UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________
FORM
_________________________________________
For the quarterly period ended
OR
For the Transition Period from __________to __________
Commission file number
__________________________________________________
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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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 August 31, 2024,
PAYCHEX, INC.
Table of Contents
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
In millions, except per share amounts
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For the three months ended |
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August 31, |
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August 31, |
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2024 |
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2023 |
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Revenue: |
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Management Solutions |
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$ |
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$ |
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PEO and Insurance Solutions |
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Total service revenue |
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Interest on funds held for clients |
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Total revenue |
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Expenses: |
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Cost of service revenue |
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Selling, general and administrative expenses |
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Total expenses |
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Operating income |
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Other income, net |
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Income before income taxes |
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Income taxes |
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Net income |
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$ |
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$ |
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Other comprehensive income/(loss), net of tax |
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( |
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Comprehensive income |
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$ |
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$ |
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Basic earnings per share |
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$ |
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$ |
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Diluted earnings per share |
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$ |
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$ |
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Weighted-average common shares outstanding |
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Weighted-average common shares outstanding, assuming dilution |
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See Notes to Consolidated Financial Statements.
1
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In millions, except per share amounts
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August 31, |
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May 31, |
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2024 |
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2024 |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Corporate investments |
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Interest receivable |
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Accounts receivable, net of allowance for credit losses |
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PEO unbilled receivables, net of advance collections |
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Prepaid income taxes |
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— |
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Prepaid expenses and other current assets |
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Current assets before funds held for clients |
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Funds held for clients |
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Total current assets |
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Long-term corporate investments |
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— |
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Property and equipment, net of accumulated depreciation |
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Operating lease right-of-use assets, net of accumulated amortization |
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Intangible assets, net of accumulated amortization |
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Goodwill |
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Long-term deferred costs |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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Liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued corporate compensation and related items |
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Accrued worksite employee compensation and related items |
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Short-term borrowings |
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Accrued income taxes |
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— |
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Deferred revenue |
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Other current liabilities |
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Current liabilities before client fund obligations |
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Client fund obligations |
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Total current liabilities |
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Accrued income taxes |
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Deferred income taxes |
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Long-term borrowings, net of debt issuance costs |
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Operating lease liabilities |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See Notes to Consolidated Financial Statements.
2
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
In millions, except per share amounts
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For the three months ended August 31, 2024 |
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Common stock |
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Accumulated other comprehensive loss |
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Shares |
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Amount |
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Additional paid-in capital |
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Retained earnings |
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Net unrealized loss on AFS securities |
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Foreign currency translation |
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Total accumulated comprehensive loss |
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Total |
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Balance as of May 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
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( |
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$ |
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( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Unrealized gains on securities, net of $ |
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— |
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— |
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— |
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— |
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— |
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Reclassification adjustment for realized gains on securities, net of $ |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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( |
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Cash dividends declared ($ |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Repurchases of common shares (2) |
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( |
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( |
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( |
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( |
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— |
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— |
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— |
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( |
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Stock-based compensation costs |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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Activity related to equity-based plans |
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( |
) |
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— |
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— |
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— |
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( |
) |
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Balance as of August 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
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( |
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$ |
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( |
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$ |
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For the three months ended August 31, 2023 |
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Common stock |
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Accumulated other comprehensive loss |
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Shares |
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Amount |
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Additional paid-in capital |
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Retained earnings |
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Net unrealized loss on AFS securities |
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Foreign currency translation |
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Total accumulated comprehensive loss |
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Total |
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Balance as of May 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
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( |
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$ |
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( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Unrealized losses on securities, net of $ |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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( |
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Reclassification adjustment for realized losses on securities, net of $ |
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— |
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— |
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— |
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— |
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— |
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Cash dividends declared ($ |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Repurchases of common shares (2) |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation costs |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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Activity related to equity-based plans |
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( |
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— |
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— |
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— |
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Balance as of August 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
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( |
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$ |
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( |
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$ |
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See Notes to Consolidated Financial Statements.
3
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In millions
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For the three months ended |
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August 31, |
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August 31, |
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2024 |
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2023 (1) |
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Operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of premiums and discounts on AFS securities, net |
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( |
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( |
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Amortization of deferred contract costs |
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Stock-based compensation costs |
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Benefit from deferred income taxes |
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( |
) |
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( |
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Provision for credit losses |
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Net realized (gains)/losses on sales of AFS securities |
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( |
) |
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Changes in operating assets and liabilities: |
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Interest receivable |
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Accounts receivable and PEO unbilled receivables, net |
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( |
) |
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Prepaid expenses and other current assets |
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Accounts payable and other current liabilities |
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Deferred costs |
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( |
) |
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( |
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Net change in other long-term assets and liabilities |
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Net change in operating lease right-of-use assets and liabilities |
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( |
) |
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( |
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Net cash provided by operating activities |
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Investing activities |
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Purchases of AFS securities |
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( |
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( |
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Proceeds from sales and maturities of AFS securities |
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Net purchases of short-term accounts receivable |
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( |
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( |
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Purchases of property and equipment |
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( |
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( |
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Acquisition of businesses, net of cash acquired |
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— |
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( |
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Purchases of other assets, net |
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( |
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( |
) |
Net cash used in investing activities |
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( |
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( |
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Financing activities |
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Net change in client fund obligations |
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( |
) |
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Net change in short-term borrowings |
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— |
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Dividends paid |
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( |
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( |
) |
Repurchases of common shares |
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( |
) |
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— |
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Activity related to equity-based plans |
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( |
) |
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Net cash (used in)/provided by financing activities |
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( |
) |
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Net change in cash, restricted cash, and equivalents |
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( |
) |
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Cash, restricted cash, and equivalents, beginning of period |
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Cash, restricted cash, and equivalents, end of period |
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$ |
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$ |
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||
|
|
|
|
|
|
|
|
|
||
Reconciliation of cash, restricted cash, and equivalents |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
||
Restricted cash |
|
|
|
|
|
|
|
|
||
Restricted cash and restricted cash equivalents included in funds held for clients |
|
|
|
|
|
|
|
|
||
Total cash, restricted cash, and equivalents |
|
$ |
|
|
|
$ |
|
|
||
See Notes to Consolidated Financial Statements.
4
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2024
Note A: Description of Business, Basis of Presentation, and Significant Accounting Policies
Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Paychex”) is a leading provider of integrated human capital management (“HCM”) solutions for human resources (“HR”), payroll, benefits, and insurance for small- to medium-sized businesses in the United States (“U.S.”) and parts of Europe. The Company also has operations in India. Paychex, a Delaware corporation formed in 1979, reports as
Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q ("Form 10-Q") and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statement presentation. The consolidated financial statements include the consolidated accounts of the Company with all intercompany transactions eliminated. Certain disclosures are reported as zero balances due to rounding. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair statement of the results for the interim period. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related Notes to Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended May 31, 2024 (“fiscal 2024”). Operating results and cash flows for the three months ended August 31, 2024 are not necessarily indicative of the results that may be expected for other interim periods or for the fiscal year ending May 31, 2025 (“fiscal 2025”).
Reclassifications: Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated earnings.
Revision to previously issued financial statements: The consolidated statement of cash flows for the three months ended August 31, 2023 includes a revision to previously reported amounts related to the presentation of the cash flows associated with short-term receivables purchased from the Company’s clients under non-recourse arrangements. The revision increased net cash provided by operating activities and decreased net cash provided by investing activities by $
Restricted cash and restricted cash equivalents: Restricted cash and restricted cash equivalents are recorded at fair value, and consist of cash and cash equivalents, primarily money market securities, included in funds held for clients and cash that is restricted in use to secure commitments for certain workers’ compensation insurance policies.
Accounts receivable, net of allowance for credit losses: Accounts receivable balances are shown on the Consolidated Balance Sheets net of the allowance for credit losses of $
The Company is exposed to credit losses through the sale of services, payment of client obligations, and collection of purchased receivables. To mitigate this credit risk, the Company has multiple programs in place to assess and continuously monitor each client’s ability to pay for these solutions and support. Credit monitoring programs include, but are not limited to, new client credit reviews, establishing appropriate credit limits, monitoring of credit distressed clients, and early electronic wire and collection procedures. The Company also considers contract terms and conditions, client business type or strategy and may require collateralized asset support or prepayment to mitigate credit risk.
Accounts receivable are written off and charged against the allowance for credit losses when the Company has exhausted all collection efforts without success. The Company estimates its credit losses based on historical loss activity adjusted for current economic conditions and reasonable and supportable forecast factors, when applicable. The provision for the allowance for credit losses and accounts written off were
5
Professional Employer Organization (“PEO”) unbilled receivables, net of advance collections: PEO unbilled receivables, including estimated revenues, offset by advance collections from clients, are recorded as PEO unbilled receivables, net of advance collections on the Company’s Consolidated Balance Sheets. As of August 31, 2024 and May 31, 2024, advance collections were $
PEO insurance reserves: As part of its PEO solution, the Company offers workers’ compensation insurance and health insurance coverage to clients for the benefit of client employees. Workers’ compensation insurance is primarily provided under fully insured high deductible workers’ compensation insurance policies. Workers’ compensation insurance reserves are established to provide for the estimated costs of paying claims up to per occurrence liability limits. These reserves include estimates of certain expenses associated with processing and settling claims. For fiscal 2025 and 2024, the Company has an aggregate maximum liability of $
With respect to PEO health insurance coverage, the Company offers various health insurance plans that take the form of either fully insured guaranteed cost plans or fully insured insurance arrangements where the Company retains risk. A reserve for insurance arrangements where the Company retains risk is established to provide for the payment of claims in accordance with the Company’s service contract with the carrier. The claims reserve includes estimates for reported losses, plus amounts for those claims incurred but not reported, and estimates of certain expenses associated with processing and settling the claims. The Company’s maximum individual claims liability is $
In establishing the PEO workers' compensation insurance reserves, the Company uses an independent actuarial estimate of undiscounted future cash payments that would be made to settle claims. Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and accepted actuarial methods and assumptions. These reserves are subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present estimates, particularly with workers’ compensation insurance where those payments may not occur until well into the future. The Company regularly reviews the adequacy of its estimated insurance reserves. Adjustments to previously established reserves are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant, reflecting any combination of new and adverse or favorable trends.
Stock-based compensation costs: The Company has issued stock-based awards to employees and members of its Board of Directors (the “Board”) consisting of stock options, restricted stock units, and restricted stock awards. The Company accounts for all stock-based awards to employees and members of the Board as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized over the requisite service period. Stock-based compensation costs recognized were $
Recently adopted accounting pronouncements: There were
Recently issued accounting pronouncements: In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. The requirements are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and are required to be applied retrospectively. This ASU is applicable to the Company’s Annual Report on Form 10-K for the fiscal year ending May 31, 2025, and subsequent interim periods, with early application permitted. The requirements of this ASU are disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its reportable segment disclosures.
In December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. This ASU is effective for annual periods beginning after December 15, 2024, and is applicable to the Company’s fiscal year beginning June 1, 2025, with early application permitted. The transition method is prospective with the retrospective method permitted. The requirements of this ASU are
6
disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its income tax disclosures.
Note B: Service Revenue
Service revenue is primarily attributable to fees for providing services to the Company’s clients and is recognized when control of the contracted services is transferred to its clients, in an amount that reflects the consideration it expects to receive in exchange for such services. Insurance Solutions revenue is commissions earned on premiums collected and remitted to insurance carriers. The Company’s contracts generally do not contain specified contract periods and may be terminated by either party with a
Based upon similar operational and economic characteristics, the Company’s service revenue is disaggregated by Management Solutions and PEO and Insurance Solutions as reported in the Company’s Consolidated Statements of Income and Comprehensive Income. 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.
Management Solutions Revenue
Management Solutions revenue is primarily derived from the Company’s integrated HCM services and HR solutions. Clients can select services on an á la carte basis or as part of various product bundles. The Company’s offerings often leverage the information gathered in its base payroll processing service, allowing it to provide comprehensive services covering the HCM spectrum. Management Solutions revenue is generally recognized over time as services are performed and the client simultaneously receives and controls the benefits from these services.
Revenue earned from delivery service for the distribution of certain client payroll checks and reports is also included in Management Solutions revenue in the Company’s Consolidated Statements of Income and Comprehensive Income. Delivery service revenue is recognized at a point in time following the delivery of payroll checks, reports, quarter-end packages, and tax returns to the Company’s clients.
PEO and Insurance Solutions Revenue
PEO solutions are sold through the Company’s registered and licensed subsidiaries and offer businesses HCM and HR solutions. The Company serves as a co-employer of its clients’ employees, offers health insurance coverage to client employees, and assumes the risks and rewards of workers’ compensation insurance and certain health insurance offerings. PEO Solutions revenue is recognized over time as the services are performed and the client simultaneously receives and controls the benefits from these services. PEO Solutions revenue is reported net of certain pass-through costs billed and incurred, which include payroll wages, payroll taxes, including federal and state unemployment insurance, and health insurance premiums on guaranteed cost benefit plans. For workers’ compensation and health insurance plans where the Company retains risk, revenues and costs are recorded on a gross basis.
PEO pass-through costs netted within the PEO and Insurance Solutions revenue were as follows:
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|||||||
In millions |
|
2024 |
|
|
2023 |
|
||||
Payroll wages and payroll taxes |
|
$ |
|
|
|
$ |
|
|
||
State unemployment insurance (included in payroll wages and payroll taxes) |
|
$ |
|
|
|
$ |
|
|
||
Guaranteed cost benefit plans |
|
$ |
|
|
|
$ |
|
|
||
Insurance solutions are sold through the Company’s licensed insurance agency, Paychex Insurance Agency, Inc., which provides insurance through a variety of carriers, allowing companies to expand their employee benefit offerings at an affordable cost. Insurance offerings include property and casualty coverage such as workers’ compensation, business-owner policies, commercial auto, cyber security, and health and benefits coverage, including health, dental, vision, life and disability. Insurance Solutions revenue reflects commissions earned on remitted insurance services premiums billed and is recognized over time as services are performed and the client simultaneously receives and controls the benefits from these services.
7
Contract Balances
The timing of revenue recognition for Management Solutions and PEO and Insurance Solutions is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.
Payments received for certain of the Company’s service offerings for set-up fees are considered a material right. Therefore,
Changes in deferred revenue related to material rights that exceed one year were as follows:
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|||||||
In millions |
|
2024 |
|
|
2023 |
|
||||
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
||
Deferral of revenue |
|
|
|
|
|
|
|
|
||
Recognition of unearned revenue |
|
|
|
( |
) |
|
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
||
Deferred revenue related to material rights is reported in the deferred revenue and other long-term liabilities line items on the Company’s Consolidated Balance Sheets. As of August 31, 2024, the Company expects to recognize deferred revenue related to these material rights for the remainder of fiscal 2025 and subsequent fiscal years as follows:
In millions |
|
Estimated |
|
||
Year ending May 31, |
|
recognition of unearned revenue |
|
||
|
$ |
|
|
||
|
|
|
|
||
|
|
|
|
||
Total recognition of unearned revenue |
|
$ |
|
|
|
Assets Recognized from the Costs to Obtain and Fulfill Contracts
The Company recognizes an asset for the incremental costs of obtaining a contract with a client if it is expected that the economic benefit and amortization period will be longer than one year. The Company also recognizes an asset for the costs to fulfill a contract with a client if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered.
Deferred costs to obtain and fulfill contracts are reported in the prepaid expenses and other current assets and long-term deferred costs line items on the Company’s Consolidated Balance Sheets. Amortization expense related to costs to obtain and fulfill a contract are included in cost of service revenue and selling, general and administrative expenses in the Company’s Consolidated Statements of Income and Comprehensive Income and recognized over the expected economic benefit period.
The Company regularly reviews its deferred costs for potential impairment and did
Changes in deferred costs to obtain and fulfill contracts were as follows:
Costs to obtain contracts: |
|
|
|
|
|
|
|
|
||
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|||||||
In millions |
|
2024 |
|
|
2023 |
|
||||
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
||
Capitalization of costs |
|
|
|
|
|
|
|
|
||
Amortization |
|
|
|
( |
) |
|
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
||
8
Costs to fulfill contracts: |
|
|
|
|
|
|
|
|
||
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|||||||
In millions |
|
2024 |
|
|
2023 |
|
||||
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
||
Capitalization of costs |
|
|
|
|
|
|
|
|
||
Amortization |
|
|
|
( |
) |
|
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
||
Note C: Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|
August 31, |
|
||||
In millions, except per share amounts |
|
2024 |
|
|
2023 |
|
||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
|
$ |
|
|
||
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
|
|
|
$ |
|
|
||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
|
$ |
|
|
||
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
||
Dilutive effect of common share equivalents |
|
|
|
|
|
|
|
|
||
Weighted-average common shares outstanding, assuming dilution |
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
|
|
|
$ |
|
|
||
Weighted-average anti-dilutive common share equivalents |
|
|
|
|
|
|
|
|
||
Weighted-average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.
9
Note D: Business Combinations
Effective July 31, 2023, substantially all of the net assets of Alterna Capital Solutions LLC (“Alterna”), were acquired by a wholly owned subsidiary of the Company. Alterna purchases outstanding accounts receivable of their customers under non-recourse arrangements. This acquisition allows the Company to increase and diversify its portfolio of solutions and support serving small- to medium-sized businesses. The acquisition consideration was comprised of a base purchase price of $
Note E: Other Income, Net
Other income, net, consisted of the following items:
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|
August 31, |
|
||||
In millions |
|
2024 |
|
|
2023 |
|
||||
Interest income on corporate investments |
|
$ |
|
|
|
$ |
|
|
||
Interest expense |
|
|
|
( |
) |
|
|
|
( |
) |
Other |
|
|
|
|
|
|
|
|
||
Other income, net |
|
$ |
|
|
|
$ |
|
|
||
Note F: Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments were as follows:
|
|
August 31, 2024 |
|
|||||||||||||||||
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||||||
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
||||||||
In millions |
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
||||||||
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Funds held for clients' money market securities and other |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
|
||
AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
U.S. government agency and treasury securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total AFS securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total funds held for clients and corporate investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
10
|
|
May 31, 2024 |
|
|||||||||||||||||
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||||||
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
||||||||
In millions |
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
||||||||
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Funds held for clients' money market securities and other |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
|
||
AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
U.S. government agency and treasury securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total AFS securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total funds held for clients and corporate investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
Included in funds held for clients' money market securities and other restricted cash equivalents as of August 31, 2024 were bank demand deposit accounts, money market funds and U.S. government agency and treasury securities with original maturities of 90 days or less at acquisition.
Included in asset-backed securities as of August 31, 2024 were investment-grade securities primarily collateralized by fixed-rate auto loans and credit card receivables and all have credit ratings of AAA. The primary risk associated with these securities is the collection of the underlying receivables. Collateral on these asset-backed securities has performed as expected through August 31, 2024.
Included in corporate bonds as of August 31, 2024 were investment-grade securities covering a wide range of issuers, industries, and sectors primarily carrying credit ratings of A or better and having maturities ranging from
Included in municipal bonds as of August 31, 2024 were general obligation bonds and revenue bonds primarily carrying credit ratings of AA or better and have maturities ranging from
A substantial portion of the Company's portfolios are invested in high credit quality securities with ratings of AA or higher, and A-1/P-1 ratings on short-term securities.
The classification of funds held for clients and corporate investments on the Consolidated Balance Sheets was as follows:
|
|
August 31, |
|
|
May 31, |
|
||||
In millions |
|
2024 |
|
|
2024 |
|
||||
Funds held for clients |
|
$ |
|
|
|
$ |
|
|
||
Corporate investments |
|
|
|
|
|
|
|
|
||
Long-term corporate investments |
|
|
|
— |
|
|
|
|
|
|
Total funds held for clients and corporate investments |
|
$ |
|
|
|
$ |
|
|
||
Funds held for clients’ money market securities and other restricted cash equivalents is collected from clients before due dates for payroll tax administration services and employee payment services and is invested until remitted to the applicable tax or regulatory agencies or client employees. Based upon the Company’s intent and its contractual obligation to clients, these funds are considered restricted until they are remitted to fund these client obligations.
The Company’s AFS securities reflected net unrealized losses of $
11
AFS securities in an unrealized loss position for which a credit loss has not been recognized were as follows:
|
|
August 31, 2024 |
|
|||||||||||||||||||||||||||
|
|
Securities in an unrealized |
|
|
Securities in an unrealized |
|
|
Total |
|
|||||||||||||||||||||
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|||||||||
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
||||||||||||
In millions |
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
||||||||||||
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asset-backed securities |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
Corporate bonds |
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Municipal bonds |
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
U.S. government agency and treasury securities |
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total |
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
|
|
May 31, 2024 |
|
|||||||||||||||||||||||||||
|
|
Securities in an unrealized |
|
|
Securities in an unrealized |
|
|
Total |
|
|||||||||||||||||||||
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|||||||||
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
||||||||||||
In millions |
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
||||||||||||
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asset-backed securities |
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
Corporate bonds |
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Municipal bonds |
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
U.S. government agency and treasury securities |
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total |
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
The Company regularly reviews its investment portfolios to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. The Company believes the investments held as of August 31, 2024 that had gross unrealized losses of $
Realized gains and losses on the sale of AFS securities are determined by specific identification of the cost basis of each security. On the Consolidated Statements of Income and Comprehensive Income, realized gains and losses from the funds held for clients portfolio and corporate investments portfolio are included in interest on funds held for clients and other income, net, respectively.
12
Realized gains and losses from the sale of AFS securities were as follows:
|
|
For the three months ended |
|
|||||||
|
|
August 31, |
|
|
August 31, |
|
||||
In millions |
|
2024 |
|
|
2023 |
|
||||
Gross realized gains |
|
$ |
|
|
|
$ |
|
|
||
Gross realized losses |
|
|
|
( |
) |
|
|
|
( |
) |
Net realized gains/(losses) |
|
$ |
|
|
|
$ |
|
( |
) |
|
The amortized cost and fair value of AFS securities that had stated maturities as of August 31, 2024 are shown below by expected maturity.
|
|
August 31, 2024 |
|
|||||||
|
|
Amortized |
|
|
Fair |
|
||||
In millions |
|
cost |
|
|
value |
|
||||
Maturity date: |
|
|
|
|
|
|
|
|
||
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
||
Due after one year through three years |
|
|
|
|
|
|
|
|
||
Due after three years through five years |
|
|
|
|
|
|
|
|
||
Due after five years |
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
$ |
|
|
||
Variable rate demand notes (“VRDNs”), when held by the Company, are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically
Note G: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:
The carrying values of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, net of allowance for credit losses, PEO unbilled receivables, net of advance collections, accounts payable and short-term borrowings, when used by the Company, approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as AFS and are recorded at fair value on a recurring basis.
13
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
August 31, 2024 |
|
|||||||||||||||||
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
||||||
|
|
|
|
|
|
prices in |
|
|
other |
|
|
Significant |
|
|||||||
|
|
Carrying |
|
|
active |
|
|
observable |
|
|
unobservable |
|
||||||||
|
|
value |
|
|
markets |
|
|
inputs |
|
|
inputs |
|
||||||||
In millions |
|
(Fair value) |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restricted and unrestricted cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
||
U.S. government agency and treasury securities |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Total restricted and unrestricted cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|||
AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
||
Corporate bonds |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Municipal bonds |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
U.S. government agency and treasury securities |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Total AFS securities |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
||
Other |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other long-term liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
||
|
|
May 31, 2024 |
|
|||||||||||||||||
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
||||||
|
|
|
|
|
|
prices in |
|
|
other |
|
|
Significant |
|
|||||||
|
|
Carrying |
|
|
active |
|
|
observable |
|
|
unobservable |
|
||||||||
|
|
value |
|
|
markets |
|
|
inputs |
|
|
inputs |
|
||||||||
In millions |
|
(Fair value) |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restricted and unrestricted cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government agency securities |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
||
Money market securities |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
||
Total restricted and unrestricted cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|||
AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
||
Corporate bonds |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Municipal bonds |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
U.S. government agency and treasury securities |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Total AFS securities |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
||
Other |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other long-term liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
— |
|
||
In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. Money market securities, which are cash equivalents, are considered Level 1 investments as they are valued based on quoted market prices in active markets. Cash equivalents also include U.S. government agency and treasury securities with original maturities of 90 days or less which are considered Level 2 investments as they are valued based on similar, but not identical, instruments in active markets. AFS securities, including asset-backed securities, corporate bonds, municipal bonds, U.S. government agency securities, and VRDNs, when held by the Company, are included in Level 2 and are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company’s Level 2 AFS securities, the independent pricing service uses a variety of inputs, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company has not adjusted the prices obtained from the independent pricing service because it believes that they are appropriately valued.
Assets included as other are mutual fund investments, consisting of participants’ eligible deferral contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term
14
liabilities. The mutual funds are considered Level 1 investments as they are valued based on quoted market prices in active markets.
The Company’s long-term borrowings are accounted for on a historical cost basis. As of August 31, 2024 and May 31, 2024, the fair value of long-term borrowings, net of debt issuance costs was $
The Company’s long-term borrowings are not traded in active markets, and as a result, its fair values were estimated using a market approach employing Level 2 valuation inputs, including borrowing rates the Company believes are currently available based on loans with similar terms and maturities.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Note H: Supplemental Information
Property and equipment, net of accumulated depreciation: Depreciation expense was $
Goodwill and intangible assets, net of accumulated amortization: Amortization expense relating to intangible assets was $
Short-term financing: Outstanding borrowings on the Company’s credit facilities had a weighted-average interest rate of
The credit facilities contain various financial and operational covenants that are usual and customary for such arrangements. The Company was in compliance with all of these covenants as of August 31, 2024.
Letters of credit: The Company had irrevocable standby letters of credit available totaling $
Long-term debt: There have been no material changes to the Company's long-term debt agreement or balances subsequent to May 31, 2024. The Company’s long-term debt agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants that are usual and customary for such arrangements. The Company was in compliance with all of these covenants as of August 31, 2024.
Note I: Commitments and Contingencies
Other commitments: The Company had outstanding commitments under existing workers’ compensation insurance agreements and other legally binding contractual arrangements. The Company also enters into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase capital assets of approximately $
In the normal course of business, the Company makes representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees. The Company has also entered into indemnification agreements with its officers, directors, and fiduciaries of certain of our retirement plans,
15
which require the Company to defend and, if necessary, indemnify these individuals for certain pending or future claims as they relate to their services provided to the Company.
The Company currently self-insures the deductible portion of various insured exposures under certain corporate employee and PEO employee health and medical benefit plans. The Company’s estimated loss exposure under these insurance arrangements is recorded in other current liabilities on the Consolidated Balance Sheets. Historically, the amounts accrued have not been material and were not material as of August 31, 2024. The Company also maintains insurance, in addition to its purchased primary insurance policies, for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism, as well as capacity for deductibles and self-insured retentions through its captive insurance company.
Contingencies: The Company is subject to various claims and legal matters that arise in the normal course of its business. These include disputes or potential disputes related to breach of contract, tort, employment-related claims, tax claims, statutory, and other matters.
The Company’s management currently believes that resolution of any outstanding legal matters will not have a material adverse effect on the Company’s financial position or results of operations. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse impact on the Company’s financial position and results of operations in the period in which any such effects are recorded.
Note J: Income Taxes
The Company’s effective income tax rate was
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc. and its wholly owned subsidiaries (“Paychex,” the “Company,” “we,” “our,” or “us”) for the three months ended August 31, 2024 (the “first quarter”), the prior year period ended August 31, 2023 (the “prior year period”), and our financial condition as of August 31, 2024. The focus of this review is on the underlying business reasons for material changes and trends affecting our revenue, expenses, net income, and financial condition. This review should be read in conjunction with the August 31, 2024 consolidated financial statements and the related Notes to Consolidated Financial Statements (Unaudited) contained in this Quarterly Report on Form 10-Q (“Form 10-Q”). This review should also be read in conjunction with our Annual Report on Form 10-K (“Form 10-K”) for the year ended May 31, 2024 (“fiscal 2024”). Forward-looking statements in this Form 10-Q are qualified by the cautionary statement included under the next sub-heading, “Cautionary Note Regarding Forward-Looking Statements.”
Cautionary Note Regarding Forward-Looking Statements
Certain written statements made in this Form 10-Q may contain, and members of management may from time to time make or discuss statements which constitute, “forward-looking statements” within the meaning of the safe harbor provisions of the United States (“U.S.”) Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as “expect,” “estimate,” “intend,” “intent,” “outlook,” “will,” “would,” “projections,” “strategy,” “mission,” “anticipate,” “believe,” “could,” “may,” “target,” “potential,” “purpose,” “design,” “might,” and other similar words or phrases. Forward-looking statements include, without limitation, all matters that are not historical facts. Examples of forward-looking statements include, among others, statements we make regarding operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, and similar projections.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to known and unknown uncertainties, risks, changes in circumstances, and other factors that are difficult to predict, many of which are outside our control. Our actual performance and outcomes, including without limitation, our actual results and financial condition, may differ materially from those indicated in or suggested by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
17
Any of these factors, as well as other factors discussed in our Form 10-K for fiscal 2024 or in our other periodic filings with the Securities and Exchange Commission (“SEC”), could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-Q is based upon the facts and circumstances known as of the date of this report, and any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of filing this Form 10-Q with the SEC to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.
Our investor presentation regarding the financial results for the first quarter is available and accessible on our Paychex Investor Relations portal at https://investor.paychex.com. Information available on our website is not a part of, and is not incorporated into, this Form 10-Q. We intend to make future investor presentations available exclusively on our Paychex Investor Relations portal.
Overview
We are an industry-leading human capital management (“HCM”) company delivering a full suite of technology and advisory services in human resources (“HR”), employee benefit solutions, insurance and payroll processing for small- to medium-sized businesses and their employees across the U.S. and parts of Europe.
We offer a full range of integrated HCM solutions from hire to retire for businesses and their employees. Clients may choose from a breadth of solutions that cover the spectrum of the employee life cycle, but we also allow integrations with popular HR, accounting, point-of-sale, and productivity applications available on the market today.
We support our small-business clients by utilizing our proprietary, robust, software as a service (“SaaS”) Paychex Flex® platform and the Company’s SurePayroll® SaaS-based solutions. Our medium-sized clients generally have more complex payroll and employee benefit needs, though with the environment of increasing regulations, we believe the need for HR outsourcing services has been moving down-market. Any of our clients on Paychex Flex can opt for the integrated suite of HCM solutions, which allows clients to choose the service and software solutions that will meet the needs of their businesses.
Our portfolio of technology, HR advisory, and employee benefits-related solutions is disaggregated into two categories, (1) Management Solutions and (2) PEO and Insurance Solutions, as discussed under the heading “Description of Solutions” in Part I, Item 1 of our Form 10-K for fiscal 2024.
Our mission is to be the leading provider of HR, employee benefits, insurance, and payroll solutions by being an essential partner to small- and medium-sized businesses across the U.S. and parts of Europe. Our strategy focuses on providing industry-leading, integrated technology; delivering superior customer experiences; expanding our leadership in HR; growing our client bases; and engaging in strategic acquisitions. We believe that successfully executing this strategy will lead to strong, long-term financial performance.
We maintain industry-leading margins by managing our personnel costs and expenses while continuing to invest in our business, particularly in sales and marketing and leading-edge technology. We believe these investments are critical to our success. Looking to the future, we believe that investing in our solutions, people, and digital capabilities will position us to capitalize on opportunities for long-term growth.
We closely monitor the evolving challenges and needs of small- and mid-sized businesses, and proactively aid our clients in navigating macroeconomic challenges, legislative changes, and other complexities they may face. Through our unique blend of innovative technology solutions, backed by our extensive compliance and HR expertise, we help clients more effectively hire, develop, and retain top talent in this challenging workforce environment. Our ongoing investments in our platforms have prepared us well for the demands of the current business and regulatory environments, allowing us to adapt while maintaining strong solutions and support delivery, resulting in high levels of client satisfaction and retention.
18
First Quarter Business Highlights
Highlights compared to the prior year period are as follows:
|
|
For the three months ended |
|
|
|
|
|||||||||||
|
|
August 31, |
|
August 31, |
|
|
|
|
|||||||||
In millions, except per share amounts |
|
2024 |
|
2023 |
|
Change(2) |
|||||||||||
Total service revenue |
|
$ |
|
1,281.0 |
|
|
|
$ |
|
1,253.3 |
|
|
|
|
2 |
|
% |
Total revenue |
|
$ |
|
1,318.5 |
|
|
|
$ |
|
1,286.0 |
|
|
|
|
3 |
|
% |
Operating income |
|
$ |
|
546.7 |
|
|
|
$ |
|
536.3 |
|
|
|
|
2 |
|
% |
Net income |
|
$ |
|
427.4 |
|
|
|
$ |
|
419.2 |
|
|
|
|
2 |
|
% |
Adjusted net income(1) |
|
$ |
|
421.2 |
|
|
|
$ |
|
415.1 |
|
|
|
|
1 |
|
% |
Diluted earnings per share |
|
$ |
|
1.18 |
|
|
|
$ |
|
1.16 |
|
|
|
|
2 |
|
% |
Adjusted diluted earnings per share(1) |
|
$ |
|
1.16 |
|
|
|
$ |
|
1.14 |
|
|
|
|
2 |
|
% |
Dividends paid to stockholders |
|
$ |
|
353.4 |
|
|
|
$ |
|
321.9 |
|
|
|
|
10 |
|
% |
For further analysis of our results of operations for the first quarter and prior year period, and our financial position as of August 31, 2024, refer to the tables and analysis in the “Results of Operations” and “Liquidity and Capital Resources” sections of this Item 2.
RESULTS OF OPERATIONS
Summary of Results of Operations:
|
|
For the three months ended |
|
|
|
|
|||||||||||
|
|
August 31, |
|
August 31, |
|
|
|
|
|||||||||
In millions, except per share amounts |
|
2024 |
|
2023 |
|
Change(1) |
|||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Management Solutions |
|
$ |
|
961.7 |
|
|
|
$ |
|
955.5 |
|
|
|
|
1 |
|
% |
PEO and Insurance Solutions |
|
|
|
319.3 |
|
|
|
|
|
297.8 |
|
|
|
|
7 |
|
% |
Total service revenue |
|
|
|
1,281.0 |
|
|
|
|
|
1,253.3 |
|
|
|
|
2 |
|
% |
Interest on funds held for clients |
|
|
|
37.5 |
|
|
|
|
|
32.7 |
|
|
|
|
15 |
|
% |
Total revenue |
|
|
|
1,318.5 |
|
|
|
|
|
1,286.0 |
|
|
|
|
3 |
|
% |
Total expenses |
|
|
|
771.8 |
|
|
|
|
|
749.7 |
|
|
|
|
3 |
|
% |
Operating income |
|
|
|
546.7 |
|
|
|
|
|
536.3 |
|
|
|
|
2 |
|
% |
Other income, net |
|
|
|
10.4 |
|
|
|
|
|
12.8 |
|
|
|
|
(19 |
) |
% |
Income before income taxes |
|
|
|
557.1 |
|
|
|
|
|
549.1 |
|
|
|
|
1 |
|
% |
Income taxes |
|
|
|
129.7 |
|
|
|
|
|
129.9 |
|
|
|
|
— |
|
% |
Effective income tax rate |
|
|
|
23.3 |
|
% |
|
|
|
23.7 |
|
% |
|
|
|
|
|
Net income |
|
$ |
|
427.4 |
|
|
|
$ |
|
419.2 |
|
|
|
|
2 |
|
% |
Diluted earnings per share |
|
$ |
|
1.18 |
|
|
|
$ |
|
1.16 |
|
|
|
|
2 |
|
% |
(1) Percentage changes are calculated based on unrounded numbers.
Total revenue increased to $1.3 billion for the first quarter, reflecting an increase of 3% compared to the prior year period. Excluding the impact of the expiration of the Employee Retention Tax Credit ("ERTC") program and one less payroll processing day as compared with the prior year quarter, revenue growth was 7%. The changes in revenue as compared to the prior year period were primarily driven by the following factors:
19
We invest in highly liquid, investment-grade fixed income securities and do not utilize derivative instruments to manage interest rate risk.
Details regarding our combined funds held for clients and corporate cash equivalents and investment portfolios were as follows:
|
|
For the three months ended |
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
August 31, |
|
August 31, |
|
|
|
|
|||||||||
$ in millions |
|
2024 |
|
2023 |
|
Change(1) |
|||||||||||
Average investment balances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Funds held for clients |
|
$ |
|
4,286.1 |
|
|
|
$ |
|
4,156.9 |
|
|
|
|
3 |
|
% |
Corporate cash equivalents and investments |
|
|
|
1,619.9 |
|
|
|
|
|
1,706.9 |
|
|
|
|
(5 |
) |
% |
Total |
|
$ |
|
5,906.0 |
|
|
|
$ |
|
5,863.8 |
|
|
|
|
1 |
|
% |
Average interest rates earned (exclusive of net realized gains): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Funds held for clients |
|
|
|
3.5 |
|
% |
|
|
|
3.2 |
|
% |
|
|
|
|
|
Corporate cash equivalents and investments |
|
|
|
4.9 |
|
% |
|
|
|
5.0 |
|
% |
|
|
|
|
|
Combined funds held for clients and corporate cash equivalents and investments |
|
|
|
3.9 |
|
% |
|
|
|
3.7 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total net realized gains/(losses) |
|
$ |
|
0.0 |
|
|
|
$ |
|
(0.0 |
) |
|
|
|
|
|
|
(1) Percentage changes are calculated based on unrounded numbers.
|
|
August 31, |
|
May 31, |
||||||||
$ in millions |
|
2024 |
|
2024 |
||||||||
Net unrealized losses on available for sale (“AFS”) securities (1) |
|
$ |
|
(80.4 |
) |
|
|
$ |
|
(162.5 |
) |
|
Federal Funds rate (2) |
|
|
|
5.50 |
|
% |
|
|
|
5.50 |
|
% |
Total fair value of AFS securities |
|
$ |
|
3,431.3 |
|
|
|
$ |
|
3,329.6 |
|
|
Weighted-average duration of AFS securities in years (3) |
|
|
|
2.6 |
|
|
|
|
|
2.7 |
|
|
Weighted-average yield-to-maturity of AFS securities (3) |
|
|
|
3.1 |
|
% |
|
|
|
3.0 |
|
% |
(1) The net unrealized loss on our investment portfolio was approximately $49.3 million as of September 27, 2024. Refer to Note F in the Notes to Consolidated Financial Statements and the "Market Risk Factors" caption contained in this Form 10-Q for more information regarding AFS securities held in an unrealized loss position.
(2) The Federal Funds rate was in the range of 5.25% to 5.50% as of August 31, 2024 and as of May 31, 2024. Effective September 19, 2024, the Federal Reserve decreased the Federal Funds rate to a range of 4.75% to 5.00%.
(3) These items exclude the impact of variable rate demand notes (“VRDNs”) as they are tied to short-term interest rates.
Total expenses: The following table summarizes the total combined cost of service revenue and selling, general and administrative expenses for the period below:
|
|
For the three months ended |
|
|
|
|
|
||||||||
|
|
August 31, |
|
|
August 31, |
|
|
|
|
|
|||||
In millions |
|
2024 |
|
|
2023 |
|
|
Change(1) |
|||||||
Compensation-related expenses |
|
$ |
|
451.3 |
|
|
$ |
|
455.3 |
|
|
|
(1 |
) |
% |
PEO direct insurance costs |
|
|
|
130.3 |
|
|
|
|
110.2 |
|
|
|
18 |
|
% |
Depreciation and amortization |
|
|
|
39.0 |
|
|
|
|
41.2 |
|
|
|
(5 |
) |
% |
Other expenses |
|
|
|
151.2 |
|
|
|
|
143.0 |
|
|
|
6 |
|
% |
Total expenses |
|
$ |
|
771.8 |
|
|
$ |
|
749.7 |
|
|
|
3 |
|
% |
(1) Percentage changes are calculated based on unrounded numbers.
20
Total expenses increased 3% to $771.8 million for the first quarter compared to the prior year period. Total expenses increased as a result of the following:
Operating income: Operating income increased 2% to $546.7 million for the first quarter. Operating income was impacted by the expiration of the ERTC program and one less payroll processing day as compared with the prior year quarter.
Operating margin (operating income as a percentage of total revenue) was as follows:
|
|
For the three months ended |
||||||||
|
|
August 31, |
|
August 31, |
||||||
|
|
2024 |
|
2023 |
||||||
Operating margin |
|
|
41.5 |
|
% |
|
|
41.7 |
|
% |
Other income, net: Other income, net decreased 19% to $10.4 million for the first quarter, primarily as a result of lower average investment balances on our corporate investments.
Income taxes: Our effective income tax rate was 23.3% for the first quarter, compared to 23.7%, for the prior year period. Both periods were impacted by the recognition of excess tax benefits related to employee stock-based compensation payments.
21
Non-GAAP Financial Measures: Adjusted net income, adjusted diluted earnings per share, and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) are summarized as follows:
|
|
For the three months ended |
|
|
|
|
|
||||||||
|
|
August 31, |
|
|
August 31, |
|
|
|
|
|
|||||
$ in millions |
|
2024 |
|
|
2023 |
|
|
Change |
|||||||
Net income |
|
$ |
|
427.4 |
|
|
$ |
|
419.2 |
|
|
|
2 |
|
% |
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Excess tax benefits related to employee stock-based compensation payments(1) |
|
|
|
(6.2 |
) |
|
|
|
(4.1 |
) |
|
|
|
|
|
Adjusted net income |
|
$ |
|
421.2 |
|
|
$ |
|
415.1 |
|
|
|
1 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Diluted earnings per share(2) |
|
$ |
|
1.18 |
|
|
$ |
|
1.16 |
|
|
|
2 |
|
% |
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Excess tax benefits related to employee stock-based compensation payments(1) |
|
|
|
(0.02 |
) |
|
|
|
(0.01 |
) |
|
|
|
|
|
Adjusted diluted earnings per share |
|
$ |
|
1.16 |
|
|
$ |
|
1.14 |
|
|
|
2 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net income |
|
$ |
|
427.4 |
|
|
$ |
|
419.2 |
|
|
|
2 |
|
% |
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest income, net |
|
|
|
(10.3 |
) |
|
|
|
(12.1 |
) |
|
|
|
|
|
Income taxes |
|
|
|
129.7 |
|
|
|
|
129.9 |
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
|
39.0 |
|
|
|
|
41.2 |
|
|
|
|
|
|
Total non-GAAP adjustments |
|
|
|
158.4 |
|
|
|
|
159.0 |
|
|
|
|
|
|
EBITDA |
|
$ |
|
585.8 |
|
|
$ |
|
578.2 |
|
|
|
1 |
|
% |
(1) Excess tax benefits related to employee stock-based compensation payments recognized in income taxes. This item is subject to volatility and will vary based on employee decisions on exercising employee stock options and fluctuations in our stock price, neither of which is within the control of management.
(2) The calculation of the impact of non-GAAP adjustments on diluted earnings per share is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.
In addition to reporting net income and diluted earnings per share, which are U.S. GAAP measures, we present adjusted net income, adjusted diluted earnings per share, and EBITDA, which are non-GAAP measures. We believe these additional measures are indicators of our core business operations’ performance period over period. Adjusted net income, adjusted diluted earnings per share, and EBITDA are not calculated through the application of U.S. GAAP and are not required forms of disclosure by the SEC. As such, they should not be considered a substitute for the U.S. GAAP measures of net income and diluted earnings per share, and, therefore, they should not be used in isolation, but in conjunction with the U.S. GAAP measures. The use of any non-GAAP measure may produce results that vary from the U.S. GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position as of August 31, 2024 remained strong with cash, restricted cash, and total corporate investments of $1.6 billion. Short-term borrowings of $18.9 million and long-term borrowings of $800.0 million were outstanding as of August 31, 2024. Our unused capacity under our unsecured credit facilities was approximately $2.0 billion as of August 31, 2024. Our primary source of cash is our ongoing operations, which was $546.1 million for the first quarter. Our positive cash flows have allowed us to support our business, and pay dividends. We currently anticipate that corporate cash, corporate restricted cash, and total corporate investments as of August 31, 2024, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, primarily investment in our technology solutions, share repurchases, dividend payments, and the servicing of long-term debt for the foreseeable future.
22
For client funds liquidity, we have the ability to borrow on our unsecured credit facilities or use corporate liquidity when necessary to meet short-term funding needs related to client fund obligations. Historically, we have borrowed, typically on an overnight basis, to settle short-term client fund obligations, rather than liquidate previously collected client funds invested in our long-term AFS portfolio. We believe that our investments in an unrealized loss position as of August 31, 2024 were not impaired due to increased credit risk or other valuation concerns, nor has any event occurred subsequent to that date to indicate any change in our assessment. We do not intend to sell these investments until recovery of their amortized cost basis or maturity and further believe that it is not more-than-likely that we would be required to sell these investments prior to that time.
Financing
Short-term financing: We maintain committed and unsecured credit facilities and irrevocable letters of credit as part of our normal and recurring business operations. The purpose of these credit facilities is to meet short-term funding requirements, finance working capital needs, and for general corporate purposes. We typically borrow on an overnight or short-term basis under our credit facilities. Refer to Note M of the Notes to Consolidated Financial Statements contained in Item 8 of our Form 10-K for fiscal 2024 for further discussion of our credit facilities.
Details of our credit facilities as of August 31, 2024 were as follows:
|
|
|
|
|
Maximum |
|
|
|
August 31, 2024 |
|
|||||||
|
|
|
|
|
Amount |
|
|
|
Outstanding |
|
|
|
Available |
|
|||
$ in millions |
|
Expiration Date |
|
|
Available |
|
|
|
Amount |
|
|
|
Amount |
|
|||
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
JP Morgan Chase Bank, N.A. (“JPM”) |
|
April 12, 2029 |
|
$ |
|
1,000.0 |
|
|
$ |
|
- |
|
|
$ |
|
1,000.0 |
|
JPM |
|
September 17, 2026 |
|
$ |
|
750.0 |
|
|
|
|
- |
|
|
|
|
750.0 |
|
PNC Bank, National Association (“PNC”) |
|
February 6, 2026 |
|
$ |
|
250.0 |
|
|
|
|
18.9 |
|
|
|
|
231.1 |
|
Total Lines of Credit Outstanding and Available |
|
|
|
|
|
|
|
$ |
|
18.9 |
|
|
$ |
|
1,981.1 |
|
|
Amounts outstanding under the PNC credit facility as of August 31, 2024 remain outstanding as of the date of this report.
Details of borrowings under each credit facility during the first quarter were as follows:
|
|
|
For the three months ended August 31, 2024 |
|
|
|||||||||||||
|
|
|
Credit Facility |
|
|
|||||||||||||
|
|
|
$1 Billion |
|
|
|
|
$750 Million |
|
|
|
|
$250 Million |
|
|
|||
$ in millions |
|
|
JPM |
|
|
|
|
JPM |
|
|
|
|
PNC |
|
|
|||
Number of days borrowed |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
92 |
|
|
Maximum amount borrowed |
|
$ |
|
— |
|
|
|
$ |
|
— |
|
|
|
$ |
|
19.0 |
|
|
Weighted-average amount borrowed |
|
$ |
|
— |
|
|
|
$ |
|
— |
|
|
|
$ |
|
18.6 |
|
|
Weighted-average interest rate |
|
|
|
— |
|
% |
|
|
|
— |
|
% |
|
|
|
6.07 |
|
% |
We primarily use short-term borrowings to settle client fund obligations, rather than liquidating previously collected client funds invested in our long-term AFS investment portfolio.
Subsequent to August 31, 2024, we borrowed twice, on an overnight basis, $333.5 million on a weighted-average basis under our PNC and JPM credit facilities.
We expect to have access to the amounts available under our current credit facilities to meet our ongoing financial needs. However, if we experience reductions in our operating cash flows due to any of the risk factors outlined in, but not limited to, Item 1A in our Form 10-K for fiscal 2024 and other SEC filings, we may need to adjust our capital, operating and other discretionary spending to realign our working capital requirements with the capital resources available to us. Furthermore, if we determine the need for additional short-term liquidity, there is no assurance that such financing, if pursued and obtained, would be adequate or on terms acceptable to us.
23
Letters of credit: As of August 31, 2024, we had irrevocable standby letters of credit available totaling $165.4 million, primarily to secure commitments for certain insurance policies. The letters of credit expire at various dates between October 02, 2024 and August 24, 2025. No amounts were outstanding on these letters of credit during the first quarter or as of August 31, 2024.
Long-term financing: We have borrowed $800.0 million through the issuance of long-term private placement debt. Refer to Note N of the Notes to Consolidated Financial Statements contained in Item 8 of our Form 10-K for fiscal 2024 for further discussion on our long-term financing.
Other commitments: We had outstanding commitments under existing workers’ compensation insurance agreements and legally binding contractual arrangements. We also entered into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase approximately $3.9 million of capital assets as of August 31, 2024. In addition, we are involved in three limited partnership agreements to contribute a maximum of $30.0 million to venture capital funds in the financial technology sector. As of August 31, 2024, we have contributed approximately $23.6 million of the total funding commitment.
In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees. We have also entered into indemnification agreements with our officers, directors, and fiduciaries of certain of our retirement plans, which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us.
We currently self-insure the deductible portion of various insured exposures under certain corporate and PEO employee health and medical benefit plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on our Consolidated Balance Sheets. Historically, the amounts accrued have not been material and were not material as of August 31, 2024. We also maintain corporate insurance coverage in addition to our purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and self-insured retention through our captive insurance company.
Operating, Investing, and Financing Cash Flow Activities
Primary sources of cash, restricted cash, and equivalents are through collections for services rendered to our customers and interest earned on funds held for clients and corporate investments. Primary uses of cash include employee compensation and contractual obligations related to business operations, cash dividends paid, share repurchases, purchases of property and equipment, and acquisitions.
Our investment portfolio incorporates both corporate cash and funds held for clients. Interest rates, market conditions, and our volatile cash flows are among several factors influencing our investment strategy directing the mix between long-term and VRDN AFS securities compared to short-term restricted cash and cash equivalents held in the portfolio. A portfolio strategy that favors larger balances held in restricted cash and cash equivalents will impact our investing activities due to the offsetting activity in the purchases and sales or maturities of AFS investments.
Our cash flows include certain activities that are short-term in nature and have an impact on short-term cash flows due to timing of collection and settlement of obligations as follows:
24
Summarized cash operating, investing, and financing cash flow information for the first quarter and the prior period:
|
|
For the three months ended |
|
|
|
|
|
||||||||
|
|
August 31, |
|
|
August 31, |
|
|
|
|
|
|||||
In millions |
|
2024 |
|
|
2023 (1) |
|
|
|
Change |
|
|||||
Net cash provided by operating activities |
|
$ |
|
546.1 |
|
|
$ |
|
693.0 |
|
|
$ |
|
(146.9 |
) |
Net cash used in investing activities |
|
|
|
(110.0 |
) |
|
|
|
(13.2 |
) |
|
|
|
(96.8 |
) |
Net cash (used in)/provided by financing activities |
|
|
|
(485.0 |
) |
|
|
|
1,069.4 |
|
|
|
|
(1,554.4 |
) |
Net change in cash, restricted cash, and equivalents |
|
$ |
|
(48.9 |
) |
|
$ |
|
1,749.2 |
|
|
$ |
|
(1,798.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash dividends per common share |
|
$ |
|
0.98 |
|
|
$ |
|
0.89 |
|
|
|
|
|
|
The changes in our cash flow for the first quarter compared to the prior year period were primarily the result of the following key drivers:
Operating Cash Flow Activities
Fiscal 2025
Fiscal 2024
Investing Cash Flow Activities
Fiscal 2025
Fiscal 2024
25
Financing Cash Flow Activities
Fiscal 2025
Fiscal 2024
MARKET RISK FACTORS
Changes in interest rates and interest rate risk: Funds held for clients are primarily comprised of short-term funds and AFS securities. Corporate investments are primarily comprised of AFS securities. As a result of our investing activities, we are exposed to changes in interest rates that may materially affect our results of operations and financial position. Changes in interest rates will impact the earnings potential of future investments and will cause fluctuations in the fair value of our long-term AFS securities. We follow an investment strategy of protecting principal and optimizing liquidity. A substantial portion of our portfolios is invested in high credit quality securities with ratings of AA or higher, and A-1/P-1 ratings on short-term securities. We invest predominantly in corporate bonds; municipal bonds; U.S. government agency securities; and VRDNs when available in the market. We limit the amounts that can be invested in any single issuer and invest primarily in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes. We manage the AFS securities to a benchmark duration of two and one-half to three and three-quarters years.
During the first quarter, our primary short-term investment vehicles were U.S. government agency discount notes and bank demand deposit accounts. We have no exposure to high-risk or non-liquid investments. We have insignificant exposure to European investments. We have not and do not utilize derivative financial instruments to manage our interest rate risk.
During the first quarter, the average interest rate earned on our combined funds held for clients and corporate cash equivalents and investment portfolios was 3.9% compared to 3.7% for the prior year period. When interest rates are falling, the full impact of lower interest rates will not immediately be reflected in net income due to the interaction of short- and long-term interest rate changes. During a falling interest rate environment, earnings will decrease from our short-term investments, and over time, decrease from our longer-term AFS securities. Earnings from AFS securities, which as of August 31, 2024 had an average duration of 2.6 years, would not reflect decreases in interest rates until the investments are sold or mature and the proceeds are reinvested at lower rates.
26
The amortized cost and fair value of AFS securities that had stated maturities as of August 31, 2024 are shown below by expected maturity.
|
|
August 31, 2024 |
|
|||||||
|
|
Amortized |
|
|
Fair |
|
||||
In millions |
|
cost |
|
|
value |
|
||||
Maturity date: |
|
|
|
|
|
|
|
|
||
Due in one year or less |
|
$ |
|
263.7 |
|
|
$ |
|
259.7 |
|
Due after one year through three years |
|
|
|
1,703.7 |
|
|
|
|
1,644.6 |
|
Due after three years through five years |
|
|
|
1,232.2 |
|
|
|
|
1,210.7 |
|
Due after five years |
|
|
|
312.1 |
|
|
|
|
316.3 |
|
Total |
|
$ |
|
3,511.7 |
|
|
$ |
|
3,431.3 |
|
VRDNs, when held by us, are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.
As of August 31, 2024, the Federal Funds rate was in the range of 5.25% to 5.50%. Effective September 19, 2024, the Federal Reserve decreased the Federal Funds rate to a range of 4.75% to 5.00%. There continues to be uncertainty in the changing market and economic conditions, including the possibility of additional measures that could be taken by the Federal Reserve and other government agencies related to the overall macroeconomic environment. We will continue to monitor the market and economic conditions.
Calculating the future effects of changing interest rates involves many factors. These factors include, but are not limited to:
Subject to these factors and under normal financial market conditions, a 25-basis-point change in taxable interest rates generally affects our tax-exempt interest rates by approximately 19 basis points. Under normal financial market conditions, the impact to earnings from a 25-basis-point change in short-term interest rates would be approximately $5.0 million to $5.5 million, after taxes, for a twelve-month period. Such a basis point change may or may not be tied to changes in the Federal Funds rate.
Our total investment portfolio (funds held for clients and corporate cash equivalents and investments) is expected to average approximately $6.2 billion for the year ending May 31, 2025. Our anticipated allocation is approximately 45% invested in short-term securities and VRDNs with an average duration of less than 30 days and 55% invested in AFS securities, with an average duration of two and one-half to three and three-quarters years.
The combined funds held for clients and corporate AFS securities reflected net unrealized losses of $80.4 million as of August 31, 2024 and $162.5 million as of May 31, 2024. During the first quarter, the net unrealized loss on our investment portfolios ranged from a loss of $162.5 million to a loss of $75.8 million. These fluctuations were driven by changes in market rates of interest. The net unrealized loss on our investment portfolio was approximately $49.3 million as of September 27, 2024.
As of August 31, 2024 and May 31, 2024, we had $3.4 billion and $3.3 billion, respectively, invested in AFS securities at fair value. The weighted-average yield-to-maturity was 3.1% as of August 31, 2024 and 3.0 % as of May 31, 2024. The weighted-average yield-to-maturity excludes AFS securities tied to short-term interest rates, such as VRDNs, when held. Assuming a hypothetical decrease in longer-term interest rates of 25 basis points, the resulting potential increase in fair value for our portfolio of AFS securities as of August 31, 2024, would be in a range of approximately $20.0 million to $25.0 million. Conversely, a corresponding increase in interest rates would result in a comparable decrease in fair value. This hypothetical decrease or increase in the fair value of the portfolio would be recorded as an adjustment to the portfolio’s recorded value, with an offsetting amount recorded in stockholders’ equity. These fluctuations in fair value would have no related or immediate impact on our results of operations unless any declines in fair value are due to credit related concerns and an impairment loss is recognized.
27
We are also exposed to interest rate risk through the use of our credit facilities as outlined in the Liquidity and Capital Resources section of this Form 10-Q. If interest rates were to increase, or we increase the frequency or amounts borrowed under these credit facilities, we could experience additional interest expense and a corresponding decrease in earnings.
Credit risk: We are exposed to credit risk in connection with our investments in AFS securities through the possible inability of the borrowers to meet the terms of their bonds. We regularly review our investment portfolios to determine if any investment is impaired due to increased credit risk or other valuation concerns and we believe that the investments we held as of August 31, 2024 were not impaired as a result of the previously discussed reasons. While $2.0 billion of our AFS securities had fair values that were below amortized cost, we believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the gross unrealized losses of $98.0 million were due to changes in interest rates and were not due to increased credit risk or other valuation concerns. A substantial portion of the AFS securities in an unrealized loss position as of August 31, 2024 and May 31, 2024 had an AA rating or better. We do not intend to sell these investments until the recovery of their amortized cost basis or maturity, and further believe that it is not more-likely-than-not that we will be required to sell these investments prior to that time. Our assessment that an investment is not impaired due to increased credit risk or other valuation concerns could change in the future due to new developments, including changes in our strategies or assumptions related to any particular investment.
We have some credit risk exposure relating to our purchase of client accounts receivable under non-recourse arrangements. There is also credit risk exposure relating to our trade accounts receivable. This credit risk exposure is diversified amongst multiple client arrangements and all such arrangements are regularly reviewed for potential write-off. No single client was material in respect to total accounts receivable, service revenue, or results of operations as of August 31, 2024.
Market risk: We have an ongoing monitoring system for financial institutions we conduct business with and maintain cash balances at large well-capitalized (as defined by their regulators) financial institutions. We closely monitor market conditions and take appropriate measures, when necessary, to minimize potential risk exposure to our client’s and our cash and investment balances.
CRITICAL ACCOUNTING ESTIMATES
Our critical accounting policies are described in Item 7 of our Form 10-K for fiscal 2024, filed with the SEC on July 11, 2024. On an ongoing basis, we evaluate the critical accounting policies and estimates used to prepare our consolidated financial statements, including, but not limited to, those related to:
There have been no material changes in these aforementioned critical accounting policies and estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q for a discussion of recently adopted accounting pronouncements.
Recently issued accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q for a discussion of recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Market Risk Factors” under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
28
Item 4. Controls and Procedures
Disclosure Controls and Procedures: Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures: As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that as of August 31, 2024, the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting: The Company also carried out an evaluation of the internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended August 31, 2024. Based on such evaluation, there have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter ended August 31, 2024, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
29
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company maintains a program to repurchase up to $400.0 million of the Company’s common stock with authorization that expires on May 31, 2027. The purpose of this program is to manage common stock dilution. Shares repurchased under this program during the first quarter were as follows:
In millions, except per share amounts |
|
Total |
|
|
Average |
|
|
Total dollars |
|
|
Approximate dollar value |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
June 1, 2024 - June 30, 2024 |
|
|
|
— |
|
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
400.0 |
|
July 1, 2024 - July 31, 2024 |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
$ |
|
400.0 |
|
August 1, 2024 - August 31, 2024 |
|
|
|
0.8 |
|
|
|
|
125.50 |
|
|
|
|
104.0 |
|
|
$ |
|
296.0 |
|
Total for the period |
|
|
|
0.8 |
|
|
$ |
|
125.50 |
|
|
$ |
|
104.0 |
|
|
$ |
|
296.0 |
|
Item 5. Other Information
During the three months ended August 31, 2024, none of our directors or officers (as defined by Rule 16a-1 under the Exchange Act),
Item 6. Exhibits
INDEX TO EXHIBITS
|
Exhibit number |
Description |
* # |
10.1 |
|
* |
31.1 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
* |
31.2 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
* |
32.1 |
|
* |
32.2 |
|
* |
101.INS |
Inline XBRL Instance Document– the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
* |
101.SCH |
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
* |
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Exhibit filed or furnished with this report
# Management contract or compensatory plan
30
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.
PAYCHEX, INC.
Date: |
October 01, 2024 |
/s/ John B. Gibson |
|
|
|
John B. Gibson |
|
|
|
President, Chief Executive Officer and Director |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: |
October 01, 2024 |
/s/ Robert L. Schrader |
|
|
|
Robert L. Schrader |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
Date: |
October 01, 2024 |
/s/ Christopher Simmons Christopher Simmons Vice President, Controller and Treasurer (Principal Accounting Officer) |
|
31