Automatic Data Processing Inc 10-Q for FY2024 Q2
Automatic Data Processing Inc (ADP)
10-Q
2024-02-01
For: 2023-12-31
View Original
Added on
April 09, 2026
About this 10-Q
Automatic Data Processing Inc filed this 10-Q on February 1, 2024, covering the quarter ended December 31, 2023 (FY2024 Q2).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.67B
- up 6.3% from $4.39B a year earlier
- Net income
- $878.4M
- up 8.0% from net income of $813.1M a year earlier
- Diluted EPS
- $2.13
- up 9.2% from $1.95 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||||||
For the Quarterly Period Ended December 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||||||
For the Transition Period From to
Commission File Number 1-5397
__________________________
(Exact name of registrant as specified in its charter)
__________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant's telephone number, including area code: (973 ) 974-5000
__________________________
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
(voting) | ||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ☐ No ý
The number of shares outstanding of the registrant’s common stock as of January 29, 2024 was 410,790,567 .
Table of Contents
| Page | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 6. | ||||||||
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||
| Revenues, other than interest on funds held for clients and PEO revenues | $ | $ | $ | $ | |||||||||||||||||||
| Interest on funds held for clients | |||||||||||||||||||||||
| PEO revenues (A) | |||||||||||||||||||||||
| TOTAL REVENUES | |||||||||||||||||||||||
| EXPENSES: | |||||||||||||||||||||||
| Costs of revenues: | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| TOTAL COSTS OF REVENUES | |||||||||||||||||||||||
| Selling, general, and administrative expenses | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| TOTAL EXPENSES | |||||||||||||||||||||||
| Other (income)/expense, net | ( | ( | ( | ( | |||||||||||||||||||
| EARNINGS BEFORE INCOME TAXES | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| NET EARNINGS | $ | $ | $ | $ | |||||||||||||||||||
| BASIC EARNINGS PER SHARE | $ | $ | $ | $ | |||||||||||||||||||
| DILUTED EARNINGS PER SHARE | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $18,379.2 million and $17,852.4 million for the three months ended December 31, 2023 and 2022, respectively, and $34,373.8 million and $33,386.6 million for the six months ended December 31, 2023 and 2022, respectively.
See notes to the Consolidated Financial Statements.
3
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Comprehensive Income
(In millions)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income/(losses): | |||||||||||||||||||||||
| Currency translation adjustments | ( | ||||||||||||||||||||||
| Unrealized net gains/(losses) on available-for-sale securities | ( | ||||||||||||||||||||||
| Tax effect | ( | ( | ( | ||||||||||||||||||||
| Reclassification of realized net losses/(gains) on available-for-sale securities to net earnings | |||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of unrealized losses on cash flow hedging activities | |||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||
| Reclassification of pension liability adjustment to net earnings | |||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income/(loss), net of tax | ( | ||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See notes to the Consolidated Financial Statements.
4
Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
| December 31, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets before funds held for clients | ||||||||||||||
| Funds held for clients | ||||||||||||||
| Total current assets | ||||||||||||||
Long-term receivables, net of allowance for doubtful accounts of $ | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Operating lease right-of-use asset | ||||||||||||||
| Deferred contract costs | ||||||||||||||
| Other assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Accrued payroll and payroll-related expenses | ||||||||||||||
| Dividends payable | ||||||||||||||
| Short-term deferred revenues | ||||||||||||||
| Obligations under reverse repurchase agreements (A) | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total current liabilities before client funds obligations | ||||||||||||||
| Client funds obligations | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Long-term deferred revenues | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 13) | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ outstanding, | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Retained earnings | ||||||||||||||
Treasury stock - at cost: | ( | ( | ||||||||||||
| Accumulated other comprehensive (loss)/ income | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
(A) As of December 31, 2023, $21.5 million of short-term marketable securities and $0.1 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements. As of June 30, 2023, $104.6 million of long-term marketable securities and $0.8 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements (see Note 9) .
See notes to the Consolidated Financial Statements.
5
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In millions)
(Unaudited)
| Six Months Ended | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Cash Flows from Operating Activities: | |||||||||||||||||
| Net earnings | $ | $ | |||||||||||||||
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Amortization of deferred contract costs | |||||||||||||||||
| Deferred income taxes | |||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||
| Net pension income | ( | ( | |||||||||||||||
| Net accretion of discounts and amortization of premiums on available-for-sale securities | ( | ||||||||||||||||
| Other | |||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Increase in accounts receivable | ( | ( | |||||||||||||||
| Increase in deferred contract costs | ( | ( | |||||||||||||||
| Increase in other assets | ( | ( | |||||||||||||||
| Decrease in accounts payable | ( | ( | |||||||||||||||
| Decrease in accrued expenses and other liabilities | ( | ( | |||||||||||||||
| Net cash flows provided by operating activities | |||||||||||||||||
| Cash Flows from Investing Activities: | |||||||||||||||||
| Purchases of corporate and client funds marketable securities | ( | ( | |||||||||||||||
| Proceeds from the sales and maturities of corporate and client funds marketable securities | |||||||||||||||||
| Capital expenditures | ( | ( | |||||||||||||||
| Additions to intangibles | ( | ( | |||||||||||||||
| Acquisitions of businesses, net of cash acquired | ( | ( | |||||||||||||||
| Proceeds from sale of property, plant, and equipment and other assets | |||||||||||||||||
| Other | ( | ||||||||||||||||
| Net cash flows used in investing activities | ( | ( | |||||||||||||||
| Cash Flows from Financing Activities: | |||||||||||||||||
| Net increase/(decrease) in client funds obligations | ( | ||||||||||||||||
| Payments of debt | ( | ( | |||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||
| Net proceeds from stock purchase plan and stock-based compensation plans | ( | ||||||||||||||||
| Dividends paid | ( | ( | |||||||||||||||
| Net payments related to reverse repurchase agreements | ( | ( | |||||||||||||||
| Net cash flows provided by/(used in) financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | ( | ||||||||||||||||
| Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | ( | ||||||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | |||||||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | $ | $ | |||||||||||||||
| Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | |||||||||||||||
| Restricted cash and restricted cash equivalents included in funds held for clients (A) | |||||||||||||||||
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | $ | |||||||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | $ | |||||||||||||||
| Cash paid for income taxes, net of income tax refunds | $ | $ | |||||||||||||||
(A) See Note 6 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.
See notes to the Consolidated Financial Statements.
6
Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts or where otherwise stated)
(Unaudited)
Note 1. Basis of Presentation
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc., its subsidiaries and variable interest entity (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results.
The Company has a grantor trust, which holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees. The Company is the sole beneficial owner of the trust. The trust meets the criteria in Accounting Standards Codification (“ASC”) 810, “Consolidation” to be characterized as a variable interest entity (“VIE”). The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and, therefore, consolidates the trust. Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 6, “Corporate Investments and Funds Held for Clients.”
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“fiscal 2023”).
Certain amounts from the prior year's financial statements have been reclassified in order to conform to the current year's presentation. We also updated the description of "Systems development and programming costs" to "Research and development" within the Statement of Consolidated Earnings, this change did not result in changes to current or previously reported amounts.
Note 2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
| Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters | ||||||||
| ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures | This update enhances the transparency and decision usefulness of income tax disclosures to better assess how an entity’s operations and related tax risks, tax planning and operational opportunities affect its tax rate and prospects for future cash flows. | June 30, 2026 (Fiscal 2026) | The Company is assessing this guidance. The adoption will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, and cash flows. | ||||||||
| ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | This update improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and certain quantitative disclosures. | June 30, 2025 (Fiscal 2025) | The Company is assessing this guidance. The adoption will modify disclosures but will not have an impact on the Company's consolidated results of operations financial condition, and cash flows. | ||||||||
7
Note 3. Revenue
Based upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three business pillars: Human Capital Management (“HCM”), HR Outsourcing (“HRO”), and Global Solutions (“Global”), with separate disaggregation for PEO zero-margin benefits pass-through revenues and client funds interest revenues. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
The following tables provide details of revenue by our business pillars, and include a reconciliation to the Company’s reportable segments:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| Types of Revenues | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| HCM | $ | $ | $ | $ | |||||||||||||||||||
| HRO, excluding PEO zero-margin benefits pass-throughs | |||||||||||||||||||||||
| PEO zero-margin benefits pass-throughs | |||||||||||||||||||||||
| Global | |||||||||||||||||||||||
| Interest on funds held for clients | |||||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | |||||||||||||||||||
Reconciliation of disaggregated revenue to our reportable segments for the three months ended December 31, 2023:
| Types of Revenues | Employer Services | PEO | Other | Total | |||||||||||||||||||
| HCM | $ | $ | $ | ( | $ | ||||||||||||||||||
| HRO, excluding PEO zero-margin benefits pass-throughs | ( | ||||||||||||||||||||||
| PEO zero-margin benefits pass-throughs | |||||||||||||||||||||||
| Global | |||||||||||||||||||||||
| Interest on funds held for clients | |||||||||||||||||||||||
| Total Segment Revenues | $ | $ | $ | ( | $ | ||||||||||||||||||
Reconciliation of disaggregated revenue to our reportable segments for the three months ended December 31, 2022:
| Types of Revenues | Employer Services | PEO | Other | Total | |||||||||||||||||||
| HCM | $ | $ | $ | ( | $ | ||||||||||||||||||
| HRO, excluding PEO zero-margin benefits pass-throughs | ( | ||||||||||||||||||||||
| PEO zero-margin benefits pass-throughs | |||||||||||||||||||||||
| Global | |||||||||||||||||||||||
| Interest on funds held for clients | |||||||||||||||||||||||
| Total Segment Revenues | $ | $ | $ | ( | $ | ||||||||||||||||||
Reconciliation of disaggregated revenue to our reportable segments for the six months ended December 31, 2023:
| Types of Revenues | Employer Services | PEO | Other | Total | |||||||||||||||||||
| HCM | $ | $ | $ | ( | $ | ||||||||||||||||||
| HRO, excluding PEO zero-margin benefits pass-throughs | ( | ||||||||||||||||||||||
| PEO zero-margin benefits pass-throughs | |||||||||||||||||||||||
| Global | |||||||||||||||||||||||
| Interest on funds held for clients | |||||||||||||||||||||||
| Total Segment Revenues | $ | $ | $ | ( | $ | ||||||||||||||||||
8
Reconciliation of disaggregated revenue to our reportable segments for the six months ended December 31, 2022:
| Types of Revenues | Employer Services | PEO | Other | Total | |||||||||||||||||||
| HCM | $ | $ | $ | ( | $ | ||||||||||||||||||
| HRO, excluding PEO zero-margin benefits pass-throughs | ( | ||||||||||||||||||||||
| PEO zero-margin benefits pass-throughs | |||||||||||||||||||||||
| Global | |||||||||||||||||||||||
| Interest on funds held for clients | |||||||||||||||||||||||
| Total Segment Revenues | $ | $ | $ | ( | $ | ||||||||||||||||||
Contract Balances
The timing of revenue recognition for HCM, HRO and Global Solutions is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.
Changes in deferred revenues related to set up fees for the six months ended December 31, 2023 were as follows:
| Contract Liability | |||||
| Contract liability, July 1, 2023 | $ | ||||
| Recognition of revenue included in beginning of year contract liability | ( | ||||
| Contract liability, net of revenue recognized on contracts during the period | |||||
| Currency translation adjustments | |||||
| Contract liability, December 31, 2023 | $ | ||||
Note 4. Earnings per Share (“EPS”)
| Basic | Effect of Employee Stock Option Shares | Effect of Employee Restricted Stock Shares | Diluted | |||||||||||||||||||||||
| Three Months Ended December 31, 2023 | ||||||||||||||||||||||||||
| Net earnings | $ | $ | ||||||||||||||||||||||||
| Weighted average shares (in millions) | ||||||||||||||||||||||||||
| EPS | $ | $ | ||||||||||||||||||||||||
| Three Months Ended December 31, 2022 | ||||||||||||||||||||||||||
| Net earnings | $ | $ | ||||||||||||||||||||||||
| Weighted average shares (in millions) | ||||||||||||||||||||||||||
| EPS | $ | $ | ||||||||||||||||||||||||
| Six Months Ended December 31, 2023 | ||||||||||||||||||||||||||
| Net earnings | $ | $ | ||||||||||||||||||||||||
| Weighted average shares (in millions) | ||||||||||||||||||||||||||
| EPS | $ | $ | ||||||||||||||||||||||||
| Six Months Ended December 31, 2022 | ||||||||||||||||||||||||||
| Net earnings | $ | $ | ||||||||||||||||||||||||
| Weighted average shares (in millions) | ||||||||||||||||||||||||||
| EPS | $ | $ | ||||||||||||||||||||||||
For the three months ended December 31, 2023, there were 0.1 million stock options excluded from the calculation of diluted earnings per share due to anti-dilution. For the six months ended December 31, 2023, there were no stock options excluded
9
from the calculation of diluted earnings per share due to anti-dilution. For the three and six months ended December 31, 2022, there were no
Note 5. Other (Income)/Expense, Net
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Interest income on corporate funds | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Realized losses/(gains) on available-for-sale securities, net | |||||||||||||||||||||||
| Gain on sale of assets | ( | ( | |||||||||||||||||||||
| Impairment of assets | |||||||||||||||||||||||
| Non-service components of pension income, net (see Note 11) | ( | ( | ( | ( | |||||||||||||||||||
| Other (income)/expense, net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Note 6. Corporate Investments and Funds Held for Clients
Corporate investments and funds held for clients at December 31, 2023 and June 30, 2023 were as follows:
| December 31, 2023 | |||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value (A) | ||||||||||||||||||||||||||
| Type of issue: | |||||||||||||||||||||||||||||
| Money market securities, cash and other cash equivalents | $ | $ | — | $ | — | $ | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||||||||
| U.S. Treasury securities | ( | ||||||||||||||||||||||||||||
Canadian government obligations and Canadian government agency obligations | ( | ||||||||||||||||||||||||||||
| U.S. government agency securities | ( | ||||||||||||||||||||||||||||
| Asset-backed securities | ( | ||||||||||||||||||||||||||||
| Canadian provincial bonds | ( | ||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||||||||
| Other securities | ( | ||||||||||||||||||||||||||||
| Total available-for-sale securities | ( | ||||||||||||||||||||||||||||
| Total corporate investments and funds held for clients | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
(A) Included within available-for-sale securities are corporate investments with fair values of $24.4 million and funds held for clients with fair values of $30,271.1 million. All available-for-sale securities were included in Level 2 of the fair value
10
hierarchy.
| June 30, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value (B) | ||||||||||||||||||||
| Type of issue: | |||||||||||||||||||||||
| Money market securities, cash and other cash equivalents | $ | $ | — | $ | — | $ | |||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||
| U.S. Treasury securities | ( | ||||||||||||||||||||||
Canadian government obligations and Canadian government agency obligations | ( | ||||||||||||||||||||||
| U.S. government agency securities | ( | ||||||||||||||||||||||
| Asset-backed securities | ( | ||||||||||||||||||||||
| Canadian provincial bonds | ( | ||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Other securities | ( | ||||||||||||||||||||||
| Total available-for-sale securities | ( | ||||||||||||||||||||||
| Total corporate investments and funds held for clients | $ | $ | $ | ( | $ | ||||||||||||||||||
For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2023. The Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company had no
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2023, are as follows:
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Securities in Unrealized Loss Position Less Than 12 Months | Securities in Unrealized Loss Position Greater Than 12 Months | Total | |||||||||||||||||||||||||||||||||
| Gross Unrealized Losses | Fair Market Value | Gross Unrealized Losses | Fair Market Value | Gross Unrealized Losses | Fair Market Value | ||||||||||||||||||||||||||||||
| Corporate bonds | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| U.S. Treasury securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
Canadian government obligations and Canadian government agency obligations | ( | ( | ( | ||||||||||||||||||||||||||||||||
| U.S. government agency securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Asset-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Canadian provincial bonds | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Other securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| $ | ( | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
11
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2023, are as follows:
| June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Securities in Unrealized Loss Position Less Than 12 Months | Securities in Unrealized Loss Position Greater Than 12 Months | Total | |||||||||||||||||||||||||||||||||
| Gross Unrealized Losses | Fair Market Value | Gross Unrealized Losses | Fair Market Value | Gross Unrealized Losses | Fair Market Value | ||||||||||||||||||||||||||||||
| Corporate bonds | $ | ( | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| U.S. Treasury securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
Canadian government obligations and Canadian government agency obligations | ( | ( | ( | ||||||||||||||||||||||||||||||||
| U.S. government agency securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Asset-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Canadian provincial bonds | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Other securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| $ | ( | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
At December 31, 2023, corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carrying credit ratings of A and above, and have maturities ranging from January 2024 through November 2033.
At December 31, 2023, asset-backed securities include AAA-rated senior tranches of securities with predominantly prime collateral of fixed-rate auto loan, credit card, and equipment lease receivables with fair values of $552.4 million, $377.7 million, and $157.3 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through December 31, 2023.
At December 31, 2023, U.S. government agency securities primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks with fair values of $990.5 million and $447.1 million, respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's, and AA+ by Standard & Poor's, with maturities ranging from February 2024 through March 2033.
At December 31, 2023, U.S. government agency commercial mortgage-backed securities of $568.8 million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.
At December 31, 2023, other securities primarily include municipal bonds, diversified with a variety of issuers, with credit ratings of A and above with fair values of $534.3 million, AA-rated United Kingdom Gilt securities of $399.5 million, and AAA-rated supranational bonds of $211.9 million.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
| December 31, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Corporate investments: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Short-term marketable securities (a) | ||||||||||||||
| Long-term marketable securities (b) | ||||||||||||||
| Total corporate investments | $ | $ | ||||||||||||
(a) - Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.
(b) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.
12
Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.
Funds held for clients have been invested in the following categories:
| December 31, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Funds held for clients: | ||||||||||||||
| Restricted cash and cash equivalents held to satisfy client funds obligations | $ | $ | ||||||||||||
| Restricted short-term marketable securities held to satisfy client funds obligations | ||||||||||||||
| Restricted long-term marketable securities held to satisfy client funds obligations | ||||||||||||||
| Total funds held for clients | $ | $ | ||||||||||||
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $44,002.1 million and $38,538.6 million at December 31, 2023 and June 30, 2023, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations. Of the Company’s funds held for clients at December 31, 2023 and June 30, 2023, $39,005.9 million and $32,758.1 million, respectively, are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and are eliminated in consolidation.
The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash and cash equivalents related to client funds investments with original maturities of ninety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase / (decrease) in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.
All available-for-sale securities were rated as investment grade at December 31, 2023.
Expected maturities of available-for-sale securities at December 31, 2023 are as follows:
| One year or less | $ | ||||
| One year to two years | |||||
| Two years to three years | |||||
| Three years to four years | |||||
| After four years | |||||
| Total available-for-sale securities | $ | ||||
Note 7. Leases
The Company records leases on the Consolidated Balance Sheets as operating lease right-of-use (“ROU”) assets, records the current portion of operating lease liabilities within and, separately, records long-term operating lease liabilities. The difference between total ROU assets and total lease liabilities is primarily attributable to prepayments of our obligations and the recognition of various lease incentives.
The Company has entered into operating lease agreements for facilities and equipment. The Company's leases have remaining lease terms of up to approximately eleven years .
13
The components of operating lease expense were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Short-term lease cost | |||||||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Total operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
The following table provides supplemental cash flow information related to the Company's leases:
| Six Months Ended | |||||||||||
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash paid for operating lease liabilities | $ | $ | |||||||||
| Operating lease ROU assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
Other information related to our operating lease liabilities is as follows:
| December 31, | June 30, | ||||||||||
| 2023 | 2023 | ||||||||||
| Weighted-average remaining lease term (in years) | |||||||||||
| Weighted-average discount rate | % | % | |||||||||
| Current operating lease liability | $ | $ | |||||||||
As of December 31, 2023, maturities of operating lease liabilities are as follows:
| Six months ending June 30, 2024 | $ | ||||
| Twelve months ending June 30, 2025 | |||||
| Twelve months ending June 30, 2026 | |||||
| Twelve months ending June 30, 2027 | |||||
| Twelve months ending June 30, 2028 | |||||
| Thereafter | |||||
| Total undiscounted lease obligations | |||||
| Less: Imputed interest | ( | ||||
| Net lease obligations | $ | ||||
14
Note 8. Goodwill and Intangible Assets, net
Changes in goodwill for the six months ended December 31, 2023 are as follows:
| Employer Services | PEO Services | Total | |||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ||||||||||||||||||||
| Additions and other adjustments | |||||||||||||||||||||||
| Currency translation adjustments | |||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ||||||||||||||||||||
Components of intangible assets, net, are as follows:
| December 31, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Intangible assets: | ||||||||||||||
| Software and software licenses | $ | $ | ||||||||||||
| Customer contracts and lists | ||||||||||||||
| Other intangibles | ||||||||||||||
| Less accumulated amortization: | ||||||||||||||
| Software and software licenses | ( | ( | ||||||||||||
| Customer contracts and lists | ( | ( | ||||||||||||
| Other intangibles | ( | ( | ||||||||||||
| ( | ( | |||||||||||||
| Intangible assets, net | $ | $ | ||||||||||||
Other intangibles consist primarily of purchased rights, trademarks and trade names (acquired directly or through acquisitions). All intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is 6 years (6 years for software and software licenses, 3 years for customer contracts and lists, and 1 year for other intangibles). Amortization of intangible assets was $94.5 million and $93.7 million for the three months ended December 31, 2023 and 2022, respectively, and $190.2 million and $186.1 million for the six months ended December 31, 2023 and 2022, respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
| Amount | |||||
| Six months ending June 30, 2024 | $ | ||||
| Twelve months ending June 30, 2025 | $ | ||||
| Twelve months ending June 30, 2026 | $ | ||||
| Twelve months ending June 30, 2027 | $ | ||||
| Twelve months ending June 30, 2028 | $ | ||||
| Twelve months ending June 30, 2029 | $ | ||||
15
Note 9. Short-term Financing
The Company has a $4.25 billion, 364 -day credit agreement that matures in June 2024 with a one year term-out option. The Company also has a five year , $3.2 billion credit facility maturing in June 2026 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. In addition, the Company also has a $2.25 billion, five year credit facility that matures in June 2028 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. The interest rate applicable to committed borrowings is tied to SOFR, the effective federal funds rate, or the prime rate depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. The Company had no borrowings through December 31, 2023 under the credit agreements.
The Company's U.S. short-term funding requirements primarily related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $9.7 billion in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At December 31, 2023 and June 30, 2023, the Company had no Details of the borrowings under the commercial paper program are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Average daily borrowings (in billions) | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average interest rates | % | % | % | % | |||||||||||||||||||
| Weighted average maturity (approximately in days) | |||||||||||||||||||||||
The Company’s U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to business days. At December 31, 2023 and June 30, 2023, the Company had $21.6 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 | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Average outstanding balances | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average interest rates | % | % | % | % | |||||||||||||||||||
Note 10. Debt
The Company issued three series of fixed-rate notes with staggered maturities of 7 and 10 -years totaling $3.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
16
The principal amounts and associated effective interest rates of the Notes and other debt as of December 31, 2023 and June 30, 2023, are as follows:
| Debt instrument | Effective Interest Rate | December 31, 2023 | June 30, 2023 | |||||||||||||||||
Fixed-rate | $ | $ | ||||||||||||||||||
Fixed-rate | ||||||||||||||||||||
Fixed-rate | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Less: current portion (a) | ( | ( | ||||||||||||||||||
| Less: unamortized discount and debt issuance costs | ( | ( | ||||||||||||||||||
| Total long-term debt | $ | $ | ||||||||||||||||||
(a) - Current portion of long-term debt as of December 31, 2023 is included within accrued expenses and other current liabilities on the Consolidated Balance Sheets.
The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.
Note 11. Employee Benefit Plans
A. Stock-based Compensation Plans. Stock-based compensation consists of the following:
The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock units, performance-based restricted stock, and performance-based restricted stock units. The Company also offers an employee stock purchase plan for eligible employees. Beginning in September 2022, the Company discontinued granting stock options, time-based restricted stock and performance-based restricted stock. Any such future awards will be grants of time-based restricted stock units and/or performance-based restricted stock units, depending on employee eligibility. Time-based restricted stock unit awards and performance-based restricted stock unit awards granted to employees with a home country of the United States are settled in stock, and for awards granted to employees with a home country outside the United States are generally settled in cash.
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program. The Company repurchased 1.1 million and 0.9 million shares in the three months ended December 31, 2023 and 2022, respectively, and repurchased 2.1 million and 2.3 million shares in the six months ended December 31, 2023 and 2022, respectively. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
17
The following table represents pre-tax stock-based compensation expense for the three and six months ended December 31, 2023 and 2022, respectively:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating expenses | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
B. Pension Plans
The components of net pension income were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Service cost – benefits earned during the period | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Interest cost on projected benefits | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Net amortization and deferral | |||||||||||||||||||||||||||||||||||
| Settlement charges and special termination benefits | |||||||||||||||||||||||||||||||||||
| Net pension (income)/expense | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
Note 12. Income Taxes
The effective tax rate for the three months ended December 31, 2023 and 2022 was 23.2
The effective tax rate for the six months ended December 31, 2023 and 2022 was 22.3 % and 23.0 %, 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 six months ended December 31, 2023.
Note 13. Commitments and Contingencies
In May 2020, a putative class action complaint was filed against ADP, TotalSource and related defendants in the U.S. District Court, District of New Jersey. The complaint asserts violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with the ADP TotalSource Retirement Savings Plan’s fiduciary administrative and investment decision-making. The complaint seeks statutory and other unspecified monetary damages, injunctive relief and attorney’s fees. The Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter. The Company is vigorously defending against this lawsuit.
The Company is subject to various claims, litigation, and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims, litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.
It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
18
Note 14. Stockholders' Equity
Changes in stockholders' equity by component are as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuances relating to stock compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
Treasury stock acquired ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuances relating to stock compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
Treasury stock acquired ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
19
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuances relating to stock compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
Treasury stock acquired ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuances relating to stock compensation plans | — | — | — | ||||||||||||||||||||||||||||||||
Treasury stock acquired ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
20
Note 15. Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)
Changes in AOCI by component are as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | Net Gains/Losses on Available-for-sale Securities | Cash Flow Hedging Activities | Pension Liability | Accumulated Other Comprehensive (Loss) /Income | |||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Other comprehensive income/(loss) before reclassification adjustments | |||||||||||||||||||||||||||||||||||
| Tax effect | ( | ( | |||||||||||||||||||||||||||||||||
| Reclassification adjustments to net earnings | (A) | (C) | (B) | ||||||||||||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | Net Gains/Losses on Available-for-sale Securities | Cash Flow Hedging Activities | Pension Liability | Accumulated Other Comprehensive (Loss) /Income | |||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Other comprehensive (loss)/income before reclassification adjustments | |||||||||||||||||||||||||||||||||||
| Tax effect | ( | ( | |||||||||||||||||||||||||||||||||
| Reclassification adjustments to net earnings | (A) | (C) | (B) | ||||||||||||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | Net Gains/Losses on Available-for-sale Securities | Cash Flow Hedging Activities | Pension Liability | Accumulated Other Comprehensive (Loss) /Income | |||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Other comprehensive (loss)/income before reclassification adjustments | |||||||||||||||||||||||||||||||||||
| Tax effect | ( | ( | |||||||||||||||||||||||||||||||||
| Reclassification adjustments to net earnings | (A) | (C) | (B) | ||||||||||||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
21
| Six Months Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Currency Translation Adjustment | Net Gains/Losses on Available-for-sale Securities | Cash Flow Hedging Activities | Pension Liability | Accumulated Other Comprehensive (Loss) /Income | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
| Other comprehensive (loss)/income before reclassification adjustments | ( | ( | ( | ||||||||||||||||||||||||||
| Tax effect | |||||||||||||||||||||||||||||
| Reclassification adjustments to net earnings | (A) | (C) | (B) | ||||||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
(A) Reclassification adjustments out of AOCI are included within Other (income)/expense, net, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included in net pension (income)/expense (see Note 11).
(C) Reclassification adjustments out of AOCI are included in Interest expense on the Statements of Consolidated Earnings (see Note 10).
Note 16. Interim Financial Data by Segment
Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to transformation, severance costs, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense. Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility.
Segment Results:
| Revenues | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Employer Services | $ | $ | $ | $ | |||||||||||||||||||
| PEO Services | |||||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Earnings before Income Taxes | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Employer Services | $ | $ | $ | $ | |||||||||||||||||||
| PEO Services | |||||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
22
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.
23
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 six months ended December 31, 2023 include:
•Revenue growth of 7% to $9,180.3 million; 6% organic constant currency
•Earnings before income taxes margin expansion of 30 bps, and adjusted EBIT margin expansion of 20 bps
•Diluted and adjusted diluted earnings per share ("EPS") growth of 10% to $4.20, respectively.
•Cash returned via shareholder friendly actions of $1.5B, including $1.0B of dividends and $0.5B share repurchases
During the second quarter we made continued progress on our strategy with several product enhancements and partnership expansions aimed at improving the overall experience for our clients. We continued the rollout of ADP Assist, which utilizes generative AI (GenAI) technology to proactively surface insights that enhance HR productivity, aid decision-making with data-driven insights, and streamline day-to-day tasks for our clients and their employees. We also extended GenAI powered capabilities to a greater portion of our service associates to support greater client engagement. Additionally, we expanded on partnerships with other leading technology providers to further simplify the payroll experience and drive more personalized interactions.
For the six months ended December 31, 2023, we delivered solid revenue growth of 7%, 6% 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 six months ended December 31, 2023 as compared to the six months ended December 31, 2022. PEO average worksite employees increased 2% for the six months ended December 31, 2023, as compared to the six months ended December 31, 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 December 31, 2023 and we remain well positioned to support our clients and our associates.
RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS
Total Revenues
For the three and six months ended December 31, respectively:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Total Revenues | $ | 4,668.0 | $ | 4,391.0 | $ | 9,180.3 | $ | 8,606.6 | |||||||||||||||
| YoY Growth | 6 | % | 9 | % | 7 | % | 10 | % | |||||||||||||||
| YoY Growth, Organic Constant Currency | 6 | % | 10 | % | 6 | % | 11 | % | |||||||||||||||
Revenues for the three months ended December 31, 2023 increased due to new business started from New Business Bookings, strong client retention, an increase in pricing, an increase in our pays per control, and an increase in zero-margin benefits pass-throughs.
24
Revenues for the six months ended December 31, 2023 increased due to new business started from New Business Bookings, strong client retention, an increase in pricing, an increase in our pays per control, an increase in zero-margin benefits pass-throughs, and a favorable impact of one percentage point from foreign currency.
Total revenues for the three months ended December 31, 2023 include interest on funds held for clients of $225.3 million, as compared to $187.2 million for the three months ended December 31, 2022. The increase in the interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.8% for the three months ended December 31, 2023, as compared to 2.2% for the three months ended December 31, 2022, partially offset by a decrease in our average client funds balances of 2.3% to $32.6 billion for the three months ended December 31, 2023.
Total revenues for the six months ended December 31, 2023 include interest on funds held for clients of $427.1 million, as compared to $328.3 million for the six months ended December 31, 2022. The increase in the interest earned on funds held for clients resulted from an increase in our average interest rate earned to 2.7% for the six months ended December 31, 2023, as compared to 2.1% for the six months ended December 31, 2022, and an increase in our average client funds balances of 1.6% to $31.9 billion for the six months ended December 31, 2023.
Total Expenses
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||||||||
| Costs of revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses | $ | 2,213.3 | $ | 2,134.5 | 4 | % | $ | 4,370.9 | $ | 4,209.0 | 4 | % | |||||||||||||||||||||||||||||||||||
| Research and development | 228.7 | 204.2 | 12 | % | 465.1 | 413.9 | 12 | % | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 119.6 | 112.0 | 7 | % | 240.9 | 221.4 | 9 | % | |||||||||||||||||||||||||||||||||||||||
| Total costs of revenues | 2,561.6 | 2,450.7 | 5 | % | 5,076.9 | 4,844.3 | 5 | % | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 922.5 | 855.7 | 8 | % | 1,802.8 | 1,656.1 | 9 | % | |||||||||||||||||||||||||||||||||||||||
| Interest expense | 104.9 | 57.0 | 84 | % | 196.5 | 108.1 | 82 | % | |||||||||||||||||||||||||||||||||||||||
| Total expenses | $ | 3,589.0 | $ | 3,363.4 | 7 | % | $ | 7,076.2 | $ | 6,608.5 | 7 | % | |||||||||||||||||||||||||||||||||||
For the three and six months ended December 31, 2023, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs of $944.2 million to $970.7 million for the three months ended December 31, 2023, and an increase of $1,890.0 million to $1,947.5 million for the six months ended December 31, 2023. Additionally, for the three and six months ended December 31, 2023 operating expenses increased by $26.4 million and $47.1 million, respectively, due to increased service and implementation costs in support of our growing revenue.
Research and development expenses increased for the three and six months ended December 31, 2023 due to increased investments and costs to develop, support, and maintain our new and existing products, and increased investments for integration of generative AI (gen AI) in our existing products.
Depreciation and amortization expenses increased for the three months ended December 31, 2023 due to the amortization of new investments in purchased software.
Depreciation and amortization expenses increased for the six months ended December 31, 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 and six months ended December 31, 2023 due to increased selling expenses as a result of investments in our sales organization.
Interest expense increased for the three months ended December 31, 2023 due to the increase in average interest rates on commercial paper issuances and reverse repurchases to 5.4% and 5.4%, respectively, for the three months ended December 31, 2023, as compared to 3.5% and 3.4%, respectively, for the three months ended December 31, 2022, coupled with a higher volume of average commercial paper and reverse repurchases borrowings, as compared to the three months ended December 31, 2022.
25
Interest expense increased for the six months ended December 31, 2023 due to the increase in average interest rates on commercial paper issuances and reverse repurchases to 5.3% and 5.4%, respectively, for the six months ended December 31, 2023, as compared to 2.8% and 2.9%, respectively, for the six months ended December 31, 2022, coupled with a higher volume of average reverse repurchases borrowings, as compared to the six months ended December 31, 2022.
Other (Income)/Expense, net
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | 2023 | 2022 | $ Change | ||||||||||||||||||||||||||||||
| Interest income on corporate funds | $ | (56.9) | $ | (28.9) | $ | 28.0 | $ | (103.4) | $ | (58.6) | $ | 44.8 | |||||||||||||||||||||||
| Realized losses/(gains) on available-for-sale securities, net | 2.0 | 11.5 | 9.5 | 4.0 | 13.0 | 9.0 | |||||||||||||||||||||||||||||
| Gain on sale of assets | (1.4) | — | 1.4 | (16.0) | — | 16.0 | |||||||||||||||||||||||||||||
| Impairment of assets | — | — | — | — | 0.3 | 0.3 | |||||||||||||||||||||||||||||
| Non-service components of pension income, net | (8.5) | (13.1) | (4.6) | (17.1) | (24.7) | (7.6) | |||||||||||||||||||||||||||||
| Other (income)/expense, net | $ | (64.8) | $ | (30.5) | $ | 34.3 | $ | (132.5) | $ | (70.0) | $ | 62.5 | |||||||||||||||||||||||
Interest income on corporate funds increased due to higher average interest rates of 2.9% and 2.8% for the three and six months ended December 31, 2023, respectively, as compared to 2.0% and 1.8% for the three and six months ended December 31, 2022, respectively, coupled with higher average investment balances of $7.8 billion and $7.5 billion for the three and six months ended December 31, 2023, respectively, as compared to $5.7 billion and $6.4 billion for the three and six months ended December 31, 2022, respectively.
In the three months ended December 31, 2023, the Company recognized a gain of $1.4 million in relation to the sale of land. In the six months ended December 31, 2023, the Company recognized a gain of $16.0 million in relation to the sale of a building and land. 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 and six months ended December 31:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | YoY Growth | 2023 | 2022 | YoY Growth | ||||||||||||||||||||||||||||||
| EBIT | $ | 1,143.8 | $ | 1,058.1 | 8 | % | $ | 2,236.6 | $ | 2,068.1 | 8 | % | |||||||||||||||||||||||
| EBIT Margin | 24.5 | % | 24.1 | % | 40 bps | 24.4 | % | 24.0 | % | 30 bps | |||||||||||||||||||||||||
| Adjusted EBIT | $ | 1,147.1 | $ | 1,069.0 | 7 | % | $ | 2,240.4 | $ | 2,086.4 | 7 | % | |||||||||||||||||||||||
| Adjusted EBIT Margin | 24.6 | % | 24.3 | % | 20 bps | 24.4 | % | 24.2 | % | 20 bps | |||||||||||||||||||||||||
Earnings before income taxes increased for the three and six months ended December 31, 2023, due to the components discussed above.
Margin increased for the three months ended December 31, 2023, due to contributions from client funds interest revenues discussed above, operating efficiencies for costs of servicing our clients on growing revenue, partially offset by increased interest expense, increased investments and costs to develop, support and maintain our new and existing products, and increased selling expense.
Margin increased for the six months ended December 31, 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 interest expense, increased investments and costs to develop, support and maintain our new and existing products, and increased selling expense.
26
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 December 31, 2023 and 2022 was 23.2%. The rate remained flat due to a lower state income tax rate and a lower benefit for adjustments to prior year tax liabilities in the three months ended December 31, 2023.
The effective tax rate for the six months ended December 31, 2023 and 2022 was 22.3% and 23.0%, 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 six months ended December 31, 2023.
Adjusted Provision for Income Taxes
The adjusted effective tax rate for the three months ended December 31, 2023 and 2022 was 23.2%. The drivers of the adjusted effective tax rate are the same as the drivers of the effective tax rate discussed above.
The adjusted effective tax rate for the six months ended December 31, 2023 and 2022 was 22.3% and 23.0%, 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 and six months ended December 31:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | YoY Growth | 2023 | 2022 | YoY Growth | |||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 878.4 | $ | 813.1 | 8 | % | $ | 1,737.8 | $ | 1,592.2 | 9 | % | ||||||||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 2.13 | $ | 1.95 | 9 | % | $ | 4.20 | $ | 3.82 | 10 | % | ||||||||||||||||||||||||||||||||||||||
| Adjusted net earnings | $ | 880.5 | $ | 814.9 | 8 | % | $ | 1,740.4 | $ | 1,590.4 | 9 | % | ||||||||||||||||||||||||||||||||||||||
| Adjusted diluted EPS | $ | 2.13 | $ | 1.96 | 9 | % | $ | 4.20 | $ | 3.82 | 10 | % | ||||||||||||||||||||||||||||||||||||||
For the three and six months ended December 31, 2023, 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, 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 1.1 million shares during the three months ended December 31, 2023, and 0.9 million shares during the three months ended December 31, 2022, partially offset by the issuances of shares under our employee benefit plans.
For the six months ended December 31, 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 2.1 million shares during the six months ended December 31, 2023, and 2.3 million shares during the six months ended December 31, 2022, partially offset by the issuances of shares under our employee benefit plans.
27
ANALYSIS OF REPORTABLE SEGMENTS
| Revenues | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | % Change | Six Months Ended | % Change | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | As Reported | Organic constant currency | 2023 | 2022 | As Reported | Organic constant currency | ||||||||||||||||||||||||||||||||||||||||
| Employer Services | $ | 3,125.2 | $ | 2,891.9 | 8 | % | 7 | % | $ | 6,171.6 | $ | 5,682.2 | 9 | % | 8 | % | |||||||||||||||||||||||||||||||
| PEO Services | 1,546.1 | 1,503.3 | 3 | % | 3 | % | 3,015.7 | 2,932.7 | 3 | % | 3 | % | |||||||||||||||||||||||||||||||||||
| Other | (3.3) | (4.2) | n/m | n/m | (7.0) | (8.3) | n/m | n/m | |||||||||||||||||||||||||||||||||||||||
| $ | 4,668.0 | $ | 4,391.0 | 6 | % | 6 | % | $ | 9,180.3 | $ | 8,606.6 | 7 | % | 6 | % | ||||||||||||||||||||||||||||||||
| Earnings before Income Taxes | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | % Change | Six Months Ended | % Change | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | As Reported | 2023 | 2022 | As Reported | ||||||||||||||||||||||||||||||||||||||||||
| Employer Services | $ | 1,061.9 | $ | 934.6 | 14 | % | $ | 2,070.4 | $ | 1,798.1 | 15 | % | |||||||||||||||||||||||||||||||||||
| PEO Services | 255.0 | 255.6 | — | % | 477.9 | 485.9 | (2) | % | |||||||||||||||||||||||||||||||||||||||
| Other | (173.1) | (132.1) | n/m | (311.7) | (215.9) | n/m | |||||||||||||||||||||||||||||||||||||||||
| $ | 1,143.8 | $ | 1,058.1 | 8 | % | $ | 2,236.6 | $ | 2,068.1 | 8 | % | ||||||||||||||||||||||||||||||||||||
| Margin | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | YoY Growth | 2023 | 2022 | YoY Growth | ||||||||||||||||||||||||||||||||||||||||||
| Employer Services | 34.0 | % | 32.3 | % | 170 bps | 33.5 | % | 31.6 | % | 190 bps | |||||||||||||||||||||||||||||||||||||
| PEO Services | 16.5 | % | 17.0 | % | (50) bps | 15.8 | % | 16.6 | % | (70) bps | |||||||||||||||||||||||||||||||||||||
n/m - not meaningful
Employer Services
Revenues
Revenues increased for the three and six months ended December 31, 2023 due to new business started from New Business Bookings, strong client retention, an increase in pricing, an increase in interest earned on funds held for clients, an increase in our pays per control of 2%, respectively, and a favorable impact of one percentage point from foreign currency.
Earnings before Income Taxes
Employer Services' earnings before income taxes increased 14% and 15% for the three and six months ended December 31, 2023, respectively, 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, and increased selling expenses.
Margin
28
Employer Services' margin increased for the three and six months ended December 31, 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, and increased selling expenses.
PEO Services
Revenues
| PEO Revenues | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Change | Six Months Ended | Change | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| PEO Services' revenues | $ | 1,546.1 | $ | 1,503.3 | $ | 42.8 | 3 | % | $ | 3,015.7 | $ | 2,932.7 | $ | 83.0 | 3 | % | |||||||||||||||||||||||||||||||
| Less: PEO zero-margin benefits pass-throughs | 970.7 | 944.2 | 26.5 | 3 | % | 1,947.5 | 1,890.0 | 57.5 | 3 | % | |||||||||||||||||||||||||||||||||||||
| PEO Services' revenues excluding zero-margin benefits pass-throughs | $ | 575.4 | $ | 559.1 | $ | 16.3 | 3 | % | $ | 1,068.2 | $ | 1,042.7 | $ | 25.5 | 2 | % | |||||||||||||||||||||||||||||||
PEO Services' revenue increased for the three and six months ended December 31, 2023, due to increases in zero-margin benefits pass-throughs, and increases in average worksite employees of 2%, as compared to the three and six months ended December 31, 2022.
Earnings before Income Taxes
PEO Services' earnings before income taxes remained flat for the three months ended December 31, 2023 due to a change of $(2.3) million in our estimated losses related to ADP Indemnity compared to prior year, increases in zero-margin benefits pass-through costs of $26.5 million, and increases in selling expenses for the three months ended December 31, 2023, partially offset by increased revenues discussed above.
PEO Services' earnings before income taxes decreased 2% for the six months ended December 31, 2023 due to a change of $(10.7) million in our estimated losses related to ADP Indemnity compared to prior year, increases in zero-margin benefits pass-through costs of $57.5 million, and increases in selling expenses for the six months ended December 31, 2023, partially offset by increased revenues discussed above.
Margin
PEO Services' margin decreased for the three and six months ended December 31, 2023 due to increases in selling expenses, and changes in our estimated losses related to ADP Indemnity, 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 (loss)/benefit of approximately $(1.7) million and $4.5 million for the three and six months ended December 31, 2023, respectively, as compared to approximately $0.6 million and $15.2 million for the three and six months ended December 31, 2022, respectively, 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
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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.
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| Three Months Ended | % Change | Six Months Ended | % Change | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | As Reported | 2023 | 2022 | As Reported | |||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 878.4 | $ | 813.1 | 8 | % | $ | 1,737.8 | $ | 1,592.2 | 9 | % | ||||||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 265.4 | 245.0 | 498.8 | 475.9 | ||||||||||||||||||||||||||||||||||||||||||||||
| All other interest expense (a) | 17.8 | 17.7 | 35.8 | 35.5 | ||||||||||||||||||||||||||||||||||||||||||||||
| All other interest income (a) | (17.2) | (9.2) | (35.4) | (14.8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Transformation initiatives (b) | 2.7 | 2.4 | 3.4 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Legal settlements | — | — | — | (3.8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBIT | $ | 1,147.1 | $ | 1,069.0 | 7 | % | $ | 2,240.4 | $ | 2,086.4 | 7 | % | ||||||||||||||||||||||||||||||||||||||
| Adjusted EBIT Margin | 24.6 | % | 24.3 | % | 24.4 | % | 24.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 265.4 | $ | 245.0 | 8 | % | $ | 498.8 | $ | 475.9 | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation initiatives (c) | 0.6 | 0.6 | 0.8 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Legal settlements (c) | — | — | — | (1.0) | ||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted provision for income taxes | $ | 266.0 | $ | 245.6 | 8 | % | $ | 499.6 | $ | 475.3 | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Adjusted effective tax rate (d) | 23.2 | % | 23.2 | % | 22.3 | % | 23.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 878.4 | $ | 813.1 | 8 | % | $ | 1,737.8 | $ | 1,592.2 | 9 | % | ||||||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation initiatives (b) | 2.7 | 2.4 | 3.4 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit)/provision for transformation initiatives (c) | (0.6) | (0.6) | (0.8) | (0.4) | ||||||||||||||||||||||||||||||||||||||||||||||
| Legal settlements | — | — | — | (3.8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit)/provision for legal settlements (c) | — | — | — | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted net earnings | $ | 880.5 | $ | 814.9 | 8 | % | $ | 1,740.4 | $ | 1,590.4 | 9 | % | ||||||||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 2.13 | $ | 1.95 | 9 | % | $ | 4.20 | $ | 3.82 | 10 | % | ||||||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation initiatives (b) (c) | 0.01 | — | 0.01 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Legal settlements (c) | — | — | — | (0.01) | ||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted diluted EPS | $ | 2.13 | $ | 1.96 | 9 | % | $ | 4.20 | $ | 3.82 | 10 | % | ||||||||||||||||||||||||||||||||||||||
(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 the three and six months ended December 31, 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
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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, | |||||||||||||||||||||||||
| 2023 | 2023 | |||||||||||||||||||||||||
| Consolidated revenue growth as reported | 6 | % | 7 | % | ||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||
Impact of acquisitions | — | % | — | % | ||||||||||||||||||||||
Impact of foreign currency | — | % | (1) | % | ||||||||||||||||||||||
| Consolidated revenue growth, organic constant currency | 6 | % | 6 | % | ||||||||||||||||||||||
| Employer Services revenue growth as reported | 8 | % | 9 | % | ||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||
Impact of acquisitions | — | % | — | % | ||||||||||||||||||||||
Impact of foreign currency | (1) | % | (1) | % | ||||||||||||||||||||||
| Employer Services revenue growth, organic constant currency | 7 | % | 8 | % | ||||||||||||||||||||||
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2023, cash and cash equivalents were $1.6 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 $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, 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.
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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, 2023 and 2022, respectively, are summarized as follows:
| Six Months Ended | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2023 | 2022 | $ Change | ||||||||||||||||||
| Cash provided by / (used in): | ||||||||||||||||||||
| Operating activities | $ | 1,358.9 | $ | 1,617.8 | $ | (258.9) | ||||||||||||||
| Investing activities | (77.8) | (1,469.4) | 1,391.6 | |||||||||||||||||
| Financing activities | 3,816.1 | (9,624.3) | 13,440.4 | |||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | 10.6 | (24.6) | 35.2 | |||||||||||||||||
| Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 5,107.8 | $ | (9,500.5) | $ | 14,608.3 | ||||||||||||||
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 six months ended December 31, 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 $1,379.2 million.
Net cash flows provided by/used in financing activities changed due to a net increase in the cash flow from client funds obligations of $13,518.7 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, and a decrease in the net payments related to reverse repurchase agreements. These were offset by an increase in dividends paid.
We purchased approximately 2.1 million shares of our common stock at an average price per share of $238.29 during the six months ended December 31, 2023, as compared to purchases of 2.3 million shares at an average price per share of $234.87 during the six months ended December 31, 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 December 31, 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:
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| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Average daily borrowings (in billions) | $ | 3.9 | $ | 3.4 | $ | 4.0 | $ | 4.0 | |||||||||||||||
| Weighted average interest rates | 5.4 | % | 3.5 | % | 5.3 | % | 2.8 | % | |||||||||||||||
| Weighted average maturity (approximately in days) | 2 days | 2 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 December 31, 2023 and June 30, 2023, the Company had $21.6 million and $105.4 million, respectively, of outstanding obligations related to reverse repurchase agreement. Details of the reverse repurchase agreements are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Average outstanding balances | $ | 2,423.3 | $ | 960.8 | $ | 1,901.1 | $ | 1,040.1 | |||||||||||||||
| Weighted average interest rates | 5.4 | % | 3.4 | % | 5.4 | % | 2.9 | % | |||||||||||||||
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 December 31, 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 December 31, 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 six months ended December 31, 2023 were $94.0 million, as compared to $91.2 million for the six months ended December 31, 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.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, 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, and for single A rated securities, 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.
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Details regarding our overall investment portfolio are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Average investment balances at cost: | |||||||||||||||||||||||
| Corporate investments | $ | 7,823.0 | $ | 5,691.3 | $ | 7,475.7 | $ | 6,416.6 | |||||||||||||||
| Funds held for clients | 32,646.3 | 33,398.5 | 31,887.8 | 31,397.5 | |||||||||||||||||||
| Total | $ | 40,469.3 | $ | 39,089.8 | $ | 39,363.5 | $ | 37,814.1 | |||||||||||||||
| Average interest rates earned exclusive of realized (gains)/losses on: | |||||||||||||||||||||||
| Corporate investments | 2.9 | % | 2.0 | % | 2.8 | % | 1.8 | % | |||||||||||||||
| Funds held for clients | 2.8 | % | 2.2 | % | 2.7 | % | 2.1 | % | |||||||||||||||
| Total | 2.8 | % | 2.2 | % | 2.7 | % | 2.0 | % | |||||||||||||||
| Net realized losses/(gains) on available-for-sale securities | $ | 2.0 | $ | 11.5 | $ | 4.0 | $ | 13.0 | |||||||||||||||
| December 31, 2023 | June 30, 2023 | ||||||||||
| Net unrealized pre-tax (losses)/gains on available-for-sale securities | $ | (1,493.1) | $ | (2,206.9) | |||||||
| Total available-for-sale securities at fair value | $ | 30,295.5 | $ | 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 2.0% for the six months ended December 31, 2022 to 2.7% for the six months ended December 31, 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 $19 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 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 $7 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 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.
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures about Market Risk” under Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “evaluation”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023 in ensuring that (i) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There was no change in the Company's internal control over financial reporting that occurred during the three months ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Except as noted below, all other items are either inapplicable or would result in negative responses and, therefore, have been omitted.
Item 1. Legal Proceedings
In the normal course of business, the Company is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, the Company believes it has valid defenses with respect to the legal matters pending against it and the Company believes that the ultimate resolution of these matters will not have a material adverse impact on its financial condition, results of operations, or cash flows.
With respect to the disclosure of administrative or judicial proceedings arising under any Federal, State, or local provisions regulating the discharge of materials into the environment or that are primarily for the purpose of protecting the environment, the Company has determined that the following threshold is reasonably designed to result in disclosure of any such proceeding that is material to its business or financial condition: any proceeding when the potential monetary sanctions exceed $1 million.
37
Item 1A. Risk Factors
There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
| Total Number of Shares Purchased (1) | Average Price Paid per Share (3) | Total Number of Shares Purchased as Part of the Publicly Announced Common Stock Repurchase Plan (2) | Maximum Approximate Dollar Value of Shares that may yet be Purchased under the Common Stock Repurchase Plan (2) (3) | |||||||||||||||||||||||
| Period | ||||||||||||||||||||||||||
| October 1 to 31, 2023 | 471,060 | $ | 238.18 | 465,592 | $ | 3,954,527,496 | ||||||||||||||||||||
| November 1 to 30, 2023 | 403,380 | $ | 225.12 | 401,309 | $ | 3,864,193,487 | ||||||||||||||||||||
| December 1 to 31, 2023 | 206,533 | $ | 232.38 | 203,710 | $ | 3,814,508,318 | ||||||||||||||||||||
| Total | 1,080,973 | 1,070,611 | ||||||||||||||||||||||||
(1) During the three months ended December 31, 2023, pursuant to the terms of our restricted stock program, the Company purchased 10,362 shares at the then-market value of the shares to satisfy certain tax withholding requirements for employees upon the vesting of their restricted shares.
(2) The Company received the Board of Directors' approval to repurchase shares of the Company's common stock as follows:
| Date of Approval | ||||||||
| November 2022 | $5 billion | |||||||
| (3) | Inclusive of the impact of the one-percent excise tax under the Inflation Reduction Act of 2022. | ||||
There is no expiration date for the common stock repurchase authorization.
38
Item 6. Exhibits
| Exhibit Number | Exhibit | ||||
| Automatic Data Processing, Inc. 2018 Omnibus Award Plan, as amended and restated as of December 1, 2023 (the "2018 Omnibus Award Plan") (Management Compensatory Plan) | |||||
| Form of Restricted Stock Unit Award Agreement under the 2018 Omnibus Award Plan (three-year vesting schedule) (Management Compensatory Plan) | |||||
| Form of Restricted Stock Unit Award Agreement under the 2018 Omnibus Award Plan (non-three-year vesting schedule) (Management Compensatory Plan) | |||||
| Form of Performance Stock Unit Award Agreement under the 2018 Omnibus Award Plan (Management Compensatory Plan) | |||||
| Certification by Maria Black pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |||||
| Certification by Don McGuire pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |||||
| Certification by Maria Black pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
| Certification by Don McGuire pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
| 101.INS | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Document | ||||
| 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AUTOMATIC DATA PROCESSING, INC. (Registrant) | ||||||||
| Date: | February 1, 2024 | /s/ Don McGuire Don McGuire | ||||||
Chief Financial Officer (Title) | ||||||||
40
Automatic Data Processing, Inc.
2018 Omnibus Award Plan
(as amended and restated as of December 1, 2023)
1. Purpose. The purpose of the Automatic Data Processing, Inc. 2018 Omnibus Award Plan is to provide a means through which the Company and its Affiliates may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors (and prospective directors, officers, employees, consultants and advisors) of the Company and its Affiliates can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation measured by reference to the value of Common Stock, thereby strengthening their commitment to the welfare of the Company and its Affiliates and aligning their interests with those of the Company’s stockholders. This Plan document is an omnibus document which includes, in addition to the Plan, separate sub-plans (“Sub Plans”) that permit offerings of grants to employees of certain Designated Foreign Subsidiaries and other special purpose grants in connection with certain transactions. Offerings under the Sub Plans may be made in particular locations outside the United States of America and shall comply with local laws applicable to offerings in such foreign jurisdictions. The Plan shall be a separate and independent plan from the Sub Plans, but the total number of shares of Common Stock authorized to be issued under the Plan applies in the aggregate to both the Plan and the Sub Plans.
2. Definitions. The following definitions shall be applicable throughout the Plan.
(a) “Account” means the bookkeeping account established and maintained by the Company for each Participant under Section 10(b) of the Plan.
(b) “Affiliate” means (i) any person or entity that directly or indirectly controls, is controlled by or is under common control with the Company and/or (ii) to the extent provided by the Committee, any person or entity in which the Company has a significant interest. The term “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as applied to any person or entity, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person or entity, whether through the ownership of voting or other securities, by contract or otherwise.
(c) “Annual Retainer” means the annual retainer for Non-Employee Directors, as set from time to time by the Board.
(d) “Annual Retainer Dollar Amount” means a dollar amount established by the Board from time to time as the amount of the Annual Retainer that shall be paid in the form of Deferred Stock Units.
(e) “Award” means, individually or collectively, any Incentive Stock Option, Nonqualified Stock Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Other Stock-Based Award and Performance Compensation Award granted under the Plan. For purposes of Section 5(c) of the Plan, “Award” and “Award under the Plan” shall also mean any stock-based award granted under the Prior Plan and outstanding on the Effective Date.
(f) “Board” means the Board of Directors of the Company.
(g) “Cause” means, in the case of a particular Award, unless the applicable Award agreement states otherwise, (i) the Company or an Affiliate having “cause” to terminate a Participant’s employment or service, as defined in any Participant Agreement in effect at the time of such termination or (ii) in the absence of an applicable Participant Agreement defining “cause,” (A) the good faith determination by the Committee that the Participant has ceased to perform his or her duties to the Company or an Affiliate (other than as a result of his or her incapacity due to physical or mental illness or injury), which failure amounts to an intentional and extended neglect of his or her duties to such party, provided that no such failure shall constitute Cause unless the Participant has been given notice of such failure and (if cure is reasonably possible) has not cured such act or omission within 15 days following receipt of such notice, (B) the Committee’s good faith determination that the Participant has engaged or is about to engage in conduct injurious to the Company or an Affiliate, (C) the Participant having been convicted of, or plead guilty or no contest to, a felony or any crime involving as a material element fraud or dishonesty, (D) the consistent failure of the Participant to follow the lawful instructions of the Board or his or her direct superiors, which failure amounts to an intentional and extended neglect of his or her duties to the Company or an Affiliate thereof, or (E) in the case of a Participant who is a Non-Employee Director, the Participant engaging in any of the activities described in clauses (A) through (D) above. Any determination of whether Cause exists shall be made by the Committee in its sole discretion.
(h) “Change in Control” shall, in the case of a particular Award, unless the applicable Award agreement states otherwise or contains a different definition of “Change in Control,” be deemed to occur upon: (A) any “Person” (as defined in Section 3(a)(9) of the Exchange Act), excluding the Company, any Subsidiary of the Company, or any employee benefit plan sponsored or maintained by the Company (including any trustee of any such plan acting in his or her capacity as trustee), becoming the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 35% or more of the total combined voting power of the Company’s then outstanding securities; (B) the merger, consolidation or other business combination of the Company (a “Transaction”), other than a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to be the beneficial owners of securities of the resulting entity representing more than 60% of the voting power in the resulting entity, in substantially the same proportions as their ownership of Company voting securities immediately prior to the Transaction; or (C) the sale of all or substantially all of the Company’s assets, other than a sale immediately following which the stockholders of the Company immediately prior to the sale are the beneficial owners of securities of the purchasing entity representing more than 60% of the voting power in the purchasing entity, in substantially the same proportions as their ownership of Company voting securities immediately prior to the sale of assets.
(i) “Code” means the Internal Revenue Code of 1986, as amended, and any successor thereto. Reference in the Plan to any section of the Code shall be deemed to include any regulations or other interpretative guidance under such section, and any amendments or successor provisions to such section, regulations or guidance.
(j) “Committee” means a committee of at least two people as the Board may appoint to administer the Plan or, if no such committee has been appointed by the Board, the Board.
(k) “Committee Retainer” means the retainer paid to Non-Employee Directors in respect of service on a committee of the Board.
(l) “Common Stock” means the common stock, par value $0.10 per share, of the Company (and any stock or other securities into which such common stock may be converted or into which it may be exchanged).
(m) “Company” means Automatic Data Processing, Inc., a Delaware corporation, and any successor thereto.
(n) “Date of Grant” means the date on which the granting of an Award is authorized, or such other date as may be specified in such authorization.
(o) “Deferred Stock Units” has the meaning given such term in Section 10(b)(i) of the Plan.
(p) “Designated Foreign Subsidiaries” means all Affiliates organized under the laws of any jurisdiction or country other than the United States of America that may be designated by the Board or the Committee from time to time.
(q) “Disability” means, in the case of a particular Award, unless the applicable Award agreement states otherwise, the Company or an Affiliate having cause to terminate a Participant’s employment or service on account of “disability,” as defined in any Participant Agreement in effect at the time of such termination or, in the absence of an applicable Participant Agreement defining “disability,” a condition entitling the Participant to receive benefits under a long-term disability plan of the Company or an Affiliate, or, in the absence of such a plan, the complete and permanent inability by reason of illness or accident to perform the duties of the occupation at which a Participant was employed or served when such disability commenced, as determined by the Committee based upon medical evidence acceptable to it.
(r) “Distribution Date” means, with respect to each Participant (or his beneficiary, if the Participant dies before distribution of his Account), the date on which distribution in respect of his Account interests in accordance with Section 10(b)(viii) commences. A Participant’s Distribution Date shall be on the thirtieth day following the date of such Participant’s Separation From Service.
(s) “Dividend Equivalents” means, with respect to each Deferred Stock Unit, an amount equal to the cash dividends, if any, that would have been paid with respect to such Deferred Stock Unit, if such Deferred Stock Unit were a share of Common Stock.
(t) “Effective Date” means the date on which the Plan is initially approved by the stockholders of the Company.
(u) “Effective Date Share Limit” has the meaning given such term in Section 5(b).
(v) “Elective Amount” means the portion or portions of the Annual Retainer and/or the Committee Retainer determined under Section 10(b)(ii) of the Plan in respect of services for any particular year that may be paid to the Non-Employee Director either in cash or in Deferred Stock Units at the election of the Non-Employee Director.
(w) “Eligible Director” means a person who is (i) a “non‑employee director” within the meaning of Rule 16b‑3 under the Exchange Act and (ii) an “independent director” under the rules of NASDAQ or any other securities exchange or inter-dealer quotation system on which the
Common Stock is listed or quoted, or a person meeting any similar requirement under any successor rule or regulation.
(x) “Eligible Person” means any (i) individual employed by the Company or an Affiliate; provided, however, that no such employee covered by a collective bargaining agreement shall be an Eligible Person unless and to the extent that such eligibility is set forth in such collective bargaining agreement or in an agreement or instrument relating thereto; (ii) director or officer of the Company or an Affiliate; (iii) consultant or advisor to the Company or an Affiliate who may be offered securities registrable pursuant to a registration statement on Form S‑8 under the Securities Act; or (iv) individual who has accepted an offer of employment or service as an employee, director, officer, consultant or advisor with the Company or its Affiliates (and would satisfy the provisions of any of clauses (i) through (iii) above once he or she begins employment with or providing services to the Company or its Affiliates), who, in the case of each of clauses (i) through (iv) above, has entered into an Award agreement or who has received written notification from the Committee or its designee that he or she has been selected to participate in the Plan.
(y) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor thereto. Reference in the Plan to any section of (or rule promulgated under) the Exchange Act shall be deemed to include any rules, regulations or other interpretative guidance under such section or rule, and any amendments or successor provisions to such section, rules, regulations or guidance.
(z) “Exercise Price” has the meaning given such term in Section 7(b) of the Plan.
(aa) “Fair Market Value” means (i) unless otherwise determined by the Committee, on a given date, (A) if the Common Stock is listed on a national securities exchange, the closing sales price of the Common Stock reported on the primary exchange on which the Common Stock is listed and traded on such date, or, if there is no such sale on that date, then on the last preceding date on which such a sale was reported, or (B) if the Common Stock is not listed on any national securities exchange but is quoted in an inter-dealer quotation system on a last sale basis, the average between the closing bid price and ask price reported on such date, or, if there is no such sale on that date, then on the last preceding date on which a sale was reported; or (ii) if the Common Stock is not listed on a national securities exchange or quoted in an inter-dealer quotation system on a last sale basis, the amount determined by the Committee in good faith to be the fair market value of the Common Stock.
(bb) “Immediate Family Members” shall have the meaning set forth in Section 14(c).
(cc) “Incentive Stock Option” means an Option that is designated by the Committee as an incentive stock option as described in Section 422 of the Code and otherwise meets the requirements set forth in the Plan.
(dd) “Indemnifiable Person” shall have the meaning set forth in Section 4(e) of the Plan.
(ee) “Meeting Fees” shall mean fees a Non-Employee Director earns for attendance at Board meetings and committee meetings, as well as fees a Non-Employee Director earns for serving as the chairperson of a committee of the Board.
(ff) “NASDAQ” shall mean The NASDAQ Global Select Market.
(gg) “Negative Discretion” shall mean the discretion authorized by the Plan to be applied by the Committee to eliminate or reduce the size of a Performance Compensation Award.
(hh) “Nonqualified Stock Option” means an Option that is not designated by the Committee as an Incentive Stock Option.
(ii) “Non-Employee Director” means a member of the Board who is not an employee of the Company or any Affiliate.
(jj) “Option” means an Award granted under Section 7 of the Plan.
(kk) “Option Period” has the meaning given such term in Section 7(c) of the Plan.
(ll) “Other Stock-Based Award” means an Award granted under Section 10 of the Plan.
(mm) “Participant” means an Eligible Person who has been selected by the Committee to participate in the Plan and to receive an Award.
(nn) “Participant Agreement” means, with respect to an Eligible Person, any applicable Award agreement or any other employment, consulting, or other service or compensatory or severance agreement between the Eligible Person and the Company or an Affiliate, or any compensatory or severance plan, program, or arrangement of the Company or an Affiliate in which the Eligible Person participates.
(oo) “Payment Date” means an annual date established by the Board from time to time for the crediting of the Annual Retainer in the form of Deferred Stock Units.
(pp) “Performance Compensation Award” shall mean any Award, whether cash-based or stock-based, designated by the Committee as a Performance Compensation Award pursuant to Section 11 of the Plan.
(qq) “Performance Criteria” shall mean the criterion or criteria that the Committee shall select for purposes of establishing the Performance Goal(s) for a Performance Period with respect to any Performance Compensation Award under the Plan.
(rr) “Performance Formula” shall mean, for a Performance Period, the one or more objective formulae applied against the relevant Performance Goal to determine, with regard to the Performance Compensation Award of a particular Participant, whether all, some portion but less than all, or none of the Performance Compensation Award has been earned for the Performance Period.
(ss) “Performance Goals” shall mean, for a Performance Period, the one or more goals established by the Committee for the Performance Period.
(tt) “Performance Period” shall mean the one or more periods of time, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance Compensation Award.
(uu) “Permitted Transferee” shall have the meaning set forth in Section 14(c) of the Plan.
(vv) “Person” has the meaning given such term in the definition of “Change in Control.”
(ww) “Plan” means this Automatic Data Processing, Inc. 2018 Omnibus Award Plan, as amended from time to time.
(xx) “Prior Plan” shall mean the Amended and Restated Automatic Data Processing, Inc. 2008 Omnibus Award Plan.
(yy) “Restricted Period” means the period of time determined by the Committee during which an Award is subject to restrictions or, as applicable, the period of time within which performance is measured for purposes of determining whether an Award has been earned.
(zz) “Restricted Stock” means Common Stock, subject to certain specified restrictions (including, without limitation, a requirement that the Participant remain continuously employed or provide continuous services for a specified period of time), granted under Section 9 of the Plan.
(aaa) “Restricted Stock Unit” means an unfunded and unsecured promise to deliver shares of Common Stock, cash, other securities or other property, subject to certain restrictions (including, without limitation, a requirement that the Participant remain continuously employed or provide continuous services for a specified period of time), granted under Section 9 of the Plan.
(bbb) “SAR Period” has the meaning given such term in Section 8(c) of the Plan.
(ccc) “Securities Act” means the Securities Act of 1933, as amended, and any successor thereto. Reference in the Plan to any section of (or rule promulgated under) the Securities Act shall be deemed to include any rules, regulations or other interpretative guidance under such section or rule, and any amendments or successor provisions to such section, rules, regulations or guidance.
(ddd) “Separation From Service” shall have the meaning set forth in Section 409A(a)(2)(A)(i) of the Code.
(eee) “Specified Employee” means a Participant who meets the definition of “specified employee,” as defined in Section 409A(a)(2)(B)(i) of the Code.
(fff) “Stock Appreciation Right” or “SAR” means an Award granted under Section 8 of the Plan.
(ggg) “Strike Price” has the meaning given such term in Section 8(b) of the Plan.
(hhh) “Subsidiary” means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of company voting securities (without regard to the occurrence of any contingency and after giving effect to any voting agreement or stockholders’ agreement that effectively transfers voting power) is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (or any comparable foreign entity) (a) the sole general partner (or functional equivalent thereof) or the managing general partner of which is such Person or Subsidiary of such Person or (b) the only general partners (or functional equivalents thereof) of which are that Person or one or more Subsidiaries of that Person (or any combination thereof).
(iii) “Substitute Award” has the meaning given such term in Section 5(e).
(jjj) “Sub Plans” has the meaning given such term in Section 1.
(kkk) “Transaction” has the meaning given such term in the definition of “Change in Control.”
3. Effective Date; Duration. The Plan is effective as of the Effective Date. The expiration date of the Plan, on and after which date no Awards may be granted hereunder, shall be the tenth anniversary of the Effective Date; provided, however, that such expiration shall not affect Awards then outstanding, and the terms and conditions of the Plan shall continue to apply to such Awards.
4. Administration.
(a) The Committee shall administer the Plan. To the extent required to comply with the provisions of Rule 16b-3 promulgated under the Exchange Act (if the Board is not acting as the Committee under the Plan), it is intended that each member of the Committee shall, at the time he or she takes any action with respect to an Award under the Plan, be an Eligible Director. However, the fact that a Committee member shall fail to qualify as an Eligible Director shall not invalidate any Award granted by the Committee that is otherwise validly granted under the Plan.
(b) Subject to the provisions of the Plan and applicable law, the Committee shall have the sole and plenary authority, in addition to other express powers and authorizations conferred on the Committee by the Plan, to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to a Participant; (iii) determine the number of shares of Common Stock to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, shares of Common Stock, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances the delivery of cash, Common Stock, other securities, other Awards or other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant or of the Committee; (vii) compute the number of Deferred Stock Units to be credited to the Accounts of Participants; (viii) interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to, or Award granted under, the Plan; (ix) establish, amend, suspend, or waive any rules and regulations and appoint such agents as the Committee shall deem appropriate for the proper administration of the Plan; (x) accelerate the vesting or exercisability of, payment for or lapse of restrictions on, Awards (including previously deferred Awards), and accelerate and determine payouts, if any, in respect of Awards with incomplete Performance Periods, in each case upon a Change in Control, death, Disability or retirement (or on any other termination of employment) of a Participant; and (xi) make any other determination
and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
(c) Except to the extent prohibited by applicable law or the applicable rules and regulations of any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or traded, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. Without limiting the generality of the foregoing, the Committee may delegate to one or more officers of the Company or any Affiliate the authority to act on behalf of the Committee with respect to any matter, right, obligation, or election that is the responsibility of or that is allocated to the Committee herein, and that may be so delegated as a matter of law, except for grants of Awards to persons subject to Section 16 of the Exchange Act.
(d) Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award or any documents evidencing Awards granted pursuant to the Plan shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all persons or entities, including, without limitation, the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, and any stockholder of the Company.
(e) No member of the Board, the Committee or any employee or agent of the Company (each such person, an “Indemnifiable Person”) shall be liable for any action taken or omitted to be taken or any determination made with respect to the Plan or any Award hereunder (unless constituting bad faith, fraud or a willful criminal act or omission). Each Indemnifiable Person shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense (including attorneys’ fees) that may be imposed upon or incurred by such Indemnifiable Person in connection with or resulting from any action, suit or proceeding to which such Indemnifiable Person may be a party or in which such Indemnifiable Person may be involved by reason of any action taken or omitted to be taken or determination made under the Plan or any Award agreement and against and from any and all amounts paid by such Indemnifiable Person with the Company’s approval, in settlement thereof, or paid by such Indemnifiable Person in satisfaction of any judgment in any such action, suit or proceeding against such Indemnifiable Person, provided that the Company shall have the right, at its own expense, to assume and defend any such action, suit or proceeding and once the Company gives notice of its intent to assume the defense, the Company shall have sole control over such defense with counsel of the Company’s choice. The foregoing right of indemnification shall not be available to an Indemnifiable Person to the extent that a final judgment or other final adjudication (in either case not subject to further appeal) binding upon such Indemnifiable Person determines that the acts or omissions or determinations of such Indemnifiable Person giving rise to the indemnification claim resulted from such Indemnifiable Person’s bad faith, fraud or willful criminal act or omission or that such right of indemnification is otherwise prohibited by law or by the Company’s Certificate of Incorporation or Bylaws. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such Indemnifiable Persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any other power that the Company may have to indemnify such Indemnifiable Persons or hold them harmless.
(f) Notwithstanding anything to the contrary contained in the Plan, the Board may, in its sole discretion, at any time and from time to time, grant Awards and administer the Plan with
respect to such Awards. In any such case, the Board shall have all the authority granted to the Committee under the Plan.
5. Grant of Awards; Shares Subject to the Plan; Limitations.
(a) The Committee may, from time to time, grant Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards and/or Performance Compensation Awards to one or more Eligible Persons.
(b) Awards granted under the Plan shall be subject to the following limitations: (i) subject to Sections 5(c) and 12 of the Plan, no more than the sum of (A) 10,300,000 shares of Common Stock plus (B) the number of shares of Common Stock that, as of the Effective Date, are remaining available for issuance or delivery, and not subject to outstanding awards, under the Prior Plan may be delivered in the aggregate pursuant to Awards granted under the Plan (such sum of (A) and (B), the “Effective Date Share Limit”); (ii) subject to Section 12 of the Plan, no more than the number of shares of Common Stock equal to the Effective Date Share Limit may be delivered in the aggregate pursuant to the exercise of Incentive Stock Options granted under the Plan; and (iii) the maximum number of Shares subject to Awards granted to any Non-Employee Director during a single fiscal year shall be limited so that the Awards, taken together with any cash fees paid to such Non-Employee Director in respect of his or her service during such year (including service as a member or chair of any committees of the Board), do not exceed $750,000 in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for financial reporting purposes). Notwithstanding the foregoing, the Board may make exceptions to the limit in the foregoing clause (iii) for (A) a non-executive chairman of the Board, provided that such non-executive chairman does not participate in the decision to award such compensation, and (B) special projects and ad hoc committee appointments, as deemed appropriate by the Board, from time to time.
(c) If shares of Common Stock issued or issuable upon vesting or settlement of an Award are withheld by the Company, or if shares of Common Stock owned by a Participant are surrendered or tendered to the Company (either directly or by means of attestation), in payment of any taxes required to be withheld in respect of such Award (other than an Award of Options or SARs), in each case, in accordance with the terms and conditions of the Plan and any applicable Award agreement, such withheld, surrendered or tendered shares shall become available for other Awards under the Plan; provided, further, that in no event shall such shares increase the number of shares of Common Stock that may be delivered pursuant to Incentive Stock Options granted under the Plan. If and to the extent an Award under the Plan is settled in cash or expires, terminates or is canceled or forfeited for any reason whatsoever, the shares covered by such Award shall again become available for other Awards under the Plan. For the avoidance of doubt, the following shares shall not be added to the shares authorized for grant under sub-section (b) of this Section 5: (i) shares tendered by a Participant or withheld by the Company in payment of the Exercise Price of an Option; (ii) shares tendered by a Participant or withheld by the Company to satisfy any tax withholding obligation with respect to Options or SARs; (iii) shares subject to a SAR that are not issued in connection with its stock settlement on exercise thereof; and (iv) shares reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of Options.
(d) Shares of Common Stock delivered by the Company in settlement of Awards may be authorized and unissued shares, shares held in the treasury of the Company, shares purchased on the open market or by private purchase, or a combination of the foregoing.
(e) Awards may, in the sole discretion of the Committee, be granted under the Plan in assumption of, or in substitution for, outstanding awards previously granted by an entity acquired directly or indirectly by the Company or with which the Company combines (“Substitute Awards”). Shares of Common Stock underlying Substitute Awards shall not be counted against the number of shares of Common Stock available for issuance pursuant to Section 5(b) above; provided, that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code shall be counted against the aggregate number of shares of Common Stock available for Awards of Incentive Stock Options under the Plan.
(f) Following the Effective Date, no new awards shall be granted under the Prior Plan. For purposes of the preceding sentence, awards under the Prior Plan with performance periods that commenced prior to the Effective Date and end after the Effective Date shall not be deemed new awards granted following the Effective Date.
6. Eligibility. Participation shall be limited to Eligible Persons.
7. Options.
(a) Generally. Each Option granted under the Plan shall be evidenced by an Award agreement. Each Option so granted shall be subject to the conditions set forth in this Section 7, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award agreement. All Options granted under the Plan shall be Nonqualified Stock Options unless the applicable Award agreement expressly states that the Option is intended to be an Incentive Stock Option. Incentive Stock Options shall be granted only to Eligible Persons who are employees of the Company and its Affiliates, and no Incentive Stock Option shall be granted to any Eligible Person who is ineligible to receive an Incentive Stock Option under the Code. No Option shall be treated as an Incentive Stock Option unless the Plan has been approved by the stockholders of the Company in a manner intended to comply with the stockholder approval requirements of Section 422(b)(1) of the Code, provided that any Option intended to be an Incentive Stock Option shall not fail to be effective solely on account of a failure to obtain such approval, but rather such Option shall be treated as a Nonqualified Stock Option unless and until such approval is obtained. In the case of an Incentive Stock Option, the terms and conditions of such grant shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code. If for any reason an Option intended to be an Incentive Stock Option (or any portion thereof) shall not qualify as an Incentive Stock Option, then, to the extent of such nonqualification, such Option or portion thereof shall be regarded as a Nonqualified Stock Option appropriately granted under the Plan.
(b) Exercise Price. Except as otherwise provided by the Committee in the case of Substitute Awards, the exercise price (“Exercise Price”) per share of Common Stock for each Option shall not be less than 100% of the Fair Market Value of such share (determined as of the Date of Grant); provided, however, that in the case of an Incentive Stock Option granted to an employee who, at the time of the grant of such Option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Affiliate, the Exercise Price per share shall be no less than 110% of the Fair Market Value per share on the Date of Grant.
(c) Vesting and Expiration. Options shall vest and become exercisable in such manner and on such date or dates determined by the Committee and shall expire after such period, not to exceed ten years, as may be determined by the Committee (the “Option Period”); provided, however, that the Option Period shall not exceed five years from the Date of Grant in
the case of an Incentive Stock Option granted to a Participant who on the Date of Grant owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Affiliate; provided, further, that notwithstanding any vesting dates set by the Committee, and consistent with the Committee’s power under Section 4(b), the Committee may, in its sole discretion, accelerate the exercisability of any Option upon a Change in Control, death, Disability or retirement (or on any other termination of employment) of a Participant, which acceleration shall not affect the terms and conditions of such Option other than with respect to exercisability.
(d) Method of Exercise and Form of Payment. No shares of Common Stock shall be delivered pursuant to any exercise of an Option until payment in full of the Exercise Price therefor is received by the Company and the Participant has paid to the Company an amount equal to any federal, state, local and non-U.S. income and employment taxes required to be withheld. Options that have become exercisable may be exercised by delivery of written or electronic notice of exercise to the Company in accordance with the terms of the Option accompanied by payment of the Exercise Price. The Exercise Price shall be payable (i) in cash, check, cash equivalent or shares of Common Stock valued at the Fair Market Value at the time the Option is exercised (including, pursuant to procedures approved by the Committee, by means of attestation of ownership of a sufficient number of shares of Common Stock in lieu of actual delivery of such shares to the Company), provided that such shares of Common Stock are not subject to any pledge or other security interest; (ii) a “net exercise” procedure effected by withholding the minimum number of shares of Common Stock otherwise deliverable in respect of an Option that are needed to pay the Exercise Price and all applicable required withholding taxes; or (iii) by such other method as the Committee may permit in its sole discretion, including without limitation: (A) in other property having a fair market value on the date of exercise equal to the Exercise Price or (B) if there is a public market for the shares of Common Stock at such time, by means of a broker-assisted “cashless exercise” pursuant to which the Company is delivered a copy of irrevocable instructions to a stockbroker to sell the shares of Common Stock otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the Exercise Price. Notwithstanding the foregoing, if on the last day of the Option Period, the Fair Market Value exceeds the Exercise Price, the Participant has not exercised the Option, and the Option has not expired, such Option shall be deemed to have been exercised by the Participant on such last day by means of a net exercise and the Company shall deliver to the Participant the number of shares of Common Stock for which the Option was deemed exercised less such number of shares of Common Stock required to be withheld to cover the payment of the Exercise Price and all applicable required withholding taxes. Any fractional share of Common Stock shall be settled in cash.
(e) Notification upon Disqualifying Disposition of an Incentive Stock Option. Each Participant awarded an Incentive Stock Option under the Plan shall notify the Company in writing immediately after the date on which he or she makes a disqualifying disposition of any Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A disqualifying disposition is any disposition (including, without limitation, any sale) of such Common Stock before the later of (i) two years after the Date of Grant of the Incentive Stock Option and (ii) one year after the date of exercise of the Incentive Stock Option. The Company may, if determined by the Committee and in accordance with procedures established by the Committee, retain possession, as agent for the applicable Participant, of any Common Stock acquired pursuant to the exercise of an Incentive Stock Option until the end of the period described in the preceding sentence, subject to complying with any instructions from such Participant as to the sale of such Common Stock.
(f) Compliance With Laws, etc. Notwithstanding the foregoing, in no event shall a Participant be permitted to exercise an Option in a manner that the Committee determines would violate the Sarbanes-Oxley Act of 2002, or any other applicable law or the applicable rules and regulations of the Securities and Exchange Commission or the applicable rules and regulations of any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or traded.
8. Stock Appreciation Rights.
(a) Generally. Each SAR granted under the Plan shall be evidenced by an Award agreement. Each SAR so granted shall be subject to the conditions set forth in this Section 8, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award agreement. Any Option granted under the Plan may include tandem SARs. The Committee also may award SARs to Eligible Persons independent of any Option.
(b) Strike Price. Except as otherwise provided by the Committee in the case of Substitute Awards, the strike price (“Strike Price”) per share of Common Stock for each SAR shall not be less than 100% of the Fair Market Value of such share (determined as of the Date of Grant). Notwithstanding the foregoing, a SAR granted in tandem with (or in substitution for) an Option previously granted shall have a Strike Price at least equal to the Exercise Price of the corresponding Option.
(c) Vesting and Expiration. A SAR granted in connection with an Option shall become exercisable and shall expire according to the same vesting schedule and expiration provisions as the corresponding Option. A SAR granted independent of an Option shall vest and become exercisable and shall expire in such manner and on such date or dates determined by the Committee and shall expire after such period, not to exceed ten years, as may be determined by the Committee (the “SAR Period”); provided, however, that notwithstanding any vesting dates set by the Committee, and consistent with the Committee’s power under Section 4(b), the Committee may, in its sole discretion, accelerate the exercisability of any SAR upon a Change in Control, death, Disability or retirement (or on any other termination of employment) of a Participant, which acceleration shall not affect the terms and conditions of such SAR other than with respect to exercisability.
(d) Method of Exercise. SARs that have become exercisable may be exercised by delivery of written or electronic notice of exercise to the Company in accordance with the terms of the Award, specifying the number of SARs to be exercised and the date on which such SARs were awarded. Notwithstanding the foregoing, if on the last day of the Option Period (or in the case of a SAR independent of an Option, the SAR Period), the Fair Market Value exceeds the Strike Price, the Participant has not exercised the SAR or the corresponding Option (if applicable), and neither the SAR nor the corresponding Option (if applicable) has expired, such SAR shall be deemed to have been exercised by the Participant on such last day and the Company shall make the appropriate payment therefor.
(e) Payment. Upon the exercise of a SAR, the Company shall pay to the Participant an amount equal to the number of shares subject to the SAR that are being exercised multiplied by the excess, if any, of the Fair Market Value of one share of Common Stock on the exercise date over the Strike Price, less an amount equal to any federal, state, local and non-U.S. income and employment taxes required to be withheld. The Company shall pay such amount in cash, in
shares of Common Stock valued at Fair Market Value, or any combination thereof, as determined by the Committee. Any fractional share of Common Stock shall be settled in cash.
(f) Substitution of SARs for Nonqualified Stock Options. The Committee shall have the authority in its sole discretion to substitute, without the consent of the affected Participant or any holder or beneficiary of SARs, SARs settled in shares of Common Stock (or settled in shares or cash in the sole discretion of the Committee) for outstanding Nonqualified Stock Options, provided that (i) the substitution shall not otherwise result in a modification of the terms of any such Nonqualified Stock Option, (ii) the number of shares of Common Stock underlying the substituted SARs shall be the same as the number of shares of Common Stock underlying such Nonqualified Stock Options and (iii) the Strike Price of the substituted SARs shall be equal to the Exercise Price of such Nonqualified Stock Options; provided, however, that if, in the opinion of the Company’s independent public auditors, the foregoing provision creates adverse accounting consequences for the Company, such provision shall be considered null and void.
9. Restricted Stock and Restricted Stock Units.
(a) Generally. Each grant of Restricted Stock and Restricted Stock Units shall be evidenced by an Award agreement. Each Restricted Stock and Restricted Stock Unit grant shall be subject to the conditions set forth in this Section 9, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award agreement.
(b) Stock Certificates and Book Entry; Escrow or Similar Arrangement. Upon the grant of Restricted Stock, the Committee shall cause a stock certificate registered in the name of the Participant to be issued or shall cause share(s) of Common Stock to be registered in the name of the Participant and held in book-entry form subject to the Company’s directions and, if the Committee determines that the Restricted Stock shall be held by the Company or in escrow rather than delivered to the Participant pending the release of the applicable restrictions, the Committee may require the Participant to additionally execute and deliver to the Company (i) an escrow agreement satisfactory to the Committee, if applicable, and (ii) the appropriate stock power (endorsed in blank) with respect to the Restricted Stock covered by such agreement. If a Participant shall fail to execute an agreement evidencing an Award of Restricted Stock and, if applicable, an escrow agreement and blank stock power within the amount of time specified by the Committee, the Award shall be null and void. Subject to the restrictions set forth in this Section 9 and the applicable Award agreement, the Participant generally shall have the rights and privileges of a stockholder as to such Restricted Stock, including without limitation the right to vote such Restricted Stock. To the extent that shares of Restricted Stock are forfeited, any stock certificates issued to the Participant evidencing such shares shall be returned to the Company, and all rights of the Participant to such shares and as a stockholder with respect thereto shall terminate without further obligation on the part of the Company.
(c) Vesting; Acceleration of Lapse of Restrictions. The Restricted Period with respect to Restricted Stock and Restricted Stock Units shall lapse in such manner and on such date or dates determined by the Committee and the Committee shall determine the treatment of the unvested portion of Restricted Stock and Restricted Stock Units upon termination of employment or service of the Participant granted the applicable Award. Consistent with the Committee’s power under Section 4(b), the Committee may in its sole discretion accelerate the lapse of any or all of the restrictions on the Restricted Stock and Restricted Stock Units upon a Change in Control, death, Disability or retirement (or on any other termination of employment) of a Participant, which acceleration shall not affect any other terms and conditions of such Awards.
(d) Delivery of Restricted Stock and Settlement of Restricted Stock Units.
(i) Upon the expiration of the Restricted Period with respect to any shares of Restricted Stock, the restrictions set forth in the applicable Award agreement shall be of no further force or effect with respect to such shares, except as set forth in the applicable Award agreement. If an escrow arrangement is used, upon such expiration, the Company shall deliver to the Participant, or his or her beneficiary, without charge, the stock certificate (or, if applicable, a notice evidencing a book entry notation) evidencing the shares of Restricted Stock that have not then been forfeited and with respect to which the Restricted Period has expired (rounded down to the nearest full share). Dividends, if any, that may have been withheld by the Committee and attributable to any particular share of Restricted Stock shall be distributed to the Participant in cash or, at the sole discretion of the Committee, in shares of Common Stock having a Fair Market Value equal to the amount of such dividends, upon the release of restrictions on such share and, if such share is forfeited, the Participant shall have no right to such dividends.
(ii) Unless otherwise provided by the Committee in the applicable Award agreement, upon the expiration of the Restricted Period with respect to any outstanding Restricted Stock Units, the Company shall deliver to the Participant, or his or her beneficiary, without charge, one share of Common Stock (or other securities or other property, as applicable) for each such outstanding Restricted Stock Unit; provided, however, that the Committee may, in its sole discretion, elect to (A) pay cash or part cash and part Common Stock in lieu of delivering only shares of Common Stock in respect of such Restricted Stock Units or (B) defer the delivery of Common Stock (or cash or part Common Stock and part cash, as the case may be) beyond the expiration of the Restricted Period. If a cash payment is made in lieu of delivering shares of Common Stock, the amount of such payment shall be equal to the Fair Market Value of the Common Stock as of the date on which the Restricted Period lapsed with respect to such Restricted Stock Units. To the extent provided in the applicable Award agreement, the holder of outstanding Restricted Stock Units shall be entitled to be credited with dividend equivalent payments (upon the payment by the Company of dividends on shares of Common Stock) either in cash or, at the sole discretion of the Committee, in shares of Common Stock having a Fair Market Value equal to the amount of such dividends, upon the release of restrictions on such Restricted Stock Units, and, if such Restricted Stock Units are forfeited, the Participant shall have no right to such dividend equivalent payments.
(e) Legends on Restricted Stock. Each certificate representing Restricted Stock awarded under the Plan, if any, shall bear a legend substantially in the form of the following, in addition to any other information the Company deems appropriate, until the lapse of all restrictions with respect to such Common Stock:
TRANSFER OF THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY IS RESTRICTED PURSUANT TO THE TERMS OF THE AUTOMATIC DATA PROCESSING, INC. 2018 OMNIBUS AWARD PLAN AND A RESTRICTED STOCK AWARD AGREEMENT, BETWEEN AUTOMATIC DATA PROCESSING, INC. AND PARTICIPANT. A COPY OF SUCH PLAN AND AWARD AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF AUTOMATIC DATA PROCESSING, INC.
10. Other Stock-Based Awards.
(a) Generally. The Committee may issue unrestricted Common Stock or rights under the Company’s Performance-Based Restricted Stock Program or other incentive programs that, subject to the terms and conditions thereof, provide for the right to receive grants of Awards at a future date, or other Awards denominated in Common Stock, under the Plan to Eligible Persons, alone or in tandem with other Awards, in such amounts as the Committee shall from time to time in its sole discretion determine. Each Other Stock-Based Award granted under the Plan shall be evidenced by an Award agreement. Each Other Stock-Based Award so granted shall be subject to such conditions not inconsistent with the Plan as may be reflected in the applicable Award agreement.
(b) Non-Employee Director Deferrals.
(i) Generally. Non-Employee Directors may be granted Other Stock-Based Awards in the form of deferred stock units (“Deferred Stock Units”) in accordance with the provisions of this Section 10, and references to “Participant” in this Section 10(b) shall be deemed to refer only to Non-Employee Directors. Pursuant to this Section 10(b), Participants (A) shall receive non-elective payment of the Annual Retainer Dollar Amount in the form of Deferred Stock Units that entitle the Participants to receive, under the terms and conditions described herein, shares of Common Stock, (B) may defer receipt of all or part of the Elective Amount and (C) may defer receipt of all or a part of the Meeting Fees.
(ii) Elections to Defer Annual Retainer and Committee Retainer. The Board shall determine the Elective Amount in its sole discretion from time to time. A Participant who wishes to have any part of the Elective Amount for any given calendar year paid as Deferred Stock Units on his or her Distribution Date shall irrevocably elect such medium of payment prior to the commencement of the calendar year during which the Elective Amount is to be earned. Such election shall be made in accordance with procedures and rules promulgated by the Board or its delegee for such purpose. Any election made under this Section 10(b)(ii) shall apply to the Participant’s Elective Amount earned in future calendar years unless and until the Participant makes a later election in accordance with the terms of this Section 10(b)(ii).
(iii) Elections to Defer Meeting Fees. A Participant who wishes to have all or any part of his Meeting Fees for a given calendar year deferred and paid to him on his Distribution Date shall irrevocably elect payment of such Meeting Fees on a deferred basis prior to the commencement of the calendar year during which the Meeting Fees are to be earned. Such election shall be made in accordance with procedures established by the Board or its delegee for such purpose. Any election made under this Section 10(b)(iii) shall apply to Meeting Fees earned in future calendar years unless and until the Participant makes a later election in accordance with the terms of this Section 10(b)(iii). Such election shall indicate the portion, if any, of deferred Meeting Fees to be paid in cash and the portion, if any, to be paid as Deferred Stock Units and shall also include an irrevocable designation of the form of payment to be used when such deferred Meeting Fees that are to be payable in cash are distributed on the Distribution Date. A Participant shall elect distribution of any deferred Meeting Fees payable in cash either in the form of a single lump sum payment or in the form of substantially equal annual payments to be made over a period of two to ten years. If the Participant has not designated a form of payment prior to the beginning of the calendar year in which the Meeting Fees subject to
such election are earned, such Participant shall be deemed to have irrevocably elected to receive payment of such deferred Meeting Fees in a single lump sum on his Distribution Date.
(iv) Crediting of Deferred Stock Units. On each Payment Date, the Account of each Participant shall be credited with that number of Deferred Stock Units (rounded down to the nearest whole share) in respect of a number of shares of Common Stock with a Fair Market Value equal to (A) the Participant’s Annual Retainer Dollar Amount and (B) the portion of the Participant’s Elective Amount payable in Deferred Stock Units, determined as of the relevant Payment Date. As soon as administratively practicable following the Board or applicable committee meeting at which Meeting Fees are earned, the Account of each Participant who has elected to have a portion of his Meeting Fees paid in Deferred Stock Units shall be credited with that number of Deferred Stock Units (rounded down to the nearest whole share) in respect of a number of shares of Common Stock with a Fair Market Value equal to the dollar amount of the portion of such Meeting Fees that such Participant has elected to receive in Deferred Stock Units, determined as of the date of the relevant meeting in respect of which the Meeting Fees were earned.
(v) Vesting. The interest of each Participant in any benefit payable with respect to an Account hereunder shall be at all times fully vested and non-forfeitable. Notwithstanding the previous sentence, a Participant’s interest in his Account constitutes an unsecured promise of the Company, and a Participant shall have only the rights of a general unsecured creditor of the Company with respect to his Account.
(vi) Dividend Equivalents. Each Account shall be credited with Dividend Equivalents on each date on which a dividend is paid on Common Stock, in respect of the Deferred Stock Units credited to such Account as of the record date for such dividend. Dividend Equivalents credited to an Account shall accrue interest (compounding annually) from the date of such crediting through the Distribution Date, with the applicable interest rate for each twelve-month period beginning on November 1 during such period, or any applicable portion thereof, being the rate for five-year U.S. Treasury Notes published in The Wall Street Journal (or, in the absence of such reference, such alternate publication as the Board may select from time to time) on the first business day of November of such twelve-month period plus 0.50%, rounded up to the nearest 0.25%.
(vii) Crediting of Meeting Fees Payable in Cash. Deferrals of Meeting Fees to be paid in cash shall be credited to the Account of the Participant as soon as administratively practicable following the Board or applicable committee meeting at which such Meeting Fees were earned. The portion of a Participant’s Account attributable to deferrals of Meeting Fees with respect to which the Participant elected under Section 10(b)(iii) a distribution in cash on his Distribution Date shall be adjusted by crediting such portion of the Account with interest quarterly in the manner set forth in Section 10(b)(vi).
(viii) Distributions. Except as otherwise provided in this Section 10(b)(viii), on his Distribution Date, each Participant shall receive (i) a number of shares of Common Stock equal to the number of Deferred Stock Units in such Participant’s Account, (ii) a cash payment equal to the accrued Dividend Equivalents, plus interest thereon as of the Distribution Date and (iii) a cash payment (or series of payments as determined in accordance with Section 10(b)(iii)) equal to the credited Meeting Fees with respect to
which the Participant elected under Section 10(b)(iii) a distribution in cash on his Distribution Date plus interest thereon as of the Distribution Date. Solely to the extent required by Section 409A of the Code, a distribution in respect of an Account to a Participant who is determined to be a Specified Employee shall not be actually paid before the date which is 6 months after the Specified Employee’s Separation From Service (or, if earlier, the date of death of the Specified Employee). Any distribution to any Participant or beneficiary in accordance with the provisions of this Section 10(b)(viii) shall be in full satisfaction of all claims under the Plan against the Company and the Board. The Board may require any Participant or beneficiary, as a condition to payment, to execute a receipt and release to such effect.
11. Performance Compensation Awards.
(a) Generally. The Committee shall have the authority, at the time of grant of any Award described in Section 9 or 10 of the Plan, to designate such Award as a Performance Compensation Award. The Committee shall also have the authority to grant a standalone cash-based Performance Compensation Award pursuant to this Section 11.
(b) Discretion of Committee with Respect to Performance Compensation Awards. With regard to a particular Performance Period, the Committee shall have sole discretion to select the length of such Performance Period, the type(s) of Performance Compensation Awards to be issued, the Performance Criteria that will be used to establish the Performance Goal(s), the kind(s) and/or level(s) of the Performance Goals(s) that is (are) to apply, the Performance Formula, and the form of settlement for such Award. With regard to the Performance Compensation Awards to be issued for such Performance Period, the Committee may exercise its discretion with respect to each of the matters enumerated in the immediately preceding sentence and record the same in writing.
(c) Performance Criteria. The Performance Criteria that will be used to establish the Performance Goal(s) may be based on the attainment of specific levels of performance of the Company (and/or one or more Affiliates, divisions or operational units, or any combination of the foregoing) and may include, but shall not be limited to, the following: (i) net earnings or net income (before or after taxes); (ii) basic or diluted earnings per share (before or after taxes); (iii) net revenue or net revenue growth; (iv) gross revenue, gross revenue growth; (v) gross profit or gross profit growth; (vi) net operating profit (before or after taxes); (vii) return measures (including, but not limited to, return on investment, assets, capital, invested capital, equity, or sales); (viii) cash flow measures (including, but not limited to, operating cash flow, free cash flow, and cash flow return on capital); (ix) earnings before or after taxes, interest, depreciation or amortization; (x) gross or operating margins; (xi) productivity ratios; (xii) share price (including, but not limited to, growth measures and total stockholder return); (xiii) expense targets; (xiv) operating efficiency; (xv) objective measures of customer satisfaction; (xvi) working capital targets; (xvii) measures of economic value added; (xviii) inventory control; (xix) enterprise value; (xx) sales; (xxi) stockholder return; (xxii); client retention; (xxiii) competitive market metrics; (xxiv) employee retention; (xxv) timely completion of new product rollouts; (xxvi) timely launch of new facilities; (xxvii) objective measures of personal targets, goals or completion of projects (including, but not limited to, succession and hiring projects, completion of specific acquisitions, reorganizations or other corporate transactions, expansions of specific business operations and meeting divisional or project budgets); (xxviii) any other objective or subjective criteria, including individual performance criteria, as determined by the Committee; or (xxix) any combination of the foregoing. Any one or more of the Performance Criteria may be used on an absolute or relative basis to measure the performance of the Company and/or one or
more Affiliates as a whole or any divisional or operational unit(s) of the Company and/or one or more Affiliates or any combination thereof, as the Committee may deem appropriate, or any of the above Performance Criteria may be compared to the performance of a selected group of comparison companies, or a published or special index that the Committee, in its sole discretion, deems appropriate, or as compared to various stock market indices. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of Performance Goals pursuant to the Performance Criteria specified in this paragraph.
(d) Modification of Performance Goal(s). The Committee may alter Performance Criteria or modify the calculation of a Performance Goal without obtaining shareholder approval to reflect any event that would reasonably be expected to affect or alter such Performance Criteria or Performance Goal, including, but not limited to: (i) asset write-downs; (ii) litigation or claim judgments or settlements; (iii) the effect of changes in tax laws, accounting principles, or other laws or regulatory rules affecting reported results; (iv) any reorganization and restructuring programs; (v) nonrecurring items; (vi) acquisitions or divestitures; (vii) any other specific unusual or infrequently occurring events, or objectively determinable category thereof; (viii) foreign exchange gains and losses; (ix) a change in the Company’s fiscal year; or (x) any other event as determined by the Committee.
(e) Payment of Performance Compensation Awards.
(i) Condition to Receipt of Payment. Unless otherwise provided in the applicable Participant Agreement, a Participant must be employed by the Company on the last day of a Performance Period to be eligible for payment in respect of a Performance Compensation Award for such Performance Period.
(ii) Limitation. Unless otherwise provided in the applicable Participant Agreement, a Participant shall be eligible to receive payment in respect of a Performance Compensation Award only to the extent that (A) the Performance Goals for such period are achieved; and (B) all or some of the portion of such Participant’s Performance Compensation Award has been earned for the Performance Period based on the application of the Performance Formula to such achieved Performance Goals.
(iii) Use of Negative Discretion. In determining the actual amount of an individual Participant’s Performance Compensation Award for a Performance Period, the Committee may reduce or eliminate the amount of the Performance Compensation Award earned under the Performance Formula in the Performance Period through the use of Negative Discretion if, in its sole judgment, such reduction or elimination is appropriate.
(f) Timing of Award Payments. Unless otherwise provided in the applicable Award agreement, Performance Compensation Awards granted for a Performance Period shall be paid to Participants as soon as administratively practicable following the Committee’s determination of the amount earned. Unless otherwise provided in the applicable Award agreement, any Performance Compensation Award that is otherwise payable in shares of Common Stock shall be credited (during the period between the Date of Grant and the payment date) with dividend equivalents (in a manner consistent with the methodology set forth in the last sentence of Section 9(d)(ii)).
12. Changes in Capital Structure and Similar Events. In the event of (a) any dividend (other than regular cash dividends) or other distribution (whether in the form of cash, shares of
Common Stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, split-off, spin-off, combination, repurchase or exchange of shares of Common Stock or other securities of the Company, issuance of warrants or other rights to acquire shares of Common Stock or other securities of the Company, or other similar corporate transaction or event (including, without limitation, a Change in Control) that affects the shares of Common Stock, or (b) unusual or nonrecurring events (including, without limitation, a Change in Control) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange or inter-dealer quotation system, accounting principles or law, such that in either case an adjustment is determined by the Committee in its sole discretion to be necessary or appropriate, then the Committee shall make any such adjustments in such manner as it may deem equitable, including without limitation, any or all of the following:
(i) adjusting any or all of (A) the number of shares of Common Stock or other securities of the Company (or number and kind of other securities or other property) that may be delivered in respect of Awards or with respect to which Awards may be granted under the Plan (including, without limitation, adjusting any or all of the limitations under Section 5 of the Plan) and (B) the terms of any outstanding Award, including, without limitation, (1) the number of shares of Common Stock or other securities of the Company (or number and kind of other securities or other property) subject to outstanding Awards or to which outstanding Awards relate, (2) the Exercise Price or Strike Price with respect to any Award or (3) any applicable performance measures (including, without limitation, Performance Criteria and Performance Goals);
(ii) providing for a substitution or assumption of Awards, accelerating the exercisability of, lapse of restrictions on, or termination of Awards or providing for a period of time for exercise prior to the occurrence of such event; and
(iii) cancelling any one or more outstanding Awards and causing to be paid to the holders thereof, in cash, shares of Common Stock, other securities or other property, or any combination thereof, the value of such Awards, if any, as determined by the Committee (which if applicable may be based upon the price per share of Common Stock received or to be received by other stockholders of the Company in such event), including without limitation, in the case of an outstanding Option or SAR, a cash payment in an amount equal to the excess, if any, of the Fair Market Value (as of a date specified by the Committee) of the shares of Common Stock subject to such Option or SAR over the aggregate Exercise Price or Strike Price of such Option or SAR, respectively (it being understood that, in such event, any Option or SAR having a per-share Exercise Price or Strike Price equal to, or in excess of, the Fair Market Value of a share of Common Stock subject thereto may be canceled and terminated without any payment or consideration therefor);
provided, however, that in the case of any “equity restructuring” (within the meaning of the Financial Accounting Standards Board Accounting Standards Codification Topic No. 718, or any successor thereto), the Committee shall make an equitable or proportionate adjustment to outstanding Awards to reflect such equity restructuring. Any adjustment in Incentive Stock Options under this Section 12 (other than any cancellation of Incentive Stock Options) shall be made only to the extent not constituting a “modification” within the meaning of Section 424(h)(3) of the Code, and any adjustments under this Section 12 shall be made in a manner
which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act. Any such adjustment shall be conclusive and binding for all purposes.
13. Amendments and Termination.
(a) Amendment and Termination of the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided, that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such approval is necessary to comply with any regulatory requirement applicable to the Plan (including, without limitation, as necessary to comply with any rules or regulations of any securities exchange or inter-dealer quotation system on which the securities of the Company may be listed or quoted); provided, further, that any such amendment, alteration, suspension, discontinuance or termination that would materially and adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary. Notwithstanding the foregoing, no amendment shall be made to the last proviso of Section 13(b) without stockholder approval.
(b) Amendment of Award Agreements. The Committee may, to the extent consistent with the terms of any applicable Award agreement, waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted or the associated Award agreement, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and adversely affect the rights of any Participant with respect to any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant; provided, further, that without stockholder approval, except as otherwise permitted under Section 12 of the Plan, (i) no amendment or modification may reduce the Exercise Price of any Option or the Strike Price of any SAR, (ii) the Committee may not cancel any outstanding Option or SAR and replace it with a new Option or SAR (with a lower Exercise Price or Strike Price, as the case may be) or other Award or cash in a manner which would result in any “repricing” for financial statement reporting purposes (or otherwise cause the Award to fail to qualify for equity accounting treatment) and (iii) the Committee may not take any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted.
14. General.
(a) Award Agreements. Each Award under the Plan shall be evidenced by an Award agreement, which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto, including, without limitation, the effect on such Award of the death, Disability or termination of employment or service of a Participant, or of such other events as may be determined by the Committee. For purposes of the Plan, an Award agreement may be in any such form (written or electronic) as determined by the Committee (including, without limitation, a Board or Committee resolution, an employment agreement, a notice, a certificate or a letter) evidencing the Award. The Committee need not require an Award agreement to be signed by the Participant or a duly authorized representative of the Company.
(b) Minimum Vesting Requirement. Notwithstanding any other provision of the Plan to the contrary, Awards granted under the Plan (other than cash-based Awards) shall vest no
earlier than the first anniversary of the date on which the Award is granted; provided, that the following Awards shall not be subject to the foregoing minimum vesting requirement: any (i) Substitute Awards, (ii) Shares delivered in lieu of fully vested cash Awards, (iii) Awards to Eligible Directors that vest on the earlier of the one-year anniversary of the date of grant and the next annual meeting of stockholders which is at least 50 weeks after the immediately preceding year’s annual meeting, (iv) Deferred Stock Units granted pursuant to elective deferrals of cash fees and cash retainers under Section 10(b)(ii) or Section 10(b)(iii), and (v) any additional Awards the Committee may grant, up to a maximum of five percent (5%) of the available share reserve authorized for issuance under the Plan pursuant to Section 5(b) (subject to adjustment under Section 12); and, provided, further, that the foregoing restriction does not apply to the Committee’s discretion to provide for accelerated exercisability or vesting of any Award, including in cases of retirement, death, Disability or a Change in Control, in the terms of the Award or otherwise.
(c) Nontransferability.
(i) Each Award shall be exercisable only by a Participant during the Participant’s lifetime, or, if permissible under applicable law, by the Participant’s legal guardian or representative. No Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant other than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or an Affiliate; provided, that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.
(ii) Notwithstanding the foregoing, the Committee may, in its sole discretion, permit Awards (other than Incentive Stock Options) to be transferred by a Participant, without consideration, subject to such rules as the Committee may adopt consistent with any applicable Award agreement to preserve the purposes of the Plan, to (A) any person who is a “family member” of the Participant, as such term is used in the instructions to Form S-8 under the Securities Act (collectively, “Immediate Family Members”); (B) a trust solely for the benefit of the Participant and his or her Immediate Family Members; (C) a partnership or limited liability company whose only partners or stockholders are the Participant and his or her Immediate Family Members; or (D) any other transferee as may be approved either (1) by the Board or the Committee, as applicable, in its sole discretion, or (2) as provided in the applicable Award agreement (each transferee described in clause (A), (B), (C) or (D) above is hereinafter referred to as a “Permitted Transferee”) provided that the Participant gives the Committee advance written notice describing the terms and conditions of the proposed transfer and the Committee notifies the Participant in writing that such a transfer would comply with the requirements of the Plan.
(iii) The terms of any Award transferred in accordance with the immediately preceding sentence shall apply to the Permitted Transferee, and any reference in the Plan, or in any applicable Award agreement, to a Participant shall be deemed to refer to the Permitted Transferee, except that (A) Permitted Transferees shall not be entitled to transfer any Award, other than by will or the laws of descent and distribution; (B) Permitted Transferees shall not be entitled to exercise any transferred Option unless there shall be in effect a registration statement on an appropriate form covering the shares of Common Stock to be acquired pursuant to the exercise of such Option if the Committee determines, consistent with any applicable Award agreement, that such a registration statement is necessary or appropriate; (C) the Committee or the Company shall not be
required to provide any notice to a Permitted Transferee, whether or not such notice is or would otherwise have been required to be given to the Participant under the Plan or otherwise; and (D) the consequences of the termination of the Participant’s employment by, or services to, the Company or an Affiliate under the terms of the Plan and the applicable Award agreement shall continue to be applied with respect to the Participant, including, without limitation, that an Option shall be exercisable by the Permitted Transferee only to the extent, and for the periods, specified in the Plan and the applicable Award agreement.
(d) Dividends and Dividend Equivalents. In addition to Dividend Equivalents awarded under Section 10(b) of the Plan, the Committee in its sole discretion may provide a Participant as part of an Award with dividends or dividend equivalents, payable in cash, shares of Common Stock, other securities, other Awards or other property, on a current or deferred basis, on such terms and conditions as may be determined by the Committee in its sole discretion, including, without limitation, payment directly to the Participant, withholding of such amounts by the Company subject to vesting of the Award or reinvestment in additional shares of Common Stock, Restricted Stock or other Awards.
(e) Tax Withholding.
(i) A Participant shall be required to pay to the Company or any Affiliate, and the Company or any Affiliate shall have the right and is hereby authorized to withhold, from any cash, shares of Common Stock, other securities or other property deliverable under any Award or from any compensation or other amounts owing to a Participant, the amount (in cash, Common Stock, other securities or other property) of any required withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Committee or the Company to satisfy all obligations for the payment of such withholding and taxes.
(ii) Without limiting the generality of clause (i) above, the Committee may, in its sole discretion, permit a Participant to satisfy, in whole or in part, the foregoing withholding liability (but no more than the maximum required statutory withholding liability) by (A) the delivery of shares of Common Stock (which are not subject to any pledge or other security interest) owned by the Participant having a Fair Market Value equal to such withholding liability or (B) having the Company withhold from the number of shares of Common Stock otherwise issuable or deliverable pursuant to the exercise or settlement of the Award a number of shares with a Fair Market Value equal to such withholding liability.
(f) No Claim to Awards; No Rights to Continued Employment; Waiver. No employee of the Company or an Affiliate, or other person, shall have any claim or right to be granted an Award under the Plan or, having been selected for the grant of an Award, to be selected for a grant of any other Award. There is no obligation for uniformity of treatment of Participants or holders or beneficiaries of Awards. The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant and may be made selectively among Participants, whether or not such Participants are similarly situated. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ or service of the Company or an Affiliate, nor shall it be construed as giving any Participant any rights to continued service on the Board. The Company or any of its Affiliates may at any time dismiss a
Participant from employment or discontinue any consulting relationship, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or any Award agreement. By accepting an Award under the Plan, a Participant shall thereby be deemed to have waived any claim to continued exercise or vesting of an Award or to damages or severance entitlement related to non-continuation of the Award beyond the period provided under the Plan or any Award agreement, notwithstanding any provision to the contrary in any written employment contract or other agreement between the Company and its Affiliates and the Participant, whether any such agreement is executed before, on or after the Date of Grant.
(g) International Participants. With respect to Participants who reside or work outside of the United States of America, the Committee may in its sole discretion amend the terms of the Plan or Sub-Plans or outstanding Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant, the Company or its Affiliates.
(h) Designation and Change of Beneficiary. Each Participant may file with the Committee a written designation of one or more persons as the beneficiary or beneficiaries, as applicable, who shall be entitled to receive the amounts payable with respect to an Award, if any, due under the Plan upon his or her death. A Participant may, from time to time, revoke or change his or her beneficiary designation without the consent of any prior beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant’s death, and in no event shall it be effective as of a date prior to such receipt. If no beneficiary designation is filed by a Participant, the beneficiary shall be deemed to be his or her spouse or, if the Participant is unmarried at the time of death, his or her estate.
(i) Termination of Employment. Except as otherwise provided in the applicable Participant Agreement, unless determined otherwise by the Committee at any point following such event: (i) neither a temporary absence from employment or service due to illness, vacation or leave of absence nor a transfer from employment or service with the Company to employment or service with an Affiliate (or vice-versa) shall be considered a termination of employment or service of such Participant with the Company or an Affiliate; and (ii) if a Participant’s employment with the Company and its Affiliates terminates, but such Participant continues to provide services to the Company and its Affiliates in a non-employee capacity, such change in status shall not be considered a termination of employment or service of such Participant with the Company or an Affiliate for purposes of the Plan.
(j) No Rights as a Stockholder. Except as otherwise specifically provided in the Plan or any Award agreement, no person shall be entitled to the privileges of ownership in respect of shares of Common Stock that are subject to Awards hereunder until such shares have been issued or delivered to that person.
(k) Government and Other Regulations.
(i) The obligation of the Company to settle Awards in Common Stock or other consideration shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. Notwithstanding any terms or conditions of any Award to the contrary, the Company shall be under no obligation to offer to sell or to sell, and shall be prohibited from offering to sell or selling, any shares of Common Stock pursuant to an Award unless such shares have been
properly registered for sale pursuant to the Securities Act with the Securities and Exchange Commission or unless the Company has received an opinion of counsel, satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale under the Securities Act any of the shares of Common Stock to be offered or sold under the Plan. The Committee shall have the authority to provide that all shares of Common Stock or other securities of the Company or any Affiliate delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan, the applicable Award agreement, the federal securities laws, or the rules, regulations and other requirements of the Securities and Exchange Commission, any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted and any other applicable federal, state, local or non-U.S. laws, and, without limiting the generality of Section 9 of the Plan, the Committee may cause a legend or legends to be put on certificates representing shares of Common Stock or other securities of the Company or any Affiliate delivered under the Plan to make appropriate reference to such restrictions or may cause such Common Stock or other securities of the Company or any Affiliate delivered under the Plan in book-entry form to be held subject to the Company’s instructions or subject to appropriate stop-transfer orders. Notwithstanding any provision in the Plan to the contrary, the Committee reserves the right to add any additional terms or provisions to any Award granted under the Plan that it in its sole discretion deems necessary or advisable in order that such Award complies with the legal requirements of any governmental entity to whose jurisdiction the Award is subject.
(ii) The Committee may cancel an Award or any portion thereof if it determines, in its sole discretion, that legal or contractual restrictions, blockage, other market considerations or any combination of the foregoing would make the Company’s acquisition of shares of Common Stock from the public markets, the Company’s issuance of Common Stock to the Participant, the Participant’s acquisition of Common Stock from the Company or the Participant’s sale of Common Stock to the public markets, illegal, impracticable or inadvisable. If the Committee determines to cancel all or any portion of an Award in accordance with the foregoing, the Company shall pay to the Participant an amount equal to the excess of (A) the aggregate Fair Market Value of the shares of Common Stock subject to such Award or portion thereof canceled (determined as of the applicable exercise date, or the date that the shares would have been vested or delivered, as applicable), over (B) the aggregate Exercise Price or Strike Price (in the case of an Option or SAR, respectively) or any amount payable as a condition of delivery of shares of Common Stock (in the case of any other Award). Such amount shall be delivered to the Participant as soon as practicable following the cancellation of such Award or portion thereof.
(l) No Section 83(b) Elections Without Consent of Company. No election under Section 83(b) of the Code or under a similar provision of law may be made unless expressly permitted by the terms of the applicable Award agreement or by action of the Committee in writing prior to the making of such election. If a Participant, in connection with the acquisition of shares of Common Stock under the Plan or otherwise, is expressly permitted to make such election and the Participant makes the election, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to Section 83(b) of the Code or other applicable provision.
(m) Payments to Persons Other Than Participants. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, or has died, then any payment due to such person or his or her estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so directs the Company, be paid to his or her spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor.
(n) Nonexclusivity of the Plan. Neither the adoption of this Plan by the Board nor the submission of this Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under this Plan, and such arrangements may be either applicable generally or only in specific cases.
(o) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate, on the one hand, and a Participant or other person or entity, on the other hand. No provision of the Plan or any Award shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Participants shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law.
(p) Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in acting or failing to act, as the case may be, and shall not be liable for having so acted or failed to act in good faith, in reliance upon any report made by the independent public accountant of the Company and its Affiliates and/or any other information furnished in connection with the Plan by any agent of the Company or the Committee or the Board, other than himself.
(q) Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company except as otherwise specifically provided in such other plan.
(r) Governing Law. The Plan shall be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof.
(s) Severability. If any provision of the Plan or any Award or Award agreement is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any person or entity or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be construed or deemed stricken as to such jurisdiction, person or entity or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
(t) Obligations Binding on Successors. The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company.
(u) 409A of the Code. Notwithstanding any provision of the Plan to the contrary, it is intended that the provisions of this Plan comply with Section 409A of the Code, and all provisions of this Plan shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A of the Code. Each Participant is solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on or in respect of such Participant in connection with this Plan or any other plan maintained by the Company (including any taxes and penalties under Section 409A of the Code), and neither the Company nor any Affiliate shall have any obligation to indemnify or otherwise hold such Participant (or any beneficiary) harmless from any or all of such taxes or penalties.
(v) Clawback/Forfeiture. Notwithstanding anything to the contrary contained herein, a Participant Agreement may provide that the Committee may in its sole discretion cancel such Award if the Participant, without the consent of the Company, while employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-competition, non-solicitation or non-disclosure covenant or agreement or otherwise engages in activity that is in conflict with or adverse to the interest of the Company or any Affiliate, including fraud or conduct contributing to any financial restatements or irregularities, as determined by the Committee in its sole discretion. A Participant Agreement may also provide that if the Participant engages in any activity referred to in the preceding sentence, the Participant will forfeit any gain realized on the vesting or exercise of such Award, and must repay the gain to the Company. In addition to the foregoing, a Participant Agreement shall specify that the Award is subject to recoupment by the Company pursuant to the terms and requirements of the Company’s Clawback Policy, effective as of December 1, 2023, as may be amended from time to time, if the Participant is subject to such Clawback Policy.
(w) Expenses; Gender; Titles and Headings. The expenses of administering the Plan shall be borne by the Company and its Affiliates. Masculine pronouns and other words of masculine gender shall refer to both men and women. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings shall control.
* * *
AUTOMATIC DATA PROCESSING, INC. 2018 OMNIBUS AWARD PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
AUTOMATIC DATA PROCESSING, INC. (the “Company”), pursuant to the 2018 Omnibus Award Plan, as amended from time to time (the “Plan”), hereby irrevocably grants you (the “Participant”), on [DATE] (the “Grant Date”), a forfeitable Restricted Stock Unit Award (the “Restricted Unit Award”), subject to (1) the restrictions, terms and conditions herein, and (2) any additional terms and conditions applicable to the Participant, as set forth in the appendices attached hereto (the “Appendices”).
WHEREAS, the Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”) has determined that it would be in the best interests of the Company and its stockholders to grant the award provided for herein to the Participant, on the terms and conditions described in this Restricted Stock Unit Award Agreement, including the Appendices, together, the “Agreement”).
NOW, THEREFORE, for and in consideration of the promises and the covenants of the parties contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, for themselves, and their permitted successors and assigns, hereby agree as follows:
1. Terms and Conditions.
(a) Vesting. Subject to the other terms and conditions contained in this Agreement, the Restricted Period with respect to:
(i) one third of the Restricted Unit Award shall lapse on the first anniversary of the Grant Date;
(ii) an additional one third of the Restricted Unit Award shall lapse on the second anniversary of the Grant Date; and
(iii) the remainder of the Restricted Unit Award shall lapse on the third anniversary of the Grant Date;
in each case, subject to any additional terms and conditions applicable to the Participant, as set forth in the Appendices. Notwithstanding the foregoing, the Restricted Period with respect to any unvested portion of the Restricted Unit Award shall lapse as of immediately prior to the consummation of a Change in Control, unless the successor company, or a parent of the successor company, in the Change in Control agrees to assume, replace, or substitute the unvested portion of the Restricted Unit Award granted hereunder (as of the consummation of such Change in Control) with restricted stock units on substantially identical terms, as determined by the Committee.
(b) Dividend Equivalents; Settlement; Payment.
(i) Dividend Equivalents. If the Participant’s home country is the United States, each time the Company pays a dividend with respect to a share of Common Stock during the period from the Grant Date until the time at which the
Restricted Period lapses in respect of the Restricted Unit Award (each such payment date, a “Dividend Payment Date”), the Company shall pay to the Participant a dividend equivalent in cash in an amount equal to (i) the amount of such dividend, multiplied by (ii) the number of shares underlying the Restricted Unit Award, as soon as administratively possible (but not later than 30 days) after the Dividend Payment Date.
(ii) Settlement; Payment. If the Participant’s home country is the United States, the Company shall settle as soon as administratively possible (but not later than 30 days) after the applicable vesting date, any vested portion of the Restricted Unit Award by causing one share of Common Stock for each vested Restricted Stock Unit that is outstanding (and not previously forfeited) to be registered in the name of the Participant and held in book-entry form. If the Participant’s home country is not the United States, (x) the Company shall settle as soon as administratively possible after the applicable vesting date, any vested portion of the Restricted Unit Award by the payment to the Participant in cash (without interest) of an amount equal to the Participant’s vested portion of the Restricted Unit Award, subject to applicable Tax-Related Items (as defined in Appendix B to this Restricted Stock Unit Award Agreement) and (y) at no time shall the Participant be deemed for any purpose to be the owner of shares of Common Stock in connection with a Restricted Unit Award and the Participant shall have no right to dividends or dividend equivalent payments in respect of the Restricted Unit Award.
(c) Forfeiture. Except as otherwise determined by the Committee in its sole discretion or as set forth in Section 1(a), any unvested portion of Restricted Unit Awards, including any applicable cash dividend equivalents, shall be forfeited without consideration to the Participant upon the Participant’s termination of employment with the Company or its Affiliates for any reason; provided, however, that if (x) on the Grant Date, the Participant is eligible to receive performance stock units as part of his or her annual equity award mix, (y) the Participant’s home country is the United States and (z) such Participant’s employment with the Company or one of its Affiliates is terminated due to retirement (defined for purposes of this Agreement as voluntary termination of employment at or after age 55 with 10 years of service with the Company or its Affiliates) on or after January 1st of the fiscal year of the Grant Date but prior to the third anniversary of the Grant Date, then the unvested portion of the Restricted Unit Award shall not be forfeited but shall remain outstanding, including the cash dividend equivalents relating thereto, and the Restricted Period shall lapse with respect to such unvested portion on the normal schedule set forth in Section 1(a) as if the Participant’s employment had not terminated; provided, further, that if (A) (i) on the Grant Date, the Participant is eligible to receive performance stock units as part of his or her annual equity award mix, (ii) the Participant’s home country is not the United States and (iii) such Participant’s employment with the Company or one of its Affiliates is terminated due to retirement (as defined above) on or after January 1st of the fiscal year of the Grant Date but prior to the third anniversary of the Grant Date or (B) the Participant’s employment with the Company or one of its Affiliates is terminated due to death or Disability prior to the third anniversary of the Grant Date, then the unvested portion of the Restricted Unit Award shall vest in full upon such termination.
Further, if the Participant’s home country is not the United States, for purposes of the Award, the Participant’s employment relationship will be considered terminated as of the date the Participant is no longer actively providing services to the Company or one of its Affiliates (regardless of the reason for such termination and whether or not such termination is later found invalid or in breach of employment laws in the jurisdiction where the Participant is employed, or the terms of the Participant’s employment agreement, if any), and such date will not be extended by any notice period (e.g., the Participant’s period of service would not include
any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment agreement, if any). The Committee shall have the exclusive discretion to determine when the Participant may still be considered to be providing active services for purposes of the Restricted Unit Award (including whether the Participant may still be considered to be providing services while on a leave of absence).
(d) Tax Withholding. The Participant shall be required to satisfy any and all required withholding taxes in respect of the Restricted Unit Award in accordance with the provisions of Section 14(e) of the Plan.
(e) Rights as a Stockholder. The Participant shall have no rights with respect to the shares underlying the Restricted Unit Award unless and until the Participant becomes the record owner of such shares.
2. Restrictive Covenant Agreement; Clawback; Incorporation by Reference.
(a) Restrictive Covenant Agreement. If the Participant’s home country is Australia, Canada, or the United States, this Restricted Unit Award is conditioned upon the Participant’s agreement to this Agreement and the Restrictive Covenant Agreement furnished herewith and which includes, among other provisions, certain non-competition, non-solicitation and non-disclosure covenants. If such Participant does not agree (whether electronically or otherwise) to this Agreement and the Restrictive Covenant Agreement within ninety (90) days from the Grant Date, the Restricted Unit Award shall be terminable by the Company.
(b) Clawback/Forfeiture. Notwithstanding anything to the contrary contained herein, the Restricted Unit Award may be forfeited without consideration if the Participant, as determined by the Committee in its sole discretion (i) engages in an activity that is in conflict with or adverse to the interests of the Company or any Affiliate, including but not limited to fraud or conduct contributing to any financial restatements or irregularities, or (ii) without the consent of the Company, while employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-competition, non-solicitation or non-disclosure covenant or agreement (including, if applicable, the Restrictive Covenant Agreement furnished herewith) between the Participant and the Company or any Affiliate. If the Participant engages in any activity referred to in the preceding sentence, the Participant shall, at the sole discretion of the Committee, (x) if the Participant’s home country is the United States, forfeit any gain realized in respect of the Restricted Unit Award (which gain shall be deemed to be an amount equal to the Fair Market Value, on the applicable vesting date, of the shares of Common Stock delivered to the Participant), and repay such gain to the Company or (y) if the Participant’s home country is not the United States, forfeit the amount paid in respect of the Restricted Unit Award, and repay such amount to the Company. In addition to the foregoing, the Restricted Unit Award may be subject to recoupment by the Company pursuant to the terms and requirements of the Company’s Clawback Policy, effective as of December 1, 2023, as may be amended from time to time, if the Participant is subject to such Clawback Policy.
(c) Incorporation by Reference. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan.
3. Compliance with Legal Requirements. Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the grant or payment of the Awards, including the delivery of shares of Common Stock, the Company shall not be required to grant or pay the Award, or deliver any shares subject to the Restricted Unit Award prior to the completion of any registration or qualification of the Award or shares under any U.S. or non-U.S. federal, state or local securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any U.S. or non-U.S. federal, state or local governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Participant understands that the Company is under no obligation to register or qualify the Award or shares with any U.S. federal or state or non-U.S. securities commission or to seek approval or clearance from any governmental authority for the grant of the Award or the issuance or sale of the shares. Further, the Participant agrees that the Company shall have unilateral authority to amend the Plan and the Agreement without the Participant’s consent to the extent necessary to comply with securities or other laws applicable to the grant or payment of the Award, including the issuance of shares.
4. Transferability. No Restricted Unit Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant other than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.
5. Miscellaneous.
(a) Waiver. Any right of the Company contained in this Agreement may be waived in writing by the Committee. No waiver of any right hereunder by any party shall operate as a waiver of any other right, or as a waiver of the same right with respect to any subsequent occasion for its exercise, or as a waiver of any right to damages. No waiver by any party of any breach of this Agreement shall be held to constitute a waiver of any other breach or a waiver of the continuation of the same breach.
(b) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.
(c) No Right to Employment. Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any position, as an employee, consultant, or director of the Company or its Affiliates or shall interfere with or restrict in any way the right of the Company or its Affiliates, which are hereby expressly reserved, to remove, terminate or discharge the Participant with or without cause at any time for any reason whatsoever.
(d) Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, the Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant.
(e) Entire Agreement. This Agreement, the Plan and, if applicable, the Restrictive Covenant Agreement contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations and negotiations in respect thereto; provided, however, that if the Participant’s home country is Australia, Canada or the United States, the Participant understands that the Participant may have an existing agreement(s) with the Company, through prior awards, acquisition of a prior employer or otherwise, that may include the same or similar covenants as those in the Restrictive Covenant Agreement furnished herewith, and acknowledges that the Restrictive Covenant Agreement is meant to supplement any such agreement(s) such that the covenants in the agreements that provide the Company with the greatest protection enforceable under applicable law shall control, and that the parties do not intend to create any ambiguity or conflict through the execution of the Restrictive Covenant Agreement that would release the Participant from the obligations the Participant has assumed under the restrictive covenants in any of these agreements. No change, modification or waiver of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto, except for any changes permitted without consent of the Participant under the Plan.
(f) Governing Law and Venue. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without regard to principles of conflicts of law thereof, or principles of conflicts of laws of any other jurisdiction which could cause the application of the laws of any jurisdiction other than the State of Delaware. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by the Restricted Unit Award or this Agreement, to the extent permitted by applicable law where the Participant resides, the parties hereby submit to and consent to the exclusive jurisdiction of the State of New Jersey and agree that such litigation shall be conducted only in the courts of Essex County, New Jersey, or the federal courts of the United States for the District of New Jersey, and no other courts, such jurisdiction being where the grant is made and/or to be performed.
(g) Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or construction and shall not constitute a part of this Agreement.
(h) Appendices. If the Participant’s home country is not the United States, this Restricted Unit Award shall be subject to the additional terms and conditions set forth in Appendices B, C and D to this Agreement, as applicable to the Participant’s country. Moreover, if Participant relocates from the U.S. to one of the countries included in Appendix D or if the Participant relocates between countries included in Appendix D during the life of the Restricted Unit Award, the additional terms and conditions set forth in Appendices B, C and D to this Agreement shall apply to Participant, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendices B, C and D constitute part of this Agreement. Participants whose home country is not the United States should review Appendices B, C and D to this Agreement carefully.
(i) No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Participant’s participation in the Plan. The Participant should consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to the Plan.
(j) Insider Trading Restrictions/Market Abuse Laws. Participant acknowledges that the Participant may be subject to insider trading restrictions and/or market-abuse laws which may affect the Participant’s ability to accept, acquire, sell or otherwise dispose of shares of Common Stock, rights to shares of Common Stock, or rights linked to the value of shares of Common Stock during such times as the Participant is considered to have “inside information” regarding the Company (as defined by the laws or regulations in the Participant’s country). Local insider trading laws and regulations may prohibit the cancellation or amendment of orders the Participant places before possessing inside information. Furthermore, the Participant could be prohibited from (i) disclosing the inside information to any third party (other than on a “need to know” basis) and (ii) “tipping” third parties or causing them otherwise to buy or sell securities. Third parties include fellow employees. Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under the Company’s insider trading policy. The Participant is responsible for complying with any applicable restrictions, and should speak to his or her personal legal advisor for further details regarding any applicable insider trading and/or market abuse laws in the Participant’s country.
(k) Electronic Delivery and Participation. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
(l) Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s participation in the Plan, on the Restricted Unit Awards and on any payment received under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
By accepting this Agreement through the online acceptance tool on Fidelity Stock Plan Services’ website, the Participant agrees to all of the terms and conditions in this Agreement and the Plan.
AUTOMATIC DATA PROCESSING, INC.
______________________________________
AUTOMATIC DATA PROCESSING, INC. 2018 OMNIBUS AWARD PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
AUTOMATIC DATA PROCESSING, INC. (the “Company”), pursuant to the 2018 Omnibus Award Plan, as amended from time to time (the “Plan”), hereby irrevocably grants you (the “Participant”), on [DATE] (the “Grant Date”), a forfeitable Restricted Stock Unit Award (the “Restricted Unit Award”), subject to (1) the restrictions, terms and conditions herein, and (2) any additional terms and conditions applicable to the Participant, as set forth in the appendices attached hereto (the “Appendices”).
WHEREAS, the Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”) has determined that it would be in the best interests of the Company and its stockholders to grant the award provided for herein to the Participant, on the terms and conditions described in this Restricted Stock Unit Award Agreement, including the Appendices, together, the “Agreement”).
NOW, THEREFORE, for and in consideration of the promises and the covenants of the parties contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, for themselves, and their permitted successors and assigns, hereby agree as follows:
1. Terms and Conditions.
(a) Vesting. Subject to the other terms and conditions contained in this Agreement, the Restricted Period with respect to:
[ ]
in each case, subject to any additional terms and conditions applicable to the Participant, as set forth in the Appendices. Notwithstanding the foregoing, the Restricted Period with respect to any unvested portion of the Restricted Unit Award shall lapse as of immediately prior to the consummation of a Change in Control, unless the successor company, or a parent of the successor company, in the Change in Control agrees to assume, replace, or substitute the unvested portion of the Restricted Unit Award granted hereunder (as of the consummation of such Change in Control) with restricted stock units on substantially identical terms, as determined by the Committee.
(b) Dividend Equivalents; Settlement; Payment.
(i) Dividend Equivalents. If the Participant’s home country is the United States, each time the Company pays a dividend with respect to a share of Common Stock during the period from the Grant Date until the time at which the Restricted Period lapses in respect of the Restricted Unit Award (each such payment date, a “Dividend Payment Date”), the Company shall pay to the Participant a dividend equivalent in cash in an amount equal to (i) the amount of such dividend, multiplied by (ii) the number of shares underlying the Restricted Unit Award, as soon as administratively possible (but not later than 30 days) after the Dividend Payment Date.
(ii) Settlement; Payment. If the Participant’s home country is the United States, the Company shall settle as soon as administratively possible (but not later
than 30 days) after the applicable vesting date, any vested portion of the Restricted Unit Award by causing one share of Common Stock for each vested Restricted Stock Unit that is outstanding (and not previously forfeited) to be registered in the name of the Participant and held in book-entry form. If the Participant’s home country is not the United States, (x) the Company shall settle as soon as administratively possible after the applicable vesting date, any vested portion of the Restricted Unit Award by the payment to the Participant in cash (without interest) of an amount equal to the Participant’s vested portion of the Restricted Unit Award, subject to applicable Tax-Related Items (as defined in Appendix B to this Restricted Stock Unit Award Agreement) and (y) at no time shall the Participant be deemed for any purpose to be the owner of shares of Common Stock in connection with a Restricted Unit Award and the Participant shall have no right to dividends or dividend equivalent payments in respect of the Restricted Unit Award.
(c) Forfeiture. Except as otherwise determined by the Committee in its sole discretion or as set forth in Section 1(a), any unvested portion of Restricted Unit Awards, including any applicable cash dividend equivalents, shall be forfeited without consideration to the Participant upon the Participant’s termination of employment with the Company or its Affiliates for any reason; provided, however, that if (x) on the Grant Date, the Participant is eligible to receive performance stock units as part of his or her annual equity award mix, (y) the Participant’s home country is the United States and (z) such Participant’s employment with the Company or one of its Affiliates is terminated due to retirement (defined for purposes of this Agreement as voluntary termination of employment at or after age 55 with 10 years of service with the Company or its Affiliates) on or after January 1st of the fiscal year of the Grant Date but prior to the third anniversary of the Grant Date, then the unvested portion of the Restricted Unit Award shall not be forfeited but shall remain outstanding, including the cash dividend equivalents relating thereto, and the Restricted Period shall lapse with respect to such unvested portion on the normal schedule set forth in Section 1(a) as if the Participant’s employment had not terminated; provided, further, that if (A) (i) on the Grant Date, the Participant is eligible to receive performance stock units as part of his or her annual equity award mix, (ii) the Participant’s home country is not the United States and (iii) such Participant’s employment with the Company or one of its Affiliates is terminated due to retirement (as defined above) on or after January 1st of the fiscal year of the Grant Date but prior to the third anniversary of the Grant Date or (B) the Participant’s employment with the Company or one of its Affiliates is terminated due to death or Disability prior to the third anniversary of the Grant Date, then the unvested portion of the Restricted Unit Award shall vest in full upon such termination.
Further, if the Participant’s home country is not the United States, for purposes of the Award, the Participant’s employment relationship will be considered terminated as of the date the Participant is no longer actively providing services to the Company or one of its Affiliates (regardless of the reason for such termination and whether or not such termination is later found invalid or in breach of employment laws in the jurisdiction where the Participant is employed, or the terms of the Participant’s employment agreement, if any), and such date will not be extended by any notice period (e.g., the Participant’s period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment agreement, if any). The Committee shall have the exclusive discretion to determine when the Participant may still be considered to be providing active services for purposes of the Restricted Unit Award (including whether the Participant may still be considered to be providing services while on a leave of absence).
(d) Tax Withholding. The Participant shall be required to satisfy any and all required withholding taxes in respect of the Restricted Unit Award in accordance with the provisions of Section 14(e) of the Plan.
(e) Rights as a Stockholder. The Participant shall have no rights with respect to the shares underlying the Restricted Unit Award unless and until the Participant becomes the record owner of such shares.
2. Restrictive Covenant Agreement; Clawback; Incorporation by Reference.
(a) Restrictive Covenant Agreement. If the Participant’s home country is Australia, Canada, or the United States, this Restricted Unit Award is conditioned upon the Participant’s agreement to this Agreement and the Restrictive Covenant Agreement furnished herewith and which includes, among other provisions, certain non-competition, non-solicitation and non-disclosure covenants. If such Participant does not agree (whether electronically or otherwise) to this Agreement and the Restrictive Covenant Agreement within ninety (90) days from the Grant Date, the Restricted Unit Award shall be terminable by the Company.
(b) Clawback/Forfeiture. Notwithstanding anything to the contrary contained herein, the Restricted Unit Award may be forfeited without consideration if the Participant, as determined by the Committee in its sole discretion (i) engages in an activity that is in conflict with or adverse to the interests of the Company or any Affiliate, including but not limited to fraud or conduct contributing to any financial restatements or irregularities, or (ii) without the consent of the Company, while employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-competition, non-solicitation or non-disclosure covenant or agreement (including, if applicable, the Restrictive Covenant Agreement furnished herewith) between the Participant and the Company or any Affiliate. If the Participant engages in any activity referred to in the preceding sentence, the Participant shall, at the sole discretion of the Committee, (x) if the Participant’s home country is the United States, forfeit any gain realized in respect of the Restricted Unit Award (which gain shall be deemed to be an amount equal to the Fair Market Value, on the applicable vesting date, of the shares of Common Stock delivered to the Participant), and repay such gain to the Company or (y) if the Participant’s home country is not the United States, forfeit the amount paid in respect of the Restricted Unit Award, and repay such amount to the Company. In addition to the foregoing, the Restricted Unit Award may be subject to recoupment by the Company pursuant to the terms and requirements of the Company’s Clawback Policy, effective as of December 1, 2023, as may be amended from time to time, if the Participant is subject to such Clawback Policy.
(c) Incorporation by Reference. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan.
3. Compliance with Legal Requirements. Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the grant or payment of the Awards, including the delivery of shares of Common Stock, the Company shall not be required to grant or pay the Award, or deliver any shares subject to the Restricted Unit Award prior to the completion of any registration or qualification of the Award or shares under any U.S. or non-U.S. federal, state or local securities or exchange control law or under rulings or regulations of the U.S.
Securities and Exchange Commission or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any U.S. or non-U.S. federal, state or local governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Participant understands that the Company is under no obligation to register or qualify the Award or shares with any U.S. federal or state or non-U.S. securities commission or to seek approval or clearance from any governmental authority for the grant of the Award or the issuance or sale of the shares. Further, the Participant agrees that the Company shall have unilateral authority to amend the Plan and the Agreement without the Participant’s consent to the extent necessary to comply with securities or other laws applicable to the grant or payment of the Award, including the issuance of shares.
4. Transferability. No Restricted Unit Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant other than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.
5. Miscellaneous.
(a) Waiver. Any right of the Company contained in this Agreement may be waived in writing by the Committee. No waiver of any right hereunder by any party shall operate as a waiver of any other right, or as a waiver of the same right with respect to any subsequent occasion for its exercise, or as a waiver of any right to damages. No waiver by any party of any breach of this Agreement shall be held to constitute a waiver of any other breach or a waiver of the continuation of the same breach.
(b) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.
(c) No Right to Employment. Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any position, as an employee, consultant, or director of the Company or its Affiliates or shall interfere with or restrict in any way the right of the Company or its Affiliates, which are hereby expressly reserved, to remove, terminate or discharge the Participant with or without cause at any time for any reason whatsoever.
(d) Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, the Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant.
(e) Entire Agreement. This Agreement, the Plan and, if applicable, the Restrictive Covenant Agreement contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations and negotiations in respect thereto; provided, however, that if the Participant’s home country is Australia, Canada or the United States, the Participant understands that the Participant may have an existing agreement(s) with the Company, through prior awards, acquisition of a prior employer or otherwise, that may include the same or similar covenants as those in the Restrictive Covenant Agreement furnished herewith, and acknowledges
that the Restrictive Covenant Agreement is meant to supplement any such agreement(s) such that the covenants in the agreements that provide the Company with the greatest protection enforceable under applicable law shall control, and that the parties do not intend to create any ambiguity or conflict through the execution of the Restrictive Covenant Agreement that would release the Participant from the obligations the Participant has assumed under the restrictive covenants in any of these agreements. No change, modification or waiver of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto, except for any changes permitted without consent of the Participant under the Plan.
(f) Governing Law and Venue. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without regard to principles of conflicts of law thereof, or principles of conflicts of laws of any other jurisdiction which could cause the application of the laws of any jurisdiction other than the State of Delaware. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by the Restricted Unit Award or this Agreement, to the extent permitted by applicable law where the Participant resides, the parties hereby submit to and consent to the exclusive jurisdiction of the State of New Jersey and agree that such litigation shall be conducted only in the courts of Essex County, New Jersey, or the federal courts of the United States for the District of New Jersey, and no other courts, such jurisdiction being where the grant is made and/or to be performed.
(g) Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or construction and shall not constitute a part of this Agreement.
(h) Appendices. If the Participant’s home country is not the United States, this Restricted Unit Award shall be subject to the additional terms and conditions set forth in Appendices B, C and D to this Agreement, as applicable to the Participant’s country. Moreover, if Participant relocates from the U.S. to one of the countries included in Appendix D or if the Participant relocates between countries included in Appendix D during the life of the Restricted Unit Award, the additional terms and conditions set forth in Appendices B, C and D to this Agreement shall apply to Participant, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendices B, C and D constitute part of this Agreement. Participants whose home country is not the United States should review Appendices B, C and D to this Agreement carefully.
(i) No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Participant’s participation in the Plan. The Participant should consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to the Plan.
(j) Insider Trading Restrictions/Market Abuse Laws. Participant acknowledges that the Participant may be subject to insider trading restrictions and/or market-abuse laws which may affect the Participant’s ability to accept, acquire, sell or otherwise dispose of shares of Common Stock, rights to shares of Common Stock, or rights linked to the value of shares of Common Stock during such times as the Participant is considered to have “inside information” regarding the Company (as defined by the laws or regulations in the Participant’s country). Local insider trading laws and regulations may prohibit the cancellation or amendment of orders the Participant places before possessing inside information. Furthermore, the Participant could be prohibited from (i) disclosing the inside information to any third party (other
than on a “need to know” basis) and (ii) “tipping” third parties or causing them otherwise to buy or sell securities. Third parties include fellow employees. Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under the Company’s insider trading policy. The Participant is responsible for complying with any applicable restrictions, and should speak to his or her personal legal advisor for further details regarding any applicable insider trading and/or market abuse laws in the Participant’s country.
(k) Electronic Delivery and Participation. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
(l) Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s participation in the Plan, on the Restricted Unit Awards and on any payment received under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
By accepting this Agreement through the online acceptance tool on Fidelity Stock Plan Services’ website, the Participant agrees to all of the terms and conditions in this Agreement and the Plan.
AUTOMATIC DATA PROCESSING, INC.
______________________________________
AUTOMATIC DATA PROCESSING, INC. 2018 OMNIBUS AWARD PLAN
PERFORMANCE STOCK UNIT AWARD AGREEMENT
AUTOMATIC DATA PROCESSING, INC. (the “Company”), pursuant to the 2018 Omnibus Award Plan, as amended from time to time (the “Plan”), hereby irrevocably grants you (the “Participant”), on [DATE] (the “Grant Date”), a Performance Stock Unit Award (the “Award”) of forfeitable performance stock units of the Company (“PSUs”), each PSU representing the right to receive one share of the Company’s common stock, par value $0.10 per share (“Common Stock”), subject to (1) the restrictions, terms and conditions herein and (2) any additional terms and conditions applicable to the Participant, as set forth in the appendices attached hereto (the “Appendices”).
WHEREAS, the Participant has been selected as a participant in the three-year performance stock unit program of the Company covering the Company’s 20[XX], 20[XX] and 20[XX] fiscal years, as described in the letter previously provided to the Participant (the “PSU Award Letter”); and
WHEREAS, the Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”) has determined that it would be in the best interests of the Company and its stockholders to grant the award provided for herein to the Participant, on the terms and conditions described in this Performance Stock Unit Award Agreement, including the Appendices (together, the “Agreement”).
NOW, THEREFORE, for and in consideration of the promises and the covenants of the parties contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, for themselves, and their permitted successors and assigns, hereby agree as follows:
1. Terms and Conditions.
(a) Award. Subject to the other terms and conditions contained in this Agreement, the actual number of PSUs that are earned, if any, pursuant to the terms and conditions of the Award will be determined by the Company (the “Total Award”) and shall be computed in accordance with Section 3 below, as a percentage of the sum of (i) the Target Number of PSUs set forth in the PSU Award Letter (the “Target Award”) plus (ii) any Dividend Equivalent PSUs (as defined below). The Total Award shall be a whole number of PSUs only.
(b) Performance Period; Measurement Period. Subject to the other terms and conditions contained in this Agreement, the performance period for the Award commenced on July 1, 20[XX] and shall terminate on June 30, 20[XX] (the “Performance Period”). During the Performance Period there will be three (3) separate measurement periods (each, a “Measurement Period”) of the Company’s performance based on one or more financial metrics established by the Committee and communicated to the Participant (as applicable, the “Financial Metrics”).
(c) Dividend Equivalents. Until shares of Common Stock are delivered to the Participant in respect of the settlement of the Award, at no time shall the Participant be deemed for any purpose to be the owner of shares of Common Stock in connection with the Award and the Participant shall have no right to dividends in respect of the Award; provided, however, that each time the Company pays a dividend with respect to a share of Common Stock during the period from the Grant Date to the Payout Date (as defined below), the Participant shall be
credited with an additional number of PSUs (the “Dividend Equivalent PSUs”) equal to (i) the quotient obtained by dividing the amount of such dividend by the Fair Market Value (as defined in the Plan) of a share of Common Stock on such date, multiplied by (ii) the Target Award.
(d) Settlement. If the Participant’s home country is the United States, subject to the other terms and conditions contained in this Agreement, the Company shall settle the Award by causing one share of Common Stock for each PSU in the Total Award that is outstanding (and not previously forfeited) as of the Payout Date to be registered in the name of the Participant and held in book-entry form on the Payout Date. If the Participant’s home country is not the United States, subject to the other terms and conditions contained in this Agreement, the Company shall settle the Award by the payment to the Participant in cash (without interest) of an amount equal to the Fair Market Value of the shares of Common Stock underlying the PSUs (the U.S. dollar value of the shares of Common Stock underlying the PSUs will be converted into the Participant’s local currency using the exchange rate determined by the Company) on the Payout Date.
(e) Tax Withholding. The Participant shall be required to satisfy any and all required withholding taxes in respect of the Performance Stock Unit Award in accordance with the provisions of Section 14(e) of the Plan.
2. Forfeiture of PSUs.
(a) Termination of Employment Generally. Except as otherwise determined by the Company in its sole discretion or as provided in Section 2(b) or Appendix A to this Agreement, all PSUs and Dividend Equivalent PSUs shall be forfeited without consideration to the Participant upon the Participant’s termination of employment with the Company or its Affiliates for any reason (and the Participant shall forfeit any rights to receive shares of Common Stock or cash in respect of the Award). For the avoidance of doubt, unless otherwise provided in this Agreement, employment or service during only a portion of the Performance Period shall not entitle the Participant to vest in a pro rata portion of the PSUs.
Further, if the Participant’s home country is not the United States, for purposes of this Award, the Participant’s employment relationship will be considered terminated as of the date the Participant is no longer actively providing services to the Company or one of its Affiliates (regardless of the reason for such termination and whether or not such termination is later found invalid or in breach of employment laws in the jurisdiction where the Participant is employed, or the terms of the Participant’s employment agreement, if any), and such date will not be extended by any notice period (e.g., the Participant’s period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment agreement, if any). The Committee shall have the exclusive discretion to determine when the Participant may still be considered to be providing active services for purposes of the PSUs (including whether the Participant may still be considered to be providing services while on a leave of absence).
(b) Termination due to Death, Disability or Retirement. In the event that on or after January 1st of the fiscal year of the Grant Date but prior to the end of the Performance Period, the Participant’s employment with the Company or one of its Affiliates is terminated due to death, Disability or retirement (defined for purposes of this Agreement as voluntary termination of employment at or after age 65, or age 55 with 10 years of service with the Company or its Affiliates), the Participant shall be entitled to receive the Award as determined in
accordance with Section 3. For the avoidance of doubt, if the Participant’s employment is terminated prior to January 1st of the fiscal year of the Grant Date due to death, Disability or retirement, the Award and any rights to receive shares of Common Stock, cash and Dividend Equivalent PSUs with respect thereto, will be forfeited without consideration.
3. Performance Determinations.
(a) Subject to the other terms and conditions contained in this Agreement, prior to or during each Measurement Period, the Company will adopt a schedule setting forth for such Measurement Period potential ranges of the Company’s Financial Metrics (which may be an absolute dollar or other value for such period, or growth percentage relative to a prior period, as the Company may determine). If the Participant is employed with the Company or its Affiliates at the completion of the Performance Period, then following completion of the Performance Period the Company will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the Target Award plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(b) If the Participant’s employment with the Company or its Affiliates has terminated on or after January 1st of the fiscal year of the Grant Date but prior to the end of the Performance Period due to death or Disability, then as soon as administratively feasible (in the Committee’s sole discretion) following such termination the Company will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the Target Award plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(c) If the Participant’s employment with the Company and its Affiliates has terminated on or after January 1st of the fiscal year of the Grant Date but prior to the end of the Performance Period due to retirement, then following completion of the Performance Period the Company will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the Target Award plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(d) If, in connection with a Change in Control, the successor company, or a parent of the successor company, in the Change in Control does not agree to assume, replace, or substitute the PSUs granted hereunder (as of the consummation of such Change in Control) with PSUs on substantially identical terms, as determined by the Committee, then as of immediately prior to such Change in Control, the Company will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the Target Award plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(e) For purposes of this Agreement:
(i) “Final Payout Percentage” is a number, expressed as a percentage (which shall not exceed 200%), equal to the product of (x) the sum of each Yearly Performance Percentage during the Performance Period, divided by 3 and multiplied by (y) the rTSR Factor; provided, further, that if the Company’s total shareholder return (“TSR”) for the Performance Period is not positive, then the Final Payout Percentage shall not exceed 100% (the “TSR Cap”); provided, further, that the TSR Cap shall not apply if the Participant’s employment terminates due to death or Disability prior to completion of the Performance
Period or if a Change of Control occurs prior to the completion of the Performance Period.
(ii) “Payout Date” shall be:
•September 20[XX] or as soon as administratively feasible (but not later than 60 days) thereafter if the Participant remains employed with the Company or its Affiliates until the end of the Performance Period;
•September 20[XX] or as soon as administratively feasible (but not later than 60 days) thereafter if the Participant’s employment with the Company and its Affiliates terminates due to retirement on or after January 1st of the fiscal year of the Grant Date but prior to the end of the Performance Period; provided that if the Participant subsequently dies or becomes Disabled during the Performance Period, the Payout Date shall be as soon as administratively feasible (but not later than 60 days) after the Participant’s death or Disability;
•as soon as administratively feasible (but not later than 60 days) after termination of employment if the Participant’s employment with the Company and its Affiliates terminates due to death or Disability on or after January 1st of the fiscal year of the Grant Date but prior to the end of the Performance Period, or if Appendix A applies; and
•immediately prior to the Change in Control if Section 3(d) applies.
(iii) “Peer Group” shall consist of the companies included in the S&P 500 Index as of the Performance Period commencement date; provided, however, that the Peer Group may be adjusted by the Committee in its sole discretion (x) in the event of the merger, acquisition, bankruptcy, take-private or similar transaction of a Peer Group member or (y) in any other manner that the Committee deems necessary or appropriate. Companies added to the S&P 500 Index during the Performance Period shall be excluded from the final percentile rank determination.
(iv) “rTSR Factor” is a number, expressed as a percentage, determined by the Company based on the Company’s relative TSR (“rTSR”), expressed as a percentile, measured against the TSR of the Peer Group over the Performance Period, and determined by the Company using straight line interpolation between the low and high of each applicable rTSR percentile range for the Performance Period.
(v) “Yearly Performance Percentage” is a number, expressed as a percentage, determined by the Company using straight line interpolation between the low and high of each Financial Metric range (whether a dollar or other value, or a growth percentage) for each Measurement Period, based upon the Company’s
actual performance with respect to each Financial Metric for such Measurement Period and determined based on a weighted average of the applicable Financial Metrics; provided, that if the Participant’s employment with the Company and its Affiliates terminates due to death or Disability on or after January 1st of the fiscal year of the Grant Date but prior to the end of the Performance Period, the Yearly Performance Percentage will be deemed to be 100% for each Measurement Period in the Performance Period not completed prior to the Participant’s termination of employment; provided, further, that if the Participant’s employment with the Company and its Affiliates terminates due to retirement on or after January 1st of the fiscal year of the Grant Date and the Participant subsequently dies or becomes Disabled prior to completion of the Performance Period, the Yearly Performance Percentage will be deemed to be 100% for each Measurement Period in the Performance Period not completed prior to the Participant’s death or Disability; provided, further, that in the event of a Change in Control, then the Yearly Performance Percentage will be deemed to be 100% for each Measurement Period in the Performance Period not completed prior to such Change in Control.
(f) All determinations with respect to the Award or this Agreement by the Company or Committee, including, without limitation, determinations of the Financial Metric(s) amount for any Measurement Period, the Financial Metric(s) growth relative to a prior period, rTSR, TSR, and Yearly Performance Percentage, and timing of settlements, shall be within the Company’s absolute discretion and shall be final, binding and conclusive on the Participant.
4. Restrictive Covenant Agreement; Clawback; Incorporation by Reference.
(a) Restrictive Covenant Agreement. If the Participant’s home country is Australia, Canada, or the United States, this Award is conditioned upon the Participant’s agreement to this Agreement and the Restrictive Covenant Agreement furnished herewith and which includes, among other provisions, certain non-competition, non-solicitation and non-disclosure covenants. If such Participant does not agree (whether electronically or otherwise) to this Agreement and the Restrictive Covenant Agreement within ninety (90) days from the date of the Award, the Award shall be terminable by the Company.
(b) Clawback/Forfeiture. Notwithstanding anything to the contrary contained herein, the PSUs may be forfeited without consideration if the Participant, as determined by the Committee in its sole discretion (i) engages in an activity that is in conflict with or adverse to the interests of the Company or any Affiliate, including but not limited to fraud or conduct contributing to any financial restatements or irregularities, or (ii) without the consent of the Company, while employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-competition, non-solicitation or non-disclosure covenant or agreement (including, if applicable, the Restrictive Covenant Agreement furnished herewith) between the Participant and the Company or any Affiliate. If the Participant engages in any activity referred to in the preceding sentence, the Participant shall, at the sole discretion of the Committee, forfeit any gain realized in respect of the PSUs (which gain shall be deemed to be an amount equal to the Fair Market Value, on the applicable Payout Date, of the shares of Common Stock or cash delivered to the Participant under this Award), and repay such gain to the Company. In addition to the foregoing, the Award may be subject to recoupment by the Company pursuant to the terms and requirements of the Company’s Clawback Policy, effective as of December 1, 2023, as may be amended from time to time, if the Participant is subject to such Clawback Policy.
(c) Incorporation by Reference. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan.
5. Compliance with Legal Requirements. Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the grant or payment of the PSUs, including the delivery of shares of Common Stock, the Company shall not be required to grant the PSUs, or deliver any shares subject to the PSUs, prior to the completion of any registration or qualification of the PSUs or shares under any U.S. or non-U.S. federal, state or local securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any U.S. or non-U.S. federal, state or local governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Participant understands that the Company is under no obligation to register or qualify the PSUs or shares with any U.S. federal or state or non-U.S. securities commission or to seek approval or clearance from any governmental authority for the grant of the PSUs or the issuance or sale of the shares. Further, the Participant agrees that the Company shall have unilateral authority to amend the Plan and the Agreement without the Participant’s consent to the extent necessary to comply with securities or other laws applicable to the grant or payment of the PSUs, including the issuance of shares.
6. Transferability. PSUs granted hereunder may not be assigned, alienated, pledged, attached, sold, or otherwise transferred or encumbered by the Participant other than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer, or encumbrance shall be void and unenforceable against the Company or any Affiliate.
7. Miscellaneous.
(a) Waiver. Any right of the Company contained in this Agreement may be waived in writing by the Committee. No waiver of any right hereunder by any party shall operate as a waiver of any other right, or as a waiver of the same right with respect to any subsequent occasion for its exercise, or as a waiver of any right to damages. No waiver by any party of any breach of this Agreement shall be held to constitute a waiver of any other breach or a waiver of the continuation of the same breach.
(b) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.
(c) No Right to Employment or Other Service. Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any position, as an employee, consultant, or director of the Company or its Affiliates or shall interfere with or restrict in any way the right of the Company or its Affiliates, which are hereby expressly reserved, to remove, terminate or discharge the Participant with or without cause at any time for any reason whatsoever.
(d) Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, the Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant.
(e) Entire Agreement. This Agreement, the Plan and, if applicable, the Restrictive Covenant Agreement contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations and negotiations in respect thereto; provided, however, that if the Participant’s home country is Australia, Canada, or the United States, the Participant understands that the Participant may have an existing agreement(s) with the Company, through prior awards, acquisition of a prior employer or otherwise, that may include the same or similar covenants as those in the Restrictive Covenant Agreement furnished herewith, and acknowledges that the Restrictive Covenant Agreement is meant to supplement any such agreement(s) such that the covenants in the agreements that provide the Company with the greatest protection enforceable under applicable law shall control, and that the parties do not intend to create any ambiguity or conflict through the execution of the Restrictive Covenant Agreement that would release the Participant from the obligations the Participant has assumed under the restrictive covenants in any of these agreements. No change, modification or waiver of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto, except for any changes permitted without consent of the Participant under the Plan.
(f) Governing Law and Venue. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without regard to principles of conflicts of law thereof, or principles of conflicts of laws of any other jurisdiction which could cause the application of the laws of any jurisdiction other than the State of Delaware. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by the Award or this Agreement, to the extent permitted by applicable law where the Participant resides, the parties hereby submit to and consent to the exclusive jurisdiction of the State of New Jersey and agree that such litigation shall be conducted only in the courts of Essex County, New Jersey, or the federal courts of the United States for the District of New Jersey, and no other courts, such jurisdiction being where the grant is made and/or to be performed.
(g) Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or construction and shall not constitute a part of this Agreement.
(h) Appendices. If the Participant’s home country is not the United States, this Award shall be subject to the additional terms and conditions set forth in Appendices B, C and D to this Agreement, as applicable to the Participant’s country. Moreover, if Participant relocates from the U.S. to one of the countries included in Appendix D or if the Participant relocates between countries included in Appendix D during the life of the Award, the additional terms and conditions set forth in Appendices B, C and D to this Agreement shall apply to Participant, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendices B, C and D constitute part of this Agreement. Participants whose home country is not the United States should review Appendices B, C and D to this Agreement carefully.
(i) No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Participant’s participation in the Plan. The Participant should consult with his or her own
personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to the Plan.
(j) Insider Trading Restrictions/Market Abuse Laws. Participant acknowledges that the Participant may be subject to insider trading restrictions and/or market abuse laws, which may affect the Participant’s ability to accept, acquire, sell or otherwise dispose of shares of Common Stock, rights to shares of Common Stock, or rights linked to the value of shares of Common Stock during such times as the Participant is considered to have “inside information” regarding the Company (as defined by the laws or regulations in the Participant’s country). Local insider trading laws and regulations may prohibit the cancellation or amendment of orders the Participant places before possessing inside information. Furthermore, the Participant could be prohibited from (i) disclosing the inside information to any third party (other than on a “need to know” basis) and (ii) “tipping” third parties or causing them otherwise to buy or sell securities. Third parties include fellow employees. Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under the Company’s insider trading policy. The Participant is responsible for complying with any applicable restrictions, and should speak to his or her personal legal advisor for further details regarding any applicable insider trading and/or market abuse laws in the Participant’s country.
(k) Electronic Delivery and Participation. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
(l) Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s participation in the Plan, on the PSUs and on any payment received under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
By accepting this Agreement through the online acceptance tool on Fidelity Stock Plan Services’ website, the Participant agrees to all of the terms and conditions in this Agreement and the Plan.
AUTOMATIC DATA PROCESSING, INC.
__________________________________
EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Maria Black, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Automatic Data Processing, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | February 1, 2024 | /s/ Maria Black | ||||||
| Maria Black | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Don McGuire, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Automatic Data Processing, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | February 1, 2024 | /s/ Don McGuire | ||||||
Don McGuire | ||||||||
Chief Financial Officer | ||||||||
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Automatic Data Processing, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Maria Black, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: | February 1, 2024 | /s/ Maria Black | ||||||
| Maria Black | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Automatic Data Processing, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Don McGuire, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: | February 1, 2024 | /s/ Don McGuire | ||||||
Don McGuire | ||||||||
| Chief Financial Officer | ||||||||