next-gen products.

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Selling, general and administrative expenses increased for fiscal 2024 due to increased selling expenses as a result of investments in our sales organization to support increased bookings, and increased severance costs due to company-wide efforts related to workforce optimization.

Interest expense increased due to the increase in average interest rates on commercial paper issuances and reverse repurchases to 5.3% and 5.5%, respectively, for the year ended June 30, 2024, as compared to 3.7% and 4.3%, respectively, for the year ended June 30, 2023, also coupled with a higher volume of average commercial paper and reverse repurchase borrowings, as compared to the year ended June 30, 2023.

Other (Income)/Expense, net

Interest income on corporate funds increased in fiscal 2024, as compared to fiscal 2023, due to higher average interest rates of 3.3% for the year ended June 30, 2024, as compared to 2.4% for the year ended June 30, 2023, coupled with higher average investment balances of $7.4 billion in fiscal 2024 as compared to $6.3 billion in fiscal 2023. See Note 10 of our Consolidated Financial Statements for further details on non-service components of pension income, net.

In fiscal 2024, the Company recognized a gain of $17.1 million, in relation to the sale of buildings and land.

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

For the year ended June 30, respectively:

Earnings before income taxes increased due to the increases in total revenues partially offset by the increases in total expenses discussed above.

Overall margin increased due to the increases in total revenues discussed above, increased interest income on corporate funds, operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increases in selling and marketing expenses, increased interest expense, less favorable actuarial loss development in workers’ compensation reserves related to ADP Indemnity, and investments and costs to develop, support, and maintain our new and existing products.

Adjusted EBIT and Adjusted EBIT margin exclude interest income and interest expense that are not related to our client funds

extended investment strategy, and net charges, including certain legal matters, charges related to our broad-based transformation initiative and workforce optimization.

Provision for Income Taxes

The effective tax rate in fiscal 2024 and 2023 was 23.0% and 23.1%, respectively. The decrease in the effective tax rate is primarily due to a valuation allowance release and an intercompany transfer of certain assets offset by a lower benefit for

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adjustments to prior year tax liabilities in fiscal 2024. Refer to Note 11, Income Taxes, within the Notes to the Consolidated Financial Statements for further discussion.

Adjusted Provision for Income Taxes

The adjusted effective tax rate in fiscal 2024 and 2023 was 23.0% and 23.1%, 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 year ended June 30, respectively:

Adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

Diluted EPS increased as a result of the increase in net earnings and the impact of fewer shares outstanding resulting from the repurchase of approximately 5.1 million shares during fiscal 2024 and 4.9 million shares during fiscal 2023, partially offset by the issuances of shares under our employee benefit plans.

For fiscal 2024, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

ANALYSIS OF REPORTABLE SEGMENTS

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n/m - not meaningful

Employer Services

Revenues

Revenues increased due to new business started from New Business Bookings, an increase in our pays per control of 2%, continued strong client retention, an increase in interest earned on funds held for clients, and an increase in pricing.

Earnings before Income Taxes

Employer Services' earnings before income taxes increased in fiscal 2024 due to increased revenues discussed above, partially offset by increases in expenses. The increases in expenses were due to an increase in investments and costs to develop, support, and maintain our new and existing products, increases in selling and marketing expenses, and costs to service our client base in support of our growing revenue.

Margin

Employer Services' margin increased 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 investments and costs to develop, support, and maintain our new and existing products.

PEO Services

Revenues

PEO Services' revenues increased 4% for fiscal 2024 due to increases in average worksite employees of 2% for fiscal 2024, as compared to fiscal 2023, and due to an increase in zero-margin benefits pass-throughs.

Earnings before Income Taxes

PEO Services’ earnings before income taxes decreased 6% in fiscal 2024 due to less favorable actuarial loss development in workers’ compensation reserves in ADP Indemnity of $70.0 million as compared to prior year, increases in selling expenses, and increases in zero-margin benefits pass-through costs for the year ended June 30, 2024, partially offset by increased revenues discussed above.

Margin

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PEO Services' overall margin decreased for fiscal 2024 due to less favorable actuarial loss development in workers’ compensation reserves in ADP Indemnity, increases in selling expenses, and increases in zero-margin benefits pass-through costs, 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. During fiscal 2024, ADP Indemnity paid a premium of $269 million to enter into a reinsurance arrangement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2024 policy year up to $1 million per occurrence. ADP Indemnity recorded a pre-tax benefit of approximately $3 million in fiscal 2024 and a pre-tax benefit of approximately $73 million in fiscal 2023, which were primarily the results of less favorable actuarial loss development in workers’ compensation reserves. ADP Indemnity paid a premium of $276 million in July 2024, to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for fiscal 2025 policy year on terms substantially similar to the fiscal 2024 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 all other interest income and expense.

Non-GAAP Financial Measures

In addition to our 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:

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 periods, 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.

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

(b) In fiscal 2024, the charges include consulting costs relating to our company-wide transformation initiatives.

(c) Represents reserve reversal of a legal matter from fiscal 2023.

(d) The charges relating to workforce optimization represent severance charges. Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike severance charges in prior periods, these specific charges relate to a broad-based, company-wide workforce optimization effort.

(e) The income tax (benefit)/provision was calculated based on the marginal rate in effect for the year ended June 30, 2024.

(f) 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.

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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 results using foreign exchange rates consistent with the prior year. The PEO segment is not impacted by acquisitions, dispositions or foreign currency.

Note: Numbers may not foot due to rounding.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2024, cash and cash equivalents were $2.9 billion, which were primarily invested in time deposits and money market funds.

For corporate liquidity, we expect existing cash, cash equivalents, marketable securities, cash flow from operations together with our $10.3 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 June 30, 2024 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 $10.3 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 8 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 are summarized as follows:

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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 year ended June 30, 2023.

Net cash flows used in investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $1,117.5 million.

Net cash flows used in financing activities changed due to a net increase in the cash flow from client funds obligations of $13,715.7 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, a net increase in cash received from the Internal Revenue Service as of June 30, 2024 to be refunded to our clients, a net increase in proceeds related to reverse repurchase agreements, offset by an increase in dividends paid, and an increase in repurchases of common stock in fiscal 2024.

We purchased approximately 5.1 million shares of our common stock at an average price per share of $244.04 during fiscal 2024, as compared to purchases of 4.9 million shares at an average price per share of $227.30 during fiscal 2023. 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 Fund 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 9 of our Consolidated Financial Statements for a description of our senior unsecured notes.

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. In June 2024, the company increased its U.S. short-term commercial paper program to provide for the issuance of up to $10.3 billion from $9.7 billion in aggregate maturity value. Our commercial paper program is rated A-1+ by Standard and 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 June 30, 2024 and 2023, we had no commercial paper borrowing outstanding. Details of the borrowings under the commercial paper program are as follows:

Our U.S., Canadian, and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations. We have $7.3 billion available to us on a committed basis under these reverse repurchase agreements. At June 30, 2024 and 2023, there were $385.4 million and $105.4 million, respectively, of outstanding obligations related to the reverse repurchase agreements. Details of the reverse repurchase agreements are as follows:

We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a $4.55 billion, 364-day credit agreement that matures in June 2025 with a one-year term-out option. In addition, we have a five-year $2.25 billion credit facility and a five-year $3.5 billion credit facility maturing in June 2028 and June 2029, respectively, each

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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 June 30, 2024 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 $10.3 billion available to us under the revolving credit agreements. See Note 8 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 is performing as expected through June 30, 2024. 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 4 of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients.

Capital expenditures for fiscal 2024 were $211.7 million, as compared to $206.0 million for fiscal 2023. We expect capital expenditures in fiscal 2025 to be between $200 million and $225 million.

Contractual Obligations

Our contractual obligations at June 30, 2024 relate primarily to operating leases (Note 6) and other arrangements recorded in our balance sheet or disclosed in the notes to our financial statements, including benefit plan obligations (Note 10), liabilities for uncertain tax positions (Note 11), purchase obligations (Note 12), debt obligations (Note 9) and $200.1 million of interest payments on our debt, of which $64.3 million is expected to be paid within one year.

In addition to the obligations described above, we had obligations for the remittance of funds relating to our payroll and payroll tax filing services. As of June 30, 2024, the obligations relating to these matters, which are expected to be paid in fiscal 2025, total $39,503.9 million, and were recorded in client funds obligations on our Consolidated Balance Sheets. We had $37,996.1 million of cash and cash equivalents and marketable securities to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2024. In addition, as of June 30, 2024, we held approximately $622.0 million of funds received from the Internal Revenue Service that will be refunded to our clients in fiscal 2025. This obligation is recorded in accrued expenses and other current liabilities on our Consolidated Balance Sheets.

Separately, ADP Indemnity paid a premium of $276 million in July 2024 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2025 policy year. At June 30, 2024, ADP Indemnity had total assets of $684.4 million to satisfy the actuarially estimated unpaid losses of $611.5 million for the policy years since July 1, 2003. ADP Indemnity paid claims of $1.1 million and $0.8 million, net of insurance recoveries, in fiscal 2024 and 2023, respectively. Refer to the “Analysis of Reportable Segments - PEO Services” above for additional information regarding ADP Indemnity.

In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our services and products. We do not expect any material losses related to such representations and warranties.