payx-20200831x10q

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, 2020

¨ 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.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

16-1124166

(I.R.S. Employer Identification No.)

911 Panorama Trail South

Rochester, NY

(Address of principal executive offices)

14625-2396

(Zip Code)

Registrant's telephone number, including area code: (585) 385-6666

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	PAYX	Nasdaq Global Select Market

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  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  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		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 

As of September 30, 2020, 359,500,317 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,
	2020		2019
Revenue:
Management Solutions	$	687.4	$	724.5
PEO and Insurance Solutions		229.9		247.0
Total service revenue		917.3		971.5
Interest on funds held for clients		14.9		20.5
Total revenue		932.2		992.0
Expenses:
Cost of service revenue		307.1		325.4
Selling, general and administrative expenses		341.1		317.5
Total expenses		648.2		642.9
Operating income		284.0		349.1
Other expense, net		(7.9)		(4.8)
Income before income taxes		276.1		344.3
Income taxes		64.5		80.1
Net income	$	211.6	$	264.2

Other comprehensive income, net of tax		23.0		26.4
Comprehensive income	$	234.6	$	290.6

Basic earnings per share	$	0.59	$	0.74
Diluted earnings per share	$	0.59	$	0.73
Weighted-average common shares outstanding		359.1		358.6
Weighted-average common shares outstanding, assuming dilution		361.3		361.5

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In millions, except per share amounts



	August 31,		May 31,
	2020		2020
Assets
Cash and cash equivalents	$	835.7	$	905.2
Restricted cash		50.8		49.8
Corporate investments		30.6		27.2
Interest receivable		23.6		26.2
Accounts receivable, net of allowance for doubtful accounts		414.8		384.1
PEO unbilled receivables, net of advance collections		417.5		380.0
Prepaid income taxes		—		16.8
Prepaid expenses and other current assets		252.9		244.8
Current assets before funds held for clients		2,025.9		2,034.1
Funds held for clients		3,314.3		3,430.5
Total current assets		5,340.2		5,464.6
Long-term restricted cash		24.8		21.3
Long-term corporate investments		10.2		10.2
Property and equipment, net of accumulated depreciation		396.0		407.4
Operating lease right-of-use assets, net of accumulated amortization		96.1		114.8
Intangible assets, net of accumulated amortization		314.1		330.6
Goodwill		1,796.8		1,791.1
Long-term deferred costs		368.9		372.5
Other long-term assets		29.8		38.2
Total assets	$	8,376.9	$	8,550.7
Liabilities
Accounts payable	$	62.0	$	79.4
Accrued corporate compensation and related items		97.6		131.7
Accrued worksite employee compensation and related items		503.9		512.4
Short-term borrowings		6.1		5.1
Accrued income taxes		51.8		50.5
Deferred revenue		39.6		39.2
Other current liabilities		304.2		277.6
Current liabilities before client fund obligations		1,065.2		1,095.9
Client fund obligations		3,197.9		3,331.0
Total current liabilities		4,263.1		4,426.9
Accrued income taxes		12.0		33.5
Deferred income taxes		243.5		240.8
Long-term borrowings, net of debt issuance costs		796.9		796.8
Operating lease liabilities		95.1		96.9
Other long-term liabilities		187.7		174.4
Total liabilities		5,598.3		5,769.3
Commitments and contingencies — Note H
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares; ‎Issued and outstanding: 359.5 shares as of August 31, 2020 ‎and 358.8 shares as of May 31, 2020		3.6		3.6
Additional paid-in capital		1,325.3		1,289.9
Retained earnings		1,370.2		1,431.4
Accumulated other comprehensive income		79.5		56.5
Total stockholders’ equity		2,778.6		2,781.4
Total liabilities and stockholders’ equity	$	8,376.9	$	8,550.7

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, 2020
								Accumulated
				Additional				other
	Common stock			paid-in		Retained		comprehensive
	Shares	Amount		capital		earnings		income		Total
Balance as of May 31, 2020	358.8	$	3.6	$	1,289.9	$	1,431.4	$	56.5	$	2,781.4
Net income	—		—		—		211.6		—		211.6
Unrealized gains on securities, net of $4.2 million in tax expense	—		—		—		—		13.0		13.0
Reclassification adjustment for realized gains on securities, net of $0.1 million in tax expense ⁽¹⁾	—		—		—		—		(0.2)		(0.2)
Cash dividends declared ($0.62 per share)	—		—		—		(223.2)		—		(223.2)
Repurchases of common shares ⁽²⁾	(0.4)		—		(0.7)		(28.1)		—		(28.8)
Stock-based compensation costs	—		—		13.3		—		—		13.3
Foreign currency translation adjustment	—		—		—		—		10.2		10.2
Activity related to equity-based plans	1.1		—		22.8		(21.5)		—		1.3
Balance as of August 31, 2020	359.5	$	3.6	$	1,325.3	$	1,370.2	$	79.5	$	2,778.6


	For the three months ended August 31, 2019
								Accumulated
				Additional				other
	Common stock			paid-in		Retained		comprehensive
	Shares	Amount		capital		earnings		income		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 $8.5 million in tax expense	—		—		—		—		26.1		26.1
Reclassification adjustment for realized gains on securities, net of $0.2 million in tax expense ⁽¹⁾	—		—		—		—		(0.7)		(0.7)
Cash dividends declared ($0.62 per share)	—		—		—		(222.0)		—		(222.0)
Repurchases of common shares ⁽²⁾	(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

⁽¹⁾Reclassification adjustments out of accumulated other comprehensive income for realized gains, net of tax, on the sale of available-for-sale securities are reflected in interest on funds held for clients and other expense, net on the Consolidated Statements of Income and Comprehensive Income.

⁽²⁾ In May 2019, the Company announced that its Board of Directors (the “Board”) approved a program to repurchase up to $400.0 million of its common stock, with authorization expiring on May 31, 2022. The purpose of this program is to manage common stock dilution. All shares of common stock repurchased were retired.

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In millions



	For the three months ended
	August 31,
	2020		2019
Operating activities
Net income	$	211.6	$	264.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		49.6		52.9
Amortization of premiums and discounts on available-for-sale securities, net		9.5		10.0
Amortization of deferred contract costs		47.3		46.0
Stock-based compensation costs		13.3		10.5
Benefit from deferred income taxes		(1.5)		(3.7)
Provision for allowance for doubtful accounts		0.6		2.3
Net realized gains on sales of available-for-sale securities		(0.3)		(0.9)
Changes in operating assets and liabilities:
Interest receivable		2.6		0.3
Accounts receivable and PEO unbilled receivables, net		(68.8)		(9.8)
Prepaid expenses and other current assets		8.3		13.8
Accounts payable and other current liabilities		(55.6)		(39.6)
Deferred costs		(43.3)		(41.9)
Net change in other long-term assets and liabilities		23.7		(8.4)
Net change in operating lease right-of-use assets and liabilities		18.0		(0.9)
Net cash provided by operating activities		215.0		294.8
Investing activities
Purchases of available-for-sale securities		(2,475.5)		(8,289.3)
Proceeds from sales and maturities of available-for-sale securities		2,260.5		8,862.1
Purchases of property and equipment		(20.7)		(26.4)
Purchases of other assets		(0.6)		(1.7)
Net cash (used in)/provided by investing activities		(236.3)		544.7
Financing activities
Net change in client fund obligations		(133.1)		(68.4)
Net proceeds from short-term borrowings		1.0		56.5
Dividends paid		(223.2)		(222.0)
Repurchases of common shares		(28.8)		(171.9)
Activity related to equity-based plans		1.3		(7.4)
Net cash used in financing activities		(382.8)		(413.2)
Net change in cash, restricted cash, and equivalents		(404.1)		426.3
Cash, restricted cash, and equivalents, beginning of period		1,659.8		935.2
Cash, restricted cash, and equivalents, end of period	$	1,255.7	$	1,361.5

Reconciliation of cash, restricted cash, and equivalents


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	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	16
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	28
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	29
Signatures		30