payx-20190831x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 31, 2019

¨ 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 0-11330

_________________________________________

PAYCHEX, INC.

911 Panorama Trail South

Rochester, NY 14625-2396

(585) 385-6666

A Delaware Corporation

IRS Employer Identification Number: 16-1124166

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange of which registered
Common Stock, $0.01 par value	PAYX	NASDAQ

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 x No ¨

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 x No ¨

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.

Large Accelerated Filer x

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. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of September 30, 2019, 357,944,189 shares of the registrant’s common stock, $.01 par value, were outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

In millions, except per share amounts



	For the three months ended
	August 31,
	2019		2018
Revenue:
Management Solutions	$	724.5	$	687.7
PEO and Insurance Services		247.0		158.0
Total service revenue		971.5		845.7
Interest on funds held for clients		20.5		17.1
Total revenue		992.0		862.8
Expenses:
Operating expenses		325.4		265.5
Selling, general and administrative expenses		317.5		277.0
Total expenses		642.9		542.5
Operating income		349.1		320.3
Other (expense)/income, net		(4.8)		2.3
Income before income taxes		344.3		322.6
Income taxes		80.1		79.0
Net income	$	264.2	$	243.6

Other comprehensive income, net of tax		26.4		0.4
Comprehensive income	$	290.6	$	244.0

Basic earnings per share	$	0.74	$	0.68
Diluted earnings per share	$	0.73	$	0.67
Weighted-average common shares outstanding		358.6		359.1
Weighted-average common shares outstanding, ‎ assuming dilution		361.5		361.5

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In millions, except per share amounts




	August 31,		May 31,
	2019		2019
Assets
Cash and cash equivalents	$	586.4	$	673.6
Restricted cash		55.8		50.6
Corporate investments		40.9		39.0
Interest receivable		27.1		27.4
Accounts receivable, net of allowance for doubtful accounts		425.1		420.5
PEO unbilled receivables, net of advance collections		409.2		406.3
Prepaid income taxes		—		22.6
Prepaid expenses and other current assets		242.3		233.9
Current assets before funds held for clients		1,786.8		1,873.9
Funds held for clients		3,769.1		3,803.8
Total current assets		5,555.9		5,677.7
Long-term restricted cash		1.9		6.5
Long-term corporate investments		10.3		10.2
Property and equipment, net of accumulated depreciation		403.4		408.7
Operating lease right-of-use assets, net of accumulated amortization		112.8		—
Intangible assets, net of accumulated amortization		379.5		399.1
Goodwill		1,783.1		1,782.6
Long-term deferred costs		362.7		366.3
Other long-term assets		28.6		24.9
Total assets	$	8,638.2	$	8,676.0
Liabilities
Accounts payable	$	61.7	$	75.9
Accrued corporate compensation and related items		84.5		146.4
Accrued worksite employee compensation and related items		544.1		578.6
Accrued income taxes		49.0		—
Short-term borrowings		56.5		—
Deferred revenue		41.3		40.3
Other current liabilities		270.5		219.5
Current liabilities before client fund obligations		1,107.6		1,060.7
Client fund obligations		3,715.9		3,784.3
Total current liabilities		4,823.5		4,845.0
Accrued income taxes		29.7		27.3
Deferred income taxes		227.6		223.1
Long-term borrowings, net of debt issuance costs		796.5		796.4
Operating lease liabilities		93.8		13.0
Other long-term liabilities		147.8		151.7
Total liabilities		6,118.9		6,056.5
Commitments and contingencies — Note N
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares; ‎ Issued and outstanding: 357.9 shares as of August 31, 2019 ‎ and 359.3 shares as of May 31, 2019		3.6		3.6
Additional paid-in capital		1,224.0		1,206.3
Retained earnings		1,265.2		1,409.5
Accumulated other comprehensive income		26.5		0.1
Total stockholders’ equity		2,519.3		2,619.5
Total liabilities and stockholders’ equity	$	8,638.2	$	8,676.0

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

In millions, except per share amounts


	For the three months ended August 31, 2019
								Accumulated
				Additional				other
	Common stock			paid-in		Retained		comprehensive
	Shares	Amount		capital		earnings		income/(loss)		Total
Balance as of May 31, 2019	359.3	$	3.6	$	1,206.3	$	1,409.5	$	0.1	$	2,619.5
Net income	—		—		—		264.2		—		264.2
Unrealized gains on securities, net of reclassification adjustment and tax	—		—		—		—		25.4		25.4
Cash dividends declared ($0.62 per share)	—		—		—		(222.0)		—		(222.0)
Repurchases of common shares	(2.0)		—		(3.7)		(168.2)		—		(171.9)
Stock-based compensation costs	—		—		10.5		—		—		10.5
Foreign currency translation adjustment	—		—		—		—		1.0		1.0
Activity related to equity-based plans	0.6		—		10.9		(18.3)		—		(7.4)
Balance as of August 31, 2019	357.9	$	3.6	$	1,224.0	$	1,265.2	$	26.5	$	2,519.3


	For the three months ended August 31, 2018
Balance as of May 31, 2018	359.0	$	3.6	$	1,126.8	$	1,262.6	$	(36.2)	$	2,356.8
Net income	—		—		—		243.6		—		243.6
Unrealized gains on securities, net of reclassification adjustment and tax	—		—		—		—		2.1		2.1
Cash dividends declared ($0.56 per share)	—		—		—		(201.4)		—		(201.4)
Repurchases of common shares	(0.5)		—		(0.8)		(32.0)		—		(32.8)
Stock-based compensation costs	—		—		10.9		—		—		10.9
Foreign currency translation adjustment	—		—		—		—		(1.7)		(1.7)
Activity related to equity-based plans	0.5		—		14.2		(4.7)		—		9.5
Balance as of August 31, 2018	359.0	$	3.6	$	1,151.1	$	1,268.1	$	(35.8)	$	2,387.0

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In millions



	For the three months ended
	August 31,
	2019		2018 ⁽¹⁾
Operating activities
Net income	$	264.2	$	243.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets		52.9		35.9
Amortization of premiums and discounts on available-for-sale securities, net		10.0		14.4
Amortization of deferred contract costs		46.0		44.6
Stock-based compensation costs		10.5		10.9
(Benefit)/provision for deferred income taxes		(3.7)		2.6
Provision for allowance for doubtful accounts		2.3		0.3
Net realized (gains)/losses on sales of available-for-sale securities		(0.9)		0.1
Changes in operating assets and liabilities:
Interest receivable		0.3		3.1
Accounts receivable and PEO unbilled receivables, net		(9.8)		(43.0)
Prepaid expenses and other current assets		13.8		15.2
Accounts payable and other current liabilities		(39.6)		(15.2)
Deferred costs		(41.9)		(38.4)
Net change in other long-term assets and liabilities		(8.4)		(0.4)
Net change in operating lease right-of-use assets and liabilities		(0.9)		—
Net cash provided by operating activities		294.8		273.7
Investing activities
Purchases of available-for-sale securities		(8,289.3)		(11,115.8)
Proceeds from sales and maturities of available-for-sale securities		8,862.1		11,297.0
Purchases of property and equipment		(26.4)		(24.4)
Purchases of other assets		(1.7)		(0.8)
Net cash provided by investing activities		544.7		156.0
Financing activities
Net change in client fund obligations		(68.4)		(942.5)
Net proceeds from short-term borrowings		56.5		56.7
Dividends paid		(222.0)		(201.4)
Repurchases of common shares		(171.9)		(32.8)
Activity related to equity-based plans		(7.4)		9.7
Net cash used in financing activities		(413.2)		(1,110.3)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents		426.3		(680.6)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		935.2		2,300.5
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	1,361.5	$	1,619.9

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
to the Consolidated Balance Sheets:
Cash and cash equivalents	$	586.4	$	440.1
Restricted cash		57.7		—
Restricted cash and restricted cash equivalents included in funds held for clients


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Statements of Income and Comprehensive Income	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Stockholders’ Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	39
Item 4.	Controls and Procedures	39
PART II. OTHER INFORMATION		40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 6.	Exhibits	41
Signatures		42