Paychex(PAYX) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements For the three months ended August 31, 2023, Paychex reported total revenue of $1.286 billion, an increase of 7% year-over-year, and net income of $419.2 million, an 11% increase Consolidated Statements of Income and Comprehensive Income Total revenue grew 7% year-over-year to $1.286 billion, driven by a 5.5% increase in total service revenue and an 82.7% surge in interest on funds held for clients Revenue and Income Performance | Metric | Q1 2024 (ended Aug 31, 2023) | Q1 2023 (ended Aug 31, 2022) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,286.0 M | $1,206.2 M | +6.6% | | Management Solutions | $955.5 M | $905.5 M | +5.5% | | PEO and Insurance Solutions | $297.8 M | $282.8 M | +5.3% | | Interest on funds held for clients | $32.7 M | $17.9 M | +82.7% | | Operating Income | $536.3 M | $495.6 M | +8.2% | | Net Income | $419.2 M | $379.2 M | +10.5% | | Diluted EPS | $1.16 | $1.05 | +10.5% | Consolidated Balance Sheets As of August 31, 2023, total assets were $12.2 billion, up from $10.5 billion at May 31, 2023, primarily due to a significant rise in funds held for clients Balance Sheet Summary | Balance Sheet Item | Aug 31, 2023 (in millions) | May 31, 2023 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $12,200.0 | $10,546.4 | +$1,653.6 | | Cash and cash equivalents | $1,645.9 | $1,222.0 | +$423.9 | | Funds held for clients | $5,470.7 | $4,118.8 | +$1,351.9 | | Goodwill | $1,881.4 | $1,834.0 | +$47.4 | | Total Liabilities | $8,612.2 | $7,053.2 | +$1,559.0 | | Client fund obligations | $5,677.5 | $4,294.0 | +$1,383.5 | | Total Stockholders' Equity | $3,587.8 | $3,493.2 | +$94.6 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $655.8 million for the three months ended August 31, 2023, a significant increase from the prior year, while investing activities decreased sharply due to a business acquisition Cash Flow Summary | Cash Flow Activity (in millions) | Three months ended Aug 31, 2023 | Three months ended Aug 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $655.8 | $364.3 | | Net cash provided by investing activities | $24.0 | $1,223.1 | | Net cash provided by/(used in) financing activities | $1,069.4 | $(809.7) | | Net change in cash, restricted cash, and equivalents | $1,749.2 | $777.7 | - The company completed an acquisition of businesses for $208.0 million, net of cash acquired, during the quarter[16] Notes to Consolidated Financial Statements The notes detail accounting policies, disaggregate service revenue, provide acquisition specifics, and analyze the investment portfolio, including $3.3 billion in AFS securities with $206.9 million in net unrealized losses - Paychex is a leading provider of integrated human capital management (HCM) solutions for small- to medium-sized businesses in the U.S. and parts of Europe[18] - Effective July 31, 2023, the company acquired substantially all net assets of Alterna Capital Solutions LLC for approximately $223.7 million, including a base purchase price of $94.8 million and settlement of debt totaling $128.9 million, resulting in $46.5 million in tax-deductible goodwill[48] - As of August 31, 2023, the company's Available-for-Sale (AFS) securities portfolio had a fair value of $3.3 billion and carried net unrealized losses of $206.9 million, attributed to changes in interest rates rather than credit risk, with no intent to sell until cost recovery or maturity[55][56] - The effective income tax rate for the quarter was 23.7%, compared to 22.9% for the same period last year, with both periods impacted by excess tax benefits from employee stock-based compensation[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported strong Q1 results with total revenue up 7% year-over-year, driven by client growth, higher revenue per client, and an 83% increase in interest on funds held for clients, leading to an 8% rise in operating income Results of Operations Total revenue increased 7% to $1.286 billion, with Management Solutions growing 6% and PEO and Insurance Solutions rising 5%, while interest on funds held for clients surged 83% due to higher rates Revenue Performance (Q1 2024 vs Q1 2023) | Revenue Stream | Q1 2024 (in millions) | Q1 2023 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Management Solutions | $955.5 | $905.5 | +6% | | PEO and Insurance Solutions | $297.8 | $282.8 | +5% | | Total service revenue | $1,253.3 | $1,188.3 | +5% | | Interest on funds held for clients | $32.7 | $17.9 | +83% | | Total revenue | $1,286.0 | $1,206.2 | +7% | - Growth in Management Solutions was driven by an increase in the number of clients and client employees, higher revenue per client from price realization, and strong demand for HR Solutions, retirement, and time and attendance solutions[94] Expense Breakdown (Q1 2024 vs Q1 2023) | Expense Category | Q1 2024 (in millions) | Q1 2023 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Compensation-related expenses | $455.3 | $426.6 | +7% | | PEO direct insurance costs | $110.2 | $104.5 | +5% | | Depreciation and amortization | $41.2 | $44.0 | -6% | | Other expenses | $143.0 | $135.5 | +6% | | Total expenses | $749.7 | $710.6 | +5% | - Operating margin improved to 41.7% in Q1 2024 from 41.1% in Q1 2023, as revenue growth outpaced the increase in expenses[100] Liquidity and Capital Resources The company maintains a strong financial position with $1.7 billion in cash and corporate investments, robust operating cash flow of $655.8 million, and access to $2.0 billion in credit facilities - As of August 31, 2023, the company had cash, restricted cash, and total corporate investments of $1.7 billion[107] - The company maintains committed and unsecured credit facilities totaling $2.0 billion, with $1.986 billion available as of August 31, 2023[109][110] - Dividends paid increased 13% year-over-year to $321.9 million, reflecting a dividend increase from $0.79 to $0.89 per share[93][124] Market Risk Factors The company is primarily exposed to interest rate risk, which impacts earnings from its $5.5 billion portfolio of funds held for clients and corporate investments, with rising rates generally benefiting earnings - The average interest rate earned on the combined investment portfolio was 3.7% for the quarter, up from 1.7% in the prior year period[127] - A 25-basis-point change in short-term interest rates is estimated to impact after-tax earnings by approximately $4.0 million to $4.5 million over a twelve-month period[132] - A hypothetical 25-basis-point increase in longer-term interest rates would decrease the fair value of the AFS securities portfolio by approximately $25.0 million, which would be recorded in stockholders' equity[135] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the market risk disclosures detailed in the 'Market Risk Factors' section within Item 2 - The report refers to the 'Market Risk Factors' section in the MD&A for disclosures about market risk[142] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of August 31, 2023, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that as of August 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[144] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[145] PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the first quarter, with $327.1 million remaining available under the current share repurchase program expiring January 31, 2024 - No shares were repurchased during the three months ended August 31, 2023[146] - $327.1 million remains available for share repurchases under the existing program, which expires January 31, 2024[146] Item 5. Other Information During the quarter ended August 31, 2023, no directors or officers adopted or terminated any Rule 10b5-1 trading plans or other non-Rule 10b5-1 trading arrangements for company securities - No directors or officers adopted or terminated a Rule 10b5-1 trading plan or other non-Rule 10b5-1 trading arrangement during the quarter[147] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL data files - Lists various exhibits filed with the report, including management compensation plans and officer certifications[148]