The Future of Work Is Here
Annual Report | 2020
Feature Article: Innovating the Future of Human Resources
As a human capital management (HCM) technology company, Paychex is helping drive the
future of work through our HR innovations. Continued on page 9
Contents
From President and
CEO, Martin Mucci
A Message to Our Shareholders 4
Fiscal 2020 Results
Time Tested, Proven Performance 8
Investments in HR Technology
Innovating the Future of
Human Resources 9
Impact of COVID-19
Providing Client Service in
Challenging Times 12
Supporting a National
Economic Recovery 14
WWhat It Means To Be Paychex
Purpose, Mission, Values
Inside Back Cover
Paychex 3
Access this report online at
paychex.com/AnnualReport
A Message to Our Shareholders
$ 4 Billion
Total Revenue
$889 Million
Dividends Paid
Martin Mucci, President and CEO
Our business was tested like never before in fiscal 2020, and I couldn’t be prouder of the
results our employees achieved together. We’ve created innovative HR solutions to guide
our clients and support the needs of our partners through this challenging business
environment — from applying for federal loans to managing remote employees and
paying them in real time.
The pandemic has changed how business is being done worldwide. Through it all, we’ve
continued to invest in our people and technology to help make HR, payroll, retirement, and
insurance simple for our clients, even as their needs have become more complex. For Paychex
and our clients, the future of work is here now.
For fiscal 2020, we achieved a milestone with total revenue of $4.0 billion, up 7% over fiscal
2019, and doubling our revenue since 2010. We also set a record with operating income of
$1.5 billion and increased our adjusted net income 5% to $1.1 billion. Adjusted diluted earnings
per share increased as well, by 6%, to $3.00. Our shareholders received $889 million in
dividends, or $2.48 per share, for the year.
4 From President and CEO, Martin Mucci
Anticipating technology trends
Thanks to our continuing focus on product
and service innovation, our clients are making
a smooth transition to the new workplace
demanded by the state of business today. Paychex
gives clients the flexibility to pay employees
on demand prior to payday and make real-
time payments in minutes in time-sensitive or
emergency situations.
As remote work becomes more common, our
clients and their employees can clock in and
out from anywhere through their phone or
smartwatch. Employees can also communicate
with their employer through HR Connect in our
Paychex Flex® mobile app as well as track and
report workplace incidents to help support
OSHA compliance. We also introduced new live
reports in fiscal 2020 that are easily searchable
online. They include job costing and labor
distribution, employee change history, reports
based on employee activity in HR Connect, and
data analytics to allow our clients to analyze and
compare their data to other businesses.
HR self-service options are also important. More
than 50% of small to medium-sized businesses
(SMBs) are offering employees online access to
view their pay, tax withholdings, W-2s, retirement
and insurance plans, and to update their personal
information.1
Our self-service mobile experience includes more
than 25 actions enabling client and employee
Taking Action: Anytime, Anywhere
Our Paychex Flex mobile app allows clients
and their employees to make more than
25 self-service actions — simplifying their
transition to the future of work.
independence. Clients can easily track, review,
that HR is driving the future of the workplace.
and approve HR changes across their organization.
Even before the economy was disrupted by the
They can also capture e-signatures for direct
COVID-19 pandemic, we were making investments
deposit and federal and state withholding forms,
in our HR professionals, HR solutions, and
and access reports, check stubs, tax documents,
professional employer organization (PEO) services.
employee profiles, and time-off balances — to
These investments have proved valuable in
name a few. And we’ve never had more integration
helping our clients transition employees to a work-
between our products and other popular
from-home environment and prepare them for the
business software.
future of the workplace.
Fully invested in the future of HR
As a human capital management (HCM)
We’ve become a leading provider of HR services
and solutions for SMBs, serving more than 1.4
technology company, we recognized long ago
million client worksite employees. We continue
to see an opportunity for growth in HR services
1 Paychex Pulse of HR Survey: Stepping Up to Lead, Paychex, 2020
far into the future, particularly in our PEO. It supports
clients with payroll, benefits, HR, tax administration,
and regulatory compliance assistance, while making
it simpler to attract, develop, and retain talent, as well
as establish and manage employee benefit plans.
We’ve also been making innovations in how we
support our clients. We’ve trained and empowered
more than 600 HR professionals with an average
of eight years of experience at Paychex to help
our clients learn what they need to know to stay
in business, retain their employees, recover from
this current pandemic environment, and position
themselves for future growth.
Our professionals can show clients how best to run
payroll and automate time and attendance to keep
their employees paid. They can also set up benefit
and retirement plans to help attract, retain, and
support employees, while helping simplify complex
HR issues. Paychex HR professionals leverage the
expertise of our in-house compliance experts to
help clients with new laws and regulations at the
federal, state, and local level, and navigate changing
workplace dynamics to help keep their businesses
running efficiently.
Leading clients through the business
effects of COVID-19
What do you do when you’re responsible for
more than 680,000 business clients affected by
catastrophic economic conditions? At Paychex, we
cared for the safety of our employees, doubled down
on product innovation, and helped carry our clients
through the pandemic with us.
“Paychex was the first to provide
clients with a Paycheck Protection
Program (PPP) payroll report,
available directly through their
Paychex Flex login ...”
Planning ahead for business continuity
We built our business continuity plan (BCP) to be
ready for situations like this long before COVID-19.
And we made it flexible, so our financial and
operational stability would continue to help our
clients through changing business dynamics and
challenging times.
In addition to client success, the safety of our
employees has always been a priority. So, after taking
sensible precautions in our office locations, we
undertook a company-wide effort to move 15,000
employees to remote work. Within one week, 95% of
our people — all except essential on-site employees
— were at home maintaining our client service
relationships, monitoring the regulatory landscape,
developing our products, and maximizing our sales
potential.
Daily monitoring of legislation that could
affect our clients
With our employees safe and productive, we
continued listening to the rapidly changing needs of
our clients and engaged our expert compliance team
to work directly with federal government agencies
to create essential programs. We’re staying aware of
fast-changing federal and state laws and regulations,
and their provisions such as the PPP, and updating
Paychex was the first to provide clients with a
our interactive tool on a daily basis to help businesses
Paycheck Protection Program (PPP) payroll report,
navigate state guidance.
available directly through their Paychex Flex login,
that simplified the loan application process by
automatically uploading their payroll data. We
followed that achievement by providing direct client
access to third-party lenders, creating one of the
most comprehensive PPP loan forgiveness estimators
in the industry, and generating a signature-ready PPP
Loan Forgiveness Application to simplify the loan
forgiveness process for our clients.
We share what we know about dealing with
COVID-19 and related regulations with businesses
through direct communication, industry webinars,
and the resources in our Help Center, available to
all businesses on Paychex.com, so they can take
necessary steps to stay in business and retain their
employees. Nearly 165,000 clients and CPAs have
registered for our webinars to help them keep up with
ever-changing content and guidance.2
2 Data on file
What it means to be Paychex
We couldn’t have continued creating innovative
a company and served our clients, and we will
continue to honor that commitment — as we
solutions and supporting our clients in fiscal 2020
always have.
without the flexibility shown by our employees.
Thousands of our people had to immediately
adapt to working from home, establishing a new
balance between their work and home lives while
remaining accountable for providing the highest
level of service. We’re proud to say that our people
are coming through for our clients — and each
other — in this difficult time.
Perhaps what I’m proudest of is how Paychex
is one of the few companies that can say our
efforts have had a significant, positive effect on
the economy during these challenging times.
The adaptability and innovation demonstrated by
our people has helped thousands of clients stay
in business and keep their employees working,
contributing billions of dollars to federal, state,
Despite all the challenges happening at home, in
and local economies. That positive impact will
the economy, and in the world in fiscal 2020, our
continue to be a point of pride and a responsibility
people continue to provide exemplary service.
that we take seriously.
They didn’t think about only themselves, they also
thought about their client relationships. As a result,
we increased client satisfaction and reached a
new record level of client retention even with the
challenges of the COVID-19 pandemic.
Ready for what’s next
Thank you for your continued investment in
Paychex. Our financial position remains strong
despite the COVID-19 pandemic, and our
investments in giving clients the most innovative
How do our people do it? By living our values:
products have never wavered. We hope you’ll join
integrity, partnership, accountability, respect,
us as we continue delivering the future of work,
service, and especially innovation. Even while
today.
Sincerely,
Martin Mucci
President and CEO
distant in their homes, they were committed
to working in partnership with their teams,
strengthening their connections throughout
the organization, and maintaining their close
relationship with our clients as well as accounting
professionals and our other business partners. We
couldn’t be prouder to be Paychex — right here,
right now — and we’re excited to see what our
people will continue to accomplish
in the future.
Supporting the economy by
assisting our clients
As the business environment continues to evolve,
we’re helping clients recover and support their
employees. Our compliance team is tracking the
separate state initiatives, so our clients will have
the specific information they need to confidently
operate their business and retain or rehire their
employees.
We’ve never had a time in our history when
business conditions changed so quickly each
month. We’re proud of how we’ve adapted as
Paychex 7
Time Tested, Proven Performance
Economists have described 2020 as an unprecedented, difficult, and uncertain time. At
Paychex, we have a different phrase for it — another chance to innovate.
Through our solid business continuity planning and our continuing commitment to
innovating products and processes, we’ve supported many of our more than 680,000
clients to help them stay in business during the pandemic. At the same time, we’ve
prepared them to meet the challenges of tomorrow’s workplace.
Supporting businesses and the economy
Paychex assisted many of our clients in fiscal 2020
Ready for the future of work
Paychex reached more than $4.0 billion in revenue in
thanks to our proactive innovation, our experienced
fiscal 2020 with a market capitalization of almost $26
compliance team, and our national reach. We
billion as of May 29, 2020. This reflected our long-
capitalized on our technology by making it easy for
clients to access vital reports that helped them apply
term growth as a leading provider of HR outsourcing
and consulting, payroll, retirement and employee
for emergency financing, and we prepared our team
benefits, and insurance. We’re enabling tomorrow’s
to address their evolving needs. We also provided
workplace for our clients, even as their HR needs
grow. Paychex is delivering the future of work. Right
here, right now. (cid:131)
daily information about changing federal and state
laws and regulations, so businesses could easily
apply for federal loans, transition to a remote work
environment, and support the livelihoods of their
employees.
Total Revenue ($Millions)*
2016
2017
2018
2019
2020
$2,952
$3,153
$3,378
$3,773
$4,041
Operating Income ($Millions)*
2016
2017
2018
2019
2020
$1,147
$1,254
$1,292
$1,371
$1,461
*For the fiscal year ended May 31
8 Fiscal 2020 Results
Innovating the Future of
Human Resources
Years ago, we recognized a shift — and an opportunity — occurring in the workplace.
Businesses, particularly small to medium-sized businesses (SMBs), needed more help
managing employees and simplifying tasks. Employers and employees alike wanted to make
work more convenient by transitioning manual, paper-based processes to an online mobile
app. And changing federal and state regulations were making it more complex to stay in
compliance.
We immediately understood that those needs would define and drive the future of work, and
we knew Paychex could provide the product and service innovations to make that future a
reality. So, we invested significant time and resources into ensuring our HR services, including
our professional employer organization (PEO), offered the capabilities that businesses need —
when, where, and how they need them.
The growing role of HR outsourcing
While HR trends such as remote work and employee
and approvals, as well as review and approve HR
changes, capture e-signatures for direct deposit and
self-service were slowly becoming part of the
Forms W-4, and access reports, check stubs, tax
workplace, the effects of the COVID-19 pandemic
documents, employee profiles, and time-off balances.
accelerated the shift. Among SMBs, 55% plan to allow
or require employees to work remotely, according to
a Paychex survey from June 2020.1 At the same time,
41% see more flexible work schedules becoming a
permanent change to the work environment.1
Putting solutions in the hands of employees
Even before the pandemic, businesses had been
transitioning to mobile HR technology. That trend
accelerated in fiscal 2020 as remote work became
the rule rather than the exception. And the workplace
will never be the same — 46% of SMBs said they’ll
lean on technology to support more remote work.1
Solutions to meet evolving HR challenges
Paychex is ready to meet the challenges of the future
workplace today. Our HR innovations are helping
clients support employees, whether they’re in the
office or working remotely, by managing critical
communications, keeping them engaged, and
helping them stay productive.
HR Connect
We introduced HR Connect on our Paychex Flex
platform to simplify remote communication between
our clients and their employees. HR Connect allows
employees to submit any questions, requests, and
Taking action at any time, from anywhere
Paychex has made sure clients are prepared for this
issues directly to their employer to help ensure they
are quickly addressed and resolved. It also includes
trend with our mobile-first Paychex Flex platform.
a new OSHA dashboard that lets clients prepare
It allows managers and employees to make more
documentation for reportable events, track open
than 25 self-service actions anytime, anywhere
items, access forms, and view a snapshot of injuries
through their mobile devices.
by location.
From the Paychex Flex mobile app, clients can
customize screens and online access for different
Conversations
Paychex Flex also includes an updated feature that
types of users. They can also administer self, peer,
facilitates communication between managers and
and manager self-service options, workflows,
employees. This feature is useful during the COVID-19
1 Peer Insights for Rebuilding Your Team: Tips and tools from 300 business leaders for bringing staff back together safely and efficiently, Paychex, 2020
Paychex 9
pandemic and may be essential in the new workplace
to come. Clients can now print notes and filter results
HR is personal for Paychex HR professionals
As the COVID-19 pandemic surprised and
based on tags and dates, enable employees to add
overwhelmed businesses across the country, our
their own notes, and allow administrators to share
HR clients turned to their Paychex HR professionals
for guidance. Our more than 600 professionals
across the country are knowledgeable consultants
trained to provide more than just best practices. They
average eight years of experience at Paychex, so
they know the businesses they serve and can provide
specific ideas for solving HR issues.
Our HR professionals helped clients apply for vital
funding through sources like the federal Paycheck
Protection Program (PPP), worked with clients to
transition employees to work from home, and
continue to provide clarity on how their employees
can work safely and in compliance with federal, state,
and local guidelines.
Paychex: an HR company
With all the investments we continue to make in our
products and services, Paychex is unquestionably a
leading HR company. Today, we are one of the top
HR outsourcing providers in the United States,
serving 1.4 million worksite employees. And our
innovations are getting noticed by our clients, trusted
HR organizations, and leading business associations
and publications.
Paychex is building the future of HR with technology,
dedicated service, and expert regulatory analysis. We
know the best is yet to come. (cid:131)
notes with other leaders.
Online timekeeping
Employees can clock in and out from remote
locations through their Paychex Flex app — or even
from their smartwatch — while managers can transfer
departments, check schedules, and review and
approve time cards.
Workflow approvals
New workflow approvals allow clients to customize
and implement workflows to help them track, review,
and approve HR changes across their organization.
They can also capture and store electronic signatures
for direct deposit and changes to tax withholding
forms in an employee’s record.
Worker templates
To simplify the process of adding new workers,
administrators can now create templates to include
default settings that automatically populate
commonly used fields within Paychex Flex. They can
create these templates by position type, full- or part-
time status, and other common scenarios.
Data analytics
Paychex is uniquely positioned to provide our clients
with a comprehensive set of analytics allowing them
to benchmark and compare specific data sets against
other businesses within their industry classification
or geographic location. Access to the comparison
provides another competitive advantage for business
owners who partner with Paychex.
Live reports analytics
To help clients quickly access employee data and
make informed business decisions, our new live
reports provide improved visibility on important
topics ranging from job costing and labor distribution
to workers’ compensation, employee change history,
OSHA documentation, and HR requests through our
conversations feature.
10 Investments in HR Technology
Track Time Anywhere
From a Smartwatch
With more employees working remotely,
our wearable technology allows employees
to easily clock in, clock out, and transfer
between jobs or assignments right from
their smartwatch.
Touchless Time Clock
Our InVision® Iris Time Clock gives
employees a contactless clock-in option
that is not affected by wearing a mask.
Paychex 11
Providing Client Service in
Challenging Times
The COVID-19 pandemic has had a serious effect on businesses across the country, with
ramifications that will change the future of work. Although there hasn’t been a situation like
this in a century, Paychex was prepared to respond to the needs of our clients and partners.
We’ve processed more than 500,000 special COVID-19 payroll reports that have helped
clients with the information they needed to apply for Paycheck Protection Program (PPP) loans
and help them stay in business and retain their workers, which has had a significant, positive
influence on national, state, and local economies.
Serving our clients and partners
in any situation
While we helped clients find solutions, our own
people were delivering a high level of service to
our clients and partners regardless of the situation.
Paychex employees adapted to new ways of working
by communicating the way clients preferred — over
the phone, through chat, or in online meetings when
that was most effective. Despite the adversity our
people faced, their flexibility during a difficult time
resulted in our clients telling us they were even more
satisfied with our service in fiscal 2020, and we
improved our already high levels of client retention.
Providing answers in a time of uncertainty
Another significant way we helped businesses
respond to the COVID-19 pandemic was by
sharing the latest information about changing
federal and state laws and regulations. Currently,
96% of HR leaders have said they’re involved with
ensuring regulatory compliance.1 On April 2, 2020,
we launched an online COVID-19 Help Center to
support HR managers and business owners with
the invaluable input of our compliance, risk, and
legal teams, as well as our subsidiaries Oasis and
SurePayroll.
In the months since, we’ve regularly updated the Help
Center with dozens of frequently asked questions
and their answers, webinars, articles, and other
information to help businesses and their accountants
navigate the practical and regulatory challenges
of staying in business, retaining employees, and
returning to work. As of August 1, 2020, our Help
Center resources had been viewed more than
330,000 times.2
Adapting our technology to
changing client needs
Seeing the need for assistance with applying for PPP
loans, we quickly enhanced Paychex Flex to be the
first human capital management (HCM) platform
to provide clients with a detailed PPP payroll report.
Developed in cooperation with our compliance,
risk, and legal teams, we created the report feature
to automatically update based on the latest payroll
information.
We also developed the most detailed PPP Loan
Forgiveness Estimator tool available to all businesses
that have applied for a PPP loan, and a separate
estimator for our clients accessible in Paychex Flex
that provides the documentation they need to
maximize their PPP loan forgiveness based on their
2019 and 2020 payroll data.
Providing HR experience through the
pandemic and into the future
The demand for our services has been steadily
increasing, especially with small and medium-
sized businesses (SMBs). Starting in March 2020,
businesses suddenly faced many challenges all at
once. How do they close or remain partly operational
and still do what’s best for the business and their
employees? Where can they find help with financing?
How can they stay compliant with changing laws and
1 Paychex Pulse of HR Survey: Stepping Up to Lead, Paychex, 2020
2 Data on file
12 Impact of COVID-19
“Whenever we have a question,
we give Katie Sanders, our
representative at Paychex, a call
and she gets back to us as soon
as possible. … It’s just nice to have
someone who’s reading up, does
their research, and helps make
sure you’re in compliance with all
the rules, regulations, laws — and
that’s something that’s been
a big help.”
—Ben Cottrell, Cottrell Paper Company
regulations depending on the state(s) where they
operate? Paychex is well-positioned to meet these
demands and many others thanks to our leading
positions in HR, payroll, time and attendance, and
insurance, as well as our strong financial position and
nearly 50 years of experience.
Our HR Services clients who worked with a dedicated
HR representative quickly had many of their questions
answered. These clients received recommendations
for how to stay safe, set up employees to work
efficiently from remote locations, and establish
policies in line with their priorities moving forward. (cid:131)
“During COVID-19, Paychex had many features
available on the website. In fact, I was introduced to
a library of topics that I could go and research and
find payroll-related things specifically for my state
here in California, and also, I was able to print out
reports that were essential in helping me apply for the
PPP program. … Paychex really helped me in several
different ways.”
— Kay Farjadi, Farmers Insurance Agent
“[Paychex] actually sent us information on how to
prepare ourselves and what was going to be needed in
this time of crisis.”
— Leeza Dixon, Industrial and Manufacturing Solutions
“Recently due to COVID-19, we had a lot of issues in
terms of being shut down and not having the finances
to run the operation. Paychex really helped us in several
ways. One of the big ways was that they provided a lot
of webinars and trainings in terms of how to get PPP.”
— Dr. Daniel Noor, DMD, Smile Café
“A big concern for us is keeping our employees
working, and as this pandemic hit we didn’t really have
a lot of direction as to what was going to happen next.
... I don’t think I would’ve had the success with the
loan applications and my employees if I had not had
Paychex there to assist me every step of the way.”
— Lisa Jewell, Crown Jewell Entertainment Systems
Paychex 13
Supporting a National Economic Recovery
Throughout the COVID-19 pandemic, Paychex has helped thousands of businesses stay in
business and maintain employment while operating safely and in compliance with changing
regulations. At the same time, we’re helping ensure the health and productivity of our own
employees across the country.
Assisting businesses in 50 states with
hundreds of guidelines
For businesses to be allowed to operate, they need to
understand and comply with complex federal, state,
Employees face a new reality as well. Rather than
return to traditional work hours and locations, 41% of
businesses said they would rely on more flexible work
schedules and work-from-home arrangements after
and local guidelines — sometimes in multiple states
reopening.2
with conflicting rules. Our clients have access to
resources that help them reduce the risk of penalties,
and our dedicated HR professionals can help clients
with the actions they need to take in order to safely
and lawfully do business.
Essential resources from HR and
compliance experts
Our COVID-19 Help Center on Paychex.com provides
timely information to businesses dealing with this
evolving situation, including detailed webinars,
podcasts, reports, and articles on essential topics
related to the recovery.
For example, our easy-to-use interactive tool,
COVID-19 Resources by State, helps businesses
keep up with the latest state regulations. Each state’s
page includes laws, executive orders, advisories, and
processes businesses would need to follow. The tool
also includes links to state government resources and
state-specific articles to help businesses transition
back to work.
Leading the way to the future of work
While businesses navigate rules and regulations,
many are also making significant changes to their
operations. To become more efficient, the fastest-
growing companies were most likely to use new
technology to improve customer service (47%),
communicate and collaborate more effectively (45%),
improve recordkeeping (34%), and boost sales (32%).1
It’s clear that business may never be the same.
By continually communicating with clients and
innovating based on their needs, we’re creating
products and services — such as HR Connect,
employee self-service capabilities, and Real-
Time Payments — to help our clients create new
workplaces that will allow them to stay in business
and succeed in a post-pandemic market.
Even as we help enable these workplace changes,
we’ll continue to monitor trends and work with our
clients to develop new innovations in remote work,
e-commerce, communications, and more to meet
the evolving HR and operational goals of businesses
across the country.
Looking after clients by ensuring
the safety of our people
We know that doing the best for our clients means
giving our people the support to stay safe and
productive as well. We offer several health and life
insurance options for our employees, and we pay a
significant portion of the premiums, so our people
can feel safe in the knowledge that they and their
dependents are covered. And with 15,000 employees
working remotely, successfully supporting clients
and creating the next generation of HR technology,
we’re taking the steps to ensure that our own eventual
return to the office maintains the high level of service
that our clients expect from Paychex. (cid:131)
1 Peer Insights to Help SMBs Get Back to Business: How small
2 Peer Insights for Rebuilding Your Team: Tips and tools from
and medium-sized businesses are retooling, rebuilding, and
300 business leaders for bringing staff back together safely and
returning to work, Paychex, 2020
efficiently, Paychex, 2020
14 Impact of COVID-19
Paychex 15
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2020
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From
to
Commission file number 0-11330
Paychex, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
911 Panorama Trail South
Rochester, NY
(Address of principal executive offices)
16-1124166
(I.R.S. Employer
Identification No.)
14625-2396
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (585) 385-6666
Title of each class
Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value
PAYX
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if
the registrant
is a well-known seasoned issuer, as defined in Rule 405 of
the
Securities Act. Yes Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No Í
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Í No ‘
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes Í No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Í
Smaller reporting company ‘
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ‘
Accelerated filer ‘ Non-accelerated filer ‘
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the Sarbanes-Oxley Act
the effectiveness of
(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Í
the registrant
is a shell company (as defined in Rule 12b-2 of
Indicate by check mark whether
reporting under Section 404(b) of
its internal control over
financial
the
Act). Yes ‘ No Í
As of November 30, 2019, the last business day of the most recently completed second fiscal quarter, shares held by
non-affiliates of the registrant had an aggregate market value of $27,530,894,822 based on the closing price reported for
such date on the Nasdaq Global Select Market.
As of June 30, 2020, 358,769,682 shares of the registrant’s common stock, $.01 par value, were outstanding.
Documents Incorporated by Reference
Portions of
to be issued in connection with its Annual Meeting of
Stockholders to be held on or about October 15, 2020, to the extent not set forth herein, are incorporated by reference into
Part III, Items 10 through 14, inclusive.
the registrant’s definitive proxy statement
PAYCHEX, INC.
INDEX TO FORM 10-K
For the fiscal year ended May 31, 2020
Description
Page
PART I
Cautionary Note Regarding Forward-Looking Statements Pursuant to the United
States Private Securities Litigation Reform Act of 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Item 3
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . .
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . .
Item 14 Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16 Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS PURSUANT TO
THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
PART I
“us,”
“our,”
“Paychex,” or
Certain written and oral statements made by management of Paychex, Inc. and its wholly owned
subsidiaries (“we,”
the “Company”) may 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 “we expect,” “expected to,” “estimates,” “estimated,” “intend,” “overview,” “outlook,”
“guidance,” “we look forward to,” “would equate to,” “projects,” “projections,” “projected,” “projected to
be,” “anticipates,” “anticipated,” “we believe,” “believes,” “could be,” “targeting,” and other similar words
or phrases. 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, or 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 inherent uncertainties, risks, and changes in circumstances that are difficult to predict, many of
which are outside our control. Our actual results and financial conditions may differ materially from
those indicated in the forward-looking statements. Therefore, you should not place undue reliance
upon 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:
• the impact of the outbreak of COVID-19 on the U.S. and global economy and on our ability to
provide services to our clients;
• changes in governmental regulations and policies;
• our ability to comply with U.S. and foreign laws and regulations;
• our ability to keep pace with changes in technology and to provide timely enhancements to our
products and services;
• our compliance with data privacy laws and regulations;
• the possibility of cyberattacks, security vulnerabilities and Internet disruptions,
including
breaches of data security and privacy leaks, data loss and business interruptions;
• the possibility of failure of our operating facilities, computer systems, or communication systems
during a catastrophic event, including the outbreak of COVID-19;
• the failure of third-party service providers to perform their functions;
• the possibility that we may be subject
to additional risks related to our co-employment
relationship with our professional employer organization (“PEO”);
• changes in health insurance and workers’ compensation insurance rates and underlying claim
trends;
• our clients’ failure to reimburse us for payments made by us on their behalf;
• the effect of changes in government regulations mandating the amount of tax withheld or the
timing of remittances;
• volatility in the political and economic environment;
1
• risks related to acquisitions and the integration of
the businesses we acquire,
including
integrating Oasis Outsourcing Group Holdings, L.P.’s (“Oasis”) business with ours;
• our failure to comply with covenants in our debt agreements;
• changes in the availability of qualified people, including management, technical, compliance and
sales personnel;
• our failure to protect our intellectual property rights;
• the possible effects of negative publicity on our reputation and the value of our brand; and
• potential outcomes related to pending or future litigation matters.
Any of these factors, as well as such other factors as discussed in Part I, Item 1A, “Risk Factors”
and throughout Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this Annual Report on Form 10-K (“Form 10-K”), as well as in our periodic
filings with the Securities and Exchange Commission (the “SEC”), could cause our actual results to
differ materially from our anticipated results. The information provided in this Form 10-K 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-K 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-K 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 fiscal year ended May 31, 2020 is
available and accessible at Paychex’s Investor Relations page at https://www.paychex.com/investors.
Information available on our website is not a part of, and is not incorporated into, this Form 10-K. We
intend to make future investor presentations available exclusively through our Investor Relations page.
Item 1. Business
Unless we state otherwise or the context otherwise requires, the terms “Paychex,” “we,” “us,” “our”
and the “Company” refer to Paychex, Inc., a Delaware corporation, and its consolidated subsidiaries.
Overview
We are a leading provider of integrated human capital management (“HCM”) solutions for human
resources (“HR”), payroll, benefits, and insurance services for small- to medium-sized businesses. Our
purpose is to allow our customers the freedom to succeed. The workplace is evolving, and we lead the
way by making complex HR, payroll, and benefits simple for our clients.
Paychex incorporated in Delaware in 1979 and has a fiscal year that ends May 31st. We maintain
our corporate headquarters in Rochester, New York, and serve clients throughout the U.S. and parts of
Europe. As of May 31, 2020, we served greater than 680,000 payroll and PEO clients.
For any organization, a key function is the effective management of human capital which requires
both resources and expertise. Organizations are faced with complex and ever-changing requirements,
including diverse federal, state and local regulations across multiple jurisdictions. In addition, the
workplace is rapidly changing as employees increasingly become mobile, work remotely, and expect a
user experience similar to consumer-oriented Internet applications. We focus on helping small- to
medium-sized businesses who do not have the resources or expertise to adapt to the constantly
evolving environment. The COVID-19 environment has further accelerated certain trends and
increased regulatory complexity.
Paychex offers a wide range of services — including a fully outsourced HR solution, payroll
processing, retirement services, and insurance — allowing us to customize our offering to the client’s
business, whether it is small or large, simple or complex. We believe that we have the breadth of
solutions to cover the spectrum of the employee life cycle, but we also allow integration with some of
the most popular HR, accounting, point-of-sale, and productivity applications on the market today.
2
Our comprehensive solutions allow our clients to manage their workforces effectively from hire to
retire. We provide leading-edge HCM technology solutions, coupled with human expertise, to make
complex HR, payroll, and benefits issues simple for our clients. The key features of our solutions are:
• Comprehensive cloud-based platform optimized to meet the payroll and HCM needs of small
and medium-sized organizations;
• Streamlined workforce management that combines technology with flexible service options;
• Modern, mobile, and intuitive user experience and self-service capabilities that significantly
increase employee engagement;
• Scalable and customizable platform that allows clients the ability to add services as they grow;
• Software as a service, or “SaaS”, delivery model that reduces total cost of ownership for our
clients; and
• Over 45 years of expertise in HR and payroll with our technology backed by over 200
compliance experts and 600 HR business partners.
We market our solutions through our direct and virtual sales forces which are supported by various
corporate lead generation and marketing initiatives. Over 50% of our revenues are gained from our
services beyond payroll processing. We focus on providing an industry-leading client experience, and
continue to see improving client satisfaction scores and retention.
Company Strategy
Our mission is to be the leading provider of HR, payroll, benefits, and insurance solutions by being
an essential partner to small and medium-sized businesses across the U.S. and parts of Europe. We
believe that success in this mission will lead to strong, long-term financial performance. We intend to
strengthen and extend our position as a leading provider through continued investments in both our
technology and service offerings. Key elements of our strategy include:
• Providing industry-leading, integrated technology. We continue to invest significantly in our
award-winning Paychex Flex® platform and mobility applications to increase efficiency and
functionality for our clients and their employees.
• Increasing client satisfaction. Our flexible service model and technology-enabled service
allows us to provide a personalized service experience for our clients and their employees. We
continue to invest in artificial intelligence and machine learning and self-service capabilities to
allow clients and their employees easy, intuitive, and flexible service how, when, and where they
want it.
• Expanding our leadership in HR. We have a comprehensive suite of value-added HR
Solutions for our clients and their employees. Greater than half of our revenues are from HR and
benefits solutions beyond payroll. After several strategic PEO acquisitions over the past several
years, we are now the second largest provider of PEO services in the nation. With over 600 HR
business partners, we have extensive expertise that we believe sets us apart in the industry.
• Growing our client base. We believe there is significant potential to grow within our current
target markets. We have invested significantly in new demand generation and sales tools and
expanding certain areas of our sales force. We continue to focus on sales productivity with the
intent of expanding our market share across all our product lines.
• Engaging in strategic acquisitions.
In the past, we utilized acquisitions as a mean to expand
our portfolio, enter new markets or increase our scale. We continue to evaluate and monitor
potential acquisitions and will utilize this when the acquisitions are in alignment with our overall
strategy.
3
Our Solutions
Our solutions bring together payroll and HCM software with flexible, personalized technology-
enabled service capabilities. Clients have the option of doing payroll online using our SaaS technology,
outsourcing to our payroll specialists or using a combination of
is then
integrated with HCM software modules for clients who have more complex HR needs. We also provide
comprehensive HR outsourcing through our administrative services organization (“ASO”) and PEO
solutions. The integration of leading-edge technology and flexible service options allows us to meet our
clients’ needs how, when, and where they want.
those solutions. Payroll
HCM Technology: Paychex Flex is our proprietary HCM SaaS platform that unites HR, payroll,
time and attendance, and benefits processes to maximize efficiency and savings. Paychex Flex helps
clients manage the employee life cycle from recruiting and hiring to retirement, providing an integrated
suite of solutions including recruiting, onboarding, HR, time and attendance and employee benefits. It
utilizes a single cloud-based platform, with single client and employee records. Clients can select the
modules they need and easily add on additional services as they grow. In addition, Paychex Flex
presents function-focused analytics throughout the platform, assisting HR leaders with making more
informed business decisions. Paychex Flex uses a mobile-first design throughout our HCM suite, which
allows full functionality of all application components, regardless of device or screen size. We believe
our Paychex mobile applications add greater value and convenience for our clients and their
employees by allowing them instant access on their mobile device.
We continue to invest in Paychex Flex, making significant enhancements designed to simplify the
complexity of HR. The latest enhancements include expansion of our integration capabilities to connect
users with some of the world’s leading business tools, a Help Center that gives users access to training
and how-to tutorials, a pay-on-demand solution to grant employees access to earned wages before
their scheduled pay day, a custom dashboard, and a newly enhanced grid entry view which offers
more flexibility, customization, and visibility into employee pay data. We also expanded into wearable
technology where Paychex Flex Time users can also use our smartwatch solution, which enables
users to track time worked via their smartwatch, making the time and attendance tracking process
easier for an increasingly remote workforce.
HR and Compliance Expertise: Paychex supports its HCM software solutions with over
45 years of experience. We have over 600 HR professionals who are dedicated to our clients and have
the experience and training to provide HR best practices and advice. Our HR business partners are
available to provide our ASO and PEO clients with specific guidance on HR issues. In addition, we
have over 200 compliance professionals who are in real-time contact with tax agencies and regulators
to understand upcoming or newly enacted laws and regulations, and advocate for our clients’ interests.
The contributions of these compliance experts are intended to ensure that our HCM solutions are
updated timely to adhere to regulations and to help our clients stay in compliance.
Technology-Enabled Client Service: Paychex Flex also provides technology-enabled service
with options that include self-service, a 24/7 dedicated service center, an individual payroll specialist,
and integrated service via a multi-product service center. In addition, mid-market clients can utilize a
relationship manager for more personalized service. This flexible platform services our small- to
medium-sized clients, and a portion of our PEO business.
Within Paychex Flex there is embedded technology to assist clients. The Paychex Flex
Intelligence Engine includes the Flex Assistant, a customer service chatbot who can answer over 200
commonly asked questions. Our Flex Intelligence Engine allows clients to elect their preference for
learning — via written how-to-documents, tutorial-style video vignettes, or a guided interactive tour. At
any time, a live Paychex agent is just a click away, with the entire chat conversation available real-time
to provide a better, more personalized service experience.
The platform embeds self-service capabilities that empower client employees to manage their HR
and benefits information from any location, on any device. These self-service capabilities allow for
greater access and convenience for client employees and greater productivity for clients.
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Our Clients
Paychex has HR solutions to fit
the needs of any small- to medium-sized business,
from
do-it-yourself payroll to comprehensive HR outsourcing. The target market for our integrated HCM
solutions is small- to medium-sized businesses. Within this space, we serve a diverse base of clients
operating in a broad range of industries throughout the U.S. and parts of Europe. The flexibility and
scalability of our solutions allow our clients to define the solution that best meets their needs and to
grow within the Flex platform. We utilize service agreements and arrangements with clients that
generally do not contain specified contract periods, and may be terminated by either party with
30-days’ notice of termination. For the fiscal year ended May 31, 2020 (“fiscal 2020”), client retention
was at record levels of over 83% of our beginning client base for the fiscal year.
We support our small-business clients, reducing the complexity and risk of running their own
payroll, while ensuring greater accuracy with up-to-date tax rates and regulatory information. We
simplify their payroll with a combination of our products and customer service options for a quick and
easy payday. Clients may choose to have our service team handle everything for them, or process
payroll themselves utilizing our proprietary, robust SaaS Paychex Flex platform and our SurePayroll®
SaaS-based products. Both products allow users to process payroll when they want, how they want,
and on any device (desktop, tablet, and mobile phone).
Our mid-market 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 services and software that will meet the needs of their
business.
While Paychex Flex is our primary SaaS-based platform utilized by the majority of our clients for
their HCM needs, there are some clients that use other platforms, including SurePayroll clients, certain
PEO clients, and some smaller tenured clients.
Both our small and mid-market clients can choose one of our comprehensive HR outsourcing
services, which include ASO and PEO solutions, and participate in our benefits offerings, which include
our insurance and retirement services. Our insurance services simplify the insurance process to make
it easy to find plans with the features and affordability to meet the client’s needs. Our retirement
services product line offers many plan design options to meet the client’s requirements, as well as
investment options.
Description of Services
Within our HCM solutions we offer a comprehensive portfolio of services and products that allow
our clients to meet their diverse HR and payroll needs. Clients can select services on an á la carte
basis or as part of various product bundles. Our offerings often leverage the information gathered in
our base payroll processing service, allowing us to provide comprehensive outsourcing services
covering the HCM spectrum.
Our portfolio of services is comprised of the following:
Management Solutions:
• Payroll processing services: Our payroll processing services include the calculation,
preparation, and delivery of employee payroll checks; production of internal accounting records
and management reports; preparation of
tax returns; and
collection and remittance of clients’ payroll obligations.
federal, state, and local payroll
• Payroll tax administration services: Payroll tax administration services provide for accurate
preparation and timely filing of quarterly and year-end tax returns, as well as the electronic
In
transfer of
funds to the applicable federal, state, and local
tax or regulatory agencies.
5
taxes from clients’ bank
connection with these services, we electronically collect payroll
accounts, typically on payday, prepare and file the applicable tax returns, and remit taxes to the
applicable tax or regulatory agencies on the respective due dates. These taxes are typically paid
between one and 30 days after receipt of collections from clients, with some items extending up
to 90 days. We handle regulatory correspondence, amendments, and penalty and interest
disputes.
• Employee payment services: Our employee payment services provide an employer the
option of paying their employees by direct deposit, payroll debit card, a check drawn on a
Paychex account (Readychex®), or a check drawn on the employer’s account and electronically
signed by us. For each of the first three methods, we electronically collect net payroll from the
clients’ bank accounts, typically one business day before payday, and provide payment to the
employees on payday. Our Readychex service provides a cost-effective solution that offers the
benefit of convenient, one-step payroll account reconciliation for employers.
We also allow employers to opt for more flexible pay options. Same day ACH functionality is also
available for clients using direct deposit, allowing employers the flexibility to pay employees via
direct deposit on the same day they initiate payroll. In addition, we are giving business owners
the ability to leverage real-time payments to process payroll and deliver net pay to their
employees immediately for time worked. Pay-on-demand functionality enables an employee to
request access to a portion of earned pay before the scheduled pay date, which is deposited into
a traditional bank account or a third-party account.
• Regulatory compliance services: We offer new-hire reporting services, which enable clients
to comply with federal and state requirements to report information on newly hired employees.
This information aids the government in enforcing child support orders and minimizes fraudulent
unemployment and workers’ compensation insurance claims. Our garnishment processing
service provides deductions from employees’ pay, forwards payments to third-party agencies,
including those that require electronic payments, and tracks the obligations to fulfillment. These
services enable employers to comply with legal requirements and reduce the risk of penalties.
We also offer comprehensive solutions to help employers and employees with certain mandates
under the Affordable Care Act (“ACA”), which sets forth specific coverage and reporting
requirements that employers must meet.
• HR Solutions (ASO): Our ASO offers businesses a combined package that includes payroll,
employer compliance, HR and employee benefits administration, risk management outsourcing,
and the on-site availability of a professionally trained HR representative, among other services.
Paychex HR Essentials is an ASO product that provides support to our clients over the phone or
online to help manage employee-related topics.
• Retirement services administration: Our retirement services product line offers a variety of
options to clients, including 401(k) plans, 401(k) SIMPLE plans, SIMPLE IRAs, 401(k) plans with
safe harbor provisions, owner-only 401(k) plans, profit sharing plans, and money purchase
plans. These services provide plan implementation, ongoing compliance with government
reporting, participant and employer online access,
regulations, employee and employer
electronic funds transfer, and other administrative services. Auto enrollment is an optional plan
feature that allows employers to automatically enroll employees in their company’s 401(k) plan
and increase overall plan participation. Clients may choose from a group of pre-defined fund
selections or customize their investment options within their plan. We are the largest 401(k)
recordkeeper for small businesses in the U.S. Our large-market retirement services clients
include relationships with financial advisors.
6
• HR administration services: We offer cloud-based HR administration software for employee
recruiting, and
time and attendance solutions,
benefits management and administration,
onboarding.
o
o
o
o
Paychex HR Online offers powerful tools for managing employee personnel information,
performance management, HR compliance and reporting. Our Learning Management
solution compliments our performance management. When combined with our workflow
and approval engine, we offer clients the flexibility to capture ongoing performance
feedback, recommend and enroll employees in specific training courses, and leverage
automated workflows to track progress and approve compensation changes tied to
performance.
Benefits administration software manages the employee-benefit enrollment process for
both open-enrollment and life events.
Time and attendance products, including our integrated Flex Time software, provide
timekeeping, scheduling, and workforce analytics. The InVisionTM IRIS Time Clock, a
biometric clock that scans the iris, provides fast and accurate time capture. Paychex Flex
Time also works with wearable technology to allow for employees to clock in and out
using their smartwatch.
Applicant tracking suite provides technology that streamlines, simplifies, and drives the
applicant workflow and onboarding process for companies of all sizes.
• Other HR services and products: We offer the outsourcing of plan administration under
section 125 of the Internal Revenue Code, allowing employees to use pre-tax dollars to pay for
certain health insurance benefits and health and dependent care expenses not covered by
insurance. All required implementation, administration, compliance, claims processing and
reimbursement, and coverage tests are provided with these services. We offer state
unemployment insurance services, which provide clients with prompt processing for all claims,
appeals, determinations, change statements, and requests for separation documents.
• Business services: We offer various business services to small- to medium-sized businesses.
Our wholly owned subsidiary, Paychex Advance, LLC, provides a portfolio of services to the
temporary staffing industry, including payroll funding (via the purchase of accounts receivable)
invoicing, and tax preparation.
and outsourcing services, which include payroll processing,
interruptions
Paychex Promise, a subscription-based service, offers protection against payroll
and solutions to address routine challenges of running a successful business. The primary
offering is payroll protection, which extends the collection of payroll funds from a client’s bank
account by seven days without
In
addition, through partnerships with third-party providers, we provide clients opportunities for
services such as payment processing services, financial fitness programs, and a small-business
loan resource center.
interruption of service or charges for insufficient
funds.
PEO and Insurance Solutions:
• PEO solutions: Our licensed subsidiaries, Paychex Business Solutions, LLC, HR Outsourcing
Holdings, Inc. (“HROi”), and Oasis offer businesses a combined package that includes payroll,
employer compliance, HR and employee benefits administration, risk management outsourcing,
and the on-site availability of a professionally trained HR representative, among other services.
What differentiates our PEO solutions from our ASO solutions is that we serve as a co-employer
of our clients’ employees, offer health care coverage to PEO client employees, and assume the
risks and rewards of workers’ compensation insurance and certain benefit insurance offerings.
We are certified under the Small Business Efficiency Act to provide PEO solutions.
7
• Insurance solutions: Our
licensed insurance agency, Paychex Insurance Agency,
Inc.,
provides insurance through a variety of carriers, allowing employers to expand their employee
benefit and corporate offerings at an affordable cost. Insurance offerings include property and
casualty coverage such as workers’ compensation, business-owner policies, cyber security
protection, commercial auto, and health and benefits coverage, including health, dental, vision,
and life. Our insurance services simplify the insurance process to make it easy to find plans with
the features and affordability to meet the client’s needs. With access to numerous top national
and regional
insurance agents have access to a wide
selection of plans from which they can best match the insurance needs of small businesses.
Additionally, clients have the option to integrate their insurance plans with Paychex payroll
processing for easy, accurate plan administration.
insurance carriers, our professional
Sales and Marketing
We market and sell our services primarily through our direct sales force based in the markets we
serve. Our direct sales force includes sales representatives who have defined geographical territories
and specialize within our portfolio of services. Our sales representatives are also supported by
marketing, advertising, public relations, trade shows, and telemarketing programs. Our virtual sales
force manages inbound sales leads for the under 10 employee space, sales in areas without a direct
sales force presence, and sales of various ancillary services.
In addition to our direct selling and marketing efforts, we utilize other indirect sales channels such
as our relationships with existing clients, certified public accountants (“CPAs”), and banks for new
client referrals. Approximately 50% of our new small-market payroll clients (excluding business
acquisitions) come from these referral sources. Our dedicated business development group drives
sales through banking, national associations, and franchise channels. We also utilize digital marketing
as a means to market our services.
We have a long-standing partnership with the American Institute of Certified Public Accountants
(“AICPA”) as the preferred payroll provider for its AICPA Business SolutionsTM Program. Our current
partnership agreement with the AICPA is in place through September 2021. We also partner with
numerous state CPA society organizations.
Our website is available at www.paychex.com. It is a cost-efficient channel that serves as a source
of leads and new sales, while complementing the efforts of our direct and virtual sales forces. The
website allows us to market to existing and prospective clients that want to learn more about our
products and services and offers information about our core lines of business: human resources
(www.paychex.com/human-resources),
benefits
(www.paychex.com/employee-benefits), and insurance (www.paychex.com/business-insurance).
(www.paychex.com/payroll),
payroll
Paychex also builds on its reputation as an expert in the HCM industry by providing education and
assistance primarily to clients and the CPA community. We provide free webinars, white papers, and
other information on our website to aid existing and prospective clients with the impact of regulatory
change as well as HR and business best practices. Paychex WORX, available at www.paychex.com/
worx,
from
entrepreneur to enterprise. Paychex WORX highlights our expertise, and ability to help businesses of
all sizes with a wide range of HR and financial information for current clients and prospects alike.
is a digital destination for insightful resources useful
for businesses at every stage,
impact
regulatory issues that
We also track current
the business community and provide
regulatory updates. We issue small business trend reports through our Paychex | IHS Markit Small
Business Employment Watch. Our Paychex Accountant Knowledge Center is a free online resource
available through our website that brings valuable information and time-saving online tools to
accounting professionals. Through Paychex Flex, AccountantHQ offers access to authorized client
payroll and HR data and key account contacts, along with an extensive accountant resource library.
AccountantHQ drives efficiency by putting accountants in the best position possible to easily access
critical client payroll and HR data, as well as powerful reporting tools, including our Paychex Protection
Program (“PPP”) loan forgiveness estimator.
8
Markets and Competition
We remain focused on servicing small- to medium-sized businesses based upon the growth
potential that we believe exists in the markets we serve. Our internal database source indicates that
there are approximately 8 million employer firms in the target markets that we currently serve in the
U.S.
The market for HCM services is highly competitive and fragmented. We have one primary national
competitor and we also compete with other national, international, regional, local, and online service
providers. In addition to traditional payroll processing and HR service providers, we compete with
in-house payroll and HR systems and departments. Payroll and HR systems and software are sold by
many vendors. Our products also compete with a variety of providers of HR services, such as
retirement services companies, insurance companies, HR and benefits consulting firms, and national
and regional PEOs.
Competition in the payroll processing and HR services industry is primarily based on service
responsiveness, product quality and reputation, including ease of use and accessibility of technology,
breadth of service and product offerings, and price. We believe we are competitive in each of these
leading-edge technology and mobility applications, combined with
areas. We believe that our
personalized service provided by industry professionals and our
technology-enabled service
capabilities, distinguishes us from our competitors.
Software Maintenance and Development
The ever-changing mandates of federal, state, and local tax and regulatory agencies require us to
regularly update our proprietary software to provide payroll and HR services to our clients. We are
continually engaged in developing enhancements to and maintaining our various software platforms to
meet the changing requirements of our clients and the marketplace. We continue to enhance our SaaS
solutions and mobility applications to offer our users an integrated and unified experience. Continued
enhancement of the client and client employee experience is important to our future success.
Employees
We believe our ability to attract and retain qualified employees in all areas of our business is
important to our future success and growth. As of May 31, 2020, we employed approximately 15,800
people, of which approximately 15,600 people were employed on a full-time basis.
Intellectual Property
We own or license and use a number of trademarks, trade names, copyrights, service marks,
trade secrets, computer programs and software, and other intellectual property rights. Collectively, our
intellectual property rights are material to the conduct of our business. Where it is determined to be
appropriate, we take measures to protect our intellectual property rights, including, but not limited to,
confidentiality/non-disclosure agreements or policies with employees, vendors, and others; license
agreements with licensees and licensors of intellectual property; and registration of certain trademarks.
We believe that the “Paychex” name, trademark, and logo are of material importance to us.
Seasonality
There is no significant seasonality to our business. However, during our third fiscal quarter, which
ends in February, the number of new payroll clients, new retirement services clients, and new worksite
employees associated with our HR Solutions ASO and PEO businesses tends to be higher than during
the rest of the fiscal year, primarily because many new clients prefer to start using our services at the
beginning of a calendar year. In addition, calendar year-end transaction processing and client funds
activity are traditionally higher during our third fiscal quarter due to clients paying year-end bonuses,
clients requesting additional year-end services, and the preparation and delivery of end-of year
reporting requirements.
9
Available Information
We are subject to the informational and reporting requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Therefore, we file periodic reports, proxy statements, and
other information with the SEC. The SEC maintains a website (www.sec.gov) that includes our reports,
proxy statements, and other information.
Our corporate website, www.paychex.com, provides materials for investors and information about
our services. Our Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
to
other SEC filings, as well as any amendments to such reports filed or furnished pursuant
Section 13(a) or 15(d) of the Exchange Act, are made available, free of charge, on our website as soon
as reasonably practicable after such reports have been filed with or furnished to the SEC. The
information on our website is not incorporated by reference into our Form 10-K. Also, copies of our
Annual Report to Stockholders and Proxy Statement, to be issued in connection with our 2020 Annual
Meeting of Stockholders, will be made available, free of charge, upon written request submitted to
Paychex, Inc., c/o Corporate Secretary, 911 Panorama Trail South, Rochester, New York 14625-2396.
Item 1A. Risk Factors
Our future results of operations are subject to risks and uncertainties that could cause actual
results to differ materially from historical and current results, and from our projections. The following
risk factors represent our current view of some of the most important risks facing our business and are
important to understanding our business. These are not the only risks we face. Additional factors not
presently known to us or that we currently deem to be immaterial also may adversely affect, possibly to
a material extent, our business, cash flows, financial condition, or results of operations in future
periods. In addition, refer to the cautionary note regarding forward-looking statements at the beginning
of Part I of this Form 10-K.
Our business and results of operations have been, and our financial condition may be,
impacted by the outbreak of COVID-19 and such impact could be materially adverse. The
global spread of COVID-19 created significant volatility, uncertainty and economic disruption. In the
United States and globally, governmental authorities instituted certain preventative measures, including
border closures,
travel restrictions, operational restrictions on certain businesses, shelter-in-place
orders, quarantines and recommendations to practice social distancing. These restrictions disrupted
and may continue to disrupt economic activity, resulting in reduced commercial and consumer
confidence and spending, increased unemployment, closure or restricted operating conditions for
businesses, volatility in the global capital markets, instability in the credit and financial markets, labor
shortages, regulatory recommendations to provide relief for impacted consumers, disruption in supply
chains, and restrictions on many hospitality and travel industry operations.
The extent to which the coronavirus pandemic impacts our business, operations, and financial
results is uncertain and will depend on future developments, including the duration or recurrence, of
the pandemic, the related length and severity of its impact on the U.S. and global economy, and the
continued governmental, business and individual actions taken in response to the pandemic and
economic disruption. Impacts related to the COVID-19 pandemic are expected to continue to pose
risks to our business for the foreseeable future, heightened many of the risks and uncertainties
identified below, and could have a materially adverse impact on our business, financial condition, and
results of operations.
Our business is substantially dependent on our clients continued use of our solutions and
services, and our results of operations will decline if our clients are no longer willing or able to use
them. Our clients are sensitive to negative changes in economic conditions. If they cease operations or
file for bankruptcy protection, we may not be paid for services we already provided, and our client base
will shrink, which will lower our revenue. If under financial pressure, our clients may determine that they
are no longer willing to pay for the services and solutions we provide, which would reduce our revenue.
Our clients may decrease their workforce, which would decrease their demand for our services.
10
Because of spending constraints on our clients and competition in the industry, we may face pricing
pressure on our services and face challenges in onboarding new clients, which would reduce revenue
and ultimately impact our results of operations. If the third-party service providers we rely on are
unable to perform their services for us and our clients, our operations could be materially disrupted and
we could face significant penalties or liabilities.
Our operational risk, including data security risk, has increased during the pandemic as a majority
of our employees are working remotely and cybercriminal activity increases in an attempt to profit from
the disruption to typical operations.
There has been and may continue to be a significant number of new laws and regulations
promulgated by federal, state, local, and foreign governments following the outbreak of the COVID-19
pandemic. We have expended additional resources and incurred additional costs in addressing
regulatory requirements applicable to us and our clients. These regulations may be unclear, difficult to
interpret or in conflict with other applicable regulations. The failure to comply with these new laws and
regulations could result in financial penalties, legal proceedings, and reputational harm.
Our business, services, and financial condition may be adversely impacted by changes in
government regulations and policies. Many of our services, particularly payroll tax administration
services and employee benefit plan administration services, are designed according to government
regulations that often change. Changes in regulations could affect the extent and type of benefits
employers are required, or may choose, to provide employees or the amount and type of taxes
employers and employees are required to pay. Such changes could reduce or eliminate the need for
some of our services and substantially decrease our revenue. Added requirements could also increase
our cost of doing business.
Our business and reputation may be adversely impacted if we fail to comply with U.S. and
foreign laws and regulations. Our services are subject to various laws and regulations, including,
but not limited to, the ACA and anti-money laundering rules. The growth of our international operations
via acquisition also subjects us to additional risks, such as compliance with foreign laws and
regulations. The enactment of new laws and regulations, modifications of existing laws and regulations,
or the adverse application or interpretation of new or existing laws or regulations can adversely affect
our business. Failure to update our services to comply with modified or new legislation in the area of
health care reform as well as failure to educate and assist our clients regarding this legislation could
adversely impact our business reputation and negatively impact our client base. Failure to comply with
laws and regulations could result in the imposition of consent orders or civil and criminal penalties,
including fines, which could damage our reputation and have an adverse effect on our results of
operations or financial condition. In addition, as a U.S. company, we are required to comply with the
economic sanctions and embargo programs administered by the Office of Foreign Assets Control and
similar multi-national bodies and governmental agencies worldwide, and the Foreign Corrupt Practices
Act (“FCPA”). A violation of a sanction or embargo program, or of the FCPA, or similar laws prohibiting
certain payments to governmental officials, could subject us, and individual employees, to a regulatory
enforcement action as well as significant civil and criminal penalties which could adversely impact our
business and operations.
We may not be able to keep pace with changes in technology or provide timely
enhancements to our products and services. The market for our products is characterized by
rapid technological advancements, changes in customer
frequent new product
introductions, and enhancements and changing industry standards. To maintain our growth strategy,
we must adapt and respond to technological advances and technological requirements of our clients.
Our future success will depend on our ability to: enhance our current products and introduce new
products in order to keep pace with products offered by our competitors; enhance capabilities and
increase the performance of our internal systems, particularly our systems that meet our clients’
to technological advancements and changing industry standards. We
requirements; and adapt
continue to make significant investments related to the development of new technology. If our systems
become outdated, it may negatively impact our ability to meet performance expectations related to
requirements,
11
quality, time to market, cost and innovation relative to our competitors. The failure to provide more
efficient and user-friendly customer-facing digital experience across internet and mobile platforms as
well as in physical locations may adversely impact our business and operating results. There can be no
assurance that our efforts to update and integrate systems will be successful. If we do not integrate
and update our systems in a timely manner, or if our investments in technology fail to provide the
expected results, there could be a material adverse effect to our business and results of operations.
The failure to continually develop enhancements and use of technologies such as robotics and other
workflow automation tools, natural
intelligence/machine learning
may impact our ability to increase the efficiency of and reduce costs associated with operational risk
management and compliance activities.
language processing, and artificial
We could be subject to reduced revenues, increased costs, liability claims, or harm to our
competitive position as a result of cyberattacks, security vulnerabilities or
Internet
disruptions. We rely upon information technology (“IT”) networks, cloud-based platforms, and
systems to process, transmit, and store electronic information, and to support a variety of business
processes, some of which are provided by third-party vendors. Cyberattacks and security threats are a
risk to our business and reputation. A cyberattack, unauthorized intrusion, malicious software
infiltration, network disruption or outage, corruption of data, or theft of personal or other sensitive
information, could have a material adverse effect on our business operations or that of our clients,
result in liability or regulatory sanction, or cause harm to our business and reputation and result in a
loss in confidence in our ability to serve clients all of which could have a material adverse effect on our
business. The rapid speed of disruptive innovations involving cyberattacks, security vulnerabilities and
Internet disruptions enabled by new and emerging technologies may outpace our organization’s ability
to compete and/or manage the risk appropriately. In addition, cybercriminals may seek to exploit the
disruption caused by the COVID-19 pandemic by attempting to engage in payment-related fraud or by
more frequently attempting to gain access to our systems through phishing or other means that may be
more successful when most of our employees are working remotely.
Data Security and Privacy Leaks: We collect, use, and retain increasingly large amounts of
personal information about our clients, employees of our clients, and our employees, including: bank
account numbers, credit card numbers, social security numbers, tax return information, health care
information, retirement account information, payroll information, system and network passwords, and
other sensitive personal and business information. At the same time, the continued occurrence of high-
profile cyber-attacks and data breaches provides evidence of an external environment increasingly
hostile to information security. We may be particularly targeted for cyber-attack because of the amount
and type of personal and business information that we collect, use, and retain. Vulnerabilities, threats,
and more sophisticated and targeted computer crimes pose a risk to the security of our systems and
networks, and the confidentiality, availability, and integrity of our data.
Our service platforms enable our clients to store and process personal data on premise or,
increasingly, in a cloud-based environment that we host. The security of our IT infrastructure is an
important consideration in our customers’ purchasing decisions. Because the techniques used to
obtain unauthorized access, disable or degrade service or sabotage systems change frequently, are
increasingly more complex and sophisticated and may be difficult to detect for long periods of time, we
may be unable or fail to anticipate these techniques or implement adequate or timely preventative or
responsive measures. As cyber threats continue to evolve, we are focused on ensuring that our
operating environments safeguard and protect personal and business information. We may be required
to invest significant additional resources to comply with evolving cybersecurity regulations and to
modify and enhance our information security and controls, and to investigate and remediate any
security vulnerabilities. While we have security systems and IT infrastructure in place designed to
detect and protect against unauthorized access to such information, if our security measures are
breached, our business could be substantially harmed, and we could incur significant liabilities. Any
such breach or unauthorized access could negatively affect our ability to attract new clients, cause
existing clients to terminate their agreements with us, result in reputational damage, and subject us to
12
lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect our
business and operating results. Third-parties,
including vendors that provide services for our
operations, could also be a source of security risk to us in the event of a failure of their own security
systems and infrastructure.
Data Loss and Business Interruption: If our systems are disrupted or fail for any reason, including
Internet or systems failure, or if our systems are infiltrated by unauthorized persons, both the Company
and our clients could experience data loss, financial loss, harm to reputation, or significant business
interruption. Hardware, applications and services, including cloud-based services, that we develop or
procure from third-party vendors may contain defects in design or other problems that could
compromise the integrity and availability of our services. Any delays or failures caused by network
outages, software or hardware failures, or other data processing disruptions, could result in our inability
to provide services in a timely fashion or at all. We may be required to incur significant costs to protect
against damage caused by disruptions or security breaches in the future. Such events may expose us
to unexpected liability,
loss of clients’ business,
unfavorable impact
to business reputation, and there could be a material adverse effect on our
business and results of operations.
litigation, regulatory investigation and penalties,
Our reputation, results of operations, or financial condition may be adversely impacted if
we fail to comply with data privacy laws and regulations. Our services require the storage and
transmission of proprietary and confidential information of our clients and their employees, including
personal or identifying information, as well as their financial and payroll data. Our applications are
subject to various complex government laws and regulations on the federal, state, and local levels,
including those governing personal privacy. In the U.S., we are subject to rules and regulations
promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability
and Accountability Act of 1996, the Family Medical Leave Act of 1993, the ACA, federal and state labor
and employment laws, and state data breach notification and data privacy laws, such as the California
Consumer Protection Act, which became effective on January 1, 2020. In addition, the European
Union’s General Data Privacy Regulation became fully effective in May 2018. Failure to comply with
such laws and regulations could result
in the imposition of consent orders or civil and criminal
penalties, including fines, which could damage our reputation and have an adverse effect on our
results of operations or financial condition. The regulatory framework for privacy issues is rapidly
evolving and future enactment of more restrictive laws, rules, or regulations and/or future enforcement
actions or investigations could have a materially adverse impact on us through increased costs or
restrictions on our business and noncompliance could result in regulatory penalties and significant
legal liability.
In the event of a catastrophe, our business continuity plan may fail, which could result in the
loss of client data and adversely interrupt operations. Our operations are dependent on our ability
to protect our infrastructure against damage from catastrophe or natural disaster, severe weather
loss,
including events resulting from climate change, unauthorized security breach, power
telecommunications failure, terrorist attack, public health emergency, or other events that could have a
significant disruptive effect on our operations. We have a business continuity plan in place in the event of
system failure due to any of these events. Our business continuity plan has been tested in the past by
floods, and snowstorms, and has been
circumstances of severe weather,
successful. However, these past successes are not an indicator of success in the future. If the business
continuity plan is unsuccessful in a disaster recovery scenario, we could potentially lose client data or
experience material adverse interruptions to our operations or delivery of services to our clients.
including hurricanes,
We may be adversely impacted by any failure of third-party service providers to perform their
functions. As part of providing services to clients, we rely on a number of third-party service providers.
These service providers include, but are not limited to, couriers used to deliver client payroll checks and
banks used to electronically transfer funds from clients to their employees. Failure by these service
providers, for any reason, to deliver their services in a timely manner and in compliance with applicable
laws and regulations could result in material interruptions to our operations, impact client relations, and
result in significant penalties or liabilities to us.
13
We may be exposed to additional risks related to our co-employment relationship within
our PEO business. Many federal and state laws that apply to the employer-employee relationship
do not specifically address the obligations and responsibilities of the “co-employment” relationship
within our PEO business. State and federal positions regarding co-employment relationships are in a
constant state of flux and changed with varying degrees of impact on our operations. We cannot
predict when changes will occur or forecast whether any future changes will be favorable or
unfavorable to our operations. There is a possibility that we may be subject to liability for violations of
employment or discrimination laws by our clients and acts or omissions of client employees, who may
be deemed to be our agents, even if we do not participate in any such acts or violations. Although our
agreements with clients provide that they will indemnify us for any liability attributable to their own or
their employees’ conduct, we may not be able to effectively enforce or collect such contractual
obligations. In addition, we could be subject to liabilities with respect to our employee benefit plans if it
were determined that we are not the “employer” under any applicable state or federal laws. Incurring
additional liabilities related to our PEO business may adversely affect our results of operations.
We may be adversely impacted by changes in health insurance and workers’ compensation
rates and underlying claims trends. Within our PEO business, we maintain health and workers’
compensation insurance covering worksite employees. The insurance costs are impacted by claims
experience and are a significant portion of our PEO costs. If we experience a sudden or unexpected
increase in claims activity, our costs could increase.
in the event of expiration or
cancellation of existing contracts, we may not be able to secure replacement contracts on competitive
the employer-related
terms. Also, as a co-employer in the PEO, we assume or share many of
responsibilities associated with health care reform, which may result in increased costs. Increases in
costs not incorporated into service fees timely or fully could have a material adverse effect on our
results of operations. Incorporating cost increases into service fees could also impact our ability to
attract and retain clients.
In addition,
Our clients could have insufficient funds to cover payments we made on their behalf,
resulting in financial loss to us. As part of our payroll processing service, we are authorized by our
clients to transfer money from their accounts to fund amounts owed to their employees and various
taxing authorities. It is possible that we could be held liable for such amounts in the event the client has
insufficient funds to cover them. We have in the past, and may in the future, make payments on our
clients’ behalf for which we may not be reimbursed, resulting in loss to us. If a significant number of our
clients are unable to cover payments we make on their behalf, our results of operations will be
materially adversely impacted.
Our interest earned on funds held for clients may be impacted by changes in government
regulations mandating the amount of tax withheld or timing of remittance. We receive interest
income from investing client
funds collected but not yet remitted to applicable tax or regulatory
agencies or to client employees. A change in regulations either decreasing the amount of taxes to be
withheld or allowing less time to remit taxes to applicable tax or regulatory agencies could adversely
impact interest income.
We may be adversely impacted by volatility in the political and economic
environment. Trade, monetary and fiscal policies, and political and economic conditions may
substantially change, and credit markets may experience periods of constriction and variability. These
conditions may impact our business due to lower transaction volumes or an increase in the number of
clients going out of business. Current or potential clients may decide to reduce their spending on
payroll and other outsourcing services. In addition, new business formation may be affected by an
inability to obtain credit.
14
We invest our funds held for clients in high quality, investment-grade marketable securities, money
markets, and other cash equivalents. However, these funds held for clients are subject to general
market, interest rate, credit, and liquidity risks. These risks may be exacerbated during periods of
unusual financial market volatility. The interest we earn on funds held for clients may decrease as a
result of a decline in funds available to invest and lower interest rates. In addition, during periods of
volatility in the credit markets, certain types of investments may not be available to us or may become
too risky for us to invest in, further reducing the interest we may earn on client funds. If we sell
available-for-sale securities to satisfy short-term funding requirements, we may recognize losses,
which would reduce the interest income earned on funds held for clients.
Constriction in the credit markets may impact the availability of financing, even to borrowers with
the highest credit
ratings. Historically, we have periodically borrowed against available credit
arrangements to meet short-term liquidity needs. However, should we require additional short-term
liquidity during days of large outflows of client funds, a credit constriction may limit our ability to access
those funds or the flexibility to obtain them at interest rates that would be acceptable to us. Growth in
services for funding payrolls of our clients in the temporary staffing industry may be constricted if
access to financing becomes limited. In addition, our ability to grow through significant acquisitions
may be limited. See also “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” If all of
these financial and economic circumstances were to remain in effect for an extended period of time,
there could be a material adverse effect on our results of operations and financial condition.
We made and may continue to make acquisitions that
involve numerous risks and
uncertainties. Acquisitions subject us to risks, including increased debt, assumption of unforeseen
liabilities, and difficulties in integrating operations. Successful
integration involves many challenges,
including the difficulty of developing and marketing new products and services, our exposure to
unforeseen liabilities of acquired companies, and the loss of key employees of an acquired business.
The integration and conversion of our acquired operations or other future acquisitions, if any, could
result in increased operating costs if the anticipated synergies of operating these businesses as one
are not achieved, a loss of strategic opportunities if management is distracted by the integration
process, and a loss of customers if our service levels drop during or following the integration
process. In addition, an acquisition could adversely impact cash flows and/or operating results, and
dilute stockholder
the
impairment of acquired intangible assets including goodwill,
interest costs and debt service
requirements for any debt incurred in connection with an acquisition, and any issuance of securities in
connection with an acquisition or new business venture that dilutes or lessens the rights of our current
stockholders. If the integration of any or all of our acquisitions or future acquisitions is not successful, it
could have a material adverse impact on our operating results and stock price.
including charges to our income to reflect
for many reasons,
interests,
Certain of our debt agreements contain covenants that may constrain the operation of our
business, and our failure to comply with these covenants could have a material adverse effect
on our financial condition. The Note Purchase and Guarantee Agreement (the “Agreement”) that
we entered into in January 2019 in connection with our acquisition of Oasis, contains covenants which
may restrict our flexibility to operate our business. These covenants include restrictions regarding the
incurrence of liens and indebtedness, substantial changes in the general nature of our business and
our subsidiaries (taken as a whole), certain merger transactions, certain sales of assets and other
matters, all subject to certain exceptions. The Agreement also contains financial covenants, which are
reviewed for compliance on a quarterly basis, that require us not to exceed a maximum leverage ratio
In addition, certain of our
of 3.50:1.00 and a minimum interest coverage ratio of 2.00:1.00.
indebtedness may not exceed 20% of our consolidated stockholders’ equity. If we do not comply with
these covenants, it could result in material adverse effects on our operating results and our financial
condition.
15
We may not be able to attract and retain qualified people, which could impact the quality of
our services and customer satisfaction. Our success, growth, and financial results depend in part
on our continuing ability to attract, retain, and motivate highly qualified people at all levels, including
management, technical, compliance, and sales personnel. Competition for these individuals can be
intense, and we may not be able to retain our key people, or attract, assimilate, or retain other highly-
qualified individuals in the future, which could harm our future success.
Failure to protect our intellectual property rights may harm our competitive position and
litigation to protect our intellectual property rights or defend against third-party allegations of
infringement may be costly. Despite our efforts to protect our intellectual property and proprietary
information, we may be unable to do so effectively in all cases. Our intellectual property could be
wrongfully acquired as a result of a cyberattack or other wrongful conduct by employees or third-
parties. To the extent
that our intellectual property is not protected effectively by trademarks,
copyrights, patents, or other means, other parties with knowledge of our intellectual property, including
former employees, may seek to exploit our intellectual property for their own and others’ advantage.
Competitors may also misappropriate our trademarks, copyrights or other intellectual property rights or
duplicate our
impairment or misappropriation of our
intellectual property or proprietary information could harm our business and our brand and may
adversely affect our ability to compete. Third-parties may claim that we are infringing their intellectual
property rights. To the extent we seek to enforce or must defend our intellectual property rights with
litigation, we could incur significant expenses and/or be required to pay substantial damages. We may
also be obligated to indemnify our customers or vendors in connection with claims or litigation. The
litigation to enforce or defend our intellectual property rights could be costly and time-consuming.
technology and products. Any significant
In the event we receive negative publicity, our reputation and the value of our brand could
be harmed, and clients may not use our products and services, which may have a material
adverse effect on our business. Negative publicity relating to events or activities attributed to us,
our corporate employees, or others associated with us, whether or not justified, may tarnish our
reputation and reduce the value of our brand. If we are unable to maintain quality HCM and employee
benefit-related solutions and PEO and insurance solutions, our reputation with our clients may be
harmed and the value of our brand may diminish. In addition, if our brand is negatively impacted, it may
have a material adverse effect on our business, including challenges retaining clients or attracting new
clients and recruiting talent and retaining employees.
We are involved in litigation from time to time arising from the operation of our business
and, as such, we could incur substantial judgments, fines, legal fees, or other costs. We are
sometimes the subject of complaints or litigation from customers, employees, or other third-parties for
various actions. From time to time, we are involved in litigation involving claims related to, among other
things, breach of contract, tortious conduct, and employment and labor law matters. The damages
sought against us in some of these litigation proceedings could be substantial. Although we maintain
liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our
insurance coverage limits or if our insurance policies do not cover a claim, this could have a material
adverse effect on our business, financial condition, results of operations, and cash flows.
Quantitative and qualitative disclosures about market risk: Refer to the “Market Risk
Factors” section contained in Item 7A of this Form 10-K for a discussion on this type of risk, which
could have a material adverse effect on our business and results of operations.
Item 1B. Unresolved Staff Comments
None.
16
Item 2. Properties
We owned and leased the following properties as of May 31, 2020:
Square feet
Owned facilities:
Rochester, New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012,000
65,000
Other U.S. locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,000
International locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total owned facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,090,000
Leased facilities:
Rochester, New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,000
Other U.S. locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,937,000
86,000
International locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total leased facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,120,000
Our facilities in Rochester, New York house various distribution, processing, and technology
functions, certain ancillary functions, a telemarketing unit, and other back-office functions. Facilities
outside of Rochester, New York are in various locations throughout the U.S. and house our service
locations primarily house our
centers,
European operations in Denmark and Germany and a location in India houses information technology,
service, and sales support functions. We believe that adequate, suitable lease space will continue to
be available to meet our needs.
fulfillment centers and sales functions. Our international
Item 3. Legal Proceedings
We are subject to various claims and legal matters that arise in the normal course of our business.
These include disputes or potential disputes related to breach of contract, tort, employment-related
claims, tax claims, patent, statutory, and other matters.
Our management currently believes that resolution of outstanding legal matters will not have a
material adverse effect on our 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 the results of
operations in the period in which any such effect is recorded.
Item 4. Mine Safety Disclosures
Not applicable.
17
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our common stock trades on the Nasdaq Global Select Market under the symbol “PAYX”.
Dividends have historically been paid on our common stock in August, November, February, and May.
The level and continuation of future dividends are dependent on our future earnings and cash flows
and are subject to the discretion of our Board of Directors (the “Board”).
As of June 30, 2020, there were 10,075 holders of record of our common stock, which includes
registered holders and participants in the Paychex, Inc. Dividend Reinvestment and Stock Purchase
Plan. There were also 4,031 participants in the Paychex, Inc. Qualified Employee Stock Purchase Plan
and 4,393 participants in the Paychex, Inc. Employee Stock Ownership Plan.
In May 2019, our Board approved a program to repurchase up to $400.0 million of our common
stock with authorization expiring in May 2022. All shares repurchased during fiscal 2020 were retired
and were as follows:
In millions, except per share amount
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . .
March 1 to March 31, 2020 . . . . . . . . . . . . . .
April 1 to April 30, 2020 . . . . . . . . . . . . . . . . .
May 1 to May 31, 2020 . . . . . . . . . . . . . . . . . .
Fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
number
of shares
purchased
Average price
paid per share
Total
dollars
Approximate dollar
value of shares that
may yet be
purchased under
the program
2.0
—
—
—
—
—
2.0
$84.68
$ —
$ —
$ —
$ —
$ —
$84.68
$171.9
—
—
—
—
—
$171.9
$228.1
$228.1
$228.1
$228.1
$228.1
$228.1
18
The following graph shows a five-year comparison of the total cumulative returns of investing $100
on May 31, 2015, in Paychex common stock, the S&P 500 Index, and a Peer Group Index. All
comparisons of stock price performance shown assume reinvestment of dividends. We are a
participant in the S&P 500 Index, a market group of companies with a larger than average market
capitalization. Our Peer Group is a group of companies with comparable revenue and net income, who
are in a comparable industry, or who are direct competitors of Paychex (as detailed below).
STOCK PRICE PERFORMANCE GRAPH
$250
$200
$150
$100
$50
$0
2015
2016
2017
2018
2019
2020
Fiscal Year Ending May 31
Paychex, Inc.
S&P 500
New Peer Group
Old Peer Group
May 31,
2015
2016
2017
2018
2019
2020
Paychex . . . . . . . . . . . . . . . . . . . . . $100.00
S&P 500 . . . . . . . . . . . . . . . . . . . . . $100.00
Peer Group — old . . . . . . . . . . . . . $100.00
Peer Group — new . . . . . . . . . . . . $100.00
$113.56
$101.72
$102.63
$105.21
$128.03
$119.48
$120.62
$124.50
$146.48
$136.67
$155.74
$158.25
$197.81
$141.84
$177.20
$185.85
$172.03
$160.05
$193.26
$204.80
There can be no assurance that our stock performance will continue with the same or similar
trends depicted in the graph above. We neither make nor endorse any predictions as to future stock
performance.
The Governance & Compensation Committee of our Board annually reviews and approves the
selection of Peer Group companies, adjusting the group from year to year based upon our business
and changes in the Peer Group companies’ business or the comparability of their metrics. The Peer
Group may also be adjusted in the event of mergers, acquisitions, or other significant economic
changes. The Peer Group was adjusted for
Inc. and Robert Half
International, Inc. were removed and replaced with IHS Markit Ltd. and Worldpay, Inc., as they are
more closely aligned with the Paychex business. Both the old and new peer groups are presented for
this year of transition.
fiscal 2020. DST Systems,
19
Our new Peer Group for fiscal 2020 is comprised of the following companies:
Alliance Data Systems Corporation
Automatic Data Processing, Inc. (direct competitor)
Broadridge Financial Solutions, Inc.
The Dun & Bradstreet Corporation
Equifax, Inc.
Fiserv, Inc.
Global Payments Inc.
H&R Block, Inc.
IHS Markit, Ltd.
Intuit Inc.
Moody’s Corporation
TD AMERITRADE Holding Corporation
Total Systems Services, Inc.
The Western Union Company
Worldpay, Inc.
Item 6. Selected Financial Data
In millions, except per share amounts
Year ended May 31,
2020(1)
2019(1)
2018(1),(2),(3)
2017(1)
2016(4)
Service revenue . . . . . . . . . . . . . . . . . . . . $3,953.6
86.9
Interest on funds held for clients . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . $4,040.5
Operating income . . . . . . . . . . . . . . . . . . . $1,460.5
Net income . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
3.06
Basic earnings per share . . . . . . . . . . . . . $
3.04
Diluted earnings per share . . . . . . . . . . . . $
Cash dividends per common share . . . . . $
2.48
Purchases of property and equipment
. . $ 127.0
Cash, restricted cash, and total
corporate investments . . . . . . . . . . . . . $1,013.7
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $8,550.7
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . $ 801.9
Stockholders’ equity . . . . . . . . . . . . . . . . . $2,781.4
Return on stockholders’ equity . . . . . . . . .
41%
$3,691.9
80.6
$3,772.5
$1,371.3
$1,034.4
2.88
$
2.86
$
$
2.30
$ 123.8
$ 779.9
$8,676.0
$ 796.4
$2,619.5
$3,314.2
63.5
$3,377.7
$1,291.5
$ 994.1
2.77
$
2.75
$
$
2.06
$ 154.0
$ 719.7
$7,915.4
$
$2,356.8
$3,102.4
50.6
$3,153.0
$1,253.9
$ 826.3
2.30
$
2.28
$
1.84
$
94.3
$
$ 777.4
$7,280.8
$2,227.2
$2,905.8
46.1
$2,951.9
$1,146.6
$ 756.8
2.10
$
2.09
$
1.68
$
97.7
$
$ 793.2
$6,440.8
—
$1,911.7
— $
— $
42%
44%
39%
40%
(1)
(2)
(3)
(4)
In fiscal 2017, we early-adopted new accounting guidance related to employee stock-based compensation payments. As a
result, a discrete tax benefit was recognized upon exercise or lapse of stock-based awards. This discrete tax benefit
increased diluted earnings per share by approximately $0.04 per diluted share, $0.02 per diluted share, $0.04 per diluted
share, and $0.05 per diluted share for fiscal 2020, fiscal 2019, fiscal 2018, and fiscal 2017, respectively.
In fiscal 2018, the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) significantly impacted our net income, basic and
diluted earnings per share, and return on stockholders’ equity. Refer to Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this Form
10-K for additional discussion of the impact of the Tax Act.
In fiscal 2018, an additional expense and corresponding tax benefit was recognized as a result of the termination of certain
license agreements. Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Form 10-K for additional discussion of the impact of the termination of certain license agreements.
In the fiscal year ended May 31, 2016 (“fiscal 2016”), a net tax benefit was recorded for income derived in prior tax years
from customer-facing software we produced. This net tax benefit increased diluted earnings per share by approximately
$0.06 per diluted share.
20
Item 7. 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 each of the three fiscal years ended May 31, 2020 (“fiscal 2020” or the “fiscal
year”), May 31, 2019 (“fiscal 2019”), and May 31, 2018 (“fiscal 2018”), and our financial condition as of
May 31, 2020. This review should be read in conjunction with the accompanying consolidated financial
statements and the related Notes to Consolidated Financial Statements contained in Item 8 of this
Annual Report on Form 10-K (“Form 10-K”) and the “Risk Factors” discussed in Item 1A of this
Form 10-K. Forward-looking statements in this review are qualified by the cautionary statement under
the heading “Cautionary Note Regarding Forward-Looking Statements Pursuant to the United States
Private Securities Litigation Reform Act of 1995” contained at the beginning of Part I of this Form 10-K.
Overview
We are a leading provider of integrated human capital management (“HCM”) solutions for human
resources (“HR”), payroll, benefits, and insurance services for small- to medium-sized businesses.
Within our HCM solutions, we offer a comprehensive portfolio of services and products that allow our
clients to meet their diverse HR and payroll needs.
We support our small-business clients, reducing the complexity and risk of running their own
payroll, while ensuring greater accuracy with up-to-date tax rates and regulatory information. Clients
may choose to have our service team handle everything for them, or process payroll themselves
utilizing our proprietary, robust, software-as-a-service (“SaaS”) Paychex Flex® platform and our
SurePayroll® SaaS-based products. Our mid-market clients generally have more complex payroll and
employee benefit needs. However, in the current environment of increasing regulations, we believe the
needs for HR outsourcing solutions have been moving down-market. Any of our clients using Paychex
Flex can opt for the integrated suite of HCM solutions, which allows clients to choose the services and
software that will meet the needs of their business.
Our portfolio of HCM and employee benefit-related services is disaggregated into two categories,
Management Solutions and Professional Employer Organization (“PEO”) and Insurance Solutions, as
discussed in Part 1, Item 1 of this Form 10-K.
Our mission is to be the leading provider of HR, payroll, benefits, and insurance solutions by being
an essential partner to small and medium-sized businesses across the U.S. and parts of Europe. We
believe that success in this mission will lead to strong, long-term financial performance. Our strategy
focuses on providing industry-leading, integrated technology; increasing client satisfaction; expanding
our leadership in HR; growing our client base; and engaging in strategic acquisitions.
We continue to focus on driving growth in the number of clients, revenue per client, total revenue
and profits, while providing industry-leading service and technology solutions to our clients and their
employees. We maintain industry-leading margins by managing our personnel costs and expenses
while continuing to invest in our business, particularly in leading-edge technology. We believe these
investments are critical to our success. Looking to the future, we believe that investing in our products,
people, and service capabilities will position us to capitalize on opportunities for long-term growth.
Effective December 20, 2018, the Company acquired Oasis Outsourcing Group Holdings, L.P.
(“Oasis”). Upon closing, Oasis became a wholly owned subsidiary of the Company. Oasis is an
industry leader in providing HR outsourcing services. The purchase price was $992.2 million, net of
$262.3 million in cash acquired,
including $132.1 million of restricted cash. The acquisition was
financed through a combination of cash on hand and the issuance of long-term private placement debt
totaling $800.0 million.
21
Fiscal 2020 Financial Highlights
Financial highlights for fiscal 2020, compared to fiscal 2019, are as follows:
• Total revenue increased 7% to $4.0 billion. Oasis contributed approximately 4% to the growth in
total revenue.
• Operating income increased 7% to $1.5 billion.
• Net income increased 6% to $1.1 billion. Adjusted net income(1) increased 5% to $1.1 billion.
• Diluted earnings per share and adjusted diluted earnings per share(1) both increased 6% to $3.04
per share and $3.00 per share, respectively.
• Dividends of $889.4 million were paid to stockholders, representing approximately 81% of net
income.
(1) Adjusted net income and adjusted diluted earnings per share are not U.S. generally accepted accounting principles
(“GAAP”) measures. Refer to the “Non-GAAP Financial Measures” section of this Item 7 for a discussion of these non-GAAP
measures and a reconciliation to the most comparable U.S. GAAP measures of net income and diluted earnings per share.
For further analysis of our results of operations for fiscal years 2020, 2019, and 2018, and our
financial position as of May 31, 2020, refer to the tables and analysis in the “Results of Operations” and
“Liquidity and Capital Resources” sections of this Item 7.
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.
The COVID-19 pandemic affected our business, our customers’ businesses, and the markets we serve
during the three months ended May 31, 2020 (the “fourth quarter”). See the “COVID-19 Response”
section of this Item 7 for further discussion on the impact of COVID-19 on our results of operations
along with our response to the pandemic.
Business Outlook
Our payroll and PEO client base,
including all acquisitions, was greater than 680,000 and
approximately 670,000 clients as of May 31, 2020 and May 31, 2019, respectively, and greater than
650,000 clients as of May 31, 2018. Client retention was at record levels of over 83% of the beginning
client base for fiscal 2020. Client retention was over 82% for fiscal 2019 and approximately 81% of the
beginning client base for fiscal 2018.
While our HR product offerings provide services to employers and employees beyond payroll, they
effectively leverage payroll processing data. These services are included as part of the integrated HCM
solution within Paychex Flex or provided through the Prism HR PEO platform. The following table
illustrates the growth in selected HR product offerings:
$ in billions
As of May 31,
Paychex HR Solutions and PEO
2020
Change(1)
2019
Change(1)
2018
client worksite employees(2) . . . . . .
1,428,000
(4)%
1,491,000
29%
1,157,000
Paychex HR Solutions and PEO
clients . . . . . . . . . . . . . . . . . . . . . . .
55,000
7%
52,000
26%
41,000
Health and benefits services
applicants . . . . . . . . . . . . . . . . . . . .
Retirement services plans . . . . . . . . .
Asset value of retirement services
182,000
91,000
(4)%
4%
189,000
87,000
7%
6%
177,000
82,000
participants’ funds . . . . . . . . . . . . . $
32.3
4%
$
31.0
1%
$
30.6
(1) Percentage changes are calculated based on unrounded numbers.
(2) Oasis is included in the total number of worksite employees and clients for both fiscal 2020 and fiscal 2019.
22
Concentrated effort remains on the continued enhancements of Paychex Flex, our robust, cloud-
based HCM software solutions platform, which allows direct client access to HR, payroll, and benefits
information in a streamlined and integrated approach to workplace management. In fiscal 2020, we
continued to focus on enhancing the value to clients, including new offerings and enhancements to
Paychex Flex as follows:
• Paychex Integrations enabling users to connect Paychex Flex with some of the world’s leading
HR, accounting, point-of-sale, and productivity applications on the market;
• Smartwatch Solution, which enables users to track time worked via their smartwatch;
• Pay-on-Demand, which provides participating customer employees the option to request access
to a portion of earned pay before the scheduled pay date;
• Real-Time Payments, which provides employers an efficient way to instantly pay their
employees for time worked;
• Help Center, which provides users access to training resources and how-to tutorials in written,
video, and tour-like deliverables;
• Enhancements to Flex Assistant, that provides a user with an in-app learning journey that aligns
with their preferences as a verbal, visual, or physical
learner and offers written how-to
documents, tutorial-style video vignettes, or a guided interactive tour from in-app step-by-step
messaging;
• Document Management was enhanced to add electronic signature capabilities and the ability for
log-in through
customers to run on-demand reports that show the entire process, from initial
signature event;
• HR Conversations, a new tool that enables managers, employees, and HR staff to collaborate
and capture day-to-day interactions; and
• Other enhancements including, grid entry view capabilities and the ability for employees and
administrative users to create a custom dashboard.
We continue to strengthen our position in the industry by serving as a source of education and
information to clients, businesses of all sizes, and other interested parties. We provide free webinars,
white papers, and other information on our website to aid existing and prospective clients with the
impact of regulatory changes. The Paychex Insurance Agency, Inc. website, www.paychex.com/group-
health-insurance, helps small-business owners navigate the area of insurance coverage. Both this
website and www.paychex.com/worx have sections dedicated to the topic of health care reform.
COVID-19 Response
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.
The COVID-19 pandemic began affecting our operations and employees, our customers’ businesses,
and the markets we serve in the three months ended May 31, 2020 (the “fourth quarter”). The health
and safety of our employees remains our top priority. We were expedient with the implementation of
our business continuity plan, which included moving 95% of our workforce to work remotely and
restricting unnecessary travel. Results of operations for the fourth quarter were adversely impacted by
the COVID-19 pandemic as businesses suspended operations. Management Solutions revenue was
impacted by a decline in check volumes, partially offset by increased penetration of retirement services
and time and attendance services. The decline in check volumes was due to a reduction in the number
of clients processing payrolls as well as the number of employees paid due to state and regional
shutdowns. PEO and Insurance Solutions revenue was impacted by a decline in the number of
worksite employees serviced by our existing clients. Insurance Solutions revenue was impacted by a
decrease in the number of health and benefit applicants and a decline in workers’ compensation
premiums. Since the end of April, we have seen sequential improvement in our key business metrics
across our lines of business.
23
As our clients continue to manage through the COVID-19 pandemic, our priority remains helping
them keep their businesses open and return to more normal operations. Our blend of technology and
service provides valuable tools and resources to assist our clients and their employees during this
critical time. The technology investments we made to our Paychex Flex payroll and human resources
them in managing a remote
suite of products positioned us to service our clients and support
workforce.
We created a COVID-19 Help Center on our website to assist our clients and provide them with
the support and resources they need, including:
• Webinars and white papers with information on the Coronavirus Aid, Relief, and Economic
Security Act, including the historic PPP, and Families First Coronavirus Response Act;
• Guidance on the Small Business Administration (“SBA”) loan and debt relief process,
• Interactive PPP loan estimation tool
funding through the SBA program; and
for businesses who are considering or have received
• State-by-state resources to help our clients understand specific directives that may impact their
business.
The COVID-19 Help Center also provides resources to our key business partners, including
accountants, financial institutions, financial advisors, and national associations. The COVID-19 Help
Center has been translated into Spanish to serve our Spanish-speaking clients.
Our strong balance sheet and operational flexibility allowed us to successfully manage through the
initial impact of COVID-19 while protecting our cash flow and liquidity. We will continue to evaluate the
nature and extent of future changes to market and economic conditions related to COVID-19 and will
assess the potential
impact to our business and financial position. We expect to take a cautious
approach to modifying our office and travel restrictions and will wait until we have a clearer vision on
how the pandemic unfolds and utilizing guidance provided by the federal, state, and local governments.
For further information on the risks posed to our business from the COVID-19 pandemic, refer to
Item 1A of this Form 10-K.
Results of Operations
Summary of Results of Operations for Fiscal Years:
In millions, except per share amounts
2020
Change(1)
2019
Change(1)
2018
Revenue:
Management Solutions . . . . . . . . . . . . . . . . $2,963.0
990.6
PEO and Insurance Solutions . . . . . . . . . .
3% $2,877.7
814.2
22%
4% $2,758.4
555.8
46%
Total service revenue . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Other (expense)/income, net . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
3,953.6
86.9
4,040.5
2,580.0
1,460.5
(23.4)
1,437.1
339.0
7%
8%
7%
7%
7%
n/m
5%
2%
3,691.9
80.6
3,772.5
2,401.2
1,371.3
(3.3)
1,368.0
333.6
11%
27%
12%
15%
6%
n/m
5%
9%
3,314.2
63.5
3,377.7
2,086.2
1,291.5
8.6
1,300.1
306.0
Effective income tax rate . . . . . . . . . . . . . .
23.6%
24.4%
23.5%
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
6% $1,034.4
4% $ 994.1
Diluted earnings per share . . . . . . . . . . . . . $
3.04
6% $
2.86
4% $
2.75
(1) Percentage changes are calculated based on unrounded numbers.
n/m – not meaningful
24
We invest in highly liquid, investment-grade fixed income securities and do not utilize derivative
instruments to manage interest rate risk. As of May 31, 2020, we had no exposure to high-risk or
non-liquid investments. Details regarding our combined funds held for clients and corporate cash
equivalents and investment portfolios are as follows:
$ in millions
Average investment balances:
Year ended May 31,
2019
2018
2020
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,931.3
870.7
Corporate cash equivalents and investments . . . . . . . . .
$3,969.7
848.4
$4,040.8
915.1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,802.0
$4,818.1
$4,955.9
Average interest rates earned (exclusive of net realized
gains):
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate cash equivalents and investments . . . . . . . . .
Combined funds held for clients and corporate cash
equivalents and investments . . . . . . . . . . . . . . . . . . . . .
1.9%
1.4%
2.0%
1.6%
1.6%
1.3%
1.8%
1.9%
1.5%
Total net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
11.3
$
— $
0.1
$ in millions
As of May 31,
2020
2019
2018
Net unrealized gains/(losses) on available-for-sale
securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100.0
$
Federal Funds rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of available-for-sale securities . . . . . . . . . . . $2,757.2
Weighted-average duration of available-for-sale securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
in years(3)
2.9
0.25%
19.7
2.50%
$ (38.3)
1.75%
$3,620.8
$3,104.8
2.9
3.1
Weighted-average yield-to-maturity of available-for-sale
securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1%
2.1%
1.9%
(1) The net unrealized gain on our investment portfolios was approximately $112.4 million as of July 15, 2020.
(2) The Federal Funds rate was in the range of 0.0% to 0.25% as of May 31, 2020, in the range of 2.25% to 2.50% as of
May 31, 2019, and in the range of 1.50% to 1.75% as of May 31, 2018.
(3) These items exclude the impact of variable rate demand notes (“VRDNs”), as they are tied to short-term interest rates.
Management Solutions revenue: Management Solutions revenue was $3.0 billion for fiscal
2020 and $2.9 billion for fiscal 2019, reflecting growth of 3% and 4%, respectively, compared to the
prior fiscal year periods. Both fiscal 2020 and fiscal 2019 benefited from increases in our client base
and growth in revenue per client, which improved as a result of higher price realization and increased
penetration of our suite of solutions, particularly HR outsourcing, retirement services, and time and
attendance. Retirement services revenue growth for both fiscal 2020 and fiscal 2019 benefited from an
increase in the number of retirement services plans, along with an increase in revenue earned on the
asset value of participants’ 401(k) funds.
PEO and Insurance Solutions revenue: PEO and Insurance Solutions revenue was
$990.6 million for fiscal 2020 and $814.2 million for fiscal 2019, reflecting growth of 22% and 46%,
respectively, compared to the prior fiscal year periods. In addition to the acquisition of Oasis, PEO and
Insurance Solutions revenue growth in fiscal 2020 and fiscal 2019 was driven by growth in clients
across our PEO business. In addition, for fiscal 2019, PEO and Insurance Solutions revenue growth
was driven by growth in client worksite employees across our PEO business.
25
Insurance Solutions revenue for both fiscal 2020 and fiscal 2019 benefited from an increase in the
number of health and benefit clients, offset by declining rates in the workers’ compensation market. In
addition, for fiscal 2019, Insurance Solutions revenue was impacted by an increase in the number of
health and benefit applicants.
Interest on funds held for clients:
Interest on funds held for clients increased 8% for fiscal
2020 and 27% for fiscal 2019 to $86.9 million and $80.6 million, respectively. For fiscal 2020 the
increase was due to higher realized gains, offset by lower average investment balances and average
interest rates. The realized gains primarily resulted from the strategic repositioning of our client fund
portfolio to enhance liquidity in response to the uncertainty caused by COVID-19. For fiscal 2019, the
increase was primarily due to higher average interest rates earned.
Average investment balances for funds held for clients decreased approximately 1% and 2% for
fiscal 2020 and fiscal 2019, respectively. For fiscal 2020, funds held for clients average investment
balances were impacted by lower client fund collections due to COVID-19 and changes in client base
mix, offset by wage inflation and timing of collections and remittances. For fiscal 2019, the decrease in
average investment balances for funds held for clients was primarily driven by the impact of lower
client withholdings as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), and changes in
client base mix, partially offset by the impact of wage inflation.
Refer to the “Market Risk Factors” section contained in Item 7A of this Form 10-K for more
information on changing interest rates.
Total expenses: Total expenses increased 7% and 15% for fiscal 2020 and fiscal 2019,
respectively, compared to the prior fiscal year periods. The following table summarizes total combined
cost of service revenue and selling, general and administrative expenses for fiscal years:
In millions
2020
Change(1)
2019
Change(1)
2018
Compensation-related expenses . . $1,480.8
209.7
Depreciation and amortization . . . .
334.7
PEO insurance costs . . . . . . . . . . . .
554.8
Other expenses . . . . . . . . . . . . . . . .
6%
16%
17%
3%
$1,396.8
181.5
286.7
536.2
Total expenses . . . . . . . . . . . . . . . . $2,580.0
7%
$2,401.2
13%
32%
40%
6%
15%
$1,235.2
138.0
205.2
507.8
$2,086.2
(1) Percentage changes are calculated based on unrounded numbers.
Compensation-related expenses increased 6% for fiscal 2020 and 13% for fiscal 2019. For fiscal
2020,
the increases in compensation-related expenses were driven by the acquisition of Oasis,
increased headcount, and higher wages, offset by a decrease in performance-based pay. For fiscal
2019,
the increases in compensation-related expenses were driven by the acquisition of Oasis,
increased headcount, higher wages, and an increase in performance-based pay. As of May 31, 2020,
we had approximately 15,800 employees compared with 15,600 employees as of May 31, 2019.
Depreciation expense is primarily related to buildings, furniture and fixtures, data processing
equipment, and both purchased and internally developed software. Amortization of intangible assets is
primarily related to client list acquisitions. The growth in depreciation and amortization for both fiscal
2020 and fiscal 2019, were primarily driven by the amortization of acquired Oasis intangible assets.
PEO insurance costs include workers’ compensation, minimum premium medical insurance plan
arrangements, and self-insured dental and vision plans where we retain risk. The acquisition of Oasis,
along with the growth in our PEO business, contributed to the increase in PEO insurance costs for both
fiscal 2020 and fiscal 2019. In addition, the acquisition of HR Outsourcing Holdings, Inc. (“HROi”)
contributed to the increase in PEO insurance costs for fiscal 2019.
26
Other expenses include items such as non-capital equipment, delivery,
forms and supplies,
communications, travel and entertainment, professional services, and other costs incurred to support
our business. Other expense growth for fiscal 2020 was impacted by the acquisition of Oasis and by
continued investment in product development and supporting technology, tempered by the impact of
COVID-19 in the fourth quarter which drove decreases in other selling, general and administrative
expenses, including travel and entertainment. The increase in other expenses for fiscal 2019 was
impacted by the acquisitions of Oasis and HROi and continued investment in product development and
supporting technology. Other expenses for fiscal 2018 included a one-time expense of $32.6 million
related to the termination of certain license agreements.
Operating income: Operating income increased 7% to $1.5 billion for fiscal 2020 and 6% to
$1.4 billion for fiscal 2019. Operating margin (operating income, as a percentage of total revenue), was
36.1%, 36.3%, and 38.2% for fiscal years 2020, 2019, and 2018, respectively. Adjusted operating
income(1) increased 7% to $1.5 billion for fiscal 2020 and 4% to $1.4 billion for fiscal 2019. Earnings
before interest, taxes, depreciation, and amortization (“EBITDA”)(1)
increased 8% to $1.7 billion for
fiscal 2020 and 9% to $1.6 billion for fiscal 2019. EBITDA margin(1) was 41.4%, 41.2%, and 42.3% for
fiscal years 2020, 2019, and 2018, respectively.
(1) Adjusted operating income, EBITDA and EBITDA margin are not U.S. GAAP measures. Refer to the “Non-GAAP Financial
Measures” section within the “Results of Operations” section of this Item 7 for a discussion of these non-GAAP measures
and a reconciliation to the most comparable U.S. GAAP measures of operating income and net income.
Other (expense)/income, net: Other
(expense)/income, net, primarily represents interest
expense incurred on our debt instruments, netted against earnings from our corporate cash and cash
equivalents and investments in available-for-sale securities. We recognized $23.4 million and
$3.3 million of other expense, net in fiscal 2020 and fiscal 2019, respectively, which was driven by
interest expense related to our long-term borrowings. Other expense, net included $33.3 million and
$13.7 million of interest expense related to our long-term borrowings in fiscal 2020 and fiscal 2019,
respectively.
Income taxes: Our effective income tax rate was 23.6% for fiscal 2020, 24.4% for fiscal 2019,
and 23.5% for fiscal 2018. The effective income tax rates in all periods were impacted by recognition of
net discrete tax benefits related to employee stock-based compensation payments. In fiscal 2019, the
effective income tax rate included discrete tax expense for changes in tax reserves and the revaluation
of deferred tax balances for legislative updates. In fiscal 2018, as a result of the Tax Act, we recorded
a non-recurring net tax benefit for the revaluation of our net deferred tax liabilities. This amount
impacted diluted earnings per share by approximately $0.23 per diluted share for fiscal 2018.
Additional discrete tax items recognized during each respective period are insignificant. Refer to Note L
of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional
disclosures on income taxes.
Net income and diluted earnings per share: Net income increased 6% to $1.1 billion for fiscal
2020 and 4% to $1.0 billion for fiscal 2019. Diluted earnings per share increased 6% to $3.04 per
diluted share for fiscal 2020 and 4% to $2.86 per diluted share for fiscal 2019. Adjusted net income
increased 5% to $1.1 billion for fiscal 2020 and increased 11% to $1.0 billion for fiscal 2019. Adjusted
diluted earnings per share was $3.00 per diluted share for fiscal 2020 and $2.84 per diluted share for
fiscal 2019, reflecting increases of 6% and 11%, respectively. Refer to the “Non-GAAP Financial
Measures” section that follows for a discussion of these non-GAAP measures.
27
Non-GAAP Financial Measures: Adjusted operating income, adjusted net
income, adjusted
diluted earnings per share and EBITDA are summarized as follows:
$ in millions
2020
Change
2019
Change
2018
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,460.5
Non-GAAP adjustments:
Termination of license agreements(1) . . . . . . . . . . . .
Total non-GAAP adjustments . . . . . . . . . . . . . . . . . .
—
—
7% $1,371.3
6% $1,291.5
—
—
32.6
32.6
Adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . $1,460.5
7% $1,371.3
4% $1,324.1
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
Non-GAAP adjustments:
Excess tax benefit related to employee stock-based
compensation payments(2)
. . . . . . . . . . . . . . . . . . . .
Revaluation of net deferred tax liabilities(3) . . . . . . . . .
Termination of license agreements(1) . . . . . . . . . . . . . .
Total non-GAAP adjustments . . . . . . . . . . . . . . . . . . . .
(14.9)
—
—
(14.9)
6% $1,034.4
4% $ 994.1
(8.3)
1.7
—
(6.6)
(12.9)
(83.5)
24.7
(71.7)
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,083.2
5% $1,027.8
11% $ 922.4
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . $
Non-GAAP adjustments:
3.04
6% $
2.86
4% $
2.75
Excess tax benefit related to employee stock-based
compensation payments(2)
. . . . . . . . . . . . . . . . . . . .
Revaluation of net deferred tax liabilities(3) . . . . . . . . .
Termination of license agreements(1) . . . . . . . . . . . . . .
Total non-GAAP adjustments . . . . . . . . . . . . . . . . . . . .
(0.04)
—
—
(0.04)
(0.02)
—
—
(0.02)
(0.04)
(0.23)
0.07
(0.20)
Adjusted diluted earnings per share . . . . . . . . . . . . . . . . $
3.00
6% $
2.84
11% $
2.55
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
Non-GAAP adjustments:
. . . . . . . . . . . . . . . . . .
Interest expense/(income), net
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . .
Total non-GAAP adjustments . . . . . . . . . . . . . . . . . . . .
26.5
339.0
209.7
575.2
6% $1,034.4
4% $ 994.1
4.3
333.6
181.5
519.4
(8.0)
306.0
138.0
436.0
Earnings before interest, taxes, depreciation and
amortization (“EBITDA”) . . . . . . . . . . . . . . . . . . . . . . . . $1,673.3
8% $1,553.8
9% $1,430.1
(1) Additional expense and corresponding tax benefit recognized as a result of the termination of certain license agreements.
This event is not expected to recur.
(2) Net tax windfall 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.
(3) For fiscal 2019, this line item represents a one-time tax charge that was recognized during the three months ended
August 31, 2018 as a result of updated guidance on Internal Revenue Code Section 162(m). This event is not expected to
recur. For fiscal 2018, this line item represents non-recurring tax benefits recognized as a result of the Tax Act related to the
revaluation of net deferred tax liabilities.
28
In addition to reporting operating income, net income, and diluted earnings per share, which are
U.S. GAAP measures, we present adjusted operating income, adjusted net income, adjusted diluted
earnings per share, EBITDA, and EBITDA margin (EBITDA as a percentage of total revenue), which
are non-GAAP measures. We believe these additional measures are indicators of our core business
operations’ performance period over period. Adjusted operating income, adjusted net income, adjusted
diluted earnings per share, EBITDA and EBITDA margin 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 as a substitute for the U.S. GAAP measures of operating income, net income, and diluted
earnings per share, and, therefore, 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 May 31, 2020 remained strong with cash, restricted cash, and total
corporate investments of $1.0 billion. Total short-term and long-term borrowings, net of debt issuance
costs were $801.9 million as of May 31, 2020. Our primary source of cash is generated by our ongoing
operations. Cash flows from operations were $1.4 billion for fiscal 2020. Our positive cash flows for
fiscal 2020 allowed us to support our business and pay substantial dividends. We currently anticipate
that cash, restricted cash, and total corporate investments as of May 31, 2020, along with projected
operating cash flows and available short-term financing, will support our business operations, capital
purchases, share repurchases, and dividend payments for the foreseeable future.
We believe that our investments in an unrealized loss position as of May 31, 2020 were not other-
than-temporarily impaired, nor has any event occurred subsequent to that date to indicate any other-
than-temporary impairment.
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 on our credit facilities.
Refer to Note N of
this
Form 10-K for further discussion on our credit facilities.
the Notes to Consolidated Financial Statements contained in Item 8 of
Details of our credit facilities are as follows:
$ in millions
Credit facilities:
Expiration Date
Maximum
Amount
Available
May 31, 2020
Outstanding
Amount
Available
Amount
JP Morgan Chase Bank, N.A. (“JPM”)
JPM
PNC Bank, National Association (“PNC”)
July 31, 2024 $1,000.0
August 17, 2022 $ 500.0
February 6, 2023 $ 250.0
Total Lines of Credit Outstanding and Available
$ —
—
5.1
$5.1
$ 1,000.0
500.0
244.9
$ 1,744.9
29
Details of borrowings under each credit facility during the fiscal years ended 2020, 2019, and 2018
were as follows:
$ in millions
Year ended May 31, 2020
Credit Facility
$500 Million
JPM
$250 Million
PNC
$1 Billion
JPM
Number of days borrowed . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount borrowed . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average amount borrowed . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . .
17
$694.0
$343.2
29
$450.0
$307.8
362
$246.0
$ 54.2
5.06%
3.30%
2.50%
$ in millions
Year ended May 31, 2019
Credit Facility
$500 Million
JPM
$150 Million
PNC
$1 Billion
JPM
Number of days borrowed . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount borrowed . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average amount borrowed . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . .
95
$483.0
$387.7
92
$400.0
$375.6
359
$58.9
$56.1
3.64%
3.55%
2.81%
$ in millions
Year ended May 31, 2018
Credit Facility
$500 Million
JPM
$150 Million
PNC
$1 Billion
JPM
Number of days borrowed . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount borrowed . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average amount borrowed . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . .
22
$700.0
$319.1
42
$400.0
$144.8
358
$59.9
$57.2
4.27%
2.80%
1.94%
Short-term borrowings are primarily used for the settlement of client fund obligations, rather than
liquidating previously-collected client funds that have been invested in available-for-sale securities
allocated to our long-term portfolio.
Subsequent to May 31, 2020, we borrowed twice on an overnight basis, $89.5 million on a
weighted-average basis under our PNC credit facility.
We expect to have access to the amounts available under our current credit facilities as needed 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 this Form 10-K and other SEC
filings, including any impacts related to COVID-19, 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. Additionally, if we determined 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.
Letters of credit: As of May 31, 2020, we had irrevocable standby letters of credit available
totaling $147.9 million, required to secure commitments for certain insurance policies. The letters of
credit expire at various dates between June 2020 and January 2022. No amounts were outstanding on
these letters of credit during fiscal 2020 or as of May 31, 2020. Subsequent to May 31, 2020, letters of
credit expiring in June and July 2020 were renewed through June and July 2021, respectively.
30
Long-term financing: On March 13, 2019, we borrowed $800.0 million through the issuance of
long-term private placement debt. Certain information related to the Senior Notes are as follows:
Senior Notes
Series A
Senior Notes
Series B
Stated interest rate . . . . . . . . . . . . . . . . . .
Effective interest rate . . . . . . . . . . . . . . . .
Interest rate type . . . . . . . . . . . . . . . . . . . .
Interest payment dates . . . . . . . . . . . . . . . Semi-annual, in arrears
Principal payment dates . . . . . . . . . . . . . .
Note type . . . . . . . . . . . . . . . . . . . . . . . . . .
March 13, 2026
Unsecured
4.07%
4.16%
Fixed
4.25%
4.32%
Fixed
Semi-annual, in arrears
March 13, 2029
Unsecured
Refer to Note O of the Notes to Consolidated Financial Statements contained in Item 8 of this
Form 10-K for further discussion on our long-term financing.
Other commitments: The following table summarizes our significant contractual obligations as
of May 31, 2020:
In millions
Total
Operating leases(1)
Purchase obligations(2)
Workers’ compensation estimated
. . . . . . . . . . . . . . $ 140.9
132.4
. . . . . . . . . . .
Payments due by period
Less than
1 year
$ 39.4
74.3
1-3 years
4-5 years
$ 55.3
51.0
$ 32.4
7.1
More than
5 years
$ 13.8
—
obligations . . . . . . . . . . . . . . . . . . .
Debt service obligations(3) . . . . . . . . .
174.2
1,050.8
72.2
33.3
48.4
66.6
16.7
66.6
36.9
884.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $1,498.3
$219.2
$221.3
$122.8
$935.0
(1) Operating leases are primarily for office space and equipment used in our service, fulfillment, and sales operations.
(2) Purchase obligations include our estimate of the minimum outstanding commitments under purchase orders to buy goods
and services and legally binding contractual arrangements with future payment obligations. Included in the total purchase
obligations is $5.0 million of commitments to purchase capital assets. Amounts actually paid under certain of these
arrangements may be different due to variable components of these agreements.
(3)
Includes principal and interest payments on our Senior Notes. Refer to Note O of the Notes to Consolidated Financial
Statements contained in Item 8 of this Form 10-K for more information.
The liability for uncertain tax positions,
federal benefits, was
approximately $26.5 million as of May 31, 2020. Refer to Note L of the Notes to Consolidated Financial
Statements contained in Item 8 of this Form 10-K for more information on income taxes. We are not
able to reasonably estimate the timing of future cash flows related to this liability and have excluded it
from the table above.
including interest and net of
We are involved in two limited partnership agreements to contribute a maximum amount of
$20.0 million to venture capital funds in the financial technology sector. As of May 31, 2020, we have
future
the total
contributed approximately $8.4 million of
contributions to be made to these venture capital
reasonably
determined and thus have been excluded from the table above.
funding commitment. The timing of
funds cannot be specifically or
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 and directors, 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.
31
We currently self-insure the deductible portion of various insured exposures under certain
corporate and PEO employee 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 are not material as of May 31, 2020. 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
retentions through our captive insurance company.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions with unconsolidated entities
which would have been established for facilitating off-balance sheet arrangements or other limited
purposes. We do maintain investments as a limited partner in both low-income housing projects and
venture capital funds focused on the financial technology sector. These are not considered part of our
ongoing operations. These investments are accounted for under the equity method of accounting and
represented less than one percent of our total assets as of May 31, 2020.
Operating, Investing, and Financing Cash Flow Activities
In millions
Year ended May 31,
2019
2020
2018
Net cash provided by operating activities . . . . . . . . . . . . . $ 1,440.9
771.9
Net cash provided by/(used in) investing activities . . . . . .
(1,488.2)
Net cash used in financing activities . . . . . . . . . . . . . . . . .
$ 1,271.5
(1,628.3)
(1,008.5)
$1,276.4
998.5
(423.8)
Net change in cash, restricted cash, and equivalents . . . $
724.6
$(1,365.3)
$1,851.1
Cash dividends per common share . . . . . . . . . . . . . . . . . . $
2.48
$
2.30
$
2.06
Operating Cash Flow Activities
The changes in our operating cash flows for both fiscal 2020 and fiscal 2019 compared to the prior
fiscal year periods were due to higher net income, higher non-cash adjustments, and fluctuations in our
operating assets and liabilities.
The increase in non-cash adjustments for both fiscal 2020 and fiscal 2019 were primarily driven by
larger adjustments for the amortization of intangible assets.
In fiscal 2020, the smaller outflow related to changes in operating assets and liabilities compared
to the prior fiscal year period was due to changes in accounts receivable and PEO unbilled
receivables, which were adversely impacted by COVID-19. We experienced an increase in the number
of non-processing clients and a reduction in the number of employees and worksite employees paid as
businesses suspended operations due to the pandemic. In addition, accounts payable and other
current liabilities were impacted by a decrease in accrued compensation related to worksite employees
and timing of accruals and cash settlement. In fiscal 2019, the larger outflow was due to higher
accounts receivable balances related to growth in our payroll funding business for temporary staffing
agency clients.
Investing Cash Flow Activities
The changes in our investing cash flows for both fiscal 2020 and fiscal 2019 compared to prior
year periods were primarily attributable to fluctuations in the net purchases and sales/maturities of
available-for-sale securities, changes in net cash outflows related to acquisitions of businesses, and
purchases of other assets.
32
Fluctuations in the net change in purchases and sales/maturities of available-for-sale securities
are largely due to timing within the client funds portfolio. The amount will vary based upon the timing of
collection from clients, and the related remittance to applicable tax or regulatory agencies for payroll
tax administration services and to employees of clients utilizing employee payment services. Specific
timing impacting cash flows for fiscal years 2020, 2019, and 2018 are discussed further in the financing
cash flows discussion of net changes in client fund obligations. In addition to timing fluctuations, the net
change in purchases and sales/maturities of available-for-sale securities for both fiscal 2020 and fiscal
2019 compared to prior year periods were due to changes in investment mix.
The changes in net cash outflows related to acquisition of businesses reflect our acquisitions of
Oasis in December 2018, Lessor Group (“Lessor”) in February 2018, and HROi in August 2017. We
paid cash for the Oasis and Lessor acquisitions, while we paid a combination of cash and common
stock for the HROi acquisition.
The net cash outflow for purchases of other assets during fiscal 2018 was impacted by the
resolution of a contractual dispute with certain licensees and the acquisition of rights to certain client
lists for approximately $30.0 million.
Discussion of interest rates and related risks is included in the “Market Risk Factors” section
contained in Item 7A of this Form 10-K.
Financing Cash Flow Activities
The changes in our financing cash flows for both fiscal 2020 and fiscal 2019 compared to prior
fiscal year periods were impacted by net proceeds from long-term borrowings, the net change in client
fund obligations, repurchases of common shares, and dividends paid.
In fiscal 2019, we borrowed $800.0 million under our JPM credit facilities to fund the acquisition of
Oasis which was replaced by the issuance of long-term private placement debt in March 2019. Refer to
Note O of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for
additional disclosures on our long-term financing.
funds to applicable tax or
The client fund obligations liability will vary based on the timing of collecting client funds and the
tax
related required remittance of
administration services and to employees of clients utilizing employee payment services. Collections
from clients are typically remitted from one to 30 days after receipt, with some items extending to 90
days. May 31, 2020 fell on a Sunday and May 31, 2019 fell on a Friday, which is a significant
disbursement day for direct pay funds, and as such only created minor timing differences in this liability
when comparing fiscal 2020 with fiscal 2019. However, May 31, 2020 balances were impacted by
lower client fund collections due to COVID-19. In contrast, May 31, 2018 fell on a Thursday, which is a
significant collection day for direct pay funds. These funds were then paid out on Friday June 1, 2018.
regulatory agencies for payroll
The increase in dividend payments for fiscal 2020 and fiscal 2019 compared to the corresponding
prior year periods is primarily due to an 11% and 12% increase in our dividend rate beginning in May
2019 and April 2018, respectively. The payment of
future dividends is dependent on our future
earnings and cash flow and is subject to the discretion of our Board.
During fiscal 2020, fiscal 2019, and fiscal 2018, we repurchased 2.0 million shares, 0.7 million
shares, and 2.5 million shares, respectively. As of May 31, 2020, $228.1 million remains available
under the common stock repurchase program. Refer to Note C of the Notes to Consolidated Financial
this Form 10-K for further discussion on our common stock
Statements contained in Item 8 of
repurchase program.
Other
Recently issued accounting pronouncements: Refer to Note A of the Notes to Consolidated
this Form 10-K for a discussion of recently issued
Financial Statements contained in Item 8 of
accounting pronouncements.
33
Critical Accounting Policies
Note A of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K
discusses the significant accounting policies of Paychex. Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires
us to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities,
revenue, and expenses. On an ongoing basis, we evaluate the accounting policies and estimates used
to prepare the consolidated financial statements. We base our estimates on historical experience,
facts and
future expectations, and assumptions believed to be reasonable under current
circumstances. Actual amounts and results could differ from these estimates. Certain accounting
policies that are deemed critical to our results of operations or financial position are discussed below.
Revenue recognition: Service revenue is recognized in the period services are rendered and
earned under service arrangements with clients where service fees are fixed or determinable and
collectability is reasonably assured. Our service revenue is largely attributable to processing services
where the fee is based on a fixed amount per processing period or a fixed amount per processing
period plus a fee per employee or transaction processed. Fees earned for funding of temporary staffing
clients’ payrolls via purchase of accounts receivable are based on a percentage of funding amounts as
specified in the client contract. The revenue earned from delivery service for the distribution of certain
client payroll checks and reports is included in service revenue, and the costs for delivery are included
in cost of service revenue on the Consolidated Statements of Income and Comprehensive Income.
We receive advance payments for set-up fees on some of our service offerings from our clients.
Advance payments received for certain of our service offerings are considered a material right. We
defer the revenue associated with these advance payments, recognizing the revenue and related
expenses over the expected period to which the right exists.
PEO Solutions revenue is reported net of certain direct pass-through costs billed and incurred,
which include payroll wages, payroll taxes, including federal and state unemployment insurance, and
certain health insurance benefit premiums, primarily costs related to our guaranteed cost benefit plans.
Direct costs related to workers’ compensation and certain benefit plans where we retain risk are
recognized as cost of service revenue rather than as a reduction in service revenue.
Interest on funds held for clients is earned primarily on funds that are collected from clients before
due dates for payroll tax administration services and for employee payment services, and invested until
remittance to the applicable tax or regulatory agencies or client employees. These collections from
clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days.
The interest earned on these funds is included in total revenue on the Consolidated Statements of
Income and Comprehensive Income because the collecting, holding, and remitting of these funds are
components of providing these services.
Assets Recognized from the Costs to Obtain and Fulfill Contracts: We recognize 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. Incremental costs of obtaining a contract include
only those costs that are directly related to the acquisition of new contracts and that would not have
been incurred if the contract had not been obtained. We do not incur incremental costs to obtain a
contract renewal. The Company determined that certain sales commissions and bonuses, including
related fringe benefits, meet the capitalization criteria under Accounting Standards Codification (“ASC”)
Subtopic 340-40, “Other Assets and Deferred Costs: Contracts with Customers” (“ASC 340-40”). We
also recognize 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. We determined that substantially all costs related to implementation
activities are administrative in nature and meet the capitalization criteria under ASC 340-40. These
capitalized costs to fulfill a contract principally relate to upfront direct costs that are expected to be
recovered and enhance our ability to satisfy future performance obligations.
34
The assets related to both costs to obtain and costs to fulfill contracts with clients are capitalized
and amortized using an accelerated method over an eight-year life to closely align with the pattern of
client attrition over the estimated life of the client relationship. We regularly review our deferred costs
for potential
impairment and did not recognize an impairment loss during the fiscal years ended
May 31, 2020 or May 31, 2019.
PEO insurance reserves: As part of
the PEO solution, we offer workers’ compensation
insurance and health insurance 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 these claims. In establishing the PEO workers’
compensation insurance reserves, we use an independent actuarial estimate of undiscounted future
cash payments that would be made to settle claims. The evaluation, review and determination of
estimated ultimate losses by our appointed actuary are based on actuarial methods and assumptions.
The estimated ultimate losses are primarily based upon estimated loss development factors, and other
factors such as the nature of employees’ job responsibilities, the historical frequency and severity of
workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes
in actuarial assumptions resulting from changes in actual claims experience and other trends are
incorporated into our workers’ compensation claims cost estimates.
With respect to our PEO health insurance, we offer various health insurance plans that take the
form of either fully insured guaranteed cost plans with various national insurance carriers or a fully
insured minimum premium insurance arrangement with coverage provided through a single national
carrier. In addition, we also provide self-insured dental and vision plans to certain PEO clients. Under
the minimum medical premium insurance arrangement and self-insured dental and vision plans, our
health benefits insurance reserves are established to provide for the payment of claims in accordance
with our service contract with the carrier. The claims liability 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.
Estimating the ultimate cost of future claims is an uncertain and complex process based upon
historical loss experience and independent actuarial loss projections, and is 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. We regularly
review the adequacy of our 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 possibly be significant, reflecting any combination of new and adverse or
favorable trends. Adjustments to previously established reserves were not material for the fiscal years
2020, 2019, or 2018.
Goodwill and other intangible assets: Goodwill
is not amortized, but instead is tested for
impairment on an annual basis and between annual tests if an event occurs or circumstances change
in a way to indicate that there has been a potential decline in the fair value of the reporting unit. We
perform our annual impairment testing in our fiscal fourth quarter. A qualitative analysis was performed
for all reporting units in fiscal years 2020, 2019 and 2018, to determine if it is more-likely-than-not that
the fair value of the reporting units had declined below its carrying value. The qualitative assessment
considered various financial, macroeconomic, industry, and reporting unit specific qualitative factors.
Based on the results of our testing, no impairment loss was recognized in the results of operations for
fiscal 2020, 2019, or 2018. Subsequent
there have been no events or
to the latest
circumstances that indicate any potential impairment of the Company’s goodwill balance.
review,
We also test intangible assets with indefinite useful lives for potential impairment on an annual
basis and between annual tests if events or changes in circumstances change in a way that indicate
35
that the carrying value may not be recoverable. We have determined that there is no impairment of
intangible assets with indefinite useful lives for fiscal 2020, 2019, or 2018.
Impairment of Long-Lived Assets: Long-lived assets, including intangible assets with finite
lives and operating lease right-of-use assets, are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
We have determined that there is no impairment of long-lived assets for fiscal 2020, 2019, or 2018.
Stock-based compensation costs: All stock-based awards to employees are recognized as
compensation costs in our consolidated financial statements based on their fair values measured as of
the date of grant. We estimate the fair value of stock option grants using a Black-Scholes option pricing
model. This model requires various assumptions as inputs including expected volatility of the Paychex
stock price and expected option life. Volatility is estimated based on a combination of historical volatility
using stock prices over a period equal
to the expected option life and implied market volatility.
Expected option life is estimated based on historical exercise behavior. We periodically reassess our
assumptions as well as our choice of valuation model. We will reconsider use of this model if additional
information becomes available in the future indicating that another model would provide a more
accurate estimate of fair value, or if characteristics of future grants would warrant such a change.
The fair value of stock awards is determined based on the stock price at the date of grant. For
grants that do not accrue dividends or dividend equivalents, the fair value is the stock price reduced by
the present value of estimated dividends over the vesting period or performance period.
We estimate forfeitures and only record compensation costs for those awards that are expected to
vest. Our assumptions for forfeitures were determined based on type of award and historical
experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified,
with any adjustment recorded in the period of change, and the final adjustment at the end of the
requisite service period to equal actual forfeitures.
The assumptions of volatility, expected option life, and forfeitures all require significant judgment
and are subject to change in the future due to factors such as employee exercise behavior, stock price
trends, and changes to type or provisions of stock-based awards. Any material change in one or more
of these assumptions could have a material impact on the estimated fair value of a future award.
Refer to Note F of the Notes to Consolidated Financial Statements contained in Item 8 of this
Form 10-K for further discussion of our stock-based compensation plans.
tax returns. Under
Income taxes: We account for deferred taxes by recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the consolidated
financial statements or
this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to
reverse. We record a deferred tax asset related to the stock-based compensation costs recognized for
certain stock-based awards. At the time of the exercise of non-qualified stock options or vesting of
stock awards, we recognize any excess tax benefit within income taxes in the Consolidated
Statements of Income and Comprehensive Income.
We maintain a reserve for uncertain tax positions. We evaluate tax positions taken or expected to
be taken in a tax return for recognition in our consolidated financial statements. Prior to recording the
related tax benefit in our consolidated financial statements, we must conclude that tax positions will be
more-likely-than-not to be sustained, assuming those positions will be examined by taxing authorities
with full knowledge of all relevant information. The benefit recognized in our consolidated financial
statements is the amount we expect to realize after examination by taxing authorities. If a tax position
36
drops below the more-likely-than-not standard, the benefit can no longer be recognized. Assumptions,
judgment, and the use of estimates are required in determining if the more-likely-than-not standard has
been met when developing the provision for income taxes and in determining the expected benefit. A
change in the assessment of the more-likely-than-not standard could materially impact our results of
operations or financial position. Refer to Note L of the Notes to Consolidated Financial Statements
contained in Item 8 of this Form 10-K for further discussion of our reserve for uncertain tax positions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Factors
Changes in interest rates and interest rate risk: Funds held for clients are primarily comprised
of short-term funds and available-for-sale securities. Corporate investments are primarily comprised of
available-for-sale 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 longer-term available-for-sale 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 predominately in municipal bonds – including general obligation bonds and revenue bonds; U.S.
government agency and treasury securities; and corporate bonds. 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 available-for-sale securities to a
benchmark duration of two and one-half to three and three-quarters years.
During fiscal 2020, our primary short-term investment vehicles were U.S. government agency and
treasury securities, VRDNs, 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 fiscal 2020, the average interest rate earned on our combined funds held for clients and
corporate investment portfolios was 1.8%, compared to 1.9% and 1.5% for fiscal 2019 and fiscal 2018,
respectively. 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 decrease from our short-term investments, and over time
longer-term available-for-sale securities. Earnings from the
earnings will decrease from our
available-for-sale securities, which as of May 31, 2020 had an average duration of 2.9 years, would not
reflect decreases in interest rates until the investments are sold or mature and the proceeds are
reinvested at lower rates.
The amortized cost and fair value of available-for-sale securities that had stated maturities as of
May 31, 2020 are shown below by contractual maturity. Expected maturities can differ from contractual
maturities because borrowers may have the right to prepay obligations without prepayment penalties.
In millions
Maturity date:
May 31, 2020
Amortized
cost
Fair
value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 353.4
700.9
Due after one year through three years . . . . . . . . . . . . . . . . . . . . . . . .
812.0
Due after three years through five years . . . . . . . . . . . . . . . . . . . . . . .
790.9
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 355.7
723.5
850.0
828.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,657.2
$2,757.2
37
VRDNs 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.
The Federal Reserve reduced the Federal Funds rate by 25 basis points three times in the first
nine months of fiscal 2020 after periodically raising the rate from December 2015 through May 2019.
Then in response to the COVID-19 pandemic, the Federal Reserve reduced the Federal Funds rate a
total of 150 basis points. As of May 31, 2020, the Federal Funds rate was in the range of 0.0% to
0.25% as compared to a range of 2.25% to 2.50% as of May 31, 2019, and in the range of 1.50% to
1.75% as of May 31, 2018. 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 COVID-19 pandemic. We will continue to monitor
market conditions.
Calculating the future effects of changing interest rates involves many factors. These factors
include, but are not limited to:
• governmental action resulting from the COVID-19 pandemic;
• daily interest rate changes;
• seasonal variations in investment balances;
• actual duration of short-term and available-for-sale securities;
• the proportion of taxable and tax-exempt investments;
• changes in tax-exempt municipal
synchronized or simultaneous; and
rates versus taxable investment
rates, which are not
• financial market volatility and the resulting effect on benchmark and other indexing interest rates.
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 17 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 $3.0 million to $4.0 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) averaged approximately $4.8 billion for
fiscal 2020. Our anticipated allocation is
approximately 40% invested in short-term securities and VRDNs with an average duration of less than
30 days, and 60% invested in available-for-sale securities with an average duration of two and one-half
to three and three-quarters years.
The combined funds held for clients and corporate available-for-sale securities reflected net
unrealized gains of $100.0 million and $19.7 million as of May 31, 2020 and May 31, 2019,
respectively. Refer to Note H of the Notes to Consolidated Financial Statements contained in Item 8 of
this Form 10-K for additional disclosures on fair value measurements.
During fiscal 2020, the net unrealized gain or loss on our investment portfolios ranged from an
unrealized gain of $106.3 million to an unrealized loss of $27.0 million. During fiscal 2019, the net
unrealized gain or loss on our investment portfolios ranged from an unrealized gain of $19.7 million to
an unrealized loss of $60.7 million. The net unrealized gain on our investment portfolios was
approximately $112.4 million as of July 15, 2020.
As of May 31, 2020 and 2019, we had $2.8 billion and $3.6 billion, respectively, invested in
fair value. The weighted-average yield-to-maturity was 2.1% as of
available-for-sale securities at
May 31, 2020 and May 31, 2019. The weighted-average yield-to-maturity excludes available-for-sale
securities tied to short-term interest rates, such as the VRDNs. Assuming a hypothetical increase in
38
longer-term interest rates of 25 basis points, the resulting potential decrease in fair value for our
portfolio of available-for-sale securities as of May 31, 2020, would be in the range of $20.0 million to
$25.0 million. Conversely, a corresponding decrease in interest rates would result in a comparable
increase in fair value. This hypothetical increase or decrease 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 the
results of operations, unless any declines in fair value were considered to be other-than-temporary and
an impairment loss recognized.
Credit risk: We are exposed to credit risk in connection with these investments 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 other-than-temporarily impaired due to changes in credit
risk or other potential valuation concerns. We believe that the investments we held as of May 31, 2020
were not other-than-temporarily impaired. While $66.8 million of our available-for-sale 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 unrealized losses of $1.7 million
were due to changes in interest rates and were not due to increased credit risk or other valuation
concerns. Most of the securities in an unrealized loss position as of May 31, 2020 and 2019 held 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 other-than-temporarily
impaired could change in the future due to new developments or changes in our strategies or
assumptions related to any particular investment.
We have some credit risk exposure relating to the purchase of accounts receivable as a means of
providing payroll funding to clients in the temporary staffing industry. This credit risk exposure is
diversified amongst multiple client arrangements and all such arrangements are regularly reviewed for
potential write-off. No single client is material in respect to total accounts receivable, service revenue,
or results of operations.
39
Item 8. Financial Statements and Supplementary Data
Description
TABLE OF CONTENTS
Report on Management’s Assessment of Internal Control Over Financial Reporting . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income and Comprehensive Income for the Years Ended May 31,
2020, 2019, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of May 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the Years Ended May 31, 2020, 2019, and
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended May 31, 2020, 2019, and 2018 . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II — Valuation and Qualifying Accounts for the Years Ended May 31, 2020, 2019, and
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
41
42
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40
REPORT ON MANAGEMENT’S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Paychex, Inc. (the “Company”) is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for external purposes in accordance
with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting
as of May 31, 2020. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated
the Company
Framework”
maintained effective internal control over financial reporting as of May 31, 2020.
(2013). Based on our assessment, management determined that
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, is
appointed by the Company’s Audit Committee. PricewaterhouseCoopers LLP has audited the
Consolidated Financial Statements included in this Annual Report on Form 10-K and the effectiveness
of the Company’s internal control over financial reporting as of May 31, 2020, and as a part of their
integrated audit, has issued their report, included herein, on the effectiveness of the Company’s
internal control over financial reporting.
/s/ Martin Mucci
/s/ Efrain Rivera
Martin Mucci
President and Chief Executive Officer
Efrain Rivera
Senior Vice President, Chief Financial
Officer, and Treasurer
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of Paychex, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Paychex,
Inc. and its
subsidiaries (the “Company”) as of May 31, 2020 and 2019, and the related consolidated statements of
income and comprehensive income, of stockholders’ equity, and of cash flows for each of the three
years in the period ended May 31, 2020, including the related notes and financial statement schedule
listed in the accompanying index (collectively referred to as the “consolidated financial statements”).
We also have audited the Company’s internal control over financial reporting as of May 31, 2020,
based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of May 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended May 31, 2020 in
conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of May 31, 2020, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note A to the consolidated financial statements, the Company changed the
manner in which it accounts for leases on June 1, 2019.
Basis for Opinions
The Company’s management
is responsible for these consolidated financial statements,
its assessment of
reporting, and for
for
the
financial
maintaining effective internal control over
effectiveness of internal control over financial reporting, included in the accompanying Report on
Management’s Assessment of
Internal Control Over Financial Reporting. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company’s internal
control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the
risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
42
Definition and Limitations of Internal Control over Financial Reporting
financial
reporting includes those policies and procedures that
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
(i) pertain to the
control over
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of
the consolidated financial statements that was communicated or required to be communicated to the
audit committee and that (i) relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Professional Employer Organization (PEO) Insurance Reserves — Workers’ Compensation Insurance
Reserves
As described in Note A to the consolidated financial statements, the Company offers workers’
compensation insurance 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. As of May 31, 2020, the total liability for workers’
compensation insurance reserves is $173.6 million.
In establishing the workers’ compensation
insurance reserves, management uses an independent actuarial estimate of undiscounted future cash
payments that would be made to settle the claims. The evaluation, review and determination of
estimated ultimate losses by the Company’s appointed actuary are based on actuarial methods and
assumptions. The estimated ultimate losses are primarily based upon estimated loss development
factors, and other factors such as the nature of employees’ job responsibilities, the historical frequency
and severity of workers’ compensation claims, and an estimate of future cost trends.
The principal considerations for our determination that performing procedures relating to PEO
insurance reserves — workers’ compensation insurance reserves is a critical audit matter are (i) the
significant judgment by management in determining the workers’ compensation insurance reserves,
which in turn led to a high degree of auditor judgment, subjectivity and effort in performing our
procedures and evaluating management’s assumptions and actuarial estimates related to the
estimated loss development factors and other factors such as the historical frequency and severity of
workers’ compensation claims and an estimate of future cost trends, and (ii) the audit effort included
the involvement of professionals with specialized skill and knowledge.
43
Addressing the matter
involved performing procedures and evaluating audit evidence in
connection with forming our overall opinion on the consolidated financial statements. These
procedures included testing the effectiveness of controls relating to the Company’s workers’
the development of management’s
compensation insurance reserves,
including controls over
factors. These
assumptions and actuarial estimates related to the estimated loss development
procedures also included, among others (i) the involvement of professionals with specialized skill and
knowledge to assist in developing an independent estimate of the workers’ compensation insurance
reserves and (ii) comparison of this independent estimate to management’s estimate to evaluate the
reasonableness of management’s estimate. Developing an independent estimate involved (i) testing
the completeness and accuracy of data provided by management and (ii) evaluating management’s
assumptions and actuarial estimates related to the estimated loss development factors and other
factors such as the historical frequency and severity of workers’ compensation claims and an estimate
of future cost trends.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
July 17, 2020
We have served as the Company’s auditor since 2013.
44
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
In millions, except per share amounts
PAYCHEX, INC.
Year ended May 31,
Revenue:
2020
2019
2018
Management Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,963.0
990.6
PEO and Insurance Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,877.7
814.2
$2,758.4
555.8
Total service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,953.6
86.9
3,691.9
80.6
3,314.2
63.5
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,040.5
3,772.5
3,377.7
Expenses:
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . .
1,280.8
1,299.2
1,177.8
1,223.4
1,018.2
1,068.0
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,580.0
2,401.2
2,086.2
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (expense)/income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,460.5
(23.4)
1,437.1
339.0
1,371.3
(3.3)
1,368.0
333.6
1,291.5
8.6
1,300.1
306.0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
$1,034.4
$ 994.1
Other comprehensive income/(loss), net of tax . . . . . . . . . . . . . . . . .
56.4
36.3
(56.2)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,154.5
$1,070.7
$ 937.9
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average common shares outstanding . . . . . . . . . . . . .
Weighted-average common shares outstanding, assuming
3.06
3.04
358.5
$
$
2.88
2.86
359.2
$
$
2.77
2.75
359.0
dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
361.0
361.8
361.5
See Notes to Consolidated Financial Statements.
45
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
As of May 31,
2020
2019
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 905.2
49.8
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.2
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.2
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
384.1
Accounts receivable, net of allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . .
380.0
PEO unbilled receivables, net of advance collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.8
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
244.8
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets before funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net of accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets, net of accumulated amortization . . . . . . . . . . . . . . . . . .
Intangible assets, net of accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Long-term deferred costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,034.1
3,430.5
5,464.6
21.3
10.2
407.4
114.8
330.6
1,791.1
372.5
38.2
$ 673.6
50.6
39.0
27.4
420.5
406.3
22.6
233.9
1,873.9
3,803.8
5,677.7
6.5
10.2
408.7
—
399.1
1,782.6
366.3
24.9
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,550.7
$8,676.0
Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued corporate compensation and related items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued worksite employee compensation and related items . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79.4
131.7
512.4
5.1
50.5
39.2
277.6
Current liabilities before client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, net of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,095.9
3,331.0
4,426.9
33.5
240.8
796.8
96.9
174.4
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,769.3
Commitments and contingencies — Note R
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares; Issued and outstanding:
358.8 shares as of May 31, 2020 and 359.3 shares as of May 31, 2019, respectively . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.6
1,289.9
1,431.4
56.5
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,781.4
$
75.9
146.4
578.6
—
—
40.3
219.5
1,060.7
3,784.3
4,845.0
27.3
223.1
796.4
13.0
151.7
6,056.5
3.6
1,206.3
1,409.5
0.1
2,619.5
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,550.7
$8,676.0
See Notes to Consolidated Financial Statements.
46
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
In millions
Common stock
Shares
Amount
Additional
paid-in
capital
Retained
earnings
Balance as of May 31, 2017 . . . . . . . 359.4
Net income . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on securities, net
of tax . . . . . . . . . . . . . . . . . . . . . . . . .
$3.6
$1,030.0 $1,173.6
994.1
Accumulated
other
comprehensive
income/(loss)
$ 20.0
Total
$2,227.2
994.1
(47.6)
(47.6)
Cash dividends declared ($2.06 per
share) . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . .
Acquisition of businesses . . . . . . . . . .
Stock-based compensation . . . . . . . . .
Foreign currency translation
adjustment
. . . . . . . . . . . . . . . . . . . .
Activity related to equity-based
plans . . . . . . . . . . . . . . . . . . . . . . . . .
1.5
Balance as of May 31, 2018 . . . . . . . 359.0
Net income . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on securities, net
of tax . . . . . . . . . . . . . . . . . . . . . . . . .
(2.5)
0.6
(739.7)
(138.6)
(4.5)
33.2
44.6
23.5
(26.8)
3.6
1,126.8
1,262.6
1,034.4
(8.6)
(36.2)
Cash dividends declared ($2.30 per
share) . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . .
Stock-based compensation . . . . . . . . .
Foreign currency translation
adjustment
. . . . . . . . . . . . . . . . . . . .
(0.7)
(826.8)
(55.5)
(1.4)
46.2
Activity related to equity-based
plans . . . . . . . . . . . . . . . . . . . . . . . . .
1.0
Balance as of May 31, 2019 . . . . . . . 359.3
Net income . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on securities, net
of reclassification adjustments and
tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.7
(5.2)
3.6
1,206.3
1,409.5
1,098.1
Cash dividends declared ($2.48 per
share) . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . .
Stock-based compensation . . . . . . . . .
Foreign currency translation
adjustment
. . . . . . . . . . . . . . . . . . . .
(2.0)
(889.4)
(168.2)
(3.7)
47.4
Activity related to equity-based
plans . . . . . . . . . . . . . . . . . . . . . . . . .
1.5
39.9
(18.6)
(739.7)
(143.1)
33.2
44.6
(8.6)
(3.3)
2,356.8
1,034.4
44.0
44.0
(826.8)
(56.9)
46.2
(7.7)
29.5
2,619.5
1,098.1
(7.7)
0.1
60.4
60.4
(889.4)
(171.9)
47.4
(4.0)
21.3
(4.0)
Balance as of May 31, 2020 . . . . . . . 358.8
$3.6
$1,289.9 $1,431.4
$ 56.5
$2,781.4
See Notes to Consolidated Financial Statements.
47
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
Year ended May 31,
2020
2019
2018
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premiums and discounts on available-for-sale securities, net . . . . . .
Amortization of deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit)/provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains on sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable and PEO unbilled receivables, net
. . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,098.1
$ 1,034.4
$
994.1
209.7
40.8
186.1
47.4
(4.0)
7.8
(11.3)
1.2
55.1
(1.6)
(4.9)
181.5
49.0
180.2
46.2
4.7
3.3
—
4.8
(117.2)
1.0
77.5
138.0
65.4
174.7
44.6
(37.2)
3.6
(0.1)
3.7
16.2
18.0
42.9
Deferred costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(196.6)
(188.5)
(181.8)
Net change in other long-term assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in operating lease right-of-use assets and liabilities . . . . . . . . . . . . . . . .
12.7
0.4
(5.4)
—
(5.7)
—
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,440.9
1,271.5
1,276.4
Investing activities
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,218.1)
(35,145.8)
(50,220.2)
Proceeds from sales and maturities of available-for-sale securities . . . . . . . . . . . . . . . .
26,132.9
34,638.8
51,592.9
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(127.0)
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.1)
(9.8)
(123.8)
(992.2)
(5.3)
(154.0)
(180.4)
(39.8)
Net cash provided by/(used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
771.9
(1,628.3)
998.5
Financing activities
Net change in client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings to fund acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Activity related to equity-based plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(453.3)
(950.6)
462.4
5.1
—
(889.4)
(171.9)
21.3
—
796.3
(826.8)
(56.9)
29.5
—
—
(739.7)
(143.1)
(3.4)
(423.8)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,488.2)
(1,008.5)
Net change in cash, restricted cash, and equivalents . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Cash, restricted cash, and equivalents, beginning of fiscal year
724.6
935.2
(1,365.3)
2,300.5
1,851.1
449.4
Cash, restricted cash, and equivalents, end of fiscal year . . . . . . . . . . . . . . . . . . . .
$ 1,659.8
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 . . . .
$
905.2
71.1
683.5
$
$
935.2
$ 2,300.5
673.6
57.1
204.5
$
358.2
—
1,942.3
Total cash, restricted cash, and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,659.8
$
935.2
$ 2,300.5
See Notes to Consolidated Financial Statements.
48
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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”)
to
solutions for human resources (“HR”), payroll, benefits, and insurance services for small-
medium-sized businesses in the United States (“U.S.”). The Company also has operations in parts of
Europe.
Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the
Company’s revenue is generated within the U.S. The Company also generates revenue within parts of
Europe, which represented one percent of the Company’s total revenue for each of the fiscal years
ended May 31, 2020 (“fiscal 2020”) and May 31, 2019 (“fiscal 2019”), and less than one percent for the
fiscal year ended May 31, 2018 (“fiscal 2018”). Long-lived assets in Europe were approximately five
long-lived assets of the Company as of both May 31, 2020 and May 31, 2019,
percent of total
respectively.
Within Paychex’s HCM solutions, Paychex offers a comprehensive portfolio of services and
products that allow its clients to meet their diverse HR and payroll needs. Clients can select services
on an á la carte basis or as part of various product bundles. Paychex’s offerings often leverage the
information gathered in its base payroll processing service, allowing the Company to provide
comprehensive outsourcing services covering the HCM spectrum.
Paychex supports its small business clients utilizing its proprietary, robust, software-as-a-service
(“SaaS”) Paychex Flex® platform and the Company’s SurePayroll® SaaS-based products. Both
products allow users to process payroll when they want, how they want, and on any device (desktop,
tablet, and mobile phone). Paychex’s mid-market clients generally have more complex payroll and
employee benefit needs. However, in the current environment of increasing regulations, the Company
the
believes the needs for HR outsourcing solutions have been moving down-market. Any of
Company’s clients on Paychex Flex can opt for the integrated suite of HCM solutions, which allows
clients to choose the services and software that will meet the needs of their business.
Total revenue is comprised of service revenue and interest on funds held for clients. Service
revenue is comprised primarily of the fees earned on the portfolio of HCM services, which include
payroll processing, complementary HR management and administration services, PEO (“Professional
Employer Organization”) solutions, and insurance agency commissions. Refer to Note B of this Item 8
for further discussion of the Company’s service revenue.
Basis of presentation: The consolidated financial statements include the accounts of Paychex,
intercompany accounts and transactions have been
Inc. and its wholly owned subsidiaries. All
eliminated in consolidation. Certain disclosures are reported as zero balances due to rounding.
Effective June 1, 2019, the Company adopted the requirements of ASU No. 2016-02, “Leases
(Topic 842)” (“ASU No. 2016-02”) as discussed in the “Recently adopted accounting pronouncements”
section of this Item 8. All amounts and disclosures set forth in this Annual Report on Form 10-K (the
“Form 10-K”) have been updated to comply with the new standard.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current
period presentation. These reclassifications had no effect on reported consolidated earnings.
Subsequent Events: On July 9, 2020, Paychex announced that its Board of Directors (the
“Board”) declared a regular quarterly dividend of $0.62 per share payable August 27, 2020 to
stockholders of record as of August 3, 2020.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Cash and cash equivalents: Cash and cash equivalents consist of available cash, money
market securities, and other investments with a maturity of 90 days or less at acquisition. Cash and
cash equivalents include funds collected from the Company’s PEO clients for the payment of worksite
employee payrolls and associated payroll taxes. Funds of $136.4 million and $178.8 million collected
from PEO clients are included in cash and cash equivalents on the Company’s Consolidated Balance
Sheets as of May 31, 2020 and May 31, 2019, respectively.
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 for certain
payment of workers’ compensation policies.
Accounts receivable, net of allowance for doubtful accounts: Accounts receivable balances
are shown on the Consolidated Balance Sheets net of
the allowance for doubtful accounts of
$12.5 million and $7.5 million as of May 31, 2020 and May 31, 2019, respectively. These balances
include: trade receivables for services provided to clients and purchased receivables related to payroll
funding arrangements with clients in the temporary staffing industry. Trade receivables were
$84.7 million and $94.5 million as of May 31, 2020 and May 31, 2019, respectively. Purchased
receivables were $311.9 million and $333.5 million as of May 31, 2020 and May 31, 2019, respectively.
Accounts receivable are written off and charged against the allowance for doubtful accounts when the
Company has exhausted all collection efforts without success. No single client had a material impact
on total accounts receivable, service revenue, or results of operations.
PEO unbilled receivables, net of advance collections: The Company recognizes a liability for
worksite employee gross wages and related payroll tax liabilities at the end of the period in which the
worksite employee performs work, and where it assumes, under state regulations, the obligation for the
payment of payroll and payroll tax liabilities. The estimated payroll and payroll tax liabilities are
recorded in accrued worksite employee compensation and related items on the Company’s
Consolidated Balance Sheets. The associated 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 May 31, 2020 and May 31, 2019,
advance collections included in PEO unbilled receivables, net of advance collections were $6.1 million
and $4.2 million, respectively.
Funds held for clients and corporate investments: Marketable securities included in funds
held for clients and corporate investments consist primarily of securities classified as available-for-sale
and are recorded at fair value obtained from an independent pricing service. The funds held for clients
portfolio also includes cash and cash equivalents such as money market securities. Unrealized gains
and losses, net of applicable income taxes, are reported as other comprehensive income in the
Consolidated Statements of Income and Comprehensive Income. Realized gains and losses on the
sale of available-for-sale 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 (expense)/income, net, respectively.
Concentrations: Substantially all of the Company’s deposited cash is maintained at large well-
capitalized (as defined by their regulators) financial
institutions. These deposits may exceed the
amount of any insurance provided. All of the Company’s deliverable securities, primarily municipal
bond securities, are held in custody with certain of the aforementioned financial institutions, for which
that institution bears the risk of custodial loss. Non-deliverable securities are primarily time deposits
and money market funds.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Property and equipment, net of accumulated depreciation: Property and equipment is stated
at cost, less accumulated depreciation. Depreciation is based on the estimated useful lives of property
and equipment using the straight-line method. The estimated useful lives of depreciable assets are
generally as follows:
Category
Depreciable life
Buildings and improvements
Data processing equipment
Furniture, fixtures, and equipment
Leasehold improvements
10 to 35 years or the remaining life, whichever is shorter
Three to four years
Two to seven years
10 years or the life of the lease, whichever is shorter
Normal and recurring repairs and maintenance costs are charged to expense as incurred. The
for impairment when events or
Company reviews the carrying value of property and equipment
changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Software development and enhancements: Expenditures for software purchases and software
developed for internal use are capitalized and depreciated on a straight-line basis over the estimated
useful lives, which are generally three to five years. Software developed as part of the Company’s main
processing platform is depreciated over 12 years. For software developed for internal use, certain
costs are capitalized,
including external direct costs of materials and services associated with
developing or obtaining the software, and payroll and payroll-related costs for employees who are
directly associated with internal-use software projects. Capitalization of these costs ceases no later
than the point at which the project is substantially complete and ready for its intended use. Costs
training, maintenance, and other post-
associated with preliminary project stage activities,
implementation stage activities are expensed as incurred. The carrying value of software and
development costs is reviewed for impairment when events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable.
Goodwill and other intangible assets, net of accumulated amortization: The Company had
$1.8 billion of goodwill as of both May 31, 2020 and May 31, 2019, respectively. Goodwill
is not
amortized, but instead is tested for impairment on an annual basis and between annual tests if an
event occurs or circumstances change in a way to indicate that there has been a potential decline in
the fair value of a reporting unit. The Company performs its annual impairment testing in its fiscal fourth
quarter. A qualitative analysis was performed for all reporting units in the fiscal years 2020, 2019, and
2018 to determine if it is more-likely-than-not that the fair value of the reporting units had declined
below their carrying value. The qualitative assessment considered various financial, macroeconomic,
industry, and reporting unit specific qualitative factors. Based on the results of the Company’s testing,
no impairment loss was recognized in the results of operations for the fiscal years 2020, 2019, or 2018.
Subsequent to the latest review, there have been no events or circumstances that
indicate any
potential impairment of the Company’s goodwill balance.
Intangible assets are comprised primarily of client
list acquisitions and are reported net of
accumulated amortization on the Consolidated Balance Sheets. Intangible assets are amortized over
periods generally ranging from three to 12 years. Certain client lists use an accelerated method, while
other intangible assets use the straight-line method of amortization. In addition, the Company has
intangible assets with indefinite useful lives, which are tested for impairment on an annual basis and
between annual tests if an event occurs or circumstances change in a way to indicate that the carrying
value may not be recoverable. The Company has determined there is no impairment of intangible
assets with indefinite useful lives for fiscal 2020, 2019, or 2018.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Impairment of Long-Lived Assets: Long-lived assets, including intangible assets with finite
lives and operating lease right-of-use assets, are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
The Company has determined that there was no impairment of long-lived assets for the fiscal years
2020, 2019, or 2018.
Foreign Currency: The financial statements of the Company’s foreign subsidiaries have been
translated into U.S. dollars. Assets and liabilities are translated into U.S. dollars at period-end
exchange rates. Income and expenses are translated at the average exchange rate for the reporting
period. The resulting non-cash foreign currency translation adjustments, representing unrealized gains
or losses, are included in Consolidated Statements of Stockholders’ Equity as a component of
accumulated other comprehensive income/(loss), net of tax. The Company did not have any material
realized gains or losses resulting from foreign exchange transactions during the fiscal years 2020,
2019, or 2018.
Revenue recognition: Revenues are primarily attributable to fees for providing services as well
as investment income earned on funds held for clients. Fees associated with services are recognized
in the period services are rendered and earned under service arrangements with clients where service
fees are fixed or determinable and collectability is reasonably assured. The Company’s service
revenue is largely attributable to processing services where the fee is based on a fixed amount per
processing period or a fixed amount per processing period plus a fee per employee or transaction
processed. Insurance Solutions revenues are recognized when commissions are earned on premiums
billed and collected. Fees earned for funding of payrolls for temporary staffing agency clients via the
purchase of accounts receivable are based on a percentage of funding amounts as specified in the
client contract. These fees are then recognized over the average collection period of 35 to 45 days.
The revenue earned from delivery service for the distribution of certain client payroll checks and
reports is included in service revenue, and the costs for the delivery are included in cost of service
revenue on the Consolidated Statements of Income and Comprehensive Income.
The Company receives advance payments for set-up fees from its clients. Advance payments
received for certain of the Company’s service offerings for set-up fees are considered a material right.
Therefore, the Company defers the revenue associated with these advance payments, recognizing the
revenue and related expenses over the expected period to which the material right exists.
PEO Solutions revenue is included in service revenue and is reported net of certain pass-through
costs billed and incurred, which include payroll wages, payroll taxes, including federal and state
unemployment insurance, and certain health insurance benefit premiums, primarily costs related to the
Company’s guaranteed cost benefit plans. Direct costs related to workers’ compensation and certain
benefit plans where the Company retains risk are recognized as cost of service revenue rather than as
a reduction in service revenue. Refer to Note B of this Item 8 for further discussion of the PEO pass-
through costs.
Interest on funds held for clients is earned primarily on funds that are collected from clients before
due dates for payroll tax administration services and for employee payment services and invested until
remittance to the applicable tax or regulatory agencies or client employees. The interest earned on
Income and
these funds is included in total
Comprehensive Income because the collecting, holding, and remitting of these funds are components
of providing these services.
revenue on the Consolidated Statements of
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
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. Incremental costs of obtaining a contract
include only those costs that are directly related to the acquisition of new contracts and that would not
have been incurred if the contract had not been obtained. The Company does not incur incremental costs
to obtain a contract renewal. The Company determined that certain sales commissions and bonuses,
including related fringe benefits, meet the capitalization criteria under Accounting Standards Codification
(“ASC”) Subtopic 340-40, “Other Assets and Deferred Costs: Contracts with Customers” (“ASC 340-40”).
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. The Company determined that substantially all costs related to
implementation activities are administrative in nature and meet the capitalization criteria under ASC
340-40. These capitalized costs to fulfill a contract principally relate to upfront direct costs that are
expected to be recovered and enhance the Company’s ability to satisfy future performance obligations.
The assets related to both costs to obtain and costs to fulfill contracts with clients are capitalized and
amortized using an accelerated method over an eight-year life to closely align with the pattern of client
attrition over the estimated life of the client relationship. The Company regularly reviews its deferred costs
for potential impairment and did not recognize an impairment loss during the fiscal years ended May 31,
2020 or May 31, 2019.
Cost of service revenue: The Company’s costs and expenses applicable to total service
revenue represent direct costs associated with providing HR, payroll, benefits, and insurance services.
This includes labor-related costs, direct costs related to certain PEO offerings, postage and delivery
costs,
facility costs, professional services, and depreciation and amortization of property and
equipment, including internally developed software.
Selling, general and administrative expenses: The Company’s selling, general and
including amortization of deferred sales
administrative expenses represent
commissions and bonuses, corporate asset depreciation and amortization, marketing, and other
general and administrative expenses incurred by the Company.
labor-related costs,
the PEO solution,
PEO insurance reserves: As part of
the Company offers workers’
compensation insurance and health insurance 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 these claims. 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. The evaluation, review and determination of
estimated ultimate losses by the Company’s appointed actuary are based on actuarial methods and
assumptions. The estimated ultimate losses are primarily based upon estimated loss development
factors, and other factors such as the nature of employees’ job responsibilities, the historical frequency
and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting
period, changes in actuarial assumptions resulting from changes in actual claims experience and other
trends are incorporated into our workers’ compensation claims cost estimates.
The Company’s maximum individual claims liability under its PEO workers’ compensation insurance
policies was $1.0 million for fiscal 2020. For fiscal 2019, the Company’s maximum individual claims
liability ranged from $0.5 million to $1.0 million under its PEO workers’ compensation insurance policies.
As of May 31, 2020 and May 31, 2019, the Company had recorded current liabilities of $72.3 million and
$71.1 million, respectively, and long-term liabilities of $101.3 million and $99.2 million, respectively, on its
Consolidated Balance Sheets for workers’ compensation insurance reserves.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
With respect to PEO health insurance, the Company offers various health insurance plans that
take the form of either fully insured guaranteed cost plans with various national insurance carriers or a
fully insured minimum premium insurance arrangement with coverage provided through a single
national carrier. In addition, the Company also provides self-insured dental and vision plans to certain
of its PEO clients. Under the minimum medical premium insurance arrangement and self-insured
dental and vision plans, the Company’s health benefits insurance reserves are established to provide
for the payment of claims in accordance with its service contract with the carrier. The claims liability
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 was $0.3 million under its policies during both fiscal 2020 and fiscal
2019. Amounts accrued related to the health insurance and dental and vision plan reserves were
$36.7 million and $25.4 million as of May 31, 2020 and May 31, 2019, respectively. These amounts are
included in current liabilities on the Consolidated Balance Sheets.
Estimating the ultimate cost of future claims is an uncertain and complex process based upon
historical loss experience and independent actuarial loss projections, and is 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. Adjustments to previously established reserves were not material for the fiscal years
2020, 2019, or 2018.
Leases: At contract inception, the Company determines if the new contractual arrangement is a
lease or contains a leasing arrangement. If a contract contains a lease, the Company evaluates
whether it should be classified as an operating or a finance lease. Currently, all of the Company’s
leases have been classified as operating leases. Upon modification of the contract, the Company will
reassess to determine if a contract is or contains a leasing arrangement.
The Company records lease liabilities based on the future estimated cash payments discounted
over the lease term, defined as the non-cancellable time period of the lease, together with all the
following:
• periods covered by an option to extend the lease if the Company is reasonably certain to
exercise the extension option; and
• periods covered by an option to terminate the lease if the Company is reasonably certain not to
exercise the termination option.
Leases may also include options to terminate the arrangement or options to purchase the
underlying lease property. The Company does not separate lease and non-lease components of
contracts. Lease components provide the Company with the right to use an identified asset, which
consist of the Company’s real estate properties and office equipment. Non-lease components consist
primarily of maintenance services.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
As an implicit discount rate is not readily determinable in the Company’s lease agreements, the
Company uses its estimated secured incremental borrowing rate based on the information available at
the lease commencement date in determining the present value of
future lease payments. The
incremental borrowing rate is determined using a portfolio approach utilizing publicly available information
related to our unsecured borrowing rates. For certain leases with original terms of 12 months or less, the
Company recognizes lease expense as incurred and does not recognize any lease liabilities. Short-term
and long-term portions of operating lease liabilities are classified as other current liabilities and operating
lease liabilities, respectively, in the Company’s Consolidated Balance Sheets.
A right-of-use (“ROU”) asset is measured as the amount of the lease liability with adjustments, if
applicable, for lease incentives, initial direct costs incurred by the Company, and lease prepayments
made prior to or at lease commencement. ROU assets are classified as operating lease right-of-use
assets, net of accumulated amortization, on the Company’s Consolidated Balance Sheets. The Company
evaluates the carrying value of ROU assets if there are indicators of potential impairment, and performs
the analysis concurrent with the review of the recoverability of the related asset group. If the carrying
value of the asset group is determined to not be fully recoverable and is in excess of its estimated fair
value, the Company will record an impairment loss in its Consolidated Statements of Income and
Comprehensive Income. The Company did not recognize an impairment loss during fiscal 2020.
Fixed lease expense payments are recognized on a straight-line basis over the lease term.
Variable lease payments vary because of changes in facts or circumstances occurring after the
commencement date, other than the passage of time, and are often due to changes in an external
market rate or the value of an index (e.g. Consumer Price Index). Variable lease payments are
expensed as incurred in the Company’s Consolidated Statements of Income and Comprehensive
Income.
Stock-based compensation costs: All stock-based awards to employees are recognized as
compensation costs in the consolidated financial statements based on their fair values measured as of
the date of grant. The Company estimates the fair value of stock option grants using a Black-Scholes
option pricing model. This model requires various assumptions as inputs including expected volatility of
the Paychex stock price and expected option life. Volatility is estimated based on a combination of
historical volatility, using stock prices over a period equal to the expected option life, and implied
market volatility. Expected option life is estimated based on historical exercise behavior. The Company
periodically reassesses its assumptions as well as its choice of valuation model. The Company will
reconsider use of this model if additional information becomes available in the future indicating that
another model would provide a more accurate estimate of fair value, or if characteristics of future
grants would warrant such a change.
The fair value of stock awards is determined based on the stock price at the date of grant. For
grants that do not accrue dividends or dividend equivalents, the fair value is the stock price reduced by
the present value of estimated dividends over the vesting period or performance period.
The Company’s policy is to estimate forfeitures and only record compensation costs for those
awards that are expected to vest. The assumptions for forfeitures are determined based on type of
award and historical experience. Forfeiture assumptions are adjusted at the point in time a significant
change is identified, with any adjustment recorded in the period of change, and the final adjustment at
the end of the requisite service period to equal actual forfeitures.
The assumptions of volatility, expected option life, and forfeitures all require significant judgment
and are subject to change in the future due to factors such as employee exercise behavior, stock price
trends, and changes to type or provisions of stock-based awards. Any material change in one or more
of these assumptions could have an impact on the estimated fair value of a future award.
Refer to Note F of this Item 8 for further discussion of the Company’s stock-based compensation
plans.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Income taxes: The Company accounts for deferred taxes by recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax basis of assets and
liabilities, using enacted tax rates in effect for the fiscal year in which the differences are expected to
reverse.
The Company also maintains a reserve for uncertain tax positions. The Company evaluates tax
positions taken or expected to be taken in a tax return for recognition in its consolidated financial
statements. Prior to recording the related tax benefit in the consolidated financial statements, the
Company must conclude that tax positions will be more-likely-than-not to be sustained, assuming those
positions will be examined by taxing authorities with full knowledge of all relevant information. The
benefit recognized in the consolidated financial statements is the amount the Company expects to
realize after examination by taxing authorities. If a tax position drops below the more-likely-than-not
standard, the benefit can no longer be recognized. Assumptions, judgment, and the use of estimates
are required in determining if the more-likely-than-not standard has been met when developing the
provision for income taxes and in determining the expected benefit. A change in the assessment of the
more-likely-than-not standard could materially impact the Company’s results of operations or financial
position. The Company’s reserve for uncertain tax positions, including interest and net of federal
benefits, was $26.5 million as of May 31, 2020 and $21.6 million as of May 31, 2019. Refer to Note L of
this Item 8 for further discussion of the Company’s reserve for uncertain tax positions.
Use of estimates: The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates, judgments, and assumptions
that affect reported amounts of assets, liabilities, revenue, and expenses during the reporting period.
Actual amounts and results could differ from these estimates.
Recently adopted accounting pronouncements:
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02. This guidance, as amended by subsequent ASUs
on the topic, improves transparency and comparability among companies by recognizing lease assets
and lease liabilities on the balance sheet and by disclosing key information about
leasing
arrangements. The Company adopted the requirements of ASU No. 2016-02 on June 1, 2019, utilizing
the alternative transition method provided by the FASB in ASU No. 2018-11, “Leases (Topic 842):
Targeted Improvements,” and did not restate comparative periods as permitted under the standard.
The adoption of ASU No. 2016-02 increased ROU lease-related assets and liabilities by
$116.4 million and resulted in ROU asset and lease liability balances of $116.4 million and
$135.3 million, respectively, on the Company’s Consolidated Balance Sheets as of June 1, 2019. The
difference between the ROU assets and lease liabilities relates to $18.9 million of unamortized landlord
allowances and lease incentives. The Company has updated its control framework for new internal
controls and made changes to existing internal controls related to the new standard. The adoption of
this standard did not have an impact on the financial covenants set forth in the Company’s credit
facilities and long-term borrowing agreement. Refer to Note I of this Item 8 for additional information on
the new standard.
As part of
the adoption of ASU No. 2016-02,
the Company elected the following practical
expedients: 1) lease vs. non-lease components relating to the real estate asset class; 2) the short-term
lease exemption; and 3) the package of practical expedients, which permits the Company to not
reassess prior conclusions about lease identification, lease classification, and initial direct costs under
the new standard. In addition, the Company elected not to adopt the practical expedient related to
hindsight.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
In June 2019, the Company also adopted the following ASUs, none of which had a material impact
on its consolidated financial statements:
• ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718):
Improvements to
Nonemployee Share-Based Payment Accounting;”
• ASU No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income;” and
• ASU No. 2017-08, “Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities.”
In March 2020,
Recently issued accounting pronouncements:
the FASB issued ASU
No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.” ASU No. 2020-04 provides guidance on optional expedients for a
limited time to ease the operational burden in accounting for (or recognizing the effects of) reference
rate reform (LIBOR) on financial reporting. This guidance is effective upon the ASUs issuance on
March 12, 2020 and companies may elect
to apply the amendments prospectively through
December 31, 2022. The Company’s credit facilities already contain comparable alternative reference
rates that would automatically take effect upon the LIBOR phase out, and it is also reviewing its
commercial contracts that may utilize LIBOR as a reference rate. The Company is currently evaluating
the potential effects of this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes.” ASU No. 2019-12 is intended to simplify various aspects related to
accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740
related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim
period, and clarifies certain aspects of the current guidance to promote consistent application. This
guidance is effective for public business entities for fiscal years beginning after December 15, 2020,
and for interim periods within those fiscal years, with early adoption permitted. This guidance is
applicable to the Company’s fiscal year beginning June 1, 2021. The Company is currently evaluating
the potential effects of this guidance on its consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-08 “Compensation — Stock Compensation
(Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements —
Share-Based Consideration Payable to a Customer.” ASU No. 2019-08 amends and clarifies ASU
No. 2018-07, which was adopted by the Company on June 1, 2019, to require that an entity measure
and classify share-based payment awards granted to a customer by applying the guidance in Topic
718. For entities that have already adopted the amendments in ASU No. 2018-07, the amendments in
this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods
within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s
fiscal year beginning June 1, 2020. The adoption of this guidance will not have a material impact on its
consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04 “Codification Improvements to Topic 326,
Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments.” ASU No. 2019-04 was issued as part of the FASB’s ongoing project to improve upon its
ASC, and to clarify and improve areas of guidance related to recently issued standards on credit
losses, hedging, and recognition and measurement. This guidance contains several effective dates but
is applicable to the Company’s fiscal year beginning June 1, 2020. The adoption of this guidance will
not have a material impact on its consolidated financial statements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808):
Clarifying the Interaction between Topic 808 and Topic 606.” ASU No. 2018-18 was issued to resolve
the diversity in practice concerning the manner in which entities account for transactions based on their
assessment of the economics of a collaborative arrangement. This guidance is effective for public
business entities for fiscal years beginning after December 15, 2019, and for interim periods within
those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal
year beginning June 1, 2020. The adoption of this guidance will not have a material
impact on its
consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles — Goodwill and Other —
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in
a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging
Issues Task Force).” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements
that include an internal-use software license). This guidance is effective for public business entities for
fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with
early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1,
impact on its consolidated financial
2020. The adoption of this guidance will not have a material
statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820):
Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” ASU
No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on
the FASB Concepts Statement, “Conceptual Framework for Financial Reporting — Chapter 8: Notes to
Financial Statements,” including consideration of costs and benefits. This guidance is effective for all
entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal
years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year
beginning June 1, 2020. The adoption of
impact on its
consolidated financial statements.
this guidance will not have a material
In January 2017,
the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairments.” ASU No. 2017-04 establishes a one-step
process for testing goodwill for a decrease in value, requiring a goodwill
loss to be
measured as the excess of the reporting unit’s carrying amount over its fair value. The guidance
eliminates the second step of
to be
measured as the difference between the implied value of a reporting unit’s goodwill with the goodwill’s
carrying amount. This guidance is effective for public business entities that are U.S. Securities and
Exchange Commission (“SEC”) filers for its annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual impairment tests
after January 1, 2017. This guidance is applicable to the Company’s fiscal year beginning June 1,
2020. The Company has completed its assessment of the adoption of this guidance, including changes
to internal controls, and it will not have a material impact on its consolidated financial statements.
two-step process that requires the impairment
the current
impairment
In June 2016,
the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13, as amended
by subsequent ASUs on the topic and commonly referred to as the current expected credit loss
(“CECL”) model, requires an organization to measure all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported financial assets. It also requires credit
losses related to available-for-sale debt securities to be recorded through an allowance for credit
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
losses. This guidance is effective for public business entities that are U.S. SEC filers for annual periods
beginning after December 15, 2019, and for interim periods within those fiscal years, with early
adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2020
and will be adopted using the modified retrospective approach through a cumulative-effect adjustment
to retained earnings.
The Company’s CECL implementation group has completed its evaluation, testing, and validation
of the necessary CECL model changes to business processes, systems and controls to support the
adoption of the new guidance and record expected credit losses to its accounts receivable, PEO
unbilled receivables, and available-for-sale (“AFS”) debt securities as of June 1, 2020. The ultimate
effect of CECL on our credit losses will depend on the size, composition and credit quality of the
Company’s accounts receivable and investment portfolios, economic conditions at and subsequent to
the date of adoption, as well as any refinements to our model, methodology and other key
assumptions. The adoption of this guidance will not have a material impact on its consolidated financial
statements.
Other recent authoritative guidance issued by the FASB (including technical corrections to the
FASB ASC), the American Institute of Certified Public Accountants, and the SEC did not, or are not
expected to have a material impact on the Company’s consolidated financial statements.
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 promised services is transferred to its clients, in an amount that
reflects the consideration it expects to receive in exchange for such services. The Company’s service
revenue is largely attributable to processing services where the fee is based on a fixed amount per
processing period or a fixed amount per processing period plus a fee per employee or transaction
processed. Insurance Solutions revenue is recognized when commissions are earned on premiums
billed and collected. The Company’s contracts generally do not contain specified contract periods and
may be terminated by either party with 30-days’ notice of termination. Sales and other applicable
non-payroll related taxes are excluded from service revenue.
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 payroll processing,
payroll-related ancillary services, and HR outsourcing 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
outsourcing services covering the HCM spectrum. Management Solutions revenue is generally
recognized over time as services are performed and the customer 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.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
PEO and Insurance Solutions Revenue
PEO solutions are sold through the Company’s registered and licensed subsidiaries, Paychex
Business Solutions, LLC, Oasis Outsourcing Group Holdings, L.P. (“Oasis”), and HR Outsourcing
Holdings, Inc. (“HROi”), and offer businesses a combined package of services that includes payroll,
employer compliance, HR and employee benefits administration, risk management outsourcing, and
the on-site availability of a professionally trained HR representative, among other services. 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 benefit offerings. PEO Solutions revenue is recognized over time as the services are
performed and the customer 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 certain health
insurance benefit premiums, primarily costs related to the Company’s guaranteed cost benefit plans.
For guaranteed cost benefit plans where the Company does not retain risk, revenues are recorded net
of the premiums paid to the insurance carrier. For workers’ compensation and certain benefit 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 are as follows:
In billions
Year ended May 31,
2019
2018
2020
Payroll wages and payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20.5
$ 14.5
$ 7.7
In millions
State unemployment insurance (included in payroll wages
and payroll taxes)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85.7
Guaranteed cost benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $647.0
$ 82.3
$451.8
$ 47.5
$274.2
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, and commercial auto, and
health and benefits coverage, including health, dental, vision, and life. Insurance Solutions revenue
reflects commissions earned on insurance services premiums billed and is recognized over time as
services are performed and the customer simultaneously receives and controls the benefits from these
services.
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, the Company defers revenue associated with these performance obligations,
which exceed one year, and subsequently recognizes these as future services are provided, over
approximately three years to four years.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Changes in deferred revenue related to a material right that exceed one year were as follows:
In millions
Year ended
May 31, 2020
Year ended
May 31, 2019
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferral of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45.7
24.7
(27.8)
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 42.6
$ 46.4
27.6
(28.3)
$ 45.7
Deferred revenue related to a material right is reported in the deferred revenue and other long-
term liabilities line items on the Company’s Consolidated Balance Sheets. The Company expects to
recognize $21.6 million of deferred revenue related to a material right during its fiscal year ending
May 31, 2021 and $21.0 million of such deferred revenue thereafter.
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. Refer to the Note A of this Item 8 for
additional disclosures on our policies for assets recognized from the costs to obtain and fulfill contracts.
The Company regularly reviews its deferred costs for potential impairment and did not recognize
an impairment loss during the fiscal years ended May 31, 2020 or May 31, 2019.
Changes in deferred costs to obtain and fulfill contracts were as follows:
In millions
Year ended May 31, 2020
Beginning
balance
Capitalization
of costs
Amortization
Costs to obtain a contract . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Costs to fulfill a contract
$464.3
$ 66.1
$171.7
$ 24.9
$(162.4)
$ (23.7)
In millions
Year ended May 31, 2019
Beginning
balance
Capitalization
of costs
Amortization
Costs to obtain a contract . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Costs to fulfill a contract
$455.0
$ 65.4
$166.5
$ 23.7
$(157.2)
$ (23.0)
Ending
balance
$473.6
$ 67.3
Ending
balance
$464.3
$ 66.1
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note C — Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
In millions, except per share amounts
Basic earnings per share:
Year ended May 31,
2019
2020
2018
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
358.5
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . .
$1,034.4
359.2
$994.1
359.0
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.06
$
2.88
$ 2.77
Diluted earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
358.5
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . .
2.5
Dilutive effect of common share equivalents . . . . . . . . . . . . . . . . . . . . . . . .
$1,034.4
359.2
2.6
$994.1
359.0
2.5
Weighted-average common shares outstanding, assuming dilution . . . . .
361.0
361.8
361.5
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.04
$
2.86
$ 2.75
Weighted-average anti-dilutive common share equivalents . . . . . . . . . .
0.7
0.4
0.7
Weighted-average common share equivalents that had an anti-dilutive impact are excluded from
the computation of diluted earnings per share.
In May 2019, the Company announced that its Board approved a program to repurchase up to
$400.0 million of its common stock, with authorization expiring on May 31, 2022. During fiscal 2020,
the Company repurchased 2.0 million shares for $171.9 million under this repurchase program. During
fiscal 2019 and fiscal 2018,
the Company repurchased 0.7 million shares for $56.9 million and
2.5 million shares for $143.1 million, respectively, under a previously authorized repurchase program.
The purpose of these programs is to manage common stock dilution. All shares of common stock
repurchased were retired.
Note D — Business Combinations
Effective December 20, 2018, the Company acquired Oasis. Upon closing, Oasis became a wholly
owned subsidiary of the Company. Oasis is an industry leader in providing HR outsourcing services.
The purchase price was $992.2 million, net of $262.3 million in cash acquired, including $132.1 million
of restricted cash. The acquisition was financed through a combination of cash on hand and the
issuance of long-term private placement debt totaling $800.0 million.
The results of operations for Oasis have been included in the Company’s Consolidated
Statements of Income and Comprehensive Income since the date of acquisition. During fiscal 2019,
Oasis contributed $163.7 million of total revenues and $5.1 million of operating income, including the
impact of certain one-time charges related to the acquisition and integration of the Oasis business, in
the Company’s consolidated results of operations. The Company incurred $5.3 million of acquisition
and integration costs associated with Oasis during fiscal 2019, which was included within selling,
Income and
general and administrative expenses in the Company’s Consolidated Statements of
Comprehensive Income.
The Company accounted for the acquisition as a business combination using the acquisition
method of accounting in accordance with the FASB ASC Topic 805, “Business Combinations.” The
acquired assets and liabilities of Oasis were recorded at their acquisition-date fair values and were
consolidated with those of the Company as of the acquisition date. The purchase accounting was
finalized during fiscal 2020.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The following acquisition-date fair values were assigned to the acquired net assets (amounts in
millions):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130.2
66.6
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.6
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.7
Accounts receivable, net of allowance for doubtful accounts . . . . . . . . . . . . . . . . . . .
209.8
PEO unbilled receivables, net of advance collections . . . . . . . . . . . . . . . . . . . . . . . . .
4.8
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.0
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65.5
Long-term restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.4
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
310.9
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
976.6
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,806.9
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued corporate compensation and related items . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued worksite employee compensation and related items . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.0
11.6
311.1
49.8
55.6
79.3
Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,254.5
The Company assigned $310.9 million to amortizable intangible assets, including customer lists,
trade names and trademarks, and non-compete agreements, with a weighted-average amortization
period of approximately 10 years. Goodwill in the amount of $976.6 million was recorded as a result of
the acquisition, which is not tax-deductible. Goodwill is attributable to the future economic benefits the
Company expects to achieve and expected synergies to be realized when combining the operations of
this acquisition into our existing operations.
Pro Forma Financial Results (Unaudited): The following table summarizes the Company’s
unaudited pro forma operating results for fiscal 2019 and fiscal 2018 as if the acquisition of Oasis had
been consummated as of June 1, 2017. The following pro forma information does not include the
impact of any costs incurred to integrate Oasis’ operations:
In millions
Year ended May 31,
2018
2019
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,958.0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,021.7
$3,680.5
$ 984.2
The unaudited pro forma operating results have been calculated after applying the Company’s
accounting policies and include the acquisition of Oasis adjusted, net of tax, for depreciation and
amortization expense resulting from the determination of fair values of the acquired property and
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
equipment and amortizable intangible assets, the inclusion of interest expense related to borrowings
used to fund the acquisition, the amortization of debt issuance costs related to the permanent financing
of debt, the elimination of interest income related to available cash used for the acquisition, and the
elimination of Oasis’ interest expense related to debt not assumed in the acquisition. In addition, the
net income above for the fiscal year ended May 31, 2018 includes a non-recurring one-time net tax
benefit for the revaluation of net deferred tax liabilities as a result of the Tax Cuts and Jobs Act (the
“Tax Act”). Since the pro forma financial results assume the acquisition was consummated on June 1,
2017, the unaudited pro forma operating results for fiscal 2019 excluded $2.7 million ($2.0 million, net
of tax) of costs incurred by the Company related to the acquisition of Oasis. The unaudited pro forma
operating results for fiscal 2018 included $2.7 million ($1.7 million, net of tax) of costs incurred by the
Company related to the acquisition of Oasis.
Oasis’ fiscal year end was the Sunday closest to the calendar year end. Since Oasis and the
Company had different fiscal year end dates, the unaudited pro forma operating results were prepared
based on comparable periods.
The pro forma financial information does not purport to be indicative of the results that would have
been obtained had the transactions been completed as of June 1, 2017 for the periods presented and
are not intended to be a projection of future results or trends.
Effective February 28, 2018,
the Company acquired Lessor Group (“Lessor”). Upon closing,
Lessor became a wholly owned subsidiary of the Company. Lessor is a market-leading provider of
payroll and HCM software solutions headquartered in Denmark and serving clients in Northern Europe.
The purchase price was $162.5 million, net of $13.4 million in cash acquired. Goodwill in the amount of
$112.3 million was recorded as a result of the acquisition, which is not tax-deductible.
Effective August 18, 2017, the Company acquired HROi and all of its operating subsidiaries. HROi
is a national PEO that provides HR solutions to small- and medium-sized businesses in more than 35
states. The acquisition expands the Company’s presence in the PEO industry. The purchase price was
$75.4 million and was comprised of $42.2 million of cash plus $33.2 million issued in the form of
Paychex common stock. Goodwill
in the amount of $51.1 million was recorded as a result of the
acquisition, which is not tax-deductible.
The financial results of Lessor and HROi are included in the Company’s consolidated financial
statements from the respective dates of acquisition. Subsequent adjustments made to preliminary
opening balance sheet amounts before finalization for these acquisitions were immaterial. The
Company concluded that these acquisitions were not material to its results of operations and financial
position. Therefore, pro forma financial information has been excluded.
Note E — Other (Expense)/Income, Net
Other (expense)/income, net, consisted of the following items:
In millions
Year ended May 31,
2019
2020
2018
Interest income on corporate investments . . . . . . . . . . . . . . . . . . . . $ 12.3
(38.8)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$ 13.3
(17.6)
1.0
$11.9
(3.9)
0.6
Other (expense)/income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(23.4)
$ (3.3)
$ 8.6
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note F — Stock-Based Compensation Plans
The Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated effective on October 14,
2015 (the “2002 Plan”), authorizes grants of up to 44.1 million shares of the Company’s common stock.
As of May 31, 2020, there were 17.3 million shares available for future grants under the 2002 Plan.
All stock-based awards to employees are recognized as compensation costs in the consolidated
financial statements based on their fair values measured as of the date of grant. These costs are
recognized as an expense in the Consolidated Statements of Income and Comprehensive Income on a
straight-line basis over the requisite service period and an increase in additional paid-in capital.
Stock-based compensation expense was $47.4 million, $46.2 million, and $44.6 million for fiscal
years 2020, 2019, and 2018,
respectively. Additional stock-based compensation expense was
recognized in fiscal 2018 when the Company decided to maximize its tax benefit by accelerating the
vesting of restricted stock units (“RSUs”) into fiscal 2018 that would have otherwise vested in August
2018. Related income tax benefits recognized were $9.0 million, $8.9 million, and $14.5 million for the
respective fiscal years.
As of May 31, 2020, the total unrecognized compensation cost related to all unvested stock-based
awards was $65.0 million and is expected to be recognized over a weighted-average period of
2.8 years.
Black-Scholes fair value assumptions: The fair value of stock option grants and performance-
based stock option grants was estimated at the date of grant using a Black-Scholes option pricing
model. The weighted-average assumptions used for valuation under the Black-Scholes option pricing
model are as follows:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant-date fair value of stock options
2020
Year ended May 31,
2019
Stock options
2018
2.0%
3.3%
0.18
6.2
2.9%
3.5%
0.18
6.1
2.1%
3.4%
0.17
6.1
granted (per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.86
$8.87
$6.47
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant-date fair value of stock options
Year ended May 31,
2019
2018
Performance-based stock options
2.9%
3.5%
0.18
6.5
2.4%
3.3%
0.18
6.5
granted (per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.02
$7.45
No performance-based stock options were granted during fiscal 2020.
Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at
the end of the expected option life. The estimated volatility factor is based on a combination of
historical volatility, using stock prices over a period equal to the expected option life, and implied
market volatility. The expected option life is based on historical exercise behavior.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Stock options: Stock options entitle the holder to purchase, at the end of the vesting term, a
specified number of shares of Paychex common stock at an exercise price per share equal to the
closing market price of the common stock on the date of grant. All stock options have a contractual life
of ten years from the date of the grant and a vesting schedule as established by the Board. The
Company issues new shares of common stock to satisfy stock option exercises. Stock option grants to
executives and outside directors are typically approved by the Board in July. Grants of stock options to
executives vest one-third per annum. Grants to members of the Board vest after one year. Vesting is
generally achieved on these dates with active employment or participation as a member of the Board
on the date of vesting.
The following table summarizes stock option activity for fiscal 2020:
In millions, except per share amounts
Outstanding as of May 31, 2019 . .
Granted . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of May 31, 2020 . .
Exercisable as of May 31, 2020 . . .
Shares
subject
to options
Weighted-
average
exercise price
per share
Weighted-
average
remaining
contractual term
(years)
Aggregate
intrinsic
value(1)
4.3
0.6
(0.5)
—
—
4.4
3.1
$49.23
$85.22
$44.24
$72.17
$33.34
$55.02
$46.73
5.6
4.5
$83.7
$78.1
(1) Total shares valued at the market price of the underlying stock as of May 31, 2020 less the exercise price.
Other information pertaining to stock option grants is as follows:
In millions
Year ended May 31,
2019
2020
2018
Total intrinsic value of stock options exercised . . . . . . . . . . . . . . . . . . . $22.0
Total grant-date fair value of stock options vested . . . . . . . . . . . . . . . . $ 5.0
$25.7
$ 4.3
$9.1
$4.0
RSUs: The Board grants RSUs to certain executive and non-executive employees. An RSU is
an agreement to issue shares at the time of vesting with no associated exercise cost for the employee.
For each unit granted, the holder will receive one share of Paychex common stock at the time of
vesting. If the recipient does not vest in the shares due to leaving Paychex, all shares or units of RSUs,
and any dividends accrued thereon, when applicable, will be forfeited and returned to the Company.
The Company made a decision in fiscal 2018 to accelerate the vesting of the August 2018 tranche into
fiscal 2018.
Time-based RSUs: Time-based RSUs granted to non-executives vest one-fifth per annum over
five years, while those granted to executives vest one-third per annum over three years. Vesting is
generally achieved on these dates with active employment. The fair value of time-based RSUs is equal
to the closing market price of the underlying common stock as of the date of grant, adjusted for the
present value of expected dividends over the vesting period. Time-based RSUs may, or may not, earn
dividend equivalents depending on the terms of the specific grant.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Performance-based RSUs: Performance-based RSUs primarily have a two-year performance
period, after which the number of underlying RSUs earned will be determined based on achievement
against pre-established performance targets. The RSUs earned are then subject to a one-year service
period. Performance-based RSUs do not earn dividend equivalents during the performance period.
The fair value of the RSUs is equal to the closing market price of the underlying common stock as of
the date of grant, adjusted for the present value of expected dividends over the performance period.
The following table summarizes RSU activity for fiscal 2020:
In millions, except per share amounts
Time-Based
RSUs
Weighted-average
grant-date
fair value per
share
Performance-
based RSUs
Weighted-average
grant-date
fair value per
share
Nonvested as of May 31, 2019 . . .
Granted(1) . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . .
1.5
0.5
(0.5)
(0.1)
Nonvested as of May 31, 2020 . . .
1.4
$53.45
$73.28
$49.49
$60.26
$61.60
—
0.1
—
—
0.1
$ —
$80.59
$ —
$ —
$80.59
(1) For performance-based RSUs, granted number assumes achievement of performance goals at target. Actual number of
shares to be earned may differ from this amount.
Other information pertaining to RSUs is as follows:
In millions, except per share amounts
Time-based RSUs:
Year ended May 31,
2019
2018
2020
Weighted-average grant-date fair value per share of
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73.28
Weighted-average remaining vesting period (years)
2.9
Total intrinsic value of RSUs vested . . . . . . . . . . . . . . . . . . . . . . $ 40.0
. . . . . . . . . . . . $ 99.9
Aggregate intrinsic value of nonvested RSUs(1)
Total grant-date fair value of RSUs vested . . . . . . . . . . . . . . . . $ 23.6
. . . . . . . .
$62.20
2.9
$ 1.2
$127.0
$ 0.8
$51.15
3.2
$ 60.9
$ 69.2
$ 42.4
Performance-based RSUs(2):
Weighted-average grant-date fair value per share of
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80.59
2.1
$ — $ —
Weighted-average remaining vesting period (years)
—
Total intrinsic value of RSUs vested . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ —
$ — $ —
Aggregate intrinsic value of nonvested RSUs(1)
Total grant-date fair value of RSUs vested . . . . . . . . . . . . . . . . $ — $ — $ —
. . . . . . . . . . . . $ 4.4
. . . . . . . .
—
(1) Based on the market price of the underlying common stock as of May 31, 2020, 2019 and 2018.
(2) No performance-based RSUs were granted during fiscal 2019 and fiscal 2018.
Restricted stock awards: The Board approves grants of
restricted stock awards to the
Company’s executives and outside directors. All shares underlying awards of restricted stock are
restricted in that they are not transferable until they vest. Recipients of the restricted stock earn
dividends, which are paid to the recipient at the time the awards vest. If the recipient does not vest in
the shares due to leaving Paychex, all shares of restricted stock, and the dividends accrued thereon,
when applicable, will be forfeited and returned to the Company.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Time-based restricted stock awards: Time-based restricted stock awards granted to executives
vest one-third per annum. Time-based restricted stock awards granted to outside directors vest on the
one-year anniversary of the grant date. Vesting is generally achieved on these dates with active
employment or participation as a member of the Board on the date of vesting. The fair value of time-
based restricted stock awards is equal to the closing market price of the underlying common stock as
of the date of grant.
Performance-based restricted stock awards: Performance-based restricted stock awards primarily
have a two-year performance period, after which the number of shares earned will be determined
based on achievement against pre-established performance targets. The restricted shares earned are
then subject to a one-year service period. Performance-based shares do not earn dividend equivalents
during the performance period. The fair value of performance-based shares is equal to the closing
market price of the underlying common stock as of the date of grant, adjusted for the present value of
expected dividends over the performance period.
The following table summarizes time-based and performance-based restricted stock award activity
for fiscal 2020:
In millions, except per share amounts
Time-based
shares
Weighted-average
grant-date
fair value
per share
Performance-
based shares
Weighted-average
grant-date
fair value
per share
Nonvested as of May 31, 2019 . . .
Granted(1) . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . .
0.1
0.1
(0.1)
—
Nonvested as of May 31, 2020 . . .
0.1
$64.32
$84.46
$63.63
$73.82
$73.20
0.4
—
(0.1)
—
0.3
$58.09
$80.59
$56.97
$63.07
$61.97
(1) For performance-based shares, granted number assumes achievement of performance goals at target. Actual number of
shares to be earned may differ from this amount.
Other information pertaining to time-based and performance-based restricted stock awards is as
follows:
In millions, except per share amounts
Year ended May 31,
2019
2018
2020
Weighted-average grant-date fair value per share of
time-based shares granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $84.46
$69.80
$57.50
Total grant-date fair value of time-based restricted stock
vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.2
$ 3.0
$ 3.0
Weighted-average grant-date fair value per share of
performance-based shares granted . . . . . . . . . . . . . . . . . . . . . . $80.59
$65.17
$53.08
Total grant-date fair value of performance-based
restricted stock vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.8
$ 5.3
$ 6.6
Long-term Incentive Plan (“LTIP”): The Company has two long-term incentive performance-
based stock awards under its LTIP. In July 2011, the Board approved a special award of performance-
based non-qualified stock options. Subsequent grants of this award were made upon the hire of new
executives. Under this award, stock options were granted to executives with vesting dependent on
achievement against
long-term strategic and financial objectives. Total stock options earned and
vested were based on achievement against pre-established targets for the fiscal year ended May 31,
2016 (”fiscal 2016”). The performance period was completed in fiscal 2016. Although the performance
period was completed and the stock options were earned and vested, there are still stock options
outstanding as of May 31, 2020.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
In July 2016,
the Board approved an LTIP award comprised of both performance-based
non-qualified stock options and performance-based restricted stock. This award was granted to
executives down to the vice president level with vesting dependent on achievement against long-term
strategic and financial objectives. Total stock options and restricted shares to be earned are based on
achievement against pre-established targets for the fiscal year ending May 31, 2020.
The following table summarizes LTIP performance-based stock option activity for fiscal 2020:
In millions, except per share amounts
Outstanding as of May 31, 2019 . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of May 31, 2020 . . . . .
Exercisable as of May 31, 2020 . . . . .
Shares
subject
to options
Weighted-average
exercise price per
share
Weighted-average
remaining
contractual term
(years)
Aggregate
intrinsic
value(1)
1.9
—
(0.5)
(0.1)
—
1.3
0.2
$51.09
$ —
$31.35
$63.17
$ —
$56.13
$31.63
5.3
1.1
$21.8
$ 9.0
(1) Shares valued at the market price of the underlying stock as of May 31, 2020 less the exercise price.
Other information pertaining to LTIP performance-based stock options is as follows:
In millions
Year ended May 31,
2019
2020
2018
Total intrinsic value of stock options exercised . . . . . . . . . . . . . . . . . . . . $23.0
$8.2
$7.9
No performance-based stock options vested in fiscal years 2020, 2019, or 2018.
LTIP performance-based restricted stock do not earn dividend equivalents during the performance
period. The fair value of LTIP performance-based restricted stock is equal to the closing market price
of the underlying common stock as of the date of grant, adjusted for the present value of expected
dividends over the performance period. If the recipient leaves Paychex prior to the vesting date for any
reason,
the shares of performance-based restricted stock will be forfeited and returned to the
Company.
The following table summarizes LTIP performance-based restricted stock activity for fiscal 2020:
In millions, except per share amounts
Restricted
shares
Weighted-average
grant date
fair value
per share
Nonvested as of May 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested as of May 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
—
—
(0.1)
—
0.1
$54.31
$ —
$ —
$56.97
$ —
$53.97
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Non-compensatory employee benefit plan: The Company offers a qualified Employee Stock
Purchase Plan (“ESPP”) to all employees. The Company’s common stock can be purchased through a
payroll deduction at a discount to the market price. The qualified ESPP allows for a discount of up to
15% based on the sole discretion of the committee established to administer the plan. For offering
periods during fiscal years 2020, 2019, and 2018 the discount was set at 5% of the market price.
Transactions under the non-qualified ESPP occurred directly through the Company’s transfer agent
and no brokerage fees were charged to employees. Transactions under the qualified ESPP occur
through the Company’s third-party stock plan administrator. The plans have been deemed
non-compensatory and therefore, no stock-based compensation costs have been recognized for fiscal
years 2020, 2019, or 2018 related to the plan.
Note G — Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments are as follows:
In millions
May 31, 2020
Gross
unrealized
gains
Gross
unrealized
losses
Amortized
cost
Fair value
Type of issue:
Funds held for clients’ money market
securities and other cash equivalents . . . . . $ 683.5
Available-for-sale securities:
Asset-backed securities . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . .
U.S. government agency and treasury
securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68.0
649.6
1,373.8
565.8
2,657.2
25.4
$ —
$ —
$ 683.5
1.7
34.1
37.4
28.5
101.7
2.2
—
(0.1)
(1.6)
—
(1.7)
(0.4)
69.7
683.6
1,409.6
594.3
2,757.2
27.2
Total funds held for clients and corporate
investments . . . . . . . . . . . . . . . . . . . . . . . . . $3,366.1
$103.9
$(2.1)
$3,467.9
In millions
May 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
Amortized
cost
Fair value
Type of issue:
Funds held for clients’ money market
securities and other cash equivalents . . . . . $ 204.5
Available-for-sale securities:
Asset-backed securities . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . .
U.S. government agency and treasury
securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate demand notes . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.3
442.1
1,411.6
612.5
1,129.6
3,601.1
26.3
$ —
$ —
$ 204.5
—
5.3
12.4
4.7
—
22.4
1.7
—
(0.9)
(0.5)
(1.3)
—
(2.7)
(0.3)
5.3
446.5
1,423.5
615.9
1,129.6
3,620.8
27.7
Total funds held for clients and corporate
investments . . . . . . . . . . . . . . . . . . . . . . . . . $3,831.9
$24.1
$(3.0)
$3,853.0
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Included in funds held for clients’ money market securities and other cash equivalents as of
May 31, 2020 were bank demand deposit accounts and money market funds.
Included in asset-backed securities as of May 31, 2020 were investment-grade securities primarily
collateralized by fixed-rate auto loans and credit card receivables and all have credit ratings of AAA.
the underlying receivables.
The primary risk associated with these securities is the collection of
Collateral on these asset-backed securities has performed as expected through May 31, 2020.
Included in corporate bonds as of May 31, 2020 were investment-grade securities covering a wide
range of issuers, industries, and sectors and primarily carry credit ratings of A or better and having
maturities ranging from June 2020 through September 2026.
Included in municipal bonds as of May 31, 2020 were general obligation bonds and revenue bonds
primarily carrying credit ratings of AA or better and have maturities ranging from June 2020 through
September 2027.
A substantial portion of our 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 is as follows:
In millions
May 31,
2020
2019
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,430.5
27.2
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.2
Long-term corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,803.8
39.0
10.2
Total funds held for clients and corporate investments . . . . . . . . . . $3,467.9
$3,853.0
Funds held for clients’ money market securities and other 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 available-for-sale securities reflected net unrealized gains of $100.0 million and
$19.7 million as of May 31, 2020 and May 31, 2019, respectively. Included in net unrealized gains as of
May 31, 2020 and May 31, 2019 were 19 and 269 available-for-sale securities in an unrealized loss
position, representing approximately 2% and 28% of
the total securities held, respectively. The
available-for-sale securities in an unrealized loss position were as follows:
Securities in an unrealized
loss position for less than
twelve months
Securities in an unrealized
loss position for more than
twelve months
May 31, 2020
In millions
Type of issue:
Corporate bonds . . . . . . . . . . .
Municipal bonds . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . .
Gross
unrealized
losses
$(0.1)
(1.6)
$(1.7)
Gross
unrealized
losses
$—
—
$—
Fair
value
$—
—
$—
Fair
value
$ 6.5
60.3
$66.8
71
Total
Gross
unrealized
losses
$(0.1)
(1.6)
$(1.7)
Fair
value
$ 6.5
60.3
$66.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Securities in an unrealized
loss position for less than
twelve months
Securities in an unrealized
loss position for more than
twelve months
Total
May 31, 2019
In millions
Type of issue:
Corporate bonds . . . . . . . . . . .
Municipal bonds . . . . . . . . . . .
U.S. government agency and
treasury securities . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . .
Gross
unrealized
losses
$ —
—
—
$ —
Fair
value
$1.5
3.2
4.7
$9.4
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
$(0.9)
(0.5)
$133.8
249.1
$(0.9)
(0.5)
$135.3
252.3
(1.3)
175.6
(1.3)
180.3
$(2.7)
$558.5
$(2.7)
$567.9
The Company regularly reviews its investment portfolios to determine if any investment is other-
than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The
Company believes that the investments held as of May 31, 2020 that had gross unrealized losses of
$1.7 million were not other-than-temporarily impaired. The Company believes that it is probable that
the principal and interest will be collected in accordance with contractual terms, and that the unrealized
losses on these securities were due to changes in interest rates and were not due to increased credit
risk or other valuation concerns. Most of the securities in an unrealized loss position as of May 31,
2020 and May 31, 2019 held an AA rating or better. The Company does not intend to sell these
investments until the recovery of their amortized cost basis or maturity, and further believes that it is
not more-likely-than-not
time. The
Company’s assessment that an investment is not other-than-temporarily impaired could change in the
future due to new developments, including developments related to COVID-19, or changes in the
Company’s strategies or assumptions related to any particular investment.
these investments prior to that
it will be required to sell
that
Realized gains and losses from the sale of available-for-sale securities were as follows:
In millions
Year ended May 31,
2019
2020
2018
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.6
(0.3)
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.6
(0.6)
$ 0.3
(0.2)
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.3
$ — $ 0.1
The amortized cost and fair value of available-for-sale securities that had stated maturities as of
May 31, 2020 are shown below by contractual maturity. Expected maturities can differ from contractual
maturities because borrowers may have the right to prepay obligations without prepayment penalties.
In millions
Maturity date:
May 31, 2020
Amortized
cost
Fair value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 353.4
700.9
Due after one year through three years . . . . . . . . . . . . . . . . . . . . . . . .
812.0
Due after three years through five years . . . . . . . . . . . . . . . . . . . . . . .
790.9
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 355.7
723.5
850.0
828.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,657.2
$2,757.2
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Variable rate demand notes (“VRDNs”) 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.
Note H — 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:
• Level 1 valuations are based on quoted prices in active markets for identical instruments that the
Company can access at the measurement date.
• Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are
observable for the instrument, either directly or indirectly, for substantially the full term of the
asset or liability including the following:
O quoted prices for similar, but not identical, instruments in active markets;
O quoted prices for identical or similar instruments in markets that are not active;
O inputs other than quoted prices that are observable for the instrument; or
O inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
• Level 3 valuations are based on information that is unobservable and significant to the overall
fair value measurement.
The carrying values of cash and cash equivalents, restricted cash and restricted cash equivalents,
accounts receivable, net of allowance for doubtful accounts, 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 available-for-sale and are recorded at fair value on a recurring basis.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as
follows:
May 31, 2020
Quoted
prices in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Carrying
value
(Fair value)
$
$
43.5
$43.5
43.5
$43.5
$
69.7
683.6
1,409.6
594.3
$2,757.2
27.2
$
$ —
—
—
—
$ —
$27.2
$
$
—
—
$
69.7
683.6
1,409.6
594.3
$2,757.2
—
$
$
26.8
$26.8
$
—
$—
$—
$—
—
—
—
$—
$—
$—
May 31, 2019
Quoted
prices in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Carrying
value
(Fair value)
In millions
Assets:
Restricted and unrestricted cash
equivalents:
Money market securities . . . . . . . . . . . . .
Total restricted and unrestricted cash
equivalents . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities:
Asset-backed securities . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . .
U.S. government agency and treasury
securities . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Other long-term liabilities . . . . . . . . . . . . . . .
In millions
Assets:
Restricted and unrestricted cash
equivalents:
Commercial paper
. . . . . . . . . . . . . . . . . .
Money market securities . . . . . . . . . . . . .
Total restricted and unrestricted cash
$
10.0
29.2
$ —
29.2
$
10.0
—
equivalents . . . . . . . . . . . . . . . . . . . . . .
$
39.2
$29.2
$
10.0
Available-for-sale securities:
Asset-backed securities . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . .
U.S. government agency and treasury
securities . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate demand notes . . . . . . . . . . .
Total available-for-sale securities . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Other long-term liabilities . . . . . . . . . . . . . . .
$
5.3
446.5
1,423.5
615.9
1,129.6
$3,620.8
27.7
$
$ —
—
—
—
—
$ —
$27.7
$
5.3
446.5
1,423.5
615.9
1,129.6
$3,620.8
—
$
$
27.0
$27.0
$
—
74
$—
—
$—
$—
—
—
—
—
$—
$—
$—
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
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
commercial paper which is considered a Level 2 investment as it is valued based on similar, but not
identical, instruments in active markets. Available-for-sale securities, including asset-backed securities,
corporate bonds, municipal bonds, U.S. government agency and treasury securities, and VRDNs, 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 available-for-sale 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 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 under historical cost. As of May 31, 2020
issuance costs was
and May 31, 2019,
$441.9 million and $416.6 million for the Senior Notes, Series A, respectively, and $448.7 million and
$418.3 million for the Senior Notes, Series B, respectively.
long-term borrowings, net of debt
the fair value of
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 I: Leases
The Company’s lease portfolio consists primarily of operating leases for office space and
equipment and has remaining terms from less than one year up to ten years, with contractual terms
expiring from 2020 to 2030. Lease contracts may include one or more renewal options that allow the
Company to extend the lease term, typically from one year to five years per each renewal option. The
exercise of lease options is generally at the discretion of the Company. None of the Company’s leases
contain residual value guarantees, substantial restrictions, or covenants.
Supplemental balance sheet information related to the Company’s leases were as follows:
As of
May 31, 2020
$ in millions
Operating lease right-of-use assets, net of accumulated amortization . . . . . . . . . .
Operating lease liabilities, current(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities, non-current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average remaining lease term (in years) . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$114.8
37.2
96.9
4.6
2.06%
(1) The current portion of operating lease liabilities is reported in the other current liabilities line item on the Company’s
Consolidated Balance Sheets.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The components of lease expense were as follows:
In millions
Year ended
May 31, 2020
Fixed payment operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable payment operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$38.2
8.6
0.2
Fixed payment lease expense was $38.2 million, $42.9 million, and $39.9 million for fiscal years
2020, 2019, and 2018, respectively.
Supplemental cash flow information related to the Company’s leases were as follows:
In millions
Year ended
May 31, 2020
Cash paid for amounts included in the measurement of lease liabilities . . . . . . . .
Amortization of ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ROU assets obtained in exchange for new operating lease liabilities . . . . . . . . . . .
Lease incentives received in the form of tenant allowances and free rent . . . . . . .
$41.6
34.4
21.5
6.1
Lease incentives received in the form of
tenant allowances and free rent was $6.1 million,
$3.5 million, and $7.7 million for fiscal years 2020, 2019, and 2018, respectively.
Future lease payments are as follows:
May 31,
In millions
2020
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39.4
31.6
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.7
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.5
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.9
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.8
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: imputed interest
140.9
6.8
Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $134.1
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37.2
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96.9
2019(1)
$29.9
21.3
13.8
10.5
—
10.7
86.2
—
$ —
$ —
$ —
(1) Presented in accordance with legacy GAAP, ASC Topic 840, Leases.
As of May 31, 2020, the Company has entered into two lease agreements that have not yet
commenced for terms up to ten years. These leases will require lease payments over their terms of
approximately $6.8 million.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note J — Property and Equipment, Net of Accumulated Depreciation
The components of property and equipment, at cost, consisted of the following:
In millions
May 31,
2020
2019
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures, and equipment
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.8
166.5
222.4
690.9
116.3
110.6
47.1
$
10.8
162.9
221.6
626.6
117.2
105.4
30.3
Total property and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . .
1,364.6
957.2
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net of accumulated depreciation . . . . . . . $ 407.4
1,274.8
866.1
$ 408.7
(1) Software includes both purchased software and costs capitalized related to internally developed software placed in service.
Capitalized costs related to internally developed software that has not yet been placed in service is included in construction
in progress.
Depreciation expense was $127.8 million, $125.7 million, and $116.9 million for fiscal years 2020,
2019, and 2018, respectively.
Note K — Goodwill and Intangible Assets, Net of Accumulated Amortization
Goodwill and changes in goodwill as of and for the years ended May 31, 2020 and May 31, 2019
were as follows:
In millions
May 31,
2020
2019
Balance, beginning of fiscal year
Changes during the period:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,782.6
$ 814.0
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition accounting adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1
4.5
(0.1)
972.1
1.6
(5.1)
Balance, end of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,791.1
$1,782.6
Goodwill acquired in fiscal 2019 related to the December 2018 acquisition of Oasis. Refer to Note
D of this Item 8 for further details.
The Company had certain intangible assets on its Consolidated Balance Sheets. The components
of intangible assets, at cost, consisted of the following:
In millions
May 31,
2020
2019
Client lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $618.4
23.3
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total intangible assets, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
641.7
311.1
$608.2
23.0
631.2
232.1
Intangible assets, net of accumulated amortization . . . . . . . . . . . . . . . . $330.6
$399.1
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
During fiscal 2020, the Company acquired customer lists with a weighted-average amortization of
7.7 years. Amortization expense relating to intangible assets was $81.9 million, $55.8 million, and
$21.1 million for fiscal years 2020, 2019, and 2018, respectively.
The Company did not recognize an impairment loss as it relates to its goodwill or intangible assets
during the fiscal years 2020, 2019, or 2018.
The estimated amortization expense for the next five fiscal years relating to intangible asset
balances is as follows:
In millions
Year ending May 31,
Estimated amortization
expense
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$65.8
60.6
56.0
53.1
50.8
Note L — Income Taxes
The components of deferred tax assets and liabilities are as follows:
In millions
Deferred tax assets:
May 31,
2020
2019
Compensation and employee benefit liabilities . . . . . . . . . . . . . . . . . . . . $ 37.6
8.0
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
Tax credit carry forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.8
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.2
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.7
Net operating loss (“NOL”) carry forwards . . . . . . . . . . . . . . . . . . . . . . . .
7.0
Tax benefit of uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 36.3
8.8
0.2
17.5
—
10.6
5.7
1.2
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114.0
80.3
Deferred tax liabilities:
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue not subject to current taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on available-for-sale securities . . . . . . . . . . . . . . . . . . .
122.8
45.7
11.4
117.4
29.3
3.7
24.5
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
354.8
119.7
42.8
3.0
127.5
—
5.2
5.2
303.4
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(240.8)
$(223.1)
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The deferred tax asset related to NOL carry forward is comprised of $4.4 million of federal NOL
carry forwards and $5.3 million of state NOL carry forwards. The federal NOL carry forwards were
acquired through various acquisitions and expire between the fiscal years ending May 31, 2022 and
May 31, 2037. The state NOL carry forwards expire between the fiscal years ending May 31, 2021
through May 31, 2039.
The components of the provision for income taxes are as follows:
In millions
Current:
Year ended May 31,
2019
2018
2020
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265.5
77.5
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$258.2
70.7
$289.1
54.1
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
343.0
328.9
343.2
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.5)
(3.5)
(4.0)
0.7
4.0
4.7
(38.0)
0.8
(37.2)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339.0
$333.6
$306.0
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is
as follows:
Year ended May 31,
2019
2018
2020
Federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0% 21.0% 29.2%
Increase/(decrease) resulting from:
. . . . . . . . . . —%
Statutory tax rate reduction resulting from the Tax Act
3.9%
State income taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . .
Section 199 — Qualified production activities . . . . . . . . . . . . . . . . . —%
Tax-exempt municipal bond interest . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option windfall benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, including adoption of ASC 606 . . . . . . . . . . . . . . . . . . .
—% (2.0)%
3.0%
4.3%
—% (0.3)%
(0.4)% (0.5)% (1.1)%
(0.8)% (0.5)% (0.8)%
(0.1)% 0.1% (4.5)%
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.6% 24.4% 23.5%
The effective income tax rates in all periods were impacted by recognition of net discrete tax
benefits related to employee stock-based compensation payments. In fiscal 2019, the effective income
tax rate included discrete tax expense for changes in tax reserves and the revaluation of deferred tax
balances for legislative updates. In fiscal 2018, as a result of the Tax Act, we recorded a non-recurring
net tax benefit for the revaluation of our net deferred tax liabilities.
The Tax Act made broad and complex changes to U.S. federal corporate income taxation including,
but not limited to: (i) reducing the statutory corporate tax rate from 35% to 21% (a blended statutory tax
rate of 29.2% for fiscal 2018); (ii) repeal of the Section 199 qualified production activities deduction;
(iii) creating new or furthering limitations to the deductibility of certain officer compensation, interest,
meals, entertainment and other expenses; and (iv) changing from a worldwide to a territorial taxation
system. As of May 31, 2019, the Company’s accounting for the impact of the Tax Act was completed.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
As a result of the Tax Act, the Company derived estimated tax benefits of $160.5 million, including
a net tax benefit of $83.5 million related to the revaluation of the Company’s net deferred tax liabilities
and a net tax benefit of $77.0 million related to the reduction in the Company’s statutory income tax
rate for fiscal 2018 applied to income before taxes. These amounts totaled $0.23 per diluted share and
$0.21 per diluted share, respectively.
Uncertain income tax positions: The Company is subject
income tax,
numerous local and state tax jurisdictions within the U.S., and taxes in Europe. The Company
maintains a reserve for uncertain tax positions. As of May 31, 2020 and May 31, 2019, the total reserve
for uncertain tax positions,
federal benefits, was $26.5 million and
$21.6 million, respectively, and was included in long-term liabilities on the Consolidated Balance
Sheets.
including interest and net of
to U.S.
federal
A reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax
benefits, not including interest or other potential offsetting effects, is as follows:
In millions
Year ended May 31,
2019
2018
2020
Balance as of beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . $22.1
4.1
1.2
(0.6)
—
(0.6)
. . . . . . . . . . . . . . . .
Additions for tax positions of the current year
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . .
Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . .
$14.9
3.8
5.2
—
(1.2)
(0.6)
$ 43.7
2.3
0.1
(1.2)
(28.6)
(1.4)
Balance as of end of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.2
$22.1
$ 14.9
In May 2018, the Company settled its IRS examination for fiscal 2012 through fiscal 2017. As a
result of the settlement, the reserve for uncertain tax positions was decreased by $27.2 million and
income tax expense of $2.7 million was recorded.
The reserve as of May 31, 2020 substantially relates to the Company’s uncertain tax positions for
certain state income tax matters. The Company believes the reserve for uncertain tax positions,
including interest and net of federal benefits, of $26.5 million as of May 31, 2020 adequately covers
open tax years and uncertain tax positions up to and including fiscal 2020 for major taxing jurisdictions.
As of May 31, 2020 and May 31, 2019, the entire $26.5 million and $21.6 million, respectively, of
unrecognized tax benefits, including interest and net of federal benefit, if recognized, would impact the
Company’s effective income tax rate.
The Company has concluded all U.S. federal income tax matters through fiscal 2017. With limited
exception, state income tax audits by taxing authorities are closed through fiscal 2014, primarily due to
expiration of the statute of limitations.
The Company continues to follow its policy of recognizing interest and penalties accrued on tax
positions as a component of
Income and
Comprehensive Income. The amount of accrued interest and penalties associated with the Company’s
tax positions is immaterial to the Consolidated Balance Sheets. The amount of interest and penalties
recognized for fiscal years 2020, 2019, and 2018 was immaterial
to the Company’s results of
operations.
income taxes on the Consolidated Statements of
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note M — Accumulated Other Comprehensive Income/(Loss)
The changes in accumulated other comprehensive income/(loss) on the Company’s Consolidated
Balance Sheets are as follows:
In millions
Year ended May 31,
2019
2018
2020
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.1
Other comprehensive income/(loss):
$(36.2)
$ 20.0
Unrealized gains/(losses) on securities, net of tax . . . . . . . . . . . .
Reclassification adjustment for the net gain on sale of
available-for-sale securities realized in net income, net of tax . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . .
68.9
44.0
(47.6)
(8.5)
(4.0)
—
(7.7)
—
(8.6)
Total other comprehensive income/(loss), net of tax . . . . . . . . .
56.4
36.3
(56.2)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56.5
$ 0.1
$(36.2)
Total tax expense/(benefit) included in other comprehensive
income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19.8
$ 14.2
$(22.6)
Reclassification adjustments out of accumulated other comprehensive income/(loss) are for
realized gains and losses on the sale of available-for-sale securities and are reflected in interest on
funds held for clients and other (expense)/income, net on the Consolidated Statements of Income and
Comprehensive Income.
Note N — Short-term Financing
The Company maintains committed and unsecured credit facilities and irrevocable letters of credit
as part of its 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.
The Company typically borrows on an overnight or short-term basis on its credit facilities.
Details of the Company’s credit facilities are as follows:
$ in millions
Expiration Date
Maximum
Amount
Available
Amount
Outstanding
May 31,
2020
2019
Credit facilities:
JP Morgan Chase Bank, N.A. (“JPM”)(1)(2)
JPM(1)
PNC Bank, National Association (“PNC”) (weighted-average
interest rate of 1.28% at May 31, 2020)(3)
July 31, 2024
August 17, 2022
$1,000.0
$ 500.0
$ — $—
—
—
February 6, 2023
$ 250.0
5.1
—
Outstanding short-term financing(4)
$5.1
$—
(1) JPM acts as the administrative agent for this syndicated credit facility.
(2) This agreement replaced the Company’s predecessor five-year unsecured $1.0 billion credit facility dated August 5, 2015,
which was terminated on July 31, 2019.
(3) This agreement replaced the Company’s predecessor four-year unsecured $150.0 million credit facility dated March 17,
2016, which was terminated on February 6, 2020.
(4) The total amount available under these credit facilities as of May 31, 2020 was approximately $1.8 billion. Amounts under
the PNC credit facility remain outstanding as of the date of this report.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Subsequent to May 31, 2020, the Company borrowed twice on an overnight basis, $89.5 million
on a weighted-average basis under its PNC credit facility.
Upon the expiration date of any credit facility, any borrowings outstanding under that facility will
mature and be payable on such date.
Interest rates on each of the Company’s credit facilities can be based upon (1) an alternate base
rate that is established by the lending institution at the highest of several publicly available interest
rates, plus an applicable interest rate margin, or (2) at our election, the adjusted London Interbank
Offered Rate (“LIBOR”) or an alternate interest rate as determined by the administrative agent, plus an
applicable interest rate margin. The Company is also required to pay a commitment fee, ranging from
0.05% to 0.15%, related to the unutilized portion of each credit
fee is
determined on a sliding-scale basis based upon the Company’s consolidated leverage ratio.
facility. The commitment
the credit
Obligations under
facilities are guaranteed by the Company and certain of
its
subsidiaries. The credit facilities contain financial and operational covenants with which the Company
must maintain compliance. The Company’s ability to borrow under the credit facilities may be restricted
in the event of certain covenant breaches or events of default. In addition, the terms of the credit
facilities could restrict the Company’s ability to engage in certain business transactions. The Company
was in compliance with all of these covenants as of May 31, 2020.
Certain lenders under these credit facilities, and their respective affiliates, have performed, and
may in the future perform for the Company, various commercial banking,
investment banking,
underwriting, and other financial advisory services, for which they have received, and will continue to
receive in the future, customary fees and expenses.
Letters of credit: The Company had irrevocable standby letters of credit outstanding totaling
$147.9 million and $148.9 million as of May 31, 2020 and May 31, 2019, respectively, required to secure
commitments for certain insurance policies. The letters of credit expire at various dates between June
2020 and January 2022. No amounts were outstanding on these letters of credit during fiscal 2020 or
fiscal 2019, or as of May 31, 2020 and May 31, 2019. Subsequent to May 31, 2020, letters of credit
expiring in June and July 2020 were renewed through June and July 2021, respectively.
Note O — Long-term Financing
On March 13, 2019,
the Company and its Paychex of New York LLC (“PoNY”) subsidiary
completed the private placement of Senior Notes, Series A in an aggregate principal amount of
$400.0 million due on March 13, 2026, and Senior Notes, Series B in an aggregate principal amount of
$400.0 million due on March 13, 2029 (collectively the “Notes”), pursuant to its Note Purchase and
Guarantee Agreement (the “Agreement”) among the Company, PoNY, and the respective purchasers.
Proceeds from the Notes were used to pay off $800.0 million in short-term borrowings under the
Company’s JPM credit facilities used to temporarily finance the acquisition of Oasis.
Long-term debt, at amortized cost, consisted of the following:
In millions
May 31,
2020
2019
Senior Notes, Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400.0
400.0
Senior Notes, Series B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$400.0
400.0
Total long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Debt issuance costs, net of accumulated amortization . . . . . . . . . . . .
800.0
(3.2)
800.0
(3.6)
Long-term borrowings, net of debt issuance costs . . . . . . . . . . . . . . . . . $796.8
$796.4
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Certain information related to the Senior Notes for fiscal 2020 and fiscal 2019 are as follows:
Senior Notes
Series A
Senior Notes
Series B
Stated interest rate . . . . . . . . . . . . . . . . . .
Effective interest rate . . . . . . . . . . . . . . . .
Interest rate type . . . . . . . . . . . . . . . . . . . .
Interest payment dates . . . . . . . . . . . . . . . Semi-annual, in arrears
Principal payment dates . . . . . . . . . . . . . .
Note type . . . . . . . . . . . . . . . . . . . . . . . . . .
March 13, 2026
Unsecured
4.07%
4.16%
Fixed
4.25%
4.32%
Fixed
Semi-annual, in arrears
March 13, 2029
Unsecured
The effective interest rates for each note series includes the interest on the note and amortization
of debt issuance costs.
Payment of all amounts due with respect to the Notes and performance under the Agreement is
guaranteed by the Company, PoNY and certain other subsidiaries of the Company. The Company
may, at its option, prepay at any time all, or any part of, the Notes, subject to certain conditions as
described in the Agreement.
The 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 May 31, 2020.
Note P — Supplemental Cash Flow Information
Income taxes paid were $298.8 million, $317.9 million, and $319.1 million for fiscal 2020, 2019,
and 2018, respectively.
Interest expense paid was $38.0 million, $10.4 million, and $4.0 million for fiscal 2020, 2019, and
2018, respectively.
$33.2 million in Paychex common stock was issued in connection with the Company’s acquisition
of HROi in fiscal 2018.
Note Q — Employee Benefit Plans
401(k) plan: The Company maintains a contributory savings plan that qualifies under
section 401(k) of the Internal Revenue Code. The Paychex, Inc. 401(k) Incentive Retirement Plan (the
“Plan”) allows all employees to immediately participate in the salary deferral portion of the Plan,
contributing up to a maximum of 50% of their salary, subject to Internal Revenue Service limitations.
Employees who have completed one year of service and a minimum of 1,000 hours worked are eligible
to receive a Company matching contribution, when such contribution is in effect. The Company
provided a matching contribution of 50% of up to 8% of eligible pay that an employee contributed to the
Plan through March 29, 2018. Beginning March 30, 2018,
the Company provides a matching
contribution of 100% of the first 3% and 50% on the next 2% of eligible pay for a total matching
contribution of 4%. Company contributions to the Plan for fiscal years 2020, 2019, and 2018 were
$30.1 million, $29.3 million, and $23.6 million, respectively.
The Plan is 100% participant directed. Plan participants can fully diversify their portfolios by
choosing from any or all investment fund choices in the Plan. Transfers in and out of investment funds,
including the Paychex, Inc. Employee Stock Ownership Plan Stock Fund, are not restricted, with the
exception of certain restricted trading periods for individuals designated as insiders as specified in the
Company’s Insider Trading Policy. The Company match contribution, when in effect, follows the same
fund elections as the employee compensation deferrals.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Deferred compensation plans: The Company and certain subsidiaries offer non-qualified and
unfunded deferred compensation plans to a select group of key employees, executive officers, and
outside directors. Eligible employees are provided with the opportunity to defer up to 50% of their annual
base salary and bonus and outside directors may defer 100% of their Board cash compensation. Gains
and losses are credited based on the participant’s election of a variety of investment choices. The
Company does not match any participant deferral or guarantee its return. Distributions are paid at one of
the following dates selected by the participant: the participant’s termination date, the date the participant
retires from any active employment, or a designated specific date. The amounts accrued under these
plans were $26.8 million and $27.0 million as of May 31, 2020 and May 31, 2019, respectively, and are
reflected in other long-term liabilities on the accompanying Consolidated Balance Sheets.
Note R — Commitments and Contingencies
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, patent, 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 the results of operations in the period in which any such effect is recorded.
Other commitments: As of May 31, 2020, the Company had outstanding commitments under
purchase orders, legally binding contractual arrangements, and commitments under existing workers’
compensation insurance agreements with minimum future payment obligations of approximately
$306.6 million, including $5.0 million of commitments to purchase capital assets. These minimum
future payment obligations relate to the following fiscal years:
In millions
Year ending May 31,
Minimum payment obligation
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$146.5
59.1
40.3
17.1
6.7
36.9
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 and directors, 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 and PEO employee 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 May 31,
2020. The Company also maintains insurance coverage 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; and capacity for deductibles and self-
insured retentions through its captive insurance company.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note S — Quarterly Financial Data (Unaudited)
In millions, except per share amounts
Fiscal 2020
August 31
November 30
February 29
May 31
Full Year
Three Months Ended
Fiscal 2019
August 31
November 30
February 28
May 31
Full Year
Three Months Ended
Service revenue . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . .
$971.5
20.5
Total revenue . . . . . . . . . . . . . . . . . . . . . .
$992.0
Operating income . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . .
$349.1
(4.8)
Income before income taxes . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . .
344.3
80.1
Net income . . . . . . . . . . . . . . . . . . . . . . . .
$264.2
Basic earnings per share(1) . . . . . . . . . . . .
Diluted earnings per share(1)
. . . . . . . . . .
Weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares
outstanding, assuming dilution . . . . . . .
Cash dividends per common share . . . . .
Total net realized gains(2) . . . . . . . . . . . . .
$ 0.74
$ 0.73
358.6
358.1
361.5
$ 0.62
$ 0.9
360.6
$ 0.62
$ 0.9
Service revenue . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . .
$845.7
17.1
Total revenue . . . . . . . . . . . . . . . . . . . . . .
$862.8
Operating income . . . . . . . . . . . . . . . . . . .
Other income/(expense), net . . . . . . . . . .
$320.3
2.3
Income before income taxes . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . .
322.6
79.0
Net income . . . . . . . . . . . . . . . . . . . . . . . .
$243.6
Basic earnings per share(1) . . . . . . . . . . . .
Diluted earnings per share(1)
. . . . . . . . . .
Weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares
outstanding, assuming dilution . . . . . . .
Cash dividends per common share . . . . .
Total net realized gains/(losses)(2) . . . . . .
$ 0.68
$ 0.67
359.1
359.1
361.5
$ 0.56
$ 0.1
361.5
$ 0.56
$ (0.3)
$970.8
19.9
$990.7
$341.7
(4.7)
337.0
78.3
$258.7
$ 0.72
$ 0.72
$840.6
18.3
$858.9
$307.2
2.1
309.3
73.5
$235.8
$ 0.66
$ 0.65
$1,121.5
21.2
$889.8
25.3
$3,953.6
86.9
$1,142.7
$915.1
$4,040.5
$ 470.1
(5.9)
$299.6
(8.0)
$1,460.5
(23.4)
464.2
109.7
291.6
70.9
1,437.1
339.0
$ 354.5
$220.7
$1,098.1
$
$
$
$
0.99
0.98
$ 0.62
$ 0.61
358.5
358.7
361.0
0.62
0.6
360.7
$ 0.62
$ 8.9
$
$
$
$
3.06
3.04
358.5
361.0
2.48
11.3
$1,047.4
23.0
$958.2
22.2
$3,691.9
80.6
$1,070.4
$980.4
$3,772.5
$ 429.3
(3.7)
$314.5
(4.0)
$1,371.3
(3.3)
425.6
101.0
310.5
80.1
1,368.0
333.6
$ 324.6
$230.4
$1,034.4
$
$
$
$
0.90
0.90
$ 0.64
$ 0.64
359.2
359.4
361.6
0.56
0.1
362.5
$ 0.62
$ 0.1
$
$
$
$
2.88
2.86
359.2
361.8
2.30
—
(1) Each quarter is a discrete period and the sum of the four quarters’ basic and diluted earnings per share amounts may not
equal the full year amount.
(2) Total net realized gains/(losses) on the combined funds held for clients and corporate investment portfolios.
85
Schedule II — Valuation and Qualifying Accounts
PAYCHEX, INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED MAY 31,
(In millions)
Description
2020
Allowance for doubtful accounts . . . . .
Reserve for client fund losses . . . . . .
2019
Allowance for doubtful accounts . . . . .
Reserve for client fund losses . . . . . .
2018
Allowance for doubtful accounts . . . . .
Reserve for client fund losses . . . . . .
Balance as of
beginning
of fiscal year
Additions
charged to
expenses
Additions to/
(deductions from)
other accounts(1)
Costs and
deductions(2)
Balance as
of end
of fiscal year
$7.5
$2.7
$7.0
$2.4
$6.0
$3.0
$7.8
$5.2
$3.3
$3.7
$3.6
$3.1
$ 3.0
$(3.0)
$ 0.7
$ —
$ —
$ —
$5.8
$4.9
$3.5
$3.4
$2.6
$3.7
$12.5
$ —
$ 7.5
$ 2.7
$ 7.0
$ 2.4
(1) Amounts related to business acquisitions in fiscal 2019 and the reclassification of the reserve for client fund losses in
fiscal 2020.
(2) Uncollectible amounts written off, net of recoveries, and other adjustments.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 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 May 31, 2020, the end of the period covered by this report,
the Company’s disclosure controls and procedures were effective.
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 May 31, 2020. 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 May 31, 2020, that materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
86
Internal Control Over Financial Reporting: The Report on Management’s Assessment of
Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting
Firm are included in Part II, Item 8 of this Form 10-K.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table shows the executive officers of
the Company as of May 31, 2020, and
information regarding their positions and business experience. Such executive officers hold principal
policy-making powers at the Company.
Name
Age
Position and business experience
Martin Mucci
. . . . . . . . . . . . . . .
60
Efrain Rivera . . . . . . . . . . . . . . .
63
Mark A. Bottini . . . . . . . . . . . . . .
59
Mr. Mucci has served as President and Chief Executive
Officer of the Company since September 2010. Mr. Mucci
joined the Company in 2002 as Senior Vice President,
Operations. Prior to joining Paychex, he held senior level
positions with Frontier Communications of Rochester, a
including President of
telecommunications company,
Telephone Operations and Chief Executive Officer of
Frontier Telephone of Rochester, during his 20-year
career. Mr. Mucci was a director of Cbeyond, Inc. until it
was purchased by Birch Communications in July 2014. He
is a Trustee Emeritus of St. John Fisher College. He also
serves as a director of the Company and is chairman of
the Executive Committee.
Mr. Rivera joined Paychex in June 2011 as Senior Vice
President, Chief Financial Officer, and Treasurer. Prior to
joining the Company, Mr. Rivera served as Vice President
of Finance and Administration for Houghton College from
2009 to 2011. He previously served for over twenty years
with Bausch & Lomb Incorporated, a world leader in the
development, manufacture, and marketing of eye health
products, most recently as Corporate Vice President and
Chief Financial Officer from 2007 to 2009.
Mr. Bottini joined Paychex in October 2011 as Senior Vice
President of Sales. From 2008 to 2011, Mr. Bottini served
as Vice President of Sales for Ricoh, North America, a
provider of advanced office technology and innovative
document imaging products, services, and software. He
assumed his most recent position with Ricoh when Ricoh
acquired IKON Office Solutions, Inc. During his nearly 20
years with IKON, Mr. Bottini served in a variety of sales
leadership and field management roles.
87
Name
Age
Position and business experience
John B. Gibson . . . . . . . . . . . . .
54
Michael E. Gioja . . . . . . . . . . . .
62
Stephanie L. Schaeffer . . . . . . .
50
Robert L. Schrader . . . . . . . . . .
48
Laurie L. Zaucha . . . . . . . . . . . .
55
Mr. Gibson joined Paychex in May 2013 as Senior Vice
President of Service. Prior
to joining the Company,
Mr. Gibson served as President and Chief Executive
for AlphaStaff, a national provider of human
Officer
resource outsourcing services to small- and medium-sized
businesses. Prior to joining AlphaStaff in 2010, Mr. Gibson
the HR Management Division of
was President of
Convergys, a global
leader in technology, outsourcing,
and business services. From 2004 to 2007, he served as
Senior Vice President of Global Operations and Client
Services of Convergys.
Mr. Gioja was named Senior Vice President of Information
in July 2011.
Technology and Product Development
Mr. Gioja has been with the Company since November
2008 and previously served as Senior Vice President of
Information, Technology, Product Management, and
Development and Vice President of Product Management.
Previously, he was Chief
Information Officer and
Executive Vice President of Products and Services for
Workstream,
Inc., a provider of on-demand enterprise
talent management solutions and services.
Ms. Schaeffer was named Vice President and Chief Legal
Officer in January 2006.
In 2011, she was appointed
Corporate Secretary. She joined Paychex in 2000 as
Corporate Counsel and was promoted to Director of Legal
Affairs in 2004. In her current role, she is responsible for
overseeing all of the Company’s legal functions, including
litigation, corporate governance, and regulatory matters.
Mr. Schrader was named Vice President and Controller in
July 2019. He joined the Company in December 2014 and
previously held roles as Senior Director of Financial
Planning and Analysis and Director of Internal Audit. Prior
to joining Paychex, he served as a Chief Financial Officer
for Unither Manufacturing, LLC, and held various senior
management positions during his ten-year career at
Bausch & Lomb, including Vice President of Finance and
Controller of Global Quality and Operations. Previously in
his career, he held leadership roles with a public
accounting firm.
Ms. Zaucha joined the Company in March 2011 and was
named Vice President of Human Resources and
the
Organizational Development. Prior
Company, she served as Senior Vice President of Human
Resources for Paetec Holding Corp., a Fortune 1000
telecommunications company, from 2007 to 2011. From
2003 to 2007, she held various executive positions at
Bausch & Lomb Incorporated.
joining
to
The additional
information required by this item is set forth in the Company’s Definitive Proxy
Statement for its 2020 Annual Meeting of Stockholders, anticipated to be held on or about October 15,
in the sections “PROPOSAL 1: ELECTION OF DIRECTORS FOR A ONE-YEAR TERM,”
2020,
“CORPORATE GOVERNANCE,” and “CODE OF BUSINESS ETHICS AND CONDUCT” and is
incorporated herein by reference.
88
Item 11. Executive Compensation
The information required by this item is set forth in the Company’s Definitive Proxy Statement for
its 2020 Annual Meeting of Stockholders, anticipated to be held on or about October 15, 2020, in the
sections “COMPENSATION DISCUSSION AND ANALYSIS,”
“NAMED EXECUTIVE OFFICER
COMPENSATION,” “DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED May 31, 2020,”
“THE GOVERNANCE AND COMPENSATION COMMITTEE REPORT” and the sub-heading
“Governance and Compensation Committee Interlocks and Insider Participation” within the section
“CORPORATE GOVERNANCE” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is set forth below and in the Company’s Definitive Proxy
Statement for its 2020 Annual Meeting of Stockholders, anticipated to be held on or about October 15,
2020, under the section “BENEFICIAL OWNERSHIP OF PAYCHEX COMMON STOCK,” and is
incorporated herein by reference.
The Company maintains equity compensation plans in the form of stock incentive plans. Under the
Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated effective October 14, 2015 (the
“2002 Plan”), non-qualified or
restricted stock units,
performance shares, and performance stock options have been awarded to employees and the Board.
The 2002 Plan was adopted on July 9, 2015 by the Board and became effective upon stockholder
approval at the Company’s Annual Meeting of Stockholders held on October 14, 2015. Refer to Note F
of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for more
information on the Company’s stock incentive plans.
incentive stock options,
restricted stock,
The following table details information on securities authorized for issuance upon the exercise of
outstanding options under the Company’s equity compensation plans as of May 31, 2020:
In millions, except per share amounts
Number of
securities to be
issued upon
exercise of
outstanding
options(1)
Weighted-
average
exercise
price of
outstanding
options
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans(2)
Equity compensation plans approved by security holders . . . .
5.7
$55.28
17.3
(1) Amounts include performance stock options granted, assuming achievement of performance goals at target. Actual amount
of shares to be earned may differ from the target amount.
(2)
Includes shares available for future issuance through grants of restricted stock units and restricted stock awards under our 2002
Plan. Refer to Note F of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for more
information on the Company’s stock incentive plans.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth in the Company’s Definitive Proxy Statement for
its 2020 Annual Meeting of Stockholders, anticipated to be held on or about October 15, 2020, under
the sub-headings “Board Meetings and Committees” and “Policy on Transactions with Related
Persons” within the section “CORPORATE GOVERNANCE,” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is set forth in the Company’s Definitive Proxy Statement for
its 2020 Annual Meeting of Stockholders, anticipated to be held on or about October 15, 2020, under
OF
RATIFICATION
the
PRICEWATERHOUSECOOPERS LLP TO SERVE AS THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM,” and is incorporated herein by reference.
“PROPOSAL
SELECTION
section
THE
OF
4:
89
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)
1.
Financial Statements, Financial Statement Schedules, and Exhibits
Financial Statements
See Financial Statements and Supplementary Data Table of Contents at page 40.
2.
Financial Statement Schedules
this Form 10-K include
Financial statement schedules required to be filed by Item 8 of
Schedule II — Valuation and Qualifying Accounts. See Financial Statements and Supplementary
Data Table of Contents at page 40. All other schedules are omitted as the required matter is not
present, the amounts are not significant, or the information is shown in the financial statements
or the notes thereto.
3.
Exhibits
(2.1) Stock Purchase Agreement by and among Oasis Outsourcing Acquisition Corporation,
Oasis Outsourcing Group Holdings, L.P. and Paychex North America Inc., incorporated
herein by reference from Exhibit 2.1 to the Company’s Form 10-Q filed with the
Commission on December 21, 2018.
(3)(a) Restated Certificate of Incorporation, incorporated herein by reference from Exhibit 3(a) to
the Company’s Form 10-K filed with the Commission on July 20, 2004.
(3.1) Amended and Restated By-Laws of Paychex, Inc., as of May 1, 2020, incorporated herein
by reference from Exhibit 3.1 to the Company’s Form 8-K filed with the Commission on
May 5, 2020.
(4.1) Form of 4.07% Senior Notes, Series A, of Paychex of New York LLC, due March 13,
2026, incorporated herein by reference from Exhibit 4.1 to the Company’s Form 8-K filed
with the Commission on January 11, 2019.
(4.2) Form of 4.25% Senior Notes, Series B, of Paychex of New York LLC, due March 13,
2029, incorporated herein by reference from Exhibit 4.2 to the Company’s Form 8-K filed
with the Commission on January 11, 2019.
(4.3) Description of Registrant’s Securities, incorporated herein by reference from Exhibit 4.3 to
the Company’s Form 10-K filed with the Commission on July 24, 2019.
(10.1) Paychex, Inc. 2015 Qualified Employee Stock Purchase Plan, incorporated herein by
reference from Exhibit 4.3 to the Company’s Registration Statement on Form S-8,
No. 333-207594.
(10.2) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015), incorporated herein by reference from Exhibit 4.3 to the Company’s Registration
Statement on Form S-8, No. 333-207592.
(10.3) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12,
2005) Form of Non-Qualified Stock Option Award Agreement, incorporated herein by
reference from Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on
July 16, 2008.
(10.4) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12,
2005) Form of Restricted Stock Unit Award Agreement, incorporated herein by reference
from Exhibit 10(n) to the Company’s Form 10-K filed with the Commission on July 18,
2008.
(10.5) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12,
2005) Form of Non-Qualified Stock Option Award Agreement for Directors, incorporated
herein by reference from Exhibit 10(q) to the Company’s Form 10-K filed with the
Commission on July 18, 2008.
90
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#
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#
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#
#
#
#
#
#
#
#
(10.6) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12,
2005) Form of Restricted Stock Award Agreement (Officer),
incorporated herein by
reference from Exhibit 10.18 to the Company’s Form 10-K filed with the Commission on
July 16, 2010.
(10.7) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12,
2005) Form of Non-Qualified Stock Option Award Agreement (Officer),
incorporated
herein by reference from Exhibit 10.19 to the Company’s Form 10-K filed with the
Commission on July 16, 2010.
(10.8) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12,
2005) Form of Officer Performance Incentive Award Agreement
(Long Term),
incorporated herein by reference from Exhibit 10.20 to the Company’s Form 10-K filed
with the Commission on July 16, 2010.
(10.9) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13,
2010) Form of Non-Qualified Stock Option Award Agreement (Board), incorporated herein
by reference from Exhibit 10.20 to the Company’s Form 10-K filed with the Commission
on July 15, 2011.
(10.10) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13,
2010) Form of Restricted Stock Award Agreement (Board),
incorporated herein by
reference from Exhibit 10.21 to the Company’s Form 10-K filed with the Commission on
July 15, 2011.
(10.11) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13,
2010) Form of Non-Qualified Stock Option Award Agreement
(Officer) Long Term
Incentive Program (“LTIP”), incorporated herein by reference from Exhibit 10.23 to the
Company’s Form 10-K filed with the Commission on July 15, 2011.
(10.12) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Form of Non-Qualified Stock Option and Restricted Stock Award Agreement LTIP,
incorporated herein by reference from Exhibit 10.14 to the Company’s Form 10-K filed
with the Commission on July 22, 2016.
(10.13) Paychex, Inc. Change In Control Plan, incorporated herein by reference from Exhibit
10.24 to the Company’s Form 10-K filed with the Commission on July 15, 2011.
(10.14) Paychex, Inc. Form of Performance Award Incentive Program, incorporated herein by
reference from Exhibit 10.25 to the Company’s Form 10-K filed with the Commission on
July 15, 2011.
(10.15) Form of Indemnity Agreement for Directors and Officers, incorporated herein by reference
from Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on March 28,
2012.
(10.16) Paychex, Inc. Board Deferred Compensation Plan, incorporated herein by reference from
Exhibit 10.29 to the Company’s Form 10-K filed with the Commission on July 20, 2009.
(10.17) Paychex, Inc. Employee Deferred Compensation Plan, incorporated herein by reference
from Exhibit 10.30 to the Company’s Form 10-K filed with the Commission on July 20,
2009.
(10.18) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated October 14, 2015)
Form of Non-Qualified Stock Option Award Agreement, incorporated herein by reference
from Exhibit 10.18 to the Company’s Form 10-K filed with the Commission on July 21,
2017.
(10.19) Paychex Inc. 2002 Stock Incentive Plan (as amended and restated October 14, 2015)
Form of Officer Performance Incentive Award Agreement (Long-Term),
incorporated
herein by reference from Exhibit 10.19 to the Company’s Form 10-K filed with the
Commission on July 21, 2017.
91
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#
#
#
#
#
#
*
*
*
*
*
*
*
(10.20) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Performance-Based Restricted Stock Award Agreement, incorporated herein by
reference from Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on
September 8, 2017.
(10.21) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Amendment to Award Agreements, incorporated herein by reference from Exhibit
10.2 to the Company’s Form 8-K filed with the Commission on September 8, 2017.
(10.22) Note Purchase and Guarantee Agreement, dated as of January 9, 2019, by and among
the Company, the Parent, and the respective purchasers thereto, incorporated herein by
reference from Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on
January 11, 2019.
(10.23) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Amended Form of Restricted Stock Unit Award Agreement, incorporated herein by
reference from Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on
October 4, 2019.
(10.24) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Amended Form of Restricted Stock Unit Award Agreement (Officer), incorporated
herein by reference from Exhibit 10.2 to the Company’s Form 10-Q filed with the
Commission on October 4, 2019.
(10.25) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Amended Form of 2019-2021 Performance Incentive Award Agreement,
incorporated herein by reference from Exhibit 10.3 to the Company’s Form 10-Q filed with
the Commission on October 4, 2019.
(10.26) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Amended Form of Non-Qualified Stock Option Award Agreement, incorporated
herein by reference from Exhibit 10.4 to the Company’s Form 10-Q filed with the
Commission on October 4, 2019.
(10.27) Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14,
2015) Master Restricted Stock Unit Award Agreement, incorporated herein by reference
from Exhibit 10.5 to the Company’s Form 10-Q filed with the Commission on October 4,
2019.
(10.28) Five-Year Credit Agreement, dated as of July 31, 2019, by and among the Company, the
Parent, and the lender parties hereto, incorporated herein by reference from Exhibit 10.1
to the Company’s Form 8-K filed with the Commission on August 1, 2019.
(10.29) Three-Year Credit Agreement, dated as of February 6, 2020, by and among Paychex
Advance LLC, Paychex Inc. and the lender party thereto, incorporate herein by reference
from Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on February 11,
2020.
(21.1) Subsidiaries of the Registrant.
(23.1) Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers
LLP.
(24.1) Power of Attorney.
(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) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(32.2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
92
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Cover Page Interactive Data File – the cover page interactive data file does not appear
in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.
* Exhibit filed with this report.
# Management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
93
Pursuant to the requirements of Section 13 or 15(d) 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, on July 17, 2020.
SIGNATURES
PAYCHEX, INC.
By: /s/ Martin Mucci
Martin Mucci
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on July 17,
2020.
/s/ Martin Mucci
Martin Mucci, President and
Chief Executive Officer, and Director
(Principal Executive Officer)
/s/ Efrain Rivera
Efrain Rivera, Senior Vice President, Chief Financial Officer, and Treasurer
(Principal Financial Officer)
/s/ Robert L. Schrader
Robert L. Schrader, Vice President and Controller
(Principal Accounting Officer)
B. Thomas Golisano*, Chairman of the Board
Thomas F. Bonadio*, Director
Joseph G. Doody*, Director
David J.S. Flaschen*, Director
Pamela A. Joseph*, Director
Joseph M. Tucci*, Director
Joseph Velli*, Director
Kara Wilson*, Director
*By: /s/ Martin Mucci
Martin Mucci, as Attorney-in-Fact
94
[THIS PAGE INTENTIONALLY LEFT BLANK]
PAYCHEX, INC.
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
In millions, except per share amounts
Year ended May 31,
Results of operations
Revenue:
2020
2019(1)
2018(1)
2017(1)
2016
Service revenue . . . . . . . . . . . . . . . . . . . . $3,953.6
$3,691.9
$3,314.2
$3,102.4
$2,905.8
Interest on funds held for clients . . . . . . .
86.9
80.6
63.5
50.6
46.1
Total revenue . . . . . . . . . . . . . . . . . . . . . .
4,040.5
Total expenses . . . . . . . . . . . . . . . . . . . . . . .
2,580.0
3,772.5
2,401.2
3,377.7
2,086.2
3,153.0
1,899.1
2,951.9
1,805.3
Operating income . . . . . . . . . . . . . . . . . . . . .
1,460.5
1,371.3
1,291.5
1,253.9
1,146.6
Other (expense)/income, net . . . . . . . . . . . .
(23.4)
(3.3)
8.6
5.2
4.5
Income before income taxes . . . . . . . . . . . . $1,437.1
$1,368.0
$1,300.1
$1,259.1
$1,151.1
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098.1
$1,034.4
$ 994.1
$ 826.3
$ 756.8
Basic earnings per share . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . $
3.06
3.04
$
$
2.88
2.86
$
$
2.77
2.75
$
$
2.30
2.28
$
$
2.10
2.09
Weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . .
358.5
359.2
359.0
359.8
360.7
Weighted-average common shares
outstanding, assuming dilution . . . . . . . .
361.0
361.8
361.5
Cash dividends per common share . . . . . . $
2.48
$
2.30
$
2.06
Selected financial data
Purchases of property and equipment
. . . . $ 127.0
$ 123.8
$ 154.0
362.6
1.84
94.3
$
$
362.5
1.68
97.7
$
$
Cash, restricted cash, and total corporate
investments . . . . . . . . . . . . . . . . . . . . . . . . $1,013.7
$ 779.9
$ 719.7
$ 777.4
$ 793.2
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 801.9
$ 796.4
$
— $
— $
—
Stockholders’ equity . . . . . . . . . . . . . . . . . . . $2,781.4
$2,619.5
$2,356.8
$2,227.2
$1,911.7
Return on stockholders’ equity . . . . . . . . . .
41%
42%
44%
39%
40%
(1)
In fiscal 2019,
Customers.” As a result, amounts have been adjusted to reflect the adoption of the new standard.
the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with
2015
2014
2013
2012
2011
2010
$2,697.5
$2,478.2
$2,285.2
$2,186.2
$2,036.2
$1,945.8
42.1
40.7
41.0
43.6
48.1
55.0
2,739.6
1,686.0
1,053.6
6.4
2,518.9
1,536.2
982.7
5.4
2,326.2
1,421.4
904.8
6.6
2,229.8
1,375.9
853.9
6.4
2,084.3
1,297.9
786.4
5.8
2,000.8
1,276.0
724.8
4.5
$1,060.0
$ 988.1
$ 911.4
$ 860.3
$ 792.2
$ 729.3
$ 674.9
$ 627.5
$ 569.0
$ 548.0
$ 515.3
$ 477.0
$
$
1.86
1.85
$
$
1.72
1.71
$
$
1.56
1.56
$
$
1.51
1.51
$
$
1.42
1.42
$
$
1.32
1.32
362.9
364.5
363.8
362.4
361.8
361.4
364.6
$
1.52
$ 102.8
366.1
1.40
84.1
$
$
364.7
1.31
98.7
$
$
$
$
363.0
362.4
1.27
$
1.24
89.6
$ 100.5
361.7
1.24
61.3
$
$
$ 936.4
$ 936.8
$ 874.6
$ 790.0
$ 671.3
$ 656.9
$
— $
— $
— $
— $
— $
—
$1,785.5
$1,777.0
$1,773.7
$1,604.5
$1,496.2
$1,402.0
36%
35%
34%
34%
35%
34%
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STOCKHOLDER INFORMATION
Annual Meeting
The annual meeting of stockholders will be held
virtually Thursday, October
at
10:00 a.m. and may be accessed online at the
following website:
www.virtualshareholdermeeting.com/PAYX2020.
2020
15,
Direct Reinvestment and Stock Purchase
Plan
Stockholders can elect to have some, or all, of
their dividends reinvested, and can make
additional investments in common stock through
American Stock Transfer & Trust Co.
Common Stock
Independent Auditors
The Company’s common stock trades on The
Nasdaq Global Select Market under the symbol
PAYX.
PricewaterhouseCoopers LLP
1200 Bausch & Lomb Place
Rochester, New York 14604-2705
Dividends
Investor Relations
The Company has paid a cash dividend each
quarter since 1988. Dividends are normally paid
in August, November, February, and May. The
future dividends are
level and continuation of
dependent on the Company’s future earnings
and cash flow and are subject to the discretion
of the Board of Directors.
Members of
the financial community and the
media should direct inquiries to Efrain Rivera,
Senior Vice President, Chief Financial Officer,
and Treasurer.
For more information about Paychex Investor
Relations, please contact:
Transfer Agent and Registrar
Please send inquiries, certificates for transfer,
address changes, and dividend reinvestment
and stock purchase requests to:
Paychex Investor Relations
911 Panorama Trail South
Rochester, NY 14625-2396
or call 1-800-828-4411
American Stock Transfer & Trust Co.
6201 15th Avenue
Brooklyn, NY 11219
1-800-937-5449
Paychex,
can be
accessed at https://www.paychex.com/investors
financial materials
Inc.
Locations
Information about our locations throughout the
U.S. and parts of Europe can be accessed at
http://locations.paychex.com
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• B. Thomas Golisano
BOARD OF DIRECTORS*
• Martin Mucci
Founder and Chairman of the Board of
Paychex, Inc.
President and Chief Executive Officer of
Paychex, Inc.
• Thomas F. Bonadio
• Joseph M. Tucci
Founder and Senior Counsel of The Bonadio
Group
Founder, Co-Chief Executive Officer, and
Co-Chairman of GTY Technology Holdings, Inc.
• Joseph G. Doody
Former Vice Chairman of Staples, Inc.
• David J. S. Flaschen
Investor and Advisor
• Pamela A. Joseph
Chief Executive Officer of Clearent, LLC
• Joseph M. Velli
Retired Financial Services and Technology
Executive
• Kara Wilson
Senior Advisor at KKR & Co., Inc.
EXECUTIVE LEADERSHIP TEAM*
• Martin Mucci
• Michael J. Jeffrey
President and Chief Executive Officer
Vice President, Major Market Sales
• Efrain Rivera
Senior Vice President, Chief Financial Officer,
and Treasurer
• Theodore J. Jordan, Jr.
Vice President, Service
• Mark A. Bottini
Senior Vice President, Sales
• John B. Gibson
Senior Vice President, Service
• Maureen Lally
Vice President, Marketing
• Laurie A. Maffett
Vice President, Enterprise and Multi-Product
Services
• Michael E. Gioja
• Stephanie L. Schaeffer
Senior Vice President, Information Technology
and Product Development
Vice President, Chief Legal & Ethics Officer, and
Secretary
• Don Cahalan
Vice President, Insurance Services
• Bradley Schaufenbuel
Vice President and Chief Information Security
Officer
• Neal Collins
• Robert L. Schrader
Vice President, Corporate Development
Vice President and Controller
• Christopher DeSalvo
Vice President, Service Excellence and
Operations
• Tamara Duncan
Vice President, Small and Medium-sized
Business (SMB) Sales
• Terry Sukalski
Vice President, Human Resource Services Sales
• Jennifer R. Vossler
Vice President and Assistant Treasurer
• Frank Fiorille
Vice President, Risk, Compliance, and
Data Analytics
• Norman (Mick) Whittemore
Vice President, Information Technology,
Enterprise Operations
• Tom Hammond
• Laurie L. Zaucha
Vice President, Corporate Strategy and Product
Management
Vice President, Human Resources and
Organizational Development
* as of May 31, 2020
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What It Means To Be Paychex
Our purpose, mission, and values are the guiding principles behind all we do for
our clients, coworkers, shareholders, and communities. They’re who we are, what
we work toward, and why we succeed as a company.
Our Purpose
We provide our customers the freedom to succeed.
Our Mission
We will be the leading provider of human resource, payroll, retirement, and
employee benefit services by being an essential partner with businesses across
the U.S. and Northern Europe.
Our Values
We act with uncompromising integrity.
We provide outstanding service and build trusted relationships.
We drive innovation in our products and services and continually
improve our processes.
We work in partnership and support each other.
We’re personally accountable and deliver on our commitments.
We treat each other with respect and dignity.
Always Looking
Ahead
Business was forever changed by the events of
2020. Through it all, Paychex has been prepared
to support our clients and maintain our financial
strength. Our efforts helped thousands of clients
stay in business, which had a significant, positive
effect on the economy.
While we’re proud of what we accomplished, we
remain committed to looking ahead. We’re ready
for what’s next — from our proactive business
planning to innovative products and services.
The future of work is here, and you are part of it.
Thank you for your investment in Paychex.
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