Paychex(PAYX) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section provides the unaudited consolidated financial statements for the three and six months ended November 30, 2021 Consolidated Statements of Income and Comprehensive Income The company reported significant revenue and net income growth for the three and six-month periods ended November 30, 2021 Financial Performance Summary (in millions, except per share amounts) | Metric | Q2 2021 | Q2 2020 | YoY Change | H1 2021 | H1 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,108.5 | $983.7 | 12.7% | $2,191.4 | $1,915.9 | 14.4% | | Operating Income | $440.3 | $354.3 | 24.3% | $883.2 | $638.3 | 38.4% | | Net Income | $332.1 | $272.4 | 21.9% | $665.7 | $484.0 | 37.5% | | Diluted EPS | $0.91 | $0.75 | 21.3% | $1.83 | $1.34 | 36.6% | Revenue by Segment (in millions) | Segment | Q2 2021 | Q2 2020 | YoY Change | H1 2021 | H1 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Management Solutions | $832.0 | $732.8 | 13.5% | $1,637.5 | $1,420.2 | 15.3% | | PEO and Insurance Solutions | $262.4 | $236.1 | 11.1% | $525.3 | $466.0 | 12.7% | Consolidated Balance Sheets The balance sheet as of November 30, 2021, reflects growth in total assets, liabilities, and stockholders' equity Key Balance Sheet Items (in millions) | Account | Nov 30, 2021 | May 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $6,632.4 | $6,169.5 | | Total Assets | $9,688.1 | $9,227.2 | | Total Current Liabilities | $5,221.9 | $4,938.2 | | Total Liabilities | $6,568.3 | $6,279.2 | | Total Stockholders' Equity | $3,119.8 | $2,948.0 | Consolidated Statements of Stockholders' Equity Stockholders' equity increased for the six months ended November 30, 2021, primarily from net income, partially offset by dividends - Cash dividends of $1.32 per share, totaling $476.4 million, were declared during the six months ended November 30, 2021[13] - The company maintains two share repurchase programs, each authorizing up to $400.0 million, with expiration dates in 2022 and 2024[14][18] Consolidated Statements of Cash Flows Net cash provided by operating activities increased for the six months ended November 30, 2021, while investing and financing activities used cash Cash Flow Summary (in millions) | Activity | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $555.4 | $430.7 | | Net Cash used in Investing Activities | $(451.4) | $(490.4) | | Net Cash used in Financing Activities | $(302.9) | $(462.4) | | Net Change in Cash | $(198.9) | $(522.1) | Notes to Consolidated Financial Statements The notes provide detailed information on the company's accounting policies, business segments, investments, and income tax rates - Paychex is a leading human resource (HR) software and services company offering integrated human capital management (HCM) solutions for small- to medium-sized businesses in the U.S. and parts of Europe[23] Funds Held for Clients and Corporate Investments (in millions) | Category | Nov 30, 2021 (Fair Value) | May 31, 2021 (Fair Value) | | :--- | :--- | :--- | | Funds held for clients | $3,874.6 | $3,750.0 | | Corporate investments | $376.0 | $36.7 | | Long-term corporate investments | $7.0 | $7.1 | | Total | $4,257.6 | $3,793.8 | - The effective income tax rate for the six months ended November 30, 2021, was 24.5%, up from 22.7% in the prior year period, partly due to lower tax benefits from stock-based compensation and an increase in state taxes[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, segment results, and strategic initiatives for the first half of fiscal 2022 Overview Paychex provides integrated HCM solutions, focusing on digital technology, client satisfaction, strategic acquisitions, and client support - The company's strategy focuses on providing integrated digital technology solutions, increasing client satisfaction, expanding HR leadership, growing the client base, and strategic acquisitions[99] - Paychex has assisted businesses in securing $6.0 billion in ERTC and paid leave credits related to the COVID-19 pandemic[106] - In October 2021, the company completed an acquisition of a benefits administration software platform to drive innovation and growth in the benefits marketplace[102] Results of Operations This section details the drivers of financial performance, highlighting revenue growth across segments and operating income expansion - Management Solutions Revenue: Increased 14% in Q2 and 15% in H1, driven by higher checks per payroll, growth in client bases, improved price realization, and increased funding for temporary staffing clients[112] - PEO and Insurance Solutions Revenue: Grew 11% in Q2 and 13% in H1, due to an increase in the number of average worksite employees and higher average wages[112] - Total Expenses: Increased 6% for Q2 and 2% for H1. The H1 increase was moderated by one-time cost-saving initiatives in the prior year. Key drivers of the increase were higher PEO insurance costs and compensation-related expenses[117] - Operating margin for the second quarter was 39.7%, up from 36.0% in the prior year. For the six-month period, operating margin was 40.3%, up from 33.3%[119] Liquidity and Capital Resources The company maintains a strong financial position with substantial cash, investments, and credit facilities, ensuring sufficient liquidity - As of November 30, 2021, the company's financial position remained strong with cash, restricted cash, and total corporate investments of $1.1 billion[126] - In September 2021, the company amended and increased one of its credit facilities with JPM from $500.0 million to $750.0 million and extended its term[130] Cash Flow Activity Summary (Six months ended Nov 30, in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $555.4 | $430.7 | | Net cash used in investing activities | $(451.4) | $(490.4) | | Net cash used in financing activities | $(302.9) | $(462.4) | Item 3. Quantitative and Qualitative Disclosures of Market Risk This section discusses the company's primary market risk exposure to interest rate fluctuations on its investment portfolios - The company's primary market risk exposure is to changes in interest rates, which can affect earnings from its investment portfolios of funds held for clients and corporate investments[147] - A hypothetical 25-basis-point change in short-term interest rates is estimated to impact after-tax earnings by approximately $3.0 million to $3.5 million over a twelve-month period[154] - The weighted-average duration of the AFS securities portfolio was 3.3 years as of November 30, 2021. A hypothetical 25 basis point increase in interest rates would decrease the portfolio's fair value by approximately $25.0 million[114][157] Item 4. Controls and Procedures The company's disclosure controls and procedures were effective as of November 30, 2021, with no material changes to internal control - The company's management, including the CEO and CFO, concluded that as of November 30, 2021, disclosure controls and procedures were effective at a reasonable assurance level[166] - 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[167] PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares during the second quarter, with significant funds remaining available under authorized programs - The company maintains two stock repurchase programs, each authorizing up to $400 million[169] - No shares were repurchased during the second quarter, and $472.4 million remains available for future repurchases under both programs combined[169] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including credit agreement amendments and required certifications - Exhibits filed with the report include amendments to credit agreements and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[171] Signatures The report was duly signed and authorized by the company's principal executive, financial, and accounting officers - The Form 10-Q was signed on December 22, 2021, by the company's Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer[176]