filings.toolsItem 1C. Cybersecurity
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Item 1C. Cybersecurity
Risk Management and Strategy
We are committed to protecting the confidentiality, integrity, and availability of our systems and information. Our security program is intended to assess, identify, and manage risks from cybersecurity threats, and is aligned with the National Institute of Standards and Technology Version 2.0 Cybersecurity Framework (“NIST CSF”). The NIST CSF provides a flexible model for identifying and managing cybersecurity risks. Our security infrastructure uses a layered controls approach, incorporating various capabilities guided by the NIST CSF and other industry standards and best practices. We routinely invest in our security processes and capabilities, including those related to our risk management and assessment programs, vulnerability and intrusion detection, incident response plans, and other advanced detection, prevention, and protection capabilities.
We conduct regular assessments of cybersecurity risks to identify threats to us and potential vulnerabilities that could negatively affect our business operations if exploited. We track cybersecurity risks within our enterprise risk management system with cybersecurity threats considered to be among the top-priority risks to us. In addition, our Enterprise Security Organization (the “ESO”) conducts technical risk assessments, and, in some instances, we engage with third-party experts to assist with or perform technical risk assessments. The results of these risk assessments are reported to management. Our processes require escalation of significant cybersecurity risks to management and Paychex’s Audit Committee derived from the Board of Directors (the “Board”).
The ESO is led by our Chief Information Security Officer (“CISO”) and seeks to maintain a consistent, resilient, and secure infrastructure by partnering with resources across the Company. The ESO implements numerous cybersecurity processes and capabilities, which include but are not limited to: assessing risk associated with significant infrastructure or operational changes and the introduction of new technologies; administering our third-party service provider risk management program; managing secure software development and change management; managing access management and logical access controls, identifying security vulnerabilities through automated scanning technologies; performing penetration testing and due diligence assessments; and protecting the confidentiality, integrity, and availability of the Company’s data in transit. The ESO includes the activities of the Paychex Cyber Fusion Center, which provides 24x7x365 cybersecurity monitoring and incident response. We maintain incident response plans which outline the escalation, investigation, reporting, and overall response procedures depending on the type and severity of incidents.
As part of our security program, we require all employees to take information security awareness training upon hire and annually thereafter. We provide additional ongoing training to our employees about security best practices and awareness, including internal phishing simulations.
We maintain a program designed to assess and manage the cybersecurity-related risk associated with third-party service providers that we rely on as part of providing services to our clients. This program incorporates a risk-based approach based on service criticality and type of information. Vendor risk assessments are performed and documented within our vendor management system. As part of the vendor risk assessment, we conduct an information security program evaluation of critical third-party providers before engagement and, based on our assessment of the vendor’s risk, contractually require certain third parties we engage to implement security programs commensurate with their risk profile.
As of May 31, 2024, we are not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, and financial condition. We continue to invest in cyber-resilience and cyber-threat response preparedness as we anticipate ongoing risks from cybersecurity threats. Refer to the “Risk Factors” section contained in Item 1A of this Form 10-K for more information on our cybersecurity-related risks.
Governance
Cybersecurity risks are overseen by the Audit Committee of our Board. Annually, the Audit Committee reviews an assessment of our risk management processes with the Board. The Audit Committee is responsible for reviewing significant cybersecurity risk exposures and the steps management has taken to monitor, control, and report such exposures. The Audit Committee receives quarterly updates from our CISO regarding our cybersecurity risk management program. These updates include a status of current capabilities, ongoing initiatives, and the evolving cybersecurity threat landscape.
Our management is responsible for implementing our security program, which is overseen by our Security Governance Council (the “SGC”) that regularly reports to our CEO and Audit Committee. The SGC is chaired by our CISO and is comprised of senior leaders and key personnel throughout the Company to support cross-functional representation. The members of the SGC are comprised of our executives and managers who understand our business operations, including but not limited to individuals
from the following departments: Operations, Information Technology, Finance, Internal Audit, Legal, Human Resources and Organizational Development, and Risk Management. The SGC meets on a quarterly basis with the mission to develop, coordinate, and sustain the organization’s enterprise security program; coordinate and respond to security risks and incidents; and develop, implement, and maintain the organization’s enterprise security strategy in alignment with, or in support of, business goals and objectives. The recommendations of the SGC are considered when updating the information security policies, procedures, and standards at Paychex.
Our CISO has over two decades of experience in various roles involving information security: developing and implementing cybersecurity programs to protect the confidentiality, integrity, and availability of information systems and data. Our CISO has earned relevant degrees and holds several information security certifications, including the Certified Chief Information Security Officer certification. Prior to joining Paychex in September 2019, he served as VP and CISO at a publicly traded company in the HCM industry. Before that, he held security leadership positions at several banks, insurance companies, and professional services firms.
Our CISO reports to our Senior Vice President of Information Technology and Product Development (“SVP of IT and PD”). Our SVP of IT and PD has over 45 years of experience in the field of information technology and has earned a relevant degree. Prior to joining Paychex in November 2008, he held senior leadership positions at several technology, financial services, and HCM companies.
It****em 2. Properties
We owned and leased the following properties as of May 31, 2024:
| Square feet | ||||
| Owned facilities: | ||||
| Rochester, New York | 832,000 | |||
| Other U.S. locations | 30,000 | |||
| Total owned facilities | 862,000 | |||
| Leased facilities: | ||||
| Rochester, New York | 53,000 | |||
| Other U.S. locations | 895,000 | |||
| International locations | 179,000 | |||
| Total leased facilities | 1,127,000 |
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 centers, fulfillment centers and sales functions. Our International locations primarily house our European operations in Denmark and Germany and locations in India house information technology, service, and sales support functions.
During the fourth quarter of fiscal 2024, the Company focused on cost optimization initiatives, including further consolidation of our geographic footprint. As such, the Company ceased the use of certain leased properties in Rochester, New York and Other U.S. locations. We believe that adequate, suitable lease space will continue to be available to meet our needs.
Ite****m 3. Legal Proceedings
We are subject to various claims and legal matters that arise in the normal course of our business. Refer to Note Q of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for further discussion of our legal proceedings, if any.
It****em 4. Mine Safety Disclosures
Not applicable.
P****ART II
It****em 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, 2024, there were 8,229 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 3,110 participants in the Paychex, Inc. Qualified Employee Stock Purchase Plan and 3,745 participants in the Paychex, Inc. Employee Stock Ownership Plan.
In January 2024, our Board approved a program to repurchase up to an additional $400.0 million of our common stock, with authorization expiring on May 31, 2027. In July 2021, our Board approved a program to repurchase up to $400.0 million of our common stock with authorization expiring on January 31, 2024, at which time $157.9 million of unused repurchase authorization expired. The purpose of these programs is to manage common stock dilution. All shares repurchased during fiscal 2024 were retired and were as follows:
| Fiscal 2024 | |||||||||||||||||||
| In millions, except per share amount | 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 | |||||||||||||||
| First quarter | — | $ | — | $ | — | $ | 327.1 | ||||||||||||
| Second quarter | 1.5 | $ | 115.37 | 169.2 | $ | 157.9 | |||||||||||||
| Third quarter | — | $ | — | — | $ | 400.0 | |||||||||||||
| March 1 to March 31, 2024 | — | $ | — | — | $ | 400.0 | |||||||||||||
| April 1 to April 30, 2024 | — | $ | — | — | $ | 400.0 | |||||||||||||
| May 1 to May 31, 2024 | — | $ | — | — | $ | 400.0 | |||||||||||||
| Fiscal year | 1.5 | $ | 115.37 | $ | 169.2 |
The following graph shows a five-year comparison of the total cumulative returns of investing $100 on May 31, 2019, 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).
| May 31, | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||||||||||||||||||
| Paychex | $ | 100.00 | $ | 86.97 | $ | 125.38 | $ | 157.16 | $ | 136.91 | $ | 161.59 | ||||||||||||
| S&P 500 | $ | 100.00 | $ | 112.82 | $ | 158.29 | $ | 157.79 | $ | 162.36 | $ | 208.09 | ||||||||||||
| New Peer Group | $ | 100.00 | $ | 113.08 | $ | 143.61 | $ | 134.03 | $ | 137.76 | $ | 173.78 | ||||||||||||
| Old Peer Group | $ | 100.00 | $ | 111.95 | $ | 143.99 | $ | 134.44 | $ | 136.11 | $ | 171.83 |
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 Compensation and Leadership 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 fiscal 2024. Bread Financial Holdings, Inc., H&R Block, Inc., and The Western Union Company were removed and replaced with Euronet Worldwide, Inc., Fair Isaac Corporation, Jack Henry & Associates, Inc., SS&C Technologies Holdings, Inc., and WEX, Inc., companies that are aligned with the Paychex business. Both the old and new peer groups are presented for this year of transition.
Our Peer Group for fiscal 2024 is comprised of the following companies:
| Automatic Data Processing, Inc. (direct competitor) | Global Payments, Inc. | |
| Broadridge Financial Solutions, Inc. | Intuit, Inc. | |
| Corpay, Inc.(1) | Jack Henry & Associates, Inc. | |
| Equifax, Inc. | Moody's Corporation | |
| Euronet Worldwide, Inc. | SS&C Technologies Holdings, Inc. | |
| Fair Isaac Corporation | TransUnion | |
| Fiserv, Inc. | Verisk Analytics, Inc. | |
| Gartner, Inc. | WEX, Inc. |
(1)
FleetCor Technologies, Inc. rebranded as Corpay, Inc. on March 25, 2024.
Ite****m 6. [Reserved]
Ite****m 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 our fiscal year ended May 31, 2024 (“fiscal 2024” or the “fiscal year”), as compared to our fiscal year ended May 31, 2023 (“fiscal 2023”), and our financial condition as of May 31, 2024. A detailed review of our fiscal 2023 performance compared to our fiscal year ended May 31, 2022 performance and our financial condition as of May 31, 2023 is set forth in Part II, Item 7 of our Annual Report on Form 10-K (“Form 10-K”) for fiscal 2023. 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 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” contained at the beginning of Part I of this Form 10-K.
Overview
We are an industry-leading human capital management (“HCM”) company delivering a full suite of technology and advisory services in human resources (“HR”), employee benefits, insurance, and payroll for small- to medium-sized businesses and their employees across the United States (“U.S.”) and parts of Europe.
We offer a full range of integrated HCM solutions covering the employee life cycle for businesses and their employees. Clients may choose from a breadth of solutions that also allow integration with some of the most popular HR, accounting, point-of-sale, and productivity applications on the market today.
We support our small-business clients by utilizing our proprietary, robust, software as a service (“SaaS”) Paychex Flex® platform and the Company’s SurePayroll® SaaS-based solutions. Our medium-sized clients generally have more complex payroll and employee benefit needs, though with the environment of increasing regulations, we believe the need for HR outsourcing services has been moving down-market. Any of our clients on Paychex Flex can opt for the integrated suite of HCM solutions, which allows clients to choose the service and software solutions that will meet the needs of their business.
Our portfolio of technology, HR advisory, and employee benefits-related solutions is disaggregated into two categories, (1) Management Solutions and (2) professional employer organization (“PEO”) and Insurance Solutions, as discussed in Part I, Item 1 of this Form 10-K.
Our mission is to be the leading provider of HR, employee benefits, insurance, and payroll solutions by being an essential partner to small- and medium-sized businesses across the U.S. and parts of Europe. Our strategy focuses on providing industry-leading, integrated technology; delivering superior customer experiences; expanding our leadership in HR; growing our client bases; and engaging in strategic acquisitions. We believe that successfully executing this strategy will lead to strong, long-term financial performance.
We maintain industry-leading margins by managing our personnel costs and expenses while continuing to invest in our business, particularly in sales and marketing and leading-edge technology. We believe these investments are critical to our success. Looking to the future, we believe that investing in our solutions, people, and digital capabilities will position us to capitalize on opportunities for long-term growth.
We closely monitor the evolving challenges and needs of small- and medium-sized businesses, and proactively aid our clients in navigating these challenges. Through our unique blend of innovative technology solutions, backed by our extensive compliance and HR expertise, we help clients more effectively hire, develop, and retain top talent in this challenging workforce environment. Our ongoing investments in our platforms have prepared us well for the demands of the current business and regulatory environments, allowing us to adapt while maintaining strong solutions and support delivery, resulting in high levels of client satisfaction and retention.
Fiscal 2024 Business Highlights
Highlights compared to fiscal 2023 are as follows:
| Fiscal Year | |||||||||||||||
| In millions, except per share amounts | 2024 | 2023 | Change**(3)** | ||||||||||||
| Total revenue | $ | 5,278.3 | $ | 5,007.1 | 5 | % | |||||||||
| Operating income | $ | 2,174.1 | $ | 2,033.1 | 7 | % | |||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | 9 | % | |||||||||
| Adjusted net income(1) | $ | 1,709.1 | $ | 1,548.4 | 10 | % | |||||||||
| Diluted earnings per share | $ | 4.67 | $ | 4.30 | 9 | % | |||||||||
| Adjusted diluted earnings per share(1) | $ | 4.72 | $ | 4.27 | 11 | % | |||||||||
| Dividends paid to stockholders(2) | $ | 1,315.3 | $ | 1,175.0 | 12 | % |
(1)
Adjusted net income and adjusted diluted earnings per share are not U.S. generally accepted accounting principle (“GAAP”) measures. Adjusted net income and adjusted diluted earnings per share in all periods include an adjustment for net tax windfall benefits related to employee stock-based compensation payments. In fiscal 2024, adjusted net income and adjusted diluted earnings per share also include adjustments for one-time cost optimization initiatives. Refer to the “Non-GAAP Financial Measures” section of this Item 7 for a discussion of non-GAAP measures and a reconciliation to the U.S. GAAP measures of net income and diluted earnings per share.
(2)
Dividends paid to stockholders represented approximately 78% of net income for fiscal 2024 compared to approximately 75% of net income for fiscal 2023.
(3)
Percentage changes are calculated based on unrounded numbers.
For further analysis of our results of operations for fiscal years 2024 and 2023, and our financial position as of May 31, 2024, refer to the tables and analysis in the “Results of Operations” and “Liquidity and Capital Resources” sections of this Item 7.
Business Outlook
Our payroll and PEO client base was greater than 745,000 clients as of May 31, 2024 and approximately 740,000 clients as of May 31, 2023. Client retention remained high in the range of 82% to 83% of our beginning client base for both fiscal 2024 and fiscal 2023 and we have sustained high revenue retention.
We continue to increase penetration of our integrated solutions beyond payroll processing, including our HR outsourcing and employee benefit solutions. These offerings are included as part of the integrated HCM solutions within Paychex Flex or provided through the PEO platform. The following table illustrates selected HR solutions client metrics:
| As of May 31, | 2024 | 2023 | Change**(1)** | ||||||||||||
| Paychex HR solutions and PEO client worksite employees | 2,332,000 | 2,168,000 | 8 | % | |||||||||||
| Paychex HR solutions and PEO clients | 74,000 | 71,000 | 5 | % | |||||||||||
| Retirement services plans | 121,000 | 113,000 | 7 | % | |||||||||||
| Asset value of retirement services participants’ funds | $ | 51.8 | $ | 44.8 | 16 | % |
(1)
Percentage changes are calculated based on unrounded numbers.
In fiscal 2024, we continued to make investments in technology a priority as companies look to leverage technology solutions to maintain operations, stay connected to employees, and increase productivity. We implemented enhancements to our Paychex Flex platform designed to improve the client and client employee experiences from hiring and onboarding through employee retention. We also continue to focus on artificial intelligence (“AI”) and related technology to leverage innovative technology and advanced analytics to gain deeper insights into prospects and clients regarding their behavior, preferences, and evolving needs. In fiscal 2024, we successfully implemented several additional innovative AI models that significantly improved results for Paychex and our clients.
We have further strengthened 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 (www.paychex.com) 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.
During the fourth quarter of fiscal 2024 (the "fourth quarter"), we focused on cost optimization initiatives, including further reductions to our geographic footprint, reprioritization of certain technology investments, and headcount optimization. These initiatives are directed at generating additional cost savings for us and providing greater value to our customers.
Results of Operations
Summary of Results of Operations for Fiscal Years:
| In millions, except per share amounts | 2024 | 2023 | Change**(1)** | ||||||||||||||
| Revenue: | |||||||||||||||||
| Management Solutions | $ | 3,866.4 | $ | 3,730.5 | 4 | % | |||||||||||
| PEO and Insurance Solutions | 1,265.6 | 1,176.8 | 8 | % | |||||||||||||
| Total service revenue | 5,132.0 | 4,907.3 | 5 | % | |||||||||||||
| Interest on funds held for clients | 146.3 | 99.8 | 47 | % | |||||||||||||
| Total revenue | 5,278.3 | 5,007.1 | 5 | % | |||||||||||||
| Total expenses | 3,104.2 | 2,974.0 | 4 | % | |||||||||||||
| Operating income | 2,174.1 | 2,033.1 | 7 | % | |||||||||||||
| Other income, net | 43.9 | 15.1 | n/m | ||||||||||||||
| Income before income taxes | 2,218.0 | 2,048.2 | 8 | % | |||||||||||||
| Income taxes | 527.6 | 490.9 | 8 | % | |||||||||||||
| Effective income tax rate | 23.8 | % | 24.0 | % | |||||||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | 9 | % | |||||||||||
| Diluted earnings per share | $ | 4.67 | $ | 4.30 | 9 | % |
(1)
Percentage changes are calculated based on unrounded numbers.
n/m – not meaningful
The changes in revenue as compared to the prior year were primarily driven by the following factors:
Management Solutions revenue: $3.9 billion for fiscal 2024, reflecting an increase of 4%:
o
Increase in the number of clients and clients' employees for HCM solutions and worksite employees for HR solutions;
o
Higher revenue per client resulting from pricing realization and product attachment, including increased demand for HR solutions and retirement solutions; and
o
Lower revenue from ancillary services, primarily due to the expiration of our Employee Retention Tax Credit Service.
PEO and Insurance Solutions revenue: $1.3 billion for fiscal 2024, reflecting an increase of 8%:
o
Growth in the number of average PEO worksite employees and increases in average wages per worksite employee;
o
Higher health insurance premiums; and
o
Growth in ancillary services.
Interest on funds held for clients: $146.3 million for fiscal 2024, reflecting an increase of 47%:
o
Higher average interest rates;
o
Higher average investment balances; and
o
Lower realized losses on investment sales.
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, 2024, 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:
| Year ended May 31, | ||||||||||||
| $ in millions | 2024 | 2023 | ||||||||||
| Average investment balances: | ||||||||||||
| Funds held for clients | $ | 4,462.0 | $ | 4,392.7 | ||||||||
| Corporate cash equivalents and investments | 1,605.3 | 1,470.9 | ||||||||||
| Total | $ | 6,067.3 | $ | 5,863.6 | ||||||||
| Average interest rates earned (exclusive of net realized gains/(losses)): | ||||||||||||
| Funds held for clients | 3.3 | % | 2.5 | % | ||||||||
| Corporate cash equivalents and investments | 5.2 | % | 3.3 | % | ||||||||
| Combined funds held for clients and corporate cash equivalents and investments | 3.8 | % | 2.7 | % | ||||||||
| Total net realized losses | $ | (2.6 | ) | $ | (9.8 | ) |
| $ in millions | ||||||||||||
| As of May 31, | 2024 | 2023 | ||||||||||
| Net unrealized losses on available-for-sale ("AFS") securities(1) | $ | (162.5 | ) | $ | (175.3 | ) | ||||||
| Federal Funds rate(2) | 5.50 | % | 5.25 | % | ||||||||
| Total fair value of AFS securities | $ | 3,329.6 | $ | 3,604.6 | ||||||||
| Weighted-average duration of AFS securities in years(3) | 2.7 | 3.3 | ||||||||||
| Weighted-average yield-to-maturity of AFS securities(3) | 3.0 | % | 2.9 | % |
(1)
The net unrealized loss on our investment portfolios was approximately $137.6 million as of July 09, 2024.
(2)
The Federal Funds rate was in the range of 5.25% to 5.50% as of May 31, 2024 and in the range of 5.00% to 5.25% as of May 31, 2023.
(3)
These items exclude the impact of variable rate demand notes (“VRDNs”), as they are tied to short-term interest rates. 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: The following table summarizes total combined cost of service revenue and selling, general and administrative expenses for fiscal years:
| In millions | 2024 | 2023 | Change**(1)** | ||||||||||||
| Compensation-related expenses | $ | 1,810.4 | $ | 1,782.6 | 2 | % | |||||||||
| PEO insurance costs | 471.3 | 416.8 | 13 | % | |||||||||||
| Depreciation and amortization | 176.5 | 176.6 | (0 | ) | % | ||||||||||
| Cost optimization initiatives | 39.5 | — | n/m | ||||||||||||
| Other expenses | 606.5 | 598.0 | 1 | % | |||||||||||
| Total expenses | $ | 3,104.2 | $ | 2,974.0 | 4 | % |
(1)
Percentage changes are calculated based on unrounded numbers.
The changes in total expenses as compared to the prior year were primarily driven by the following factors:
Compensation-related expenses: $1.8 billion for fiscal 2024, reflecting a 2% increase:
o
Higher compensation costs due to increases in average wages.
PEO insurance costs: $471.3 million in fiscal 2024, reflecting a 13% increase:
o
Increase in PEO direct insurance costs related to growth in average worksite employees and wages, and PEO insurance revenues.
Cost optimization initiatives: $39.5 million in fiscal 2024:
o
During the fourth quarter, we focused on cost optimization initiatives, including further reductions to our geographic footprint, reprioritization of certain technology investments, and headcount optimization. These initiatives will provide ongoing savings in rent, facilities maintenance, and wage-related expenses.
Total expenses, excluding one-time cost optimization initiatives noted above, increased approximately 3% compared to the prior year.
Operating income: Fiscal 2024 operating income was $2.2 billion, an increase of 7% compared to fiscal 2023, as a result of revenue growth outpacing expense increases as previously discussed. Adjusted operating income(1) of $2.2 billion, which excludes the impact of one-time costs, reflects an increase of 9%. Operating margin and adjusted operating margin(1) were as follows:
| Fiscal Year | ||||||||||||
| 2024 | 2023 | |||||||||||
| Operating margin (operating income as a percentage of total revenue) | 41.2 | % | 40.6 | % | ||||||||
| Adjusted operating margin(1) (operating income, adjusted for one-time items, as a percentage of total revenue) | 41.9 | % | 40.6 | % |
Other income, net: Other income, net increased $28.8 million to $43.9 million in fiscal 2024 as a result of higher average investment balances and average interest rates earned on our corporate investments.
Income taxes: Our effective income tax rate was 23.8% and 24.0% for fiscal years 2024 and 2023, respectively. The effective income tax rates in both periods were impacted by the recognition of net discrete tax benefits related to the volume of stock option exercises and the associated employee stock-based compensation payments. 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 was $1.7 billion and $1.6 billion for fiscal 2024 and fiscal 2023, respectively. Diluted earnings per share was $4.67 per diluted share for fiscal 2024 and $4.30 per diluted share for fiscal 2023. Refer to Note C of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for information on dilutive shares outstanding.
Adjusted net income(1) was $1.7 billion and $1.5 billion for fiscal 2024 and fiscal 2023, respectively, reflecting an increase of 10%. Adjusted diluted earnings per share(1) was $4.72 per diluted share and $4.27 per diluted share for fiscal 2024 and fiscal 2023, respectively, reflecting an increase of 11%.
(1)
Adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are not U.S. GAAP measures. Refer to the “Non-GAAP Financial Measures” section below for a discussion of these non-GAAP measures and a reconciliation to the most comparable GAAP measure of operating income, operating margin, net income and diluted earnings per share.
Non-GAAP Financial Measures: Adjusted net income, adjusted operating income, adjusted operating margin, adjusted diluted earnings per share, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and adjusted EBITDA are summarized as follows:
| $ in millions | 2024 | 2023 | Change**(1)** | ||||||||||||
| Operating income | $ | 2,174.1 | $ | 2,033.1 | 7 | % | |||||||||
| Non-GAAP adjustments: | |||||||||||||||
| Cost optimization initiatives(2) | 39.5 | — | |||||||||||||
| Total non-GAAP adjustments | 39.5 | — | |||||||||||||
| Adjusted operating income | $ | 2,213.6 | $ | 2,033.1 | 9 | % | |||||||||
| Adjusted operating margin | 41.9 | % | 40.6 | % | |||||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | 9 | % | |||||||||
| Non-GAAP adjustments: | |||||||||||||||
| Excess tax benefit related to employee stock-based compensation payments(3) | (11.2 | ) | (8.9 | ) | |||||||||||
| Cost optimization initiatives(2) | 29.9 | — | |||||||||||||
| Total non-GAAP adjustments | 18.7 | (8.9 | ) | ||||||||||||
| Adjusted net income | $ | 1,709.1 | $ | 1,548.4 | 10 | % | |||||||||
| Diluted earnings per share(4) | $ | 4.67 | $ | 4.30 | 9 | % | |||||||||
| Non-GAAP adjustments: | |||||||||||||||
| Excess tax benefit related to employee stock-based compensation payments(3) | (0.03 | ) | (0.02 | ) | |||||||||||
| Cost optimization initiatives(2) | 0.08 | — | |||||||||||||
| Total non-GAAP adjustments | 0.05 | (0.02 | ) | ||||||||||||
| Adjusted diluted earnings per share | $ | 4.72 | $ | 4.27 | 11 | % | |||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | 9 | % | |||||||||
| Non-GAAP adjustments: | |||||||||||||||
| Interest income, net | (45.4 | ) | (12.4 | ) | |||||||||||
| Income taxes | 527.6 | 490.9 | |||||||||||||
| Depreciation and amortization expense | 176.5 | 176.6 | |||||||||||||
| Total non-GAAP adjustments | 658.7 | 655.1 | |||||||||||||
| EBITDA | $ | 2,349.1 | $ | 2,212.4 | 6 | % | |||||||||
| Cost optimization initiatives(2) | 39.5 | — | |||||||||||||
| Adjusted EBITDA | $ | 2,388.6 | $ | 2,212.4 | 8 | % |
(1)
Percentage changes are calculated based on unrounded numbers.
(2)
One-time costs and corresponding tax benefit related to our cost optimization initiatives, including further reductions to our geographic footprint, reprioritization of certain technology investments, and headcount optimization.
(3)
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.
(4)
The calculation of the impact of non-GAAP adjustments on diluted earnings per share is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.
In addition to reporting operating income, operating margin, net income and diluted earnings per share, which are U.S. GAAP measures, we present adjusted operating income, adjusted operating margin, adjusted net income, adjusted diluted earnings per share, EBITDA and adjusted EBITDA, 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 operating margin, adjusted net income, adjusted diluted earnings per share, EBITDA and adjusted EBITDA, are not calculated through the application of U.S. GAAP and are not required forms of disclosure by the Securities and Exchange Commission (“SEC”). As such, they should not be considered a substitute for the U.S. GAAP measures of net income and diluted earnings per share, and, therefore, they should not be used in isolation but in conjunction with the U.S. GAAP measures. The use of any non-GAAP
measure may produce results that vary from the U.S. GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
Liquidity and Capital Resources
Our financial position as of May 31, 2024 remained strong with cash, restricted cash, and total corporate investments of $1.6 billion. Short-term borrowings of $18.7 million and long-term borrowings of $800.0 million were outstanding as of May 31, 2024. Our unused capacity under our unsecured credit facilities was $2.0 billion as of May 31, 2024. Our primary source of cash is our ongoing operations, which was $1.9 billion for fiscal 2024. Our positive cash flows have allowed us to support our business, pay dividends and fund our acquisition of Alterna Capital Solutions, Inc. We currently anticipate that corporate cash, corporate restricted cash, and total corporate investments as of May 31, 2024, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, primarily investment in our technology solutions, share repurchases, dividend payments, and the servicing of long-term debt for the foreseeable future.
For client funds liquidity, we have the ability to borrow on our unsecured credit facilities or use corporate liquidity when necessary to meet short-term funding needs related to client fund obligations. Historically, we have borrowed, typically on an overnight basis, to settle short-term client fund obligations, rather than liquidate previously collected client funds invested in our long-term AFS portfolio. We believe that our investments in an unrealized loss position as of May 31, 2024 were not impaired due to increased credit risk or other valuation concerns, nor has any event occurred subsequent to that date to indicate any change in our assessment. We do not intend to sell these investments until recovery of their amortized cost basis or maturity and further believe that it is not more-than-likely that we would be required to sell these investments prior to that time.
Financing
Short-term financing: We maintain committed and unsecured credit facilities and irrevocable letters of credit as part of our normal and recurring business operations. The purpose of these credit facilities is to meet short-term funding requirements, finance working capital needs, and for general corporate purposes. We typically borrow on an overnight or short-term basis on our credit facilities. Refer to Note M of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for further discussion on our credit facilities.
Details of our credit facilities are as follows:
| Maximum | May 31, 2024 | ||||||||||||||||
| Amount | Outstanding | Available | |||||||||||||||
| $ in millions | Expiration Date | Available | Amount | Amount | |||||||||||||
| Credit facilities: | |||||||||||||||||
| JP Morgan Chase Bank, N.A. (“JPM”) | April 12, 2029 | $ | 1,000.0 | $ | — | $ | 1,000.0 | ||||||||||
| JPM | September 17, 2026 | $ | 750.0 | — | 750.0 | ||||||||||||
| PNC Bank, National Association (“PNC”) | February 6, 2026 | $ | 250.0 | 18.7 | 231.3 | ||||||||||||
| Total Lines of Credit Outstanding and Available | $ | 18.7 | $ | 1,981.3 | |||||||||||||
Amounts outstanding under the PNC credit facility as of May 31, 2024 remain outstanding as of the date of this report.
Details of borrowings under each credit facility during fiscal 2024 were as follows:
| Year ended May 31, 2024 | ||||||||||||||||||
| Credit Facility | ||||||||||||||||||
| $1 Billion | $750 Million | $250 Million | ||||||||||||||||
| $ in millions | JPM | JPM | PNC | |||||||||||||||
| Number of days borrowed | — | — | 366 | |||||||||||||||
| Maximum amount borrowed | $ | — | $ | — | $ | 97.7 | ||||||||||||
| Weighted-average amount borrowed | $ | — | $ | — | $ | 16.3 | ||||||||||||
| Weighted-average interest rate | — | % | — | % | 6.34 | % |
We primarily use short-term borrowings to settle client fund obligations, rather than liquidating previously collected client funds invested in our long-term AFS investment portfolio.
On April 12, 2024, we and Paychex of New York LLC, a Delaware limited liability company (“PoNY”), entered into an amendment (the “2019 Credit Facility Amendment”) to our $1.0 billion, five-year, unsecured, revolving credit facility (the “2019 Credit Facility”), for which JPM acts as Administrative Agent. The 2019 Credit Facility Amendment, among other things, (a) extended the maturity date of the 2019 Credit Facility from July 31, 2024 to April 12, 2029, (b) amended the interest rate provisions under the 2019 Credit Facility, (c) amended the lenders under the syndication and (d) made other ministerial changes to the 2019 Credit Facility.
On April 12, 2024, we and PoNY entered into an amendment (the “2017 Credit Facility Amendment”) to our $750.0 million, five-year, unsecured, revolving credit facility (the “2017 Credit Facility”), for which JPM acts as Administrative Agent. The 2017 Credit Facility Amendment, among other things, (a) amended the interest rate provisions under the 2017 Credit Facility, and (b) made other ministerial changes to the 2017 Credit Facility.
Subsequent to May 31, 2024, there were no additional overnight borrowings under our PNC and JPM credit facilities.
We expect to have access to the amounts available under our current credit facilities to meet our ongoing financial needs. However, if we experience reductions in our operating cash flows due to any of the risk factors outlined in, but not limited to, Item 1A in this Form 10-K and other SEC filings, we may need to adjust our capital, operating, and other discretionary spending to realign our working capital requirements with the capital resources available to us. Furthermore, if we determine the need for additional short-term liquidity, there is no assurance that such financing, if pursued and obtained, would be adequate or on terms acceptable to us.
Letters of credit: As of May 31, 2024, we had irrevocable standby letters of credit available totaling $168.5 million, required to secure commitments for certain insurance policies. The letters of credit expire at various dates between June 26, 2024 and September 29, 2025. No amounts were outstanding on these letters of credit during fiscal 2024 or fiscal 2023, or as of May 31, 2024 and May 31, 2023. Subsequent to May 31, 2024, one letter of credit expiring on June 26, 2024, was renewed for a one year term.
Long-term financing: We have borrowed $800.0 million through the issuance of long-term private placement debt (“Senior Notes”). Refer to Note N 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 Company has various long-term contractual obligations as of May 31, 2024, which include:
operating leases for $73.2 million;
purchase obligations for $211.2 million;
workers’ compensation estimated obligations for $218.6 million; and
long-term Senior Notes debt obligations for $800.0 million, plus interest payments of $117.6 million.
Refer to Notes A, I, N, and Q of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for more information on these areas.
The liability for uncertain tax positions, including interest and net of federal benefits, was approximately $86.4 million as of May 31, 2024. 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.
We are a limited partner in three venture capital fund arrangements and have committed to contribute a maximum amount of $30.0 million for investment in equity and debt securities of start-up entities primarily in the financial technology sector. As of May 31, 2024, we have contributed $23.4 million of the total funding commitment. The timing of future contributions to be made to these venture capital funds cannot be specifically or reasonably determined. Our investments in these venture capital funds are not considered part of our ongoing operations, are accounted for under the equity method, and represented less than one percent of our total assets as of May 31, 2024.
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 commitment. We have also entered into indemnification agreements with our officers, directors, and non-officer fiduciaries of our pooled employer plan retirement offering, which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us.
We currently self-insure the deductible portion of various insured exposures under certain corporate and PEO employee health and medical benefit plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on our Consolidated Balance Sheets. Historically, the amounts accrued have not been material and were not material as of May 31, 2024. We also maintain corporate insurance coverage in addition to our purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and self-insured retention through our captive insurance company.
Operating, Investing, and Financing Cash Flow Activities
Primary sources of cash, restricted cash, and equivalents are through collections for services rendered to our customers and interest earned on funds held for clients and corporate investments. Primary uses of cash include employee compensation and contractual obligations related to business operations, cash dividends paid, share repurchases, purchases of property and equipment, and acquisitions.
Our investment portfolio incorporates both corporate cash and funds held for clients. Interest rates, market conditions, and our volatile cash flows are among several factors influencing our investment strategy directing the mix between long-term and VRDN AFS securities vs. short-term restricted cash and cash equivalents held in the portfolio. A portfolio strategy that favors larger balances held in restricted cash and cash equivalents will impact our investing activities due to the offsetting activity in the purchases and sales/maturities of AFS investments.
Our cash flows include certain activities that are short-term in nature and have an impact on short-term cash flows due to timing of collection and settlement of obligations as follows:
PEO receivables and worksite-employee ("WSE") accrued compensation: PEO receivables and WSE accrued compensation fluctuate based on either/both: (1) the timing of the payroll cut-off date and the Company’s month-end close, and (2) the timing of when cash is collected from the customer, and it is remitted to either the WSE for wages earned or applicable tax or regulatory agencies for payroll taxes. PEO accounts receivable collections and compensation payments to WSEs and applicable tax or regulatory agencies are settled through our corporate cash and the fluctuations impact our operating activities.
Client fund obligations: Client fund obligations liability will vary based on the timing of when cash is collected from the clients and when it is remitted to employees of the clients utilizing employee payment services or applicable tax or regulatory agencies for payroll tax administration services. Collections from clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days. Fluctuations in client fund obligations impact financing activities.
Summarized cash operating, investing, and financing cash flow information is as follows for fiscal 2024 and fiscal 2023:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023(1) | Change | ||||||||||||
| Net cash provided by operating activities | $ | 1,897.7 | $ | 1,706.2 | $ | 191.5 | |||||||||
| Net cash (used in)/provided by investing activities | (260.9 | ) | 211.7 | (472.6 | ) | ||||||||||
| Net cash used in financing activities | (1,874.7 | ) | (711.4 | ) | (1,163.3 | ) | |||||||||
| Net change in cash, restricted cash, and equivalents | $ | (237.9 | ) | $ | 1,206.5 | $ | (1,444.4 | ) | |||||||
| Cash dividends per common share | $ | 3.65 | $ | 3.26 |
(1)
The consolidated statement of cash flows for the fiscal year ended May 31, 2023 includes a revision to previously reported amounts related to the presentation of cash flows associated with short-term receivables purchased from our clients under non-recourse arrangements, net of funding reserves. Refer to Note A of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion on the revision.
The changes in our cash flows for fiscal 2024 and fiscal 2023 were primarily the result of the following key drivers:
Operating Cash Flow Activities
Fiscal 2024
Net income attributable to the reasons discussed in the “Results of Operations” section of this Item 7;
Net changes in PEO assets and liabilities as a result of the timing of cash collected and the settlement of payroll taxes;
Net realized losses on the disposal of assets primarily due to our cost optimization initiatives; and
Increase in income tax reserves related to unrecognized tax positions taken for years still subject to audit by regulatory bodies; offset by
Decrease in accrued corporate compensation primarily due to a decrease in incentive compensation tied to performance measures and the timing of payroll payments at month-end.
Fiscal 2023
Net income attributable to the reasons discussed in the “Results of Operations” section of this Item 7;
Increase in deferred revenue primarily due to set-up fees related to our pooled employer plan option, which we began offering to our clients during fiscal 2022 and amortize over 4 years; and
Change in accrued income taxes due to the impact of an increase in our unrecognized tax position related to ongoing regulatory audits, offset by an increase in prepaid income taxes as a result of changes to the deductibility of research and development costs; offset by
Increase in non-PEO related trade receivables primarily due to timing related to our payroll cut-off and month-end, as well as the timing of cash collections for other ancillary services; and
Payment of federal payroll taxes deferred under the Coronavirus Aid, Relief and Economic Security Act.
Investing Cash Flow Activities
Fiscal 2024
Cash used for the acquisition of Alterna Capital Solutions, LLC and settlement of its outstanding debt at closing. Refer to Note D of the Notes to the Consolidated Financial Statements for additional discussion on this transaction;
Cash used to develop and enhance our client-facing internal-use software and the acquisition of third-party customer lists; and
Net purchases of short-term accounts receivable due to an increase in our client base, and funding to existing client base, and the timing of net cash collections; offset by
Net sales from AFS securities primarily due to a shift from investing in VRDNs to reinvesting in cash and cash equivalents due to more favorable interest rates. Our VRDN holdings were $- at May 31, 2024 compared to $344.1 million at May 31, 2023.
Fiscal 2023
Net sales from AFS securities primarily due to a shift from investing in VRDNs to reinvesting in cash and cash equivalents due to more favorable interest rates. Our VRDN holdings were $344.1 million at May 31, 2023 compared to $1.2 billion at May 31, 2022; and
Proceeds received from the sale of two commercial buildings; offset by
Cash used to develop and enhance our client-facing internal-use software and the acquisition of third-party customer lists.
Financing Cash Flow Activities
Fiscal 2024
Cumulative dividends paid at $3.65 per share for fiscal 2024. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board of Directors;
Decrease in client fund obligations related to the timing of collections and remittances of semi-weekly tax payments that were deferred at the end of fiscal 2023 as a result of the Memorial Day holiday; and
Repurchases of 1.5 million shares of our common stock at a weighted-average price of $115.37. These shares were retired immediately upon purchase; offset by
Cash activity related to equity-based plans.
Fiscal 2023
Cumulative dividends paid at $3.26 per share for fiscal 2023. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board of Directors; and
Cash activity related to equity-based plans; offset by
Increase in client fund obligations due to the timing of collections and remittances of semi-weekly tax payments that were deferred at the end of fiscal 2023 due to the Memorial Day holiday.
Other
Recently issued accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
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, future expectations, and assumptions believed to be reasonable under current facts and 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: 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 when control of the contracted services is transferred to our clients, in an amount that reflects the consideration we expect to receive in exchange for such services. 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. Insurance Solutions revenues are recognized when commissions are earned on premiums billed and collected. Fees earned for the purchase of client's accounts receivable under non-recourse arrangements 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 40 to 60 days for clients in the temporary staffing agency market and approximately 5 to 15 days for other clients. 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.
We receive advance payments for set-up fees from our clients. Advance payments received for certain of our service offerings for set-up fees are considered a material right. Therefore, we defer 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 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. We 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.
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, 2024 or May 31, 2023.
PEO insurance reserves: As part of our 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 determination of estimated ultimate losses by our independent actuary are based on accepted actuarial methods and assumptions. The estimated ultimate losses are primarily based upon 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 or fully insured insurance arrangements where we retain risk. A reserve for insurance arrangements where we retain risk is 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 accepted actuarial methods and assumptions, 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 fiscal 2024 or 2023.
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 a reporting unit. We perform our annual impairment testing in our fiscal fourth quarter. During fiscal 2024 and 2023, a qualitative analysis was performed for all reporting units. 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 2024 or 2023. Subsequent to the latest review, there have been no events or circumstances that indicate any potential impairment of the Company’s goodwill balance.
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 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 2024 or 2023 as a result of the qualitative analyses performed.
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 2024 or as of May 31, 2024.
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.
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 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. 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 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.
Ite****m 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 AFS securities. Corporate investments are primarily comprised of AFS securities. As a result of our investing activities, we are exposed to changes in interest rates that may materially affect our results of operations and financial position. Changes in interest rates will impact the earnings potential of future investments and will cause fluctuations in the fair value of our longer-term AFS securities. We follow an investment strategy of protecting principal and optimizing liquidity. 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. We invest predominately in corporate bonds; municipal bonds; U.S. government agency securities; and VRDNs when available in the market. We limit the amounts that can be invested in any single issuer and invest primarily in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes. We manage the AFS securities to a benchmark duration of two and one-half to three and three-quarters years.
During fiscal 2024, our primary short-term investment vehicles were U.S. government agency discount notes and bank demand deposit accounts. We have no exposure to high-risk or non-liquid investments. We have insignificant exposure to European investments. We have not and do not utilize derivative financial instruments to manage our interest rate risk.
During fiscal 2024, the average interest rate earned on our combined funds held for clients and corporate cash equivalents and investment portfolios was 3.8%, compared to 2.7% for fiscal 2023. When interest rates are falling, the full impact of lower interest rates will not immediately be reflected in net income due to the interaction of short- and long-term interest rate changes. During a falling interest rate environment, earnings will decrease from our short-term investments, and over time, will decrease from our longer-term AFS securities. Earnings from the AFS securities, which as of May 31, 2024 had an average duration of 2.7 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 AFS securities that had stated maturities as of May 31, 2024 are shown below by expected maturity.
| May 31, 2024 | ||||||||||
| Amortized | Fair | |||||||||
| In millions | cost | value | ||||||||
| Maturity date: | ||||||||||
| Due in one year or less | $ | 211.0 | $ | 207.1 | ||||||
| Due after one year through three years | 1,439.4 | 1,365.2 | ||||||||
| Due after three years through five years | 1,452.8 | 1,377.2 | ||||||||
| Due after five years | 388.9 | 380.1 | ||||||||
| Total | $ | 3,492.1 | $ | 3,329.6 |
VRDNs, when held by us, are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.
As of May 31, 2024 and 2023, the Federal Funds rate was in the range of 5.25% to 5.50% and in the range of 5.00% to 5.25%, respectively. 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 concerns over inflation risk and the failure of financial institutions. We continue to monitor market conditions and take appropriate measures, when necessary, to manage our investment portfolios.
Calculating the future effects of changing interest rates involves many factors. These factors include, but are not limited to:
governmental action to address inflation;
daily interest rate changes;
seasonal variations in investment balances;
actual duration of short-term and AFS securities;
the proportion of taxable and tax-exempt investments;
changes in tax-exempt municipal rates versus taxable investment rates, which are not synchronized or simultaneous; and
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 19 basis points. Under normal financial market conditions, the impact to earnings from a 25-basis-point change in short-term interest rates would be approximately $5.0 million to $5.5 million, after taxes, for a twelve-month period. Such a basis point change may or may not be tied to changes in the Federal Funds rate.
Our total investment portfolio (funds held for clients and corporate cash equivalents and investments) averaged approximately $6.1 billion for fiscal 2024. Our anticipated allocation is approximately 45% invested in short-term securities and VRDNs with an average duration of less than 30 days, and 55% invested in 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 losses of $162.5 million and $175.3 million as of May 31, 2024 and 2023, 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 2024, the net unrealized loss on our investment portfolios ranged from $125.7 million to $259.6 million. During fiscal 2023, the net unrealized loss on our investment portfolios ranged from $126.5 million to $263.6 million. The net unrealized loss on our investment portfolios was approximately $137.6 million as of July 9, 2024.
As of May 31, 2024 and 2023, we had $3.3 billion and $3.6 billion, respectively, invested in AFS securities at fair value. The weighted-average yield-to-maturity was 3.0% and 2.9% as of May 31, 2024 and 2023, respectively. The weighted-average yield-to-maturity excludes AFS securities tied to short-term interest rates, such as VRDNs. Assuming a hypothetical decrease in longer-term interest rates of 25 basis points, the resulting potential increase in fair value for our portfolio of AFS securities as of May 31, 2024, would be in a range of approximately $20.0 million to $25.0 million. Conversely, a corresponding increase in interest rates would result in a comparable decrease in fair value. This hypothetical decrease or increase in the fair value of the portfolio would be recorded as an adjustment to the portfolio’s recorded value, with an offsetting amount recorded in stockholders’ equity. These fluctuations in fair value would have no related or immediate impact on our results of operations unless any declines in fair value are due to credit related concerns and an impairment loss recognized.
We are also exposed to interest rate risk through the use of our credit facilities as outlined in Liquidity and Capital Resources section of this Form 10-K. If interest rates were to increase, or we increase the frequency or amounts borrowed under these credit facilities, we could experience additional interest expense and a corresponding decrease in earnings.
Credit risk: We are exposed to credit risk in connection with 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 impaired due to increased credit risk or other valuation concerns and we believe that the investments we held as of May 31, 2024 were not impaired as a result of the previously discussed reasons. While $3.2 billion of our AFS securities had fair values that were below amortized cost, we believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the gross unrealized losses of $164.2 million were due to changes in interest rates and were not due to increased credit risk or other valuation concerns. Most of the AFS securities in an unrealized loss position as of May 31, 2024 and 2023 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 impaired due to increased credit risk or other valuation concerns could change in the future due to new developments, including changes in our strategies or assumptions related to any particular investment.
We have some credit risk exposure relating to our purchase of client accounts receivable under non-recourse arrangements. There is also credit risk exposure relating to our trade accounts receivable. These credit risk exposures are diversified among 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.
Market risk: We have an ongoing monitoring system for financial institutions we conduct business with and maintain cash balances at large well-capitalized (as defined by their regulators) financial institutions. We closely monitor market conditions and take appropriate measures, when necessary, to minimize potential risk exposure to our client’s and our cash and investment balances.
Ite****m 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
REPO****RT 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, 2024. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated Framework” (2013). Based on our assessment, management determined that the Company maintained effective internal control over financial reporting as of May 31, 2024.
On July 31, 2023, we completed our acquisition of Alterna Capital Solutions LLC (“Alterna”). We are in the process of evaluating the existing controls and procedures of Alterna and integrating Alterna into our internal control over financial reporting. In accordance with Securities and Exchange Commission Staff guidance, permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the year in which the acquisition is completed, we have excluded Alterna from our assessment of the effectiveness of internal control over financial reporting as of May 31, 2024. Alterna represented approximately 2% of the Company’s total assets as of May 31, 2024 and 1% of the Company’s revenues for the year ended May 31, 2024.
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, 2024, 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/ John B. Gibson John B. Gibson President and Chief Executive Officer | /s/ Robert L. Schrader Robert L. Schrader Senior Vice President and Chief Financial Officer |
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, 2024 and 2023, 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, 2024, 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, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2024 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, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the 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.
As described in the Report on Management’s Assessment of Internal Control Over Financial Reporting, management has excluded Alterna Capital Solutions LLC from its assessment of internal control over financial reporting as of May 31, 2024 because it was acquired by the Company in a purchase business combination during 2024. We have also excluded Alterna Capital Solutions LLC from our audit of internal control over financial reporting. Alterna Capital Solutions LLC is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 2% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended May 31, 2024.
Definition and Limitations of Internal Control over Financial Reporting
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 control over financial reporting includes those policies and procedures that (i) pertain to the 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, 2024, the total liability for workers’ compensation insurance reserves is $218.6 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 determination of estimated ultimate losses by the Company’s actuary is based on accepted actuarial methods and assumptions. The estimated ultimate losses are primarily based upon 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) there was significant judgment used 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 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.
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’ compensation insurance reserves, including controls over the development of management’s assumptions and actuarial estimates related to the loss development factors. These 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 model, assumptions and actuarial estimates related to the 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
Fairport, New York
July 11, 2024
We have served as the Company’s auditor since 2013.
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME AND CO****MPREHENSIVE INCOME
In millions, except per share amounts
| Year ended May 31, | 2024 | 2023 | 2022 | ||||||||||||
| Revenue: | |||||||||||||||
| Management Solutions | $ | 3,866.4 | $ | 3,730.5 | $ | 3,442.7 | |||||||||
| PEO and Insurance Solutions | 1,265.6 | 1,176.8 | 1,111.3 | ||||||||||||
| Total service revenue | 5,132.0 | 4,907.3 | 4,554.0 | ||||||||||||
| Interest on funds held for clients | 146.3 | 99.8 | 57.7 | ||||||||||||
| Total revenue | 5,278.3 | 5,007.1 | 4,611.7 | ||||||||||||
| Expenses: | |||||||||||||||
| Cost of service revenue | 1,479.3 | 1,453.0 | 1,356.3 | ||||||||||||
| Selling, general and administrative expenses | 1,624.9 | 1,521.0 | 1,415.4 | ||||||||||||
| Total expenses | 3,104.2 | 2,974.0 | 2,771.7 | ||||||||||||
| Operating income | 2,174.1 | 2,033.1 | 1,840.0 | ||||||||||||
| Other income/(expense), net | 43.9 | 15.1 | (15.4 | ) | |||||||||||
| Income before income taxes | 2,218.0 | 2,048.2 | 1,824.6 | ||||||||||||
| Income taxes | 527.6 | 490.9 | 431.8 | ||||||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | $ | 1,392.8 | |||||||||
| Other comprehensive income/(loss), net of tax | 14.8 | (26.0 | ) | (185.7 | ) | ||||||||||
| Comprehensive income | $ | 1,705.2 | $ | 1,531.3 | $ | 1,207.1 | |||||||||
| Basic earnings per share | $ | 4.69 | $ | 4.32 | $ | 3.86 | |||||||||
| Diluted earnings per share | $ | 4.67 | $ | 4.30 | $ | 3.84 | |||||||||
| Weighted-average common shares outstanding | 360.3 | 360.4 | 360.6 | ||||||||||||
| Weighted-average common shares outstanding, assuming dilution | 362.1 | 362.3 | 363.1 |
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
CONSOLIDATED BAL****ANCE SHEETS
In millions, except per share amounts
| As of May 31, | 2024 | 2023 | ||||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 1,468.9 | $ | 1,222.0 | ||||||
| Restricted cash | 47.8 | 49.8 | ||||||||
| Corporate investments | 33.9 | 373.4 | ||||||||
| Interest receivable | 23.3 | 24.4 | ||||||||
| Accounts receivable, net of allowance for credit losses | 1,059.6 | 873.3 | ||||||||
| PEO unbilled receivables, net of advance collections | 542.4 | 528.5 | ||||||||
| Prepaid income taxes | 47.5 | 48.1 | ||||||||
| Prepaid expenses and other current assets | 321.9 | 289.8 | ||||||||
| Current assets before funds held for clients | 3,545.3 | 3,409.3 | ||||||||
| Funds held for clients | 3,706.2 | 4,118.8 | ||||||||
| Total current assets | 7,251.5 | 7,528.1 | ||||||||
| Long-term corporate investments | 3.7 | 3.8 | ||||||||
| Property and equipment, net of accumulated depreciation | 411.7 | 396.3 | ||||||||
| Operating lease right-of-use assets, net of accumulated amortization | 46.9 | 61.5 | ||||||||
| Intangible assets, net of accumulated amortization | 194.5 | 187.4 | ||||||||
| Goodwill | 1,882.7 | 1,834.0 | ||||||||
| Long-term deferred costs | 477.1 | 470.1 | ||||||||
| Other long-term assets | 115.0 | 65.2 | ||||||||
| Total assets | $ | 10,383.1 | $ | 10,546.4 | ||||||
| Liabilities | ||||||||||
| Accounts payable | $ | 104.3 | $ | 84.7 | ||||||
| Accrued corporate compensation and related items | 135.0 | 209.9 | ||||||||
| Accrued worksite employee compensation and related items | 662.4 | 763.9 | ||||||||
| Short-term borrowings | 18.7 | 10.2 | ||||||||
| Deferred revenue | 50.2 | 47.3 | ||||||||
| Other current liabilities | 469.8 | 395.4 | ||||||||
| Current liabilities before client fund obligations | 1,440.4 | 1,511.4 | ||||||||
| Client fund obligations | 3,868.7 | 4,294.0 | ||||||||
| Total current liabilities | 5,309.1 | 5,805.4 | ||||||||
| Accrued income taxes | 102.6 | 83.0 | ||||||||
| Deferred income taxes | 86.0 | 112.1 | ||||||||
| Long-term borrowings, net of debt issuance costs | 798.6 | 798.2 | ||||||||
| Operating lease liabilities | 49.0 | 57.3 | ||||||||
| Other long-term liabilities | 236.8 | 197.2 | ||||||||
| Total liabilities | 6,582.1 | 7,053.2 | ||||||||
| Commitments and contingencies — Note Q | ||||||||||
| Stockholders’ equity | ||||||||||
| Common stock, $0.01 par value; Authorized: 600.0 shares; Issued and outstanding: 360.1 shares as of May 31, 2024 and 360.5 shares as of May 31, 2023 | 3.6 | 3.6 | ||||||||
| Additional paid-in capital | 1,729.5 | 1,626.4 | ||||||||
| Retained earnings | 2,213.0 | 2,023.1 | ||||||||
| Accumulated other comprehensive loss | (145.1 | ) | (159.9 | ) | ||||||
| Total stockholders’ equity | 3,801.0 | 3,493.2 | ||||||||
| Total liabilities and stockholders’ equity | $ | 10,383.1 | $ | 10,546.4 |
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF ST****OCKHOLDERS’ EQUITY
In millions, except per share amounts
| Accumulated | |||||||||||||||||||||||||||||
| Additional | other | ||||||||||||||||||||||||||||
| Common stock | paid-in | Retained | comprehensive | ||||||||||||||||||||||||||
| Shares | Amount | capital | earnings | income/(loss) | Total | ||||||||||||||||||||||||
| Balance as of May 31, 2021 | 359.8 | $ | 3.6 | $ | 1,446.7 | $ | 1,445.9 | $ | 51.8 | $ | 2,948.0 | ||||||||||||||||||
| Net income | — | — | — | 1,392.8 | — | 1,392.8 | |||||||||||||||||||||||
| Unrealized losses on securities, net of $53.1 million in tax benefit | — | — | — | — | (162.3 | ) | (162.3 | ) | |||||||||||||||||||||
| Reclassification adjustment for realized gains on securities, net of $0.1million in tax expense (1) | — | — | — | — | (0.1 | ) | (0.1 | ) | |||||||||||||||||||||
| Dividends declared ($2.77 per share) | — | — | — | (1,000.1 | ) | — | (1,000.1 | ) | |||||||||||||||||||||
| Repurchases of common shares (2) | (1.2 | ) | (0.0 | ) | (5.2 | ) | (140.0 | ) | — | (145.2 | ) | ||||||||||||||||||
| Stock-based compensation | — | — | 52.8 | — | — | 52.8 | |||||||||||||||||||||||
| Foreign currency translation adjustment(3) | — | — | — | — | (23.3 | ) | (23.3 | ) | |||||||||||||||||||||
| Activity related to equity-based plans | 1.3 | — | 51.6 | (29.0 | ) | — | 22.6 | ||||||||||||||||||||||
| Balance as of May 31, 2022 | 359.9 | 3.6 | 1,545.9 | 1,669.6 | **(**133.9 | ) | 3,085.2 | ||||||||||||||||||||||
| Net income | — | — | — | 1,557.3 | — | 1,557.3 | |||||||||||||||||||||||
| Unrealized losses on securities, net of $12.2 million in tax benefit | — | — | — | — | (36.6 | ) | (36.6 | ) | |||||||||||||||||||||
| Reclassification adjustment for realized losses on securities, net of $2.5million in tax benefit (1) | — | — | — | — | 7.4 | 7.4 | |||||||||||||||||||||||
| Dividends declared ($3.26 per share) | — | — | — | (1,175.5 | ) | — | (1,175.5 | ) | |||||||||||||||||||||
| Repurchases of common shares (2) | — | — | — | — | — | — | |||||||||||||||||||||||
| Stock-based compensation | — | — | 62.6 | — | — | 62.6 | |||||||||||||||||||||||
| Foreign currency translation adjustment(3) | — | — | — | — | 3.2 | 3.2 | |||||||||||||||||||||||
| Activity related to equity-based plans | 0.6 | 0.0 | 17.9 | (28.3 | ) | — | (10.4 | ) | |||||||||||||||||||||
| Balance as of May 31, 2023 | 360.5 | 3.6 | 1,626.4 | 2,023.1 | **(**159.9 | ) | 3,493.2 | ||||||||||||||||||||||
| Net income | — | — | — | 1,690.4 | — | 1,690.4 | |||||||||||||||||||||||
| Unrealized gains on securities, net of $2.6 million in tax expense | — | — | — | — | 7.6 | 7.6 | |||||||||||||||||||||||
| Reclassification adjustment for realized losses on securities, net of $0.7 million in tax benefit (1) | — | — | — | — | 2.0 | 2.0 | |||||||||||||||||||||||
| Dividends declared ($3.65 per share) | — | — | — | (1,315.4 | ) | — | (1,315.4 | ) | |||||||||||||||||||||
| Repurchases of common shares (2) | (1.5 | ) | (0.0 | ) | (6.2 | ) | (163.0 | ) | — | (169.2 | ) | ||||||||||||||||||
| Stock-based compensation | — | — | 61.1 | — | — | 61.1 | |||||||||||||||||||||||
| Foreign currency translation adjustment(3) | — | — | — | — | 5.2 | 5.2 | |||||||||||||||||||||||
| Activity related to equity-based plans | 1.1 | 0.0 | 48.2 | (22.1 | ) | — | 26.1 | ||||||||||||||||||||||
| Balance as of May 31, 2024 | 360.1 | $ | 3.6 | $ | 1,729.5 | $ | 2,213.0 | $ | **(**145.1 | ) | $ | 3,801.0 |
(1)
Reclassification adjustments out of accumulated other comprehensive income/(loss) for realized (losses)/gains, net of tax, on the sale of available-for-sale (“AFS”) securities are reflected in interest on funds held for clients and other income/(expense), net on the Consolidated Statements of Income and Comprehensive Income.
(2)
The Company maintains a program to repurchase up to $400.0 million of its common stock, with authorization expiring May 31, 2027. The Company maintained a separate program to repurchase up to $400.0 million of its common stock which expired on January 31, 2024. The purpose of these programs is to manage common stock dilution. All shares of common stock repurchased were retired.
(3)
Foreign currency translation adjustment represented a cumulative loss of $24.4 million, $29.6 million, $32.8 million, and $9.5 million, respectively of the accumulated other comprehensive income/(loss) as of May 31, 2024, 2023, 2022, and 2021. There is no tax impact on our foreign currency translation.
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
CONSOLIDATED STATEMENT****S OF CASH FLOWS
In millions
| Year ended May 31, | 2024 | 2023(1) | 2022(1) | ||||||||||||
| Operating activities | |||||||||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | $ | 1,392.8 | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
| Depreciation and amortization | 176.5 | 176.6 | 191.8 | ||||||||||||
| Amortization of premiums and discounts on AFS securities, net | (7.0 | ) | 18.2 | 28.9 | |||||||||||
| Amortization of deferred contract costs | 231.7 | 219.1 | 202.1 | ||||||||||||
| Stock-based compensation costs | 61.1 | 62.6 | 52.8 | ||||||||||||
| (Benefit from)/provision for deferred income taxes | (29.8 | ) | (44.0 | ) | 2.3 | ||||||||||
| Provision for credit losses | 19.8 | 17.7 | 10.5 | ||||||||||||
| Net realized losses/(gains) on sales of AFS securities | 2.6 | 9.8 | (0.2 | ) | |||||||||||
| Net realized losses on disposal of assets | 32.8 | 1.3 | 0.4 | ||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||
| Interest receivable | 1.1 | (2.1 | ) | 2.1 | |||||||||||
| Accounts receivable and PEO unbilled receivables, net | 113.0 | (135.7 | ) | (154.1 | ) | ||||||||||
| Prepaid expenses and other current assets | (25.2 | ) | (17.8 | ) | (7.7 | ) | |||||||||
| Accounts payable and other current liabilities | (127.0 | ) | 86.3 | 113.1 | |||||||||||
| Deferred costs | (244.9 | ) | (269.4 | ) | (267.1 | ) | |||||||||
| Net change in other long-term assets and liabilities | 6.1 | 30.6 | 25.9 | ||||||||||||
| Net change in operating lease right-of-use assets and liabilities | (3.5 | ) | (4.3 | ) | (3.9 | ) | |||||||||
| Net cash provided by operating activities | 1,897.7 | 1,706.2 | 1,589.7 | ||||||||||||
| Investing activities | |||||||||||||||
| Purchases of AFS securities | (6,868.5 | ) | (14,585.3 | ) | (17,807.7 | ) | |||||||||
| Proceeds from sales and maturities of AFS securities | 7,161.2 | 14,943.2 | 16,554.9 | ||||||||||||
| Net change in purchased receivables | (153.8 | ) | (6.8 | ) | (84.2 | ) | |||||||||
| Purchases of property and equipment | (161.4 | ) | (143.0 | ) | (133.8 | ) | |||||||||
| Proceeds from sale of property and equipment | — | 16.7 | 1.2 | ||||||||||||
| Acquisition of businesses, net of cash acquired | (208.3 | ) | (2.7 | ) | (24.9 | ) | |||||||||
| Purchases of other assets | (30.1 | ) | (10.4 | ) | (10.6 | ) | |||||||||
| Net cash (used in)/provided by investing activities | **(**260.9 | ) | 211.7 | **(**1,505.1 | ) | ||||||||||
| Financing activities | |||||||||||||||
| Net change in client fund obligations | (425.3 | ) | 474.8 | 143.2 | |||||||||||
| Net proceeds from short-term borrowings | 9.0 | 2.0 | 1.3 | ||||||||||||
| Dividends paid | (1,315.3 | ) | (1,175.0 | ) | (999.6 | ) | |||||||||
| Repurchases of common shares | (169.2 | ) | — | (145.2 | ) | ||||||||||
| Contingent consideration paid for acquisitions | — | (2.8 | ) | (1.6 | ) | ||||||||||
| Activity related to equity-based plans | 26.1 | (10.4 | ) | 22.6 | |||||||||||
| Net cash used in financing activities | **(**1,874.7 | ) | **(**711.4 | ) | **(**979.3 | ) | |||||||||
| Net change in cash, restricted cash, and equivalents | **(**237.9 | ) | 1,206.5 | **(**894.7 | ) | ||||||||||
| Cash, restricted cash, and equivalents, beginning of fiscal year | 2,134.9 | 928.4 | 1,823.1 | ||||||||||||
| Cash, restricted cash, and equivalents, end of fiscal year | $ | 1,897.0 | $ | 2,134.9 | $ | 928.4 | |||||||||
| Reconciliation of cash, restricted cash, and equivalents | |||||||||||||||
| Cash and cash equivalents | $ | 1,468.9 | $ | 1,222.0 | $ | 370.0 | |||||||||
| Restricted cash | 47.8 | 49.8 | 75.8 | ||||||||||||
| Restricted cash and restricted cash equivalents included in funds held for clients | 380.3 | 863.1 | 482.6 | ||||||||||||
| Total cash, restricted cash, and equivalents | $ | 1,897.0 | $ | 2,134.9 | $ | 928.4 |
(1)
The consolidated statement of cash flows for the fiscal years ended May 31, 2023 and May 31, 2022 include revisions to previously reported amounts related to the presentation of cash flows associated with short-term receivables purchased from the Company’s clients under non-recourse arrangements, net of funding reserves. See Note A for further discussion on the revision.
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
NOTES TO CONSOLIDATED FIN****ANCIAL 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 an industry-leading human capital management (“HCM”) company delivering a full suite of technology and advisory services in human resources (“HR”), employee benefit solutions, insurance and payroll for small- to medium-sized businesses and their employees in the United States (“U.S.”) and parts of Europe. The Company also has operations in India.
Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the Company’s revenue is generated within the U.S. Approximately 1% of the Company’s total revenue was generated within Europe for each of the fiscal years ended May 31, 2024 (“fiscal 2024”), May 31, 2023 (“fiscal 2023”), and May 31, 2022 (“fiscal 2022”). Long-lived assets in Europe were approximately 6% of total long-lived assets of the Company as of May 31, 2024 and 2023. Long-lived assets in India were less than 1% of total long-lived assets of the Company as of May 31, 2024 and 2023.
The Company's offers a full range of integrated HCM solutions covering the employee life cycle for businesses and their employees. Clients may choose from a breadth of solutions that also allow integration with some of the most popular HR, accounting, point-of-sale, and productivity applications on the market today. 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 by utilizing its proprietary, robust, software as a service (“SaaS”) Paychex Flex® platform and the Company’s SurePayroll® SaaS-based solutions. Both solutions allow users to process payroll when they want, how they want, and on any type of device (desktop, tablet, and mobile phone). Paychex’s medium-sized clients generally have more complex payroll and employee benefit needs and can opt for an integrated suite of HCM solutions, which allows them to choose the services and software that will meet the needs of their businesses.
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, professional employer organization (“PEO”) 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 the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain disclosures are reported as zero balances due to rounding.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated earnings.
Revision to previously issued financial statements: The consolidated statement of cash flows for fiscal years 2023 and 2022 includes revisions to previously reported amounts related to the presentation of the cash flows associated with short-term receivables purchased from the Company’s clients under non-recourse arrangements. The revision increased net cash provided by operating activities and decreased net cash provided by investing activities by $6.8 million and $84.2 million, respectively. Management concluded that this revision was not material to the consolidated financial statements of any previously filed annual or interim periods.
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. $171.7 million and $291.3 million collected from PEO clients are included in cash and cash equivalents on the Company’s Consolidated Balance Sheets as of May 31, 2024 and 2023, 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 to secure commitments for certain workers’ compensation insurance policies.
Accounts receivable, net of allowance for credit losses: Accounts receivable balances are shown on the Consolidated Balance Sheets net of the allowance for credit losses of $21.3 million and $20.5 million as of May 31, 2024 and 2023, respectively. These balances include trade receivables for services provided to clients and receivables purchased from the Company's clients under non-recourse arrangements. Trade receivables were $141.3 million and $287.0 million as of May 31, 2024 and 2023, respectively. Purchased receivables were $939.6 million and $606.8 million as of May 31, 2024 and 2023, respectively.
The Company is exposed to credit losses through the sale of its solutions and support services, payment of client obligations, and collection of purchased receivables. To mitigate this credit risk, the Company has multiple programs in place to assess and continuously monitor each client’s ability to pay for these solutions and support services. Credit monitoring programs include, but are not limited to, new client credit reviews, establishing appropriate credit limits, monitoring of credit distressed clients, and early electronic wire and collection procedures. The Company also considers contract terms and conditions, client business type or strategy and may require collateralized asset support or prepayment to mitigate credit risk.
Accounts receivable are written off and charged against the allowance for credit losses when the Company has exhausted all collection efforts without success. The Company estimates its allowance for credit losses based on historical loss activity adjusted for current economic conditions and reasonable and supportable forecast factors, when applicable. The provision for the allowance for credit losses and accounts written off were not material for the fiscal years ended May 31, 2024, 2023 and 2022, respectively. No single client had a material impact on total accounts receivable as of May 31, 2024 or 2023. No single client had a material impact on service revenue or results of operations for the fiscal years ended May 31, 2024, 2023 and 2022.
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 applicable federal and 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, 2024 and 2023, advance collections were $0.7 million and $12.5 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 AFS 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 or loss in the Consolidated Statements of Income and Comprehensive Income. Realized gains and losses on the sale of AFS securities are determined by specific identification of the cost basis of each security. On the Consolidated Statements of Income and Comprehensive Income, realized gains and losses from the funds held for clients portfolio and corporate investments portfolio are included in interest on funds held for clients and other income/(expense), net, respectively.
Concentrations: Substantially all 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 the Company’s deliverable 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.
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 | 10 to 35 years or the remaining life, whichever is shorter | |
| Data processing equipment | 3 to 5 years | |
| Furniture, fixtures, and equipment | 2 to 7 years | |
| Leasehold improvements | 10 years or the life of the lease, whichever is shorter | |
| Software | 3 to 12 years |
Normal and recurring repairs and maintenance costs are charged to expense as incurred. The Company reviews the carrying value of property and equipment for impairment when events or 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 3 to 5 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 associated with preliminary project stage activities, training, maintenance, and other post-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: 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. During fiscal 2024 and fiscal 2023, a qualitative analysis was performed on all reporting units to determine if it is more-likely-than-not that the fair value of the reporting units had declined below their carrying values. During fiscal 2022, a qualitative assessment was performed for the Company's Paychex, Inc., excluding Purchased Receivables, reporting unit, and a quantitative assessment was performed on the Purchased Receivable reporting unit. 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 fiscal 2024, fiscal 2023, or fiscal 2022. 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 3 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, using qualitative assessments, there is no impairment of intangible assets with indefinite useful lives for fiscal 2024, fiscal 2023, or fiscal 2022.
Impairment of Long-Lived Assets: Long-lived assets, including intangible assets with finite lives and operating lease right-of-use (“ROU”) assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. The recoverability of asset groups 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 group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value. The Company has determined that there was no impairment of long-lived assets for fiscal 2024, fiscal 2023, or fiscal 2022.
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 the 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 fiscal 2024, fiscal 2023, or fiscal 2022.
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 when control of the contracted services is transferred to the Company's 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 revenues are recognized when commissions are earned on premiums billed and collected. Fees earned for the purchase of client's accounts receivable under non-recourse arrangements 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 40 to 60 days for clients in the temporary staffing agency market and approximately 5 to 15 days for other clients. 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 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 Company's 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 and employee payment services and invested until remittance to the applicable tax or regulatory agencies or client employees. 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: 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 has 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 fiscal 2024, fiscal 2023, or fiscal 2022.
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 solutions, 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 administrative expenses represent labor-related costs, including amortization of deferred sales commissions and bonuses, corporate asset depreciation and amortization, marketing, and other general and administrative expenses incurred by the Company.
PEO insurance reserves: As part of its PEO solution, 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 determination of estimated ultimate losses by the Company’s independent actuary are based on accepted actuarial methods and assumptions. The estimated ultimate losses are primarily based upon 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 the Company's workers’ compensation claims cost estimates. For fiscal 2024, the Company has an aggregate maximum liability of $1.0 million for claims exceeding $1.0 million, and once met, the maximum individual claims liability is $1.0 million. For Fiscal 2023, the Company has an aggregate maximum liability of $2.0 million for claims exceeding $1.0 million, and once met, the maximum individual claims liability is $1.0 million.
As of May 31, 2024 and 2023, the Company had recorded current liabilities of $74.1 million and $64.3 million, respectively, and long-term liabilities of $144.5 million and $131.5 million, respectively, on its Consolidated Balance Sheets for workers’ compensation insurance reserves. The amounts were recorded in the other current liabilities and other long-term liabilities sections, respectively, of the Consolidated Balance Sheets.
With respect to PEO health insurance, the Company offers various health insurance plans that take the form of either fully insured guaranteed cost plans or fully insured insurance arrangements where the Company retains risk. A reserve for insurance arrangements where the Company retains risk is established to provide for the payment of claims in accordance with the Company’s service contract with the carrier. The claims reserve includes estimates for reported losses, plus amounts for those claims incurred but not reported, and estimates of certain expenses associated with processing and settling the claims. The Company’s maximum individual claims liability was $0.5 million under its policies during both fiscal 2024 and fiscal 2023. Amounts accrued related to the health insurance and dental and vision plan reserves were $50.6 million and $47.0 million as of May 31, 2024 and 2023, respectively. These amounts are included in other 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 accepted actuarial methods and assumptions. These reserves are subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present estimates, particularly with workers’ compensation insurance where those payments may not occur until well into the future. The Company regularly reviews the adequacy of its estimated insurance reserves. Adjustments to previously established reserves are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant, reflecting any combination of new and adverse or favorable trends. Adjustments to previously established reserves were not material for fiscal 2024, fiscal 2023, or fiscal 2022.
Leases: The Company accounts for its leases under ASC Topic 842, "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 whose term is greater than one year, the Company evaluates whether it should be classified as an operating or a finance lease. Currently, all the Company’s leases have been classified as operating leases. Upon modification of a 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.
As an implicit discount rate is typically 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, on the Company’s Consolidated Balance Sheets.
An 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 ROU 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 2024, fiscal 2023 or fiscal 2022.
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.
Income taxes: The Company accounts for deferred taxes by recognizing 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. 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: Effective June 1, 2023, the Company adopted Accounting Standards Update (“ASU”) No. 2021-08 “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which did not have a material impact on its consolidated financial statements.
Recently issued accounting pronouncements: In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. The requirements are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and are required to be applied retrospectively. This ASU is applicable to the Company’s Annual Report on Form 10-K for the fiscal year ending May 31, 2025, and subsequent interim periods, with early application permitted. The requirements of this ASU are disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its reportable segment disclosures.
In December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. This ASU is effective for annual periods beginning after December 15, 2024, and is applicable to the Company’s fiscal year beginning June 1, 2025, with early application permitted. The transition method is prospective with the retrospective method permitted. The requirements of this ASU are disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its income tax disclosures.
Note B — Service Revenue
Service revenue is primarily attributable to fees for providing services to the Company’s clients and is recognized when control of the contracted services is transferred to its clients, in an amount that reflects the consideration it expects to receive in exchange for such services. Insurance Solutions revenue is commissions earned on premiums collected and remitted to insurance carriers. The Company’s contracts generally do not contain specified contract periods and may be terminated by either party with 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 integrated HCM and HR outsourcing solutions. Clients can select services on an á la carte basis or as part of various solution 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.
PEO and Insurance Solutions Revenue
PEO solutions are sold through the Company’s registered and licensed subsidiaries and offer businesses HCM and HR outsourcing solutions. The Company serves as a co-employer of its clients’ employees, offers health insurance coverage to client employees, and assumes the risks and rewards of workers’ compensation insurance and certain health insurance offerings. PEO Solutions revenue is recognized over time as the services are performed and the 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 health insurance premiums on guaranteed cost benefit plans. For workers’ compensation and health insurance plans where the Company retains risk, revenues and costs are recorded on a gross basis.
PEO pass-through costs netted within the PEO and Insurance Solutions revenue are as follows:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Payroll wages and payroll taxes | $ | 27,381.5 | $ | 26,025.3 | $ | 24,209.3 | |||||||||
| State unemployment insurance (included in payroll wages and payroll taxes) | $ | 151.8 | $ | 138.2 | $ | 139.1 | |||||||||
| Guaranteed cost benefit plans | $ | 660.3 | $ | 656.3 | $ | 641.4 |
Insurance solutions are sold through the Company’s licensed insurance agency, Paychex Insurance Agency, Inc., which provides insurance through a variety of carriers, allowing companies to expand their employee benefit offerings at an affordable cost. Insurance offerings include property and casualty coverage such as workers’ compensation, business-owner policies, commercial auto, cybersecurity, and health and benefits coverage, including health, dental, vision, and life. Insurance Solutions revenue reflects commissions earned on remitted 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 them as future services are provided, over approximately three years to four years.
Changes in deferred revenue related to material rights that exceed one year were as follows:
| Year ended May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Balance, beginning of period | $ | 62.0 | $ | 48.9 | ||||||
| Deferral of revenue | 46.7 | 42.1 | ||||||||
| Recognition of unearned revenue | (33.8 | ) | (29.0 | ) | ||||||
| Balance, end of period | $ | 74.9 | $ | 62.0 |
Deferred revenue related to material rights is reported in the deferred revenue and other long-term liabilities line items on the Company’s Consolidated Balance Sheets. As of May 31, 2024, the Company expects to recognize $32.5 million of deferred revenue related to material rights during its fiscal year ending May 31, 2025 and $42.4 million of 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 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 fiscal 2024, fiscal 2023, or fiscal 2022.
Changes in deferred costs to obtain and fulfill contracts were as follows:
| Costs to fulfill contracts: | ||||||||||
| Year ended May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Balance, beginning of period | $ | 75.3 | $ | 72.3 | ||||||
| Capitalization of costs | 27.8 | 28.9 | ||||||||
| Amortization | (26.5 | ) | (25.9 | ) | ||||||
| Balance, end of period | $ | 76.6 | $ | 75.3 |
| Costs to obtain contracts: | ||||||||||
| Year ended May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Balance, beginning of period | $ | 597.5 | $ | 550.2 | ||||||
| Capitalization of costs | 217.1 | 240.5 | ||||||||
| Amortization | (205.2 | ) | (193.2 | ) | ||||||
| Balance, end of period | $ | 609.4 | $ | 597.5 |
Note C — Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
| Year ended May 31, | |||||||||||||||
| In millions, except per share amounts | 2024 | 2023 | 2022 | ||||||||||||
| Basic earnings per share: | |||||||||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | $ | 1,392.8 | |||||||||
| Weighted-average common shares outstanding | 360.3 | 360.4 | 360.6 | ||||||||||||
| Basic earnings per share | $ | 4.69 | $ | 4.32 | $ | 3.86 | |||||||||
| Diluted earnings per share: | |||||||||||||||
| Net income | $ | 1,690.4 | $ | 1,557.3 | $ | 1,392.8 | |||||||||
| Weighted-average common shares outstanding | 360.3 | 360.4 | 360.6 | ||||||||||||
| Dilutive effect of common share equivalents | 1.8 | 1.9 | 2.5 | ||||||||||||
| Weighted-average common shares outstanding, assuming dilution | 362.1 | 362.3 | 363.1 | ||||||||||||
| Diluted earnings per share | $ | 4.67 | $ | 4.30 | $ | 3.84 | |||||||||
| Weighted-average anti-dilutive common share equivalents | 0.6 | 0.7 | 0.2 |
Weighted-average common share equivalents that had an anti-dilutive impact are excluded from the computation of diluted earnings per share.
Note D — Business Combinations
Effective July 31, 2023, substantially all of the net assets of Alterna Capital Solutions LLC (“Alterna”), were acquired by a wholly owned subsidiary of the Company. Alterna purchases outstanding accounts receivable of their customers under non-recourse arrangements. This acquisition allows the Company to increase and diversify its portfolio of solutions and support serving small- to medium-sized businesses. The acquisition consideration was comprised of a base purchase price of $95.1 million
plus immediate settlement of debt totaling $128.9 million, net of $15.7 million in cash and restricted cash acquired. Accounts receivable balances acquired, net of allowance for doubtful accounts, and less amounts due to clients related to funding arrangements, totaled $146.1 million. Management determined that intangible assets related to the client list were $18.9 million to be amortized utilizing an accelerated method of amortization over a weighted average of 8 years. Goodwill in the amount of $46.7 million was recorded as a result of the acquisition, which is tax-deductible. The Company finalized the purchase price allocation for the acquisition of Alterna as of November 30, 2023. The financial results of Alterna are included in the Company’s consolidated financial statements from its respective date of acquisition. This acquisition was not material to the Company’s results of operations, financial position, or cash flows.
Note E — Other Income/(Expense), Net
Other income/(expense), net, consisted of the following items:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Interest income on corporate investments | $ | 82.7 | $ | 49.1 | $ | 2.9 | |||||||||
| Interest expense | (37.3 | ) | (36.7 | ) | (36.6 | ) | |||||||||
| Other | (1.5 | ) | 2.7 | 18.3 | |||||||||||
| Other income/(expense), net | $ | 43.9 | $ | 15.1 | $ | **(**15.4 | ) |
Note F — Stock-Based Compensation Plans
The Paychex, Inc. 2002 Stock Incentive Plan, as last amended and restated effective October 15, 2020 (the “2002 Plan”), authorizes grants of up to 46.5 million shares of the Company’s common stock. As of May 31, 2024, there were 13.5 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 $61.1 million, $62.6 million, and $52.8 million for fiscal years 2024, 2023, and 2022, respectively. Related income tax benefits recognized were $12.7 million, $12.1 million, and $9.8 million for the respective fiscal years.
As of May 31, 2024, the total unrecognized compensation cost related to all unvested stock-based awards was $92.0 million and is expected to be recognized over a weighted-average period of 2.6 years.
Black-Scholes fair value assumptions: The fair value of 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:
| Year ended May 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Risk-free interest rate | 4.1 | % | 3.2 | % | 1.2 | % | |||||||||||
| Dividend yield | 3.1 | % | 2.6 | % | 2.9 | % | |||||||||||
| Volatility factor | 0.25 | 0.27 | 0.23 | ||||||||||||||
| Expected option life in years | 6.6 | 6.6 | 6.6 | ||||||||||||||
| Weighted-average grant-date fair value of stock options granted (per share) | $ | 27.21 | $ | 27.58 | $ | 17.47 |
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.
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 of Directors (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 2024:
| Weighted- | ||||||||||||||||||
| Weighted- | average | |||||||||||||||||
| Shares | average | remaining | Aggregate | |||||||||||||||
| subject | exercise price | contractual | intrinsic | |||||||||||||||
| In millions, except per share amounts | to options | per share | term (years) | value**(1)** | ||||||||||||||
| Outstanding as of May 31, 2023 | 3.3 | $ | 74.09 | |||||||||||||||
| Granted | 0.4 | $ | 120.76 | |||||||||||||||
| Exercised | (0.6 | ) | $ | 63.49 | ||||||||||||||
| Forfeited | (0.1 | ) | $ | 118.35 | ||||||||||||||
| Outstanding as of May 31, 2024 | 3.0 | $ | 80.09 | 5.0 | $ | 119.1 | ||||||||||||
| Exercisable as of May 31, 2024 | 2.5 | $ | 72.45 | 4.3 | $ | 117.6 |
(1)
Total shares valued at the market price of the underlying stock as of May 31, 2024 less the exercise price.
Other information pertaining to stock option grants is as follows:
| Year ended May 31, | |||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||
| Total intrinsic value of stock options exercised | $ | 35.1 | $ | 10.3 | $ | 44.3 | |||||||
| Total grant-date fair value of stock options vested | $ | 7.5 | $ | 7.1 | $ | 6.4 |
Restricted Stock Units (“RSUs”): The Board grants RSUs to certain executive and non-executive employees and outside directors. An RSU is an agreement to issue shares at the time of vesting with no associated exercise cost for the recipient. 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.
Time-based RSUs: Time-based RSUs granted to executives vest one-third per annum over three years. Time-based RSUs granted to non-executives, during fiscal 2024 and fiscal 2023, vest on a graded basis over a four- or five-year period. Time-based RSUs granted to non-executives, prior to fiscal 2023, vest one-fifth per annum over five years. Time-based RSUs 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 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.
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 2024:
| Weighted- | Weighted- | |||||||||||||||||
| average | average | |||||||||||||||||
| Time- | grant-date | Performance- | grant-date | |||||||||||||||
| based | fair value | based | fair value | |||||||||||||||
| In millions, except per share amounts | RSUs | per share | RSUs | per share | ||||||||||||||
| Nonvested as of May 31, 2023 | 1.4 | $ | 102.13 | 0.1 | $ | 107.88 | ||||||||||||
| Granted (1) | 0.5 | $ | 114.95 | 0.2 | $ | 114.23 | ||||||||||||
| Vested | (0.5 | ) | $ | 90.99 | (0.0 | ) | $ | 107.40 | ||||||||||
| Forfeited | (0.1 | ) | $ | 109.02 | (0.0 | ) | $ | 112.01 | ||||||||||
| Nonvested as of May 31, 2024 | 1.3 | $ | 110.51 | 0.3 | $ | 110.26 |
(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:
| Year ended May 31, | |||||||||||||||
| In millions, except per share amounts | 2024 | 2023 | 2022 | ||||||||||||
| Time-based RSUs: | |||||||||||||||
| Weighted-average grant-date fair value per share of RSUs granted | $ | 114.95 | $ | 127.75 | $ | 109.81 | |||||||||
| Weighted-average remaining vesting period (years)(1) | 1.4 | 1.5 | 1.5 | ||||||||||||
| Total intrinsic value of RSUs vested | $ | 55.9 | $ | 58.2 | $ | 54.7 | |||||||||
| Aggregate intrinsic value of nonvested RSUs(2) | $ | 152.5 | $ | 141.8 | $ | 165.2 | |||||||||
| Total grant-date fair value of RSUs vested | $ | 41.2 | $ | 32.7 | $ | 30.0 | |||||||||
| Performance-based RSUs: | |||||||||||||||
| Weighted-average grant-date fair value per share of RSUs granted | $ | 114.23 | $ | 108.31 | $ | 103.59 | |||||||||
| Weighted-average remaining vesting period (years)(1) | 1.1 | 1.8 | 1.0 | ||||||||||||
| Total intrinsic value of RSUs vested | $ | 0.4 | $ | 7.8 | $ | — | |||||||||
| Aggregate intrinsic value of nonvested RSUs(2) | $ | 30.8 | $ | 15.7 | $ | 14.7 | |||||||||
| Total grant-date fair value of RSUs vested | $ | 0.4 | $ | 5.4 | $ | — |
(1)
Weighting is based on the number of unvested share units vesting in each future vesting tranche.
(2)
Based on the market price of the underlying common stock as of May 31, 2024, 2023 and 2022.
Restricted stock awards ("RSAs"): The Board approved grants of RSAs to the Company’s executives and outside directors prior to fiscal 2023. All shares underlying RSAs are restricted in that they are not transferable until they vest. Recipients of the RSAs 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 RSAs, and the dividends accrued thereon, when applicable, will be forfeited and returned to the Company.
Time-based RSAs: Time-based RSAs granted to executives vest one-third per annum. Time-based RSAs 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 RSAs is equal to the closing market price of the underlying common stock as of the date of grant.
Performance-based RSAs: Performance-based RSAs 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 RSAs earned are then subject to a one-year service period. Performance-based RSAs do not earn dividend equivalents during the performance period. The fair value of performance-based RSAs 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 RSA activity for fiscal 2024:
| Weighted- | Weighted- | |||||||||||||||||
| average | average | |||||||||||||||||
| grant-date | Performance- | grant-date | ||||||||||||||||
| Time-based | fair value | based | fair value | |||||||||||||||
| In millions, except per share amounts | RSAs | per share | RSAs | per share | ||||||||||||||
| Nonvested as of May 31, 2023 | 0.1 | $ | 95.10 | 0.1 | $ | 107.40 | ||||||||||||
| Vested | (0.1 | ) | $ | 88.11 | — | $ | — | |||||||||||
| Forfeited | (0.0 | ) | $ | 114.15 | (0.0 | ) | $ | 107.40 | ||||||||||
| Nonvested as of May 31, 2024 | 0.0 | $ | 114.22 | 0.1 | $ | 107.40 |
No RSAs were granted during fiscal 2024 or fiscal 2023.
Other information pertaining to RSAs is as follows:
| Year ended May 31, | |||||||||||||||
| In millions, except per share amounts | 2024 | 2023 | 2022 | ||||||||||||
| Weighted-average grant-date fair value per share of time-based RSAs granted | $ | — | $ | — | $ | 114.21 | |||||||||
| Total grant-date fair value of time-based RSAs vested | $ | 3.1 | $ | 4.3 | $ | 3.8 | |||||||||
| Weighted-average grant-date fair value per share of performance-based RSAs granted | $ | — | $ | — | $ | 103.97 | |||||||||
| Total grant-date fair value of performance-based restricted RSAs vested | $ | — | $ | 3.7 | $ | 7.2 |
Long-term Incentive Plan (“LTIP”): In July 2016, the Board approved an LTIP award comprised of both performance-based non-qualified stock options and performance-based RSAs. 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 RSAs earned were based on achievement against pre-established targets for fiscal 2020, which vested in fiscal 2021.
The following table summarizes LTIP performance-based stock option activity for fiscal 2024:
| Weighted- | ||||||||||||||||||
| Weighted- | average | |||||||||||||||||
| Shares | average | remaining | Aggregate | |||||||||||||||
| subject | exercise price | contractual | intrinsic | |||||||||||||||
| In millions, except per share amounts | to options | per share | term (years) | value**(1)** | ||||||||||||||
| Outstanding as of May 31, 2023 | 0.4 | $ | 60.51 | |||||||||||||||
| Exercised | (0.1 | ) | $ | 58.98 | ||||||||||||||
| Outstanding as of May 31, 2024 | 0.3 | $ | 60.86 | 2.1 | $ | 20.9 | ||||||||||||
| Exercisable as of May 31, 2024 | 0.3 | $ | 60.86 | 2.1 | $ | 20.9 |
(1)
Shares valued at the market price of the underlying stock as of May 31, 2024 less the exercise price.
Other information pertaining to LTIP performance-based stock options is as follows:
| Year ended May 31, | |||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||
| Total intrinsic value of stock options exercised | $ | 5.2 | $ | 0.7 | $ | 16.0 |
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 2024, 2023, and 2022 the discount was set at 5% of the market price. 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 2024, 2023, or 2022 related to the plan.
Note G — Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments are as follows:
| May 31, 2024 | ||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||||||
| In millions | cost | gains | losses | value | ||||||||||||||||
| Type of issue: | ||||||||||||||||||||
| Funds held for clients' money market securities and other restricted cash equivalents | $ | 380.3 | $ | — | $ | — | $ | 380.3 | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | 135.7 | 0.1 | (1.1 | ) | 134.7 | |||||||||||||||
| Corporate bonds | 1,400.3 | 1.3 | (32.8 | ) | 1,368.8 | |||||||||||||||
| Municipal bonds | 1,060.1 | 0.2 | (86.9 | ) | 973.4 | |||||||||||||||
| U.S. government agency and treasury securities | 896.0 | 0.1 | (43.4 | ) | 852.7 | |||||||||||||||
| Variable rate demand notes | — | — | — | — | ||||||||||||||||
| Total AFS securities | 3,492.1 | 1.7 | (164.2 | ) | 3,329.6 | |||||||||||||||
| Other | 32.3 | 3.2 | (1.6 | ) | 33.9 | |||||||||||||||
| Total funds held for clients and corporate investments | $ | 3,904.7 | $ | 4.9 | $ | **(**165.8 | ) | $ | 3,743.8 |
| May 31, 2023 | ||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||||||
| In millions | cost | gains | losses | value | ||||||||||||||||
| Type of issue: | ||||||||||||||||||||
| Funds held for clients' money market securities and other restricted cash equivalents | $ | 863.1 | $ | — | $ | — | $ | 863.1 | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | 88.1 | — | (1.4 | ) | 86.7 | |||||||||||||||
| Corporate bonds | 1,468.3 | 3.7 | (31.1 | ) | 1,440.9 | |||||||||||||||
| Municipal bonds | 1,091.3 | 0.1 | (105.3 | ) | 986.1 | |||||||||||||||
| U.S. government agency and treasury securities | 788.1 | 0.3 | (41.6 | ) | 746.8 | |||||||||||||||
| Variable rate demand notes | 344.1 | — | — | 344.1 | ||||||||||||||||
| Total AFS securities | 3,779.9 | 4.1 | (179.4 | ) | 3,604.6 | |||||||||||||||
| Other | 30.1 | 1.1 | (2.9 | ) | 28.3 | |||||||||||||||
| Total funds held for clients and corporate investments | $ | 4,673.1 | $ | 5.2 | $ | **(**182.3 | ) | $ | 4,496.0 |
Included in funds held for clients’ money market securities and other restricted cash equivalents as of May 31, 2024 were bank demand deposit accounts and money market funds.
Included in asset-backed securities as of May 31, 2024 were investment-grade securities primarily collateralized by fixed-rate auto loans and credit card receivables and all have credit ratings of AAA. The primary risk associated with these securities is the collection of the underlying receivables. Collateral on these asset-backed securities has performed as expected through May 31, 2024.
Included in corporate bonds as of May 31, 2024 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 1, 2024 through September 15, 2029.
Included in municipal bonds as of May 31, 2024 were general obligation bonds and revenue bonds carrying credit ratings of AA or better and have maturities ranging from June 1, 2024 through October 1, 2031.
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:
| May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Funds held for clients | $ | 3,706.2 | $ | 4,118.8 | ||||||
| Corporate investments | 33.9 | 373.4 | ||||||||
| Long-term corporate investments | 3.7 | 3.8 | ||||||||
| Total funds held for clients and corporate investments | $ | 3,743.8 | $ | 4,496.0 |
Funds held for clients’ money market securities and other restricted cash equivalents is collected from clients before due dates for payroll tax administration services and employee payment services and is invested until remitted to the applicable tax or regulatory agencies or client employees. Based upon the Company’s intent and its contractual obligation to clients, these funds are considered restricted until they are remitted to fund these client obligations.
The Company’s AFS securities reflected net unrealized losses of $162.5 million and $175.3 million as of May 31, 2024 and May 31, 2023. Included in the net unrealized losses as of May 31, 2024 and May 31, 2023 were 957 and 967 AFS securities in an unrealized loss position, representing approximately 95% and 88% of the total securities held, respectively. AFS securities in an unrealized loss position for which a credit loss has not been recognized were as follows:
| May 31, 2024 | ||||||||||||||||||||||||
| Securities in an unrealized loss position for less than twelve months | Securities in an unrealized loss position for more than twelve months | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| unrealized | Fair | unrealized | Fair | unrealized | Fair | |||||||||||||||||||
| In millions | losses | value | losses | value | losses | value | ||||||||||||||||||
| Type of issue: | ||||||||||||||||||||||||
| Asset-backed securities | $ | (0.4 | ) | $ | 77.4 | $ | (0.7 | ) | $ | 43.0 | $ | (1.1 | ) | $ | 120.4 | |||||||||
| Corporate bonds | (8.4 | ) | 620.8 | (24.4 | ) | 647.8 | (32.8 | ) | 1,268.6 | |||||||||||||||
| Municipal bonds | (8.0 | ) | 102.5 | (78.9 | ) | 864.7 | (86.9 | ) | 967.2 | |||||||||||||||
| U.S. government agency and treasury securities | (6.2 | ) | 268.2 | (37.2 | ) | 547.2 | (43.4 | ) | 815.4 | |||||||||||||||
| Total | $ | **(**23.0 | ) | $ | 1,068.9 | $ | **(**141.2 | ) | $ | 2,102.7 | $ | **(**164.2 | ) | $ | 3,171.6 |
| May 31, 2023 | ||||||||||||||||||||||||
| Securities in an unrealized loss position for less than twelve months | Securities in an unrealized loss position for more than twelve months | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| unrealized | Fair | unrealized | Fair | unrealized | Fair | |||||||||||||||||||
| In millions | losses | value | losses | value | losses | value | ||||||||||||||||||
| Type of issue: | ||||||||||||||||||||||||
| Asset-backed securities | $ | (0.1 | ) | $ | 54.2 | $ | (1.3 | ) | $ | 23.3 | $ | (1.4 | ) | $ | 77.5 | |||||||||
| Corporate bonds | (5.9 | ) | 652.0 | (25.2 | ) | 382.7 | (31.1 | ) | 1,034.7 | |||||||||||||||
| Municipal bonds | (5.9 | ) | 86.7 | (99.4 | ) | 889.0 | (105.3 | ) | 975.7 | |||||||||||||||
| U.S. government agency and treasury securities | (3.3 | ) | 199.6 | (38.3 | ) | 457.9 | (41.6 | ) | 657.5 | |||||||||||||||
| Total | $ | **(**15.2 | ) | $ | 992.5 | $ | **(**164.2 | ) | $ | 1,752.9 | $ | **(**179.4 | ) | $ | 2,745.4 |
The Company regularly reviews its investment portfolios to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. The Company believes the investments held as of May 31, 2024 that had gross unrealized losses of $164.2 million were not impaired due to credit risk or other valuation concerns and was not required to record a credit loss or an allowance for credit losses on its AFS securities. The Company believes 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. A substantial portion of the securities in an unrealized loss position as of May 31, 2024 and 2023 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 that it will be required to sell these investments prior to that time. The Company’s assessment that an investment is not impaired due to credit risk or other valuation concerns could change in the future due to new developments or changes in the Company’s strategies or assumptions related to any particular investment.
Realized gains and losses from the sale of AFS securities were as follows:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Gross realized gains | $ | — | $ | 0.1 | $ | 0.2 | |||||||||
| Gross realized losses | (2.6 | ) | (9.9 | ) | 0.0 | ||||||||||
| Net realized (losses)/gains | $ | **(**2.6 | ) | $ | **(**9.8 | ) | $ | 0.2 |
The amortized cost and fair value of AFS securities that had stated maturities as of May 31, 2024 are shown below by expected maturity.
| May 31, 2024 | ||||||||||
| Amortized | Fair | |||||||||
| In millions | cost | value | ||||||||
| Maturity date: | ||||||||||
| Due in one year or less | $ | 211.0 | $ | 207.1 | ||||||
| Due after one year through three years | 1,439.4 | 1,365.2 | ||||||||
| Due after three years through five years | 1,452.8 | 1,377.2 | ||||||||
| Due after five years | 388.9 | 380.1 | ||||||||
| Total | $ | 3,492.1 | $ | 3,329.6 |
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 credit losses, PEO unbilled receivables, net of advance collections, accounts payable and short-term borrowings, when used by the Company, approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as AFS and are recorded at fair value on a recurring basis.
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
| May 31, 2024 | ||||||||||||||||||||
| Quoted | Significant | |||||||||||||||||||
| prices in | other | Significant | ||||||||||||||||||
| Carrying | active | observable | unobservable | |||||||||||||||||
| value | markets | inputs | inputs | |||||||||||||||||
| In millions | (Fair value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Restricted and unrestricted cash equivalents: | ||||||||||||||||||||
| U.S. government agency and treasury securities | $ | 386.4 | $ | — | $ | 386.4 | $ | — | ||||||||||||
| Money market securities | 31.4 | 31.4 | — | — | ||||||||||||||||
| Total restricted and unrestricted cash equivalents | $ | 417.8 | $ | 31.4 | $ | 386.4 | $ | — | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | $ | 134.7 | $ | — | $ | 134.7 | $ | — | ||||||||||||
| Corporate bonds | 1,368.8 | — | 1,368.8 | — | ||||||||||||||||
| Municipal bonds | 973.4 | — | 973.4 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 852.7 | — | 852.7 | — | ||||||||||||||||
| VRDNs | — | — | — | — | ||||||||||||||||
| Total AFS securities | $ | 3,329.6 | $ | — | $ | 3,329.6 | $ | — | ||||||||||||
| Other | $ | 33.9 | $ | 33.9 | $ | — | $ | — | ||||||||||||
| Liabilities: | ||||||||||||||||||||
| Other long-term liabilities | $ | 33.9 | $ | 33.9 | $ | — | $ | — |
| May 31, 2023 | ||||||||||||||||||||
| Quoted | Significant | |||||||||||||||||||
| prices in | other | Significant | ||||||||||||||||||
| Carrying | active | observable | unobservable | |||||||||||||||||
| value | markets | inputs | inputs | |||||||||||||||||
| In millions | (Fair value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Restricted and unrestricted cash equivalents: | ||||||||||||||||||||
| Money market securities | $ | 43.8 | $ | 43.8 | $ | — | $ | — | ||||||||||||
| Total restricted and unrestricted cash equivalents | $ | 43.8 | $ | 43.8 | $ | — | $ | — | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | $ | 86.7 | $ | — | $ | 86.7 | $ | — | ||||||||||||
| Corporate bonds | 1,440.9 | — | 1,440.9 | — | ||||||||||||||||
| Municipal bonds | 986.1 | — | 986.1 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 746.8 | — | 746.8 | — | ||||||||||||||||
| VRDNs | 344.1 | — | 344.1 | — | ||||||||||||||||
| Total AFS securities | $ | 3,604.6 | $ | — | $ | 3,604.6 | $ | — | ||||||||||||
| Other | $ | 28.3 | $ | 28.3 | $ | — | $ | — | ||||||||||||
| Liabilities: | ||||||||||||||||||||
| Other long-term liabilities | $ | 28.3 | $ | 28.3 | $ | — | $ | — |
In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. Money market securities, which are cash equivalents, are considered Level 1 investments as they are valued based on quoted market prices in active markets. Cash equivalents also include U.S. government agency and treasury securities with original maturities of 90 days or less which are considered Level 2 investments as they are valued based on similar, but not identical, instruments in active markets. AFS securities, including asset-backed securities, corporate bonds, municipal bonds, U.S. government agency securities, and VRDNs, when held by the Company, are included in Level 2 and are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company’s Level 2 AFS securities, the independent pricing service uses a variety of inputs, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company has not adjusted the prices obtained from the independent pricing service because it believes that they are appropriately valued.
Assets included as other are mutual fund investments, consisting of participants’ eligible deferral contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term liabilities. The mutual funds are considered Level 1 investments as they are valued based on quoted market prices in active markets.
The Company’s long-term borrowings are accounted for on a historical cost basis. As of May 31, 2024 and May 31, 2023, the fair value of long-term borrowings, net of debt issuance costs was $391.8 million and $392.4 million for the Senior Notes, Series A, respectively, and $386.0 million and $390.9 million for the Senior Notes, Series B, respectively.
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 has remaining terms from less than one year up to ten years, with contractual terms expiring from 2024 to 2032. 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 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:
| May 31, | ||||||||||
| $ in millions | 2024 | 2023 | ||||||||
| Operating lease ROU assets, net of accumulated amortization | $ | 46.9 | $ | 61.5 | ||||||
| Operating lease liabilities, current(1) | 19.2 | 20.3 | ||||||||
| Operating lease liabilities, non-current | 49.0 | 57.3 | ||||||||
| Weighted average remaining lease term (in years) | 4.3 | 4.7 | ||||||||
| Weighted average discount rate | 3.23 | % | 2.21 | % |
(1)
The current portion of operating lease liabilities is reported in the other current liabilities line item on the Company’s Consolidated Balance Sheets.
The components of lease expense were as follows:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Fixed payment operating lease expense | $ | 28.7 | $ | 20.8 | $ | 27.2 | |||||||||
| Variable payment operating lease expense | 5.8 | 6.2 | 6.9 | ||||||||||||
| Short-term lease expense | 0.0 | 0.0 | - |
During the fiscal fourth quarter ended May 31, 2024 (the "fourth quarter"), the Company focused on cost optimization initiatives, including further reductions to our geographic footprint. As part of this initiative the Company ceased the use of certain leased property and accelerated the amortization of certain ROU assets, resulting in an additional $9.7 million of expense. This expense is included in cost of service revenue and selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income. The related lease liabilities will be satisfied under the original terms of the lease arrangements, unless buy-outs can be negotiated.
Supplemental cash flow information related to the Company’s leases were as follows:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 20.9 | $ | 21.7 | $ | 32.4 | |||||||||
| Amortization of ROU assets | 25.8 | 17.6 | 22.7 | ||||||||||||
| ROU assets obtained in exchange for new operating lease liabilities | 7.2 | 1.3 | 15.8 | ||||||||||||
| Lease incentives received in the form of tenant allowances and free rent | 0.8 | 0.8 | 9.1 |
Future lease payments are as follows:
| May 31, | |||||
| In millions | 2024 | ||||
| 2025 | $ | 21.2 | |||
| 2026 | 16.1 | ||||
| 2027 | 12.7 | ||||
| 2028 | 10.7 | ||||
| 2029 | 7.4 | ||||
| Thereafter | 5.1 | ||||
| Total future lease payments | 73.2 | ||||
| Less: imputed interest | 5.0 | ||||
| Total operating lease liabilities | $ | 68.2 | |||
| Current portion | $ | 19.2 | |||
| Non-current portion | $ | 49.0 |
As of May 31, 2024, the Company had not entered into any lease agreement that had not yet commenced.
Note J — Property and Equipment, Net of Accumulated Depreciation
The components of property and equipment, at cost, consisted of the following:
| May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Land and improvements | $ | 9.0 | $ | 9.0 | ||||||
| Buildings and improvements | 131.4 | 130.5 | ||||||||
| Data processing equipment | 213.3 | 214.5 | ||||||||
| Software (1) | 1,010.1 | 927.3 | ||||||||
| Furniture, fixtures, and equipment | 71.9 | 77.2 | ||||||||
| Leasehold improvements | 47.6 | 67.3 | ||||||||
| Construction in progress (1) | 60.7 | 51.7 | ||||||||
| Total property and equipment, gross | 1,544.0 | 1,477.5 | ||||||||
| Less: Accumulated depreciation | 1,132.3 | 1,081.2 | ||||||||
| Property and equipment, net of accumulated depreciation | $ | 411.7 | $ | 396.3 |
(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 $127.5 million, $128.4 million, and $133.7 million for fiscal 2024, 2023, and 2022, respectively.
During the fourth quarter, the Company reprioritized certain technology investments and disposed of certain leasehold improvements, furniture, and fixtures associated with abandoned leased properties and recorded losses on disposal of $17.1 million and $4.1 million, respectively. The losses are included in selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income.
Note K — Goodwill and Intangible Assets, Net of Accumulated Amortization
Goodwill and changes in goodwill as of and for the years ended May 31, 2024 and May 31, 2023 were as follows:
| May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Balance, beginning of fiscal year | $ | 1,834.0 | $ | 1,831.5 | ||||||
| Changes during the period: | ||||||||||
| Goodwill acquired | 46.7 | 2.5 | ||||||||
| Currency translation adjustment | 2.0 | (0.0 | ) | |||||||
| Balance, end of fiscal year | $ | 1,882.7 | $ | 1,834.0 |
Acquired goodwill for fiscal 2024 relates to the Company's acquisition of Alterna. Refer to Note D for more information related to our acquisition of Alterna.
The Company had certain intangible assets on its Consolidated Balance Sheets. The components of intangible assets, at cost, consisted of the following:
| May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Client lists | $ | 675.1 | $ | 638.2 | ||||||
| Other intangible assets | 23.1 | 23.0 | ||||||||
| Total intangible assets, gross | 698.2 | 661.2 | ||||||||
| Less: Accumulated amortization | 503.7 | 473.8 | ||||||||
| Intangible assets, net of accumulated amortization | $ | 194.5 | $ | 187.4 |
During fiscal 2024, the Company acquired customer lists with a weighted-average amortization period of 8.0 years.
Amortization expense relating to intangible assets was $49.0 million, $48.2 million, and $58.1 million for fiscal 2024, 2023, and 2022, respectively.
The Company did not recognize an impairment loss as it relates to its goodwill or intangible assets during fiscal 2024, 2023, or 2022.
The estimated amortization expense for the next five fiscal years relating to intangible asset balances is as follows:
| In millions | Estimated amortization | ||||
| Year ending May 31, | expense | ||||
| 2025 | $ | 48.3 | |||
| 2026 | 43.8 | ||||
| 2027 | 37.1 | ||||
| 2028 | 33.5 | ||||
| 2029 | 19.8 |
Note L — Income Taxes
The components of deferred tax assets and liabilities are as follows:
| May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Deferred tax assets: | ||||||||||
| Compensation and employee benefit liabilities | $ | 60.3 | $ | 52.4 | ||||||
| Other current liabilities | 12.4 | 17.3 | ||||||||
| Tax credit carry forward | 0.2 | 0.2 | ||||||||
| Stock-based compensation | 16.5 | 14.8 | ||||||||
| Unrealized losses on available-for-sale securities | 40.1 | 43.4 | ||||||||
| Capitalization of research and development | 68.6 | 54.1 | ||||||||
| Leases | 13.9 | 15.9 | ||||||||
| Net operating loss (“NOL”) carry forwards | 5.0 | 5.1 | ||||||||
| Tax benefit of uncertain tax positions | 16.2 | 13.6 | ||||||||
| Gross deferred tax assets | 233.2 | 216.8 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Deferred contract costs | 151.2 | 151.3 | ||||||||
| Capitalized software | 58.2 | 56.5 | ||||||||
| Depreciation | 0.3 | 2.4 | ||||||||
| Goodwill and intangible assets | 91.8 | 99.1 | ||||||||
| Operating lease right-of-use assets | 9.5 | 13.7 | ||||||||
| Other | 7.7 | 5.7 | ||||||||
| Gross deferred tax liabilities | 318.7 | 328.7 | ||||||||
| Net deferred tax liability | $ | **(**85.5 | ) | $ | **(**111.9 | ) |
The deferred tax asset related to NOL carry forwards is comprised of $0.2 million of federal NOL carry forwards, $4.4 million of state NOL carry forwards, and $0.4 million of foreign NOL carry forwards. The federal NOL carry forwards were acquired through various acquisitions and expire between the fiscal years ending May 31, 2028 and May 31, 2030. The state NOL carry forwards expire between the fiscal years ending May 31, 2025 through May 31, 2044.
The components of the provision for income taxes are as follows:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Current: | |||||||||||||||
| Federal | $ | 433.5 | $ | 418.1 | $ | 326.0 | |||||||||
| State | 117.4 | 117.1 | 104.5 | ||||||||||||
| Non-U.S. | 6.5 | (0.3 | ) | (1.0 | ) | ||||||||||
| Total current | 557.4 | 534.9 | 429.5 | ||||||||||||
| Deferred: | |||||||||||||||
| Federal | (18.6 | ) | (34.2 | ) | 0.9 | ||||||||||
| State | (4.6 | ) | (7.4 | ) | 0.9 | ||||||||||
| Non-U.S. | (6.6 | ) | (2.4 | ) | 0.5 | ||||||||||
| Total deferred | **(**29.8 | ) | **(**44.0 | ) | 2.3 | ||||||||||
| Income taxes | $ | 527.6 | $ | 490.9 | $ | 431.8 |
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, | |||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||
| Federal statutory tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||
| Increase/(decrease) resulting from: | |||||||||||||||
| State income taxes, net of federal tax benefit | 4.0 | % | 4.2 | % | 4.6 | % | |||||||||
| Stock option windfall benefit | (0.4 | ) | % | (0.4 | ) | % | (0.9 | ) | % | ||||||
| Tax credits | (0.8 | ) | % | (0.7 | ) | % | (1.1 | ) | % | ||||||
| Other items | — | % | (0.1 | ) | % | 0.1 | % | ||||||||
| Effective income tax rate | 23.8 | % | 24.0 | % | 23.7 | % |
The effective income tax rates in all periods were impacted by recognition of net discrete tax benefits related to employee stock-based compensation payments.
Uncertain income tax positions: The Company is subject to U.S. federal 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, 2024 and 2023, the total reserve for uncertain tax positions, including interest and net of federal benefits, was $86.4 million and $69.4 million, respectively, and was included in long-term liabilities on the Consolidated Balance Sheets.
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:
| Year ended May 31, | |||||||||||||||
| In millions | 2024 | 2023 | 2022 | ||||||||||||
| Balance as of beginning of fiscal year | $ | 72.0 | $ | 50.2 | $ | 22.4 | |||||||||
| Additions for tax positions of the current year | 20.6 | 20.6 | 11.1 | ||||||||||||
| Additions for tax positions of prior years | 0.8 | 4.6 | 20.6 | ||||||||||||
| Reductions for tax positions of prior years | (3.8 | ) | (2.1 | ) | (1.8 | ) | |||||||||
| Settlements with tax authorities | (0.3 | ) | (0.4 | ) | (0.4 | ) | |||||||||
| Expiration of the statute of limitations | (2.1 | ) | (0.9 | ) | (1.7 | ) | |||||||||
| Balance as of end of fiscal year | $ | 87.2 | $ | 72.0 | $ | 50.2 |
The reserve as of May 31, 2024 substantially relates to the Company’s uncertain tax positions for certain U.S. federal and state income tax matters. The Company believes the reserve for uncertain tax positions, including interest and net of federal benefits, of $86.4 million as of May 31, 2024 adequately covers open tax years and uncertain tax positions up to and including fiscal 2024 for major taxing jurisdictions. As of May 31, 2024 and 2023, the entire $86.4 million and $69.4 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. Fiscal years 2018 and 2020 are currently under audit by the IRS. With limited exception, state income tax audits by taxing authorities are closed through fiscal 2020, 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 taxes on the Consolidated Statements 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 2024, 2023, and 2022 was immaterial to the Company’s results of operations.
Note M — 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 as of May 31, 2024 are as follows:
| Maximum | Amount Outstanding | ||||||||||||||||
| Amount | May 31, | ||||||||||||||||
| $ in millions | Expiration Date | Available | 2024 | 2023 | |||||||||||||
| Credit facilities: | |||||||||||||||||
| JP Morgan Chase Bank, N.A. (“JPM”)(1) | April 12, 2029 | $ | 1,000.0 | $ | — | $ | — | ||||||||||
| JPM (1) | September 17, 2026 | $ | 750.0 | — | — | ||||||||||||
| PNC Bank, National Association (“PNC”) (weighted-average interest rate of 6.14 % at May 31, 2024 and 5.83% at May 31, 2023) | February 6, 2026 | $ | 250.0 | 18.7 | 10.2 | ||||||||||||
| Outstanding short-term financing (2) | $ | 18.7 | $ | 10.2 |
(1)
JPM acts as the administrative agent for this syndicated credit facility.
(2)
The total amount available under these credit facilities as of May 31, 2024 was approximately $2.0 billion. Amounts borrowed under the PNC credit facility remain outstanding as of the date of this report.
Upon the expiration date of any credit facility, any borrowings outstanding under that facility will mature and be payable.
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 Securitized Overnight Financing Rate (“SOFR”) 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 facility. The commitment fee is determined on a sliding-scale basis based upon the Company’s consolidated leverage ratio.
On April 12, 2024, the Company and Paychex of New York LLC, a Delaware limited liability company (“PoNY”), entered into an amendment (the “2019 Credit Facility Amendment”) to its $1.0 billion, five-year, unsecured, revolving credit facility (the “2019 Credit Facility”), for which JPM acts as Administrative Agent. The 2019 Credit Facility Amendment, among other things, (a) extended the maturity date of the 2019 Credit Facility from July 31, 2024 to April 12, 2029, (b) amended the interest rate provisions under the 2019 Credit Facility, (c) amended the lenders under the syndication and (d) made other ministerial changes to the 2019 Credit Facility.
On April 12, 2024, the Company and PoNY entered into an amendment (the “2017 Credit Facility Amendment”) to its $750.0 million, five-year, unsecured, revolving credit facility (the “2017 Credit Facility”), for which JPM acts as Administrative Agent. The 2017 Credit Facility Amendment, among other things, (a) amended the interest rate provisions under the 2017 Credit Facility, and (b) made other ministerial changes to the 2017 Credit Facility.
On February 3, 2023, the Company and Paychex Advance LLC, a Paychex subsidiary and New York limited liability company, entered into Amendment No. 2 (the “Amendment”) to the $250 million, three-year, unsecured, revolving credit facility established on February 6, 2020 (the “2020 Credit Facility”) for which PNC Bank, N.A. acts as administrative agent.
The Amendment, among other things, extended the maturity date of the 2020 Credit Facility from February 6, 2023 to February 6, 2026 at which time all borrowings thereunder will terminate. Except for extending the maturity date and making ministerial changes to the 2020 Credit Facility, the Amendment did not change the existing terms of the 2020 Credit Facility.
Obligations under the credit 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 these covenants as of May 31, 2024.
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 $168.5 million and $141.7 million as of May 31, 2024 and May 31, 2023, respectively, required to secure commitments for certain insurance policies. The letters of credit expire at various dates between June 26, 2024 and September 29, 2025. No amounts were outstanding on these letters of credit during fiscal 2024 or fiscal 2023, or as of May 31, 2024 and May 31, 2023, respectively. Subsequent to May 31, 2024, one letter of credit expiring on June 24, 2024, was renewed for a one year term.
Note N — Long-term Financing
Long-term debt, at amortized cost, consisted of the following as of:
| May 31, | ||||||||||
| In millions | 2024 | 2023 | ||||||||
| Senior Notes, Series A | $ | 400.0 | $ | 400.0 | ||||||
| Senior Notes, Series B | 400.0 | 400.0 | ||||||||
| Total long-term borrowings | 800.0 | 800.0 | ||||||||
| Less: Debt issuance costs, net of accumulated amortization | (1.4 | ) | (1.8 | ) | ||||||
| Long-term borrowings, net of debt issuance costs | $ | 798.6 | $ | 798.2 |
Certain information related to the Senior Notes, Series A and Senior Notes, Series B (collectively the “Notes”) issued pursuant to the Note Purchase and Guarantee Agreement (the “Agreement”) for fiscal 2024 and fiscal 2023 are as follows:
| Senior Notes | Senior Notes | |||
| Series A | Series B | |||
| Stated interest rate | 4.07% | 4.25% | ||
| Effective interest rate | 4.14% | 4.31% | ||
| Interest rate type | Fixed | Fixed | ||
| Interest payment dates | Semi-annual, in arrears | Semi-annual, in arrears | ||
| Principal payment dates | March 13, 2026 | March 13, 2029 | ||
| Note type | Unsecured | 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, Paychex of New York LLC, 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 these covenants as of May 31, 2024.
Note O — Supplemental Cash Flow Information
Income taxes paid were $539.5 million, $525.8 million, and $397.7 million for fiscal 2024, fiscal 2023, and fiscal 2022, respectively.
Interest expense paid was $36.2 million, $35.7 million, and $35.5 million for fiscal 2024, fiscal 2023, and fiscal 2022, respectively.
Refer to Note I of this Item 8 for supplemental cash flow information pertaining to the Company's leasing activities.
Note P — 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 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 2024, 2023, and 2022 were $37.5 million, $36.6 million, and $35.6 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, except for certain restricted trading periods for individuals designated as insiders as specified in the Company’s Insider Trading Policy. The Company matching contribution, when in effect, follows the same fund elections as the employee compensation deferrals.
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 $33.9 million and $28.3 million as of May 31, 2024 and 2023, respectively, and are reflected in other long-term liabilities on the accompanying Consolidated Balance Sheets.
Note Q — 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, 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, 2024, the Company had outstanding commitments under existing workers’ compensation insurance agreements and legally binding contractual arrangements with minimum future payment obligations of approximately $429.8 million. The Company also enters into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase approximately $2.9 million of capital assets. These minimum future payment obligations relate to the following fiscal years:
| Payments due by period | ||||||||||||||||||||||||||||||
| In millions | 2025 | 2026 | 2027 | 2028 | 2029 | Thereafter | ||||||||||||||||||||||||
| Workers' compensation estimated obligations | $ | 74.1 | $ | 38.0 | $ | 23.9 | $ | 16.2 | $ | 11.8 | $ | 54.6 | ||||||||||||||||||
| Purchase obligations | $ | 139.8 | $ | 54.5 | $ | 13.6 | $ | 2.6 | $ | 0.7 | $ | — |
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 employee and PEO employee health and medical benefit plans. The Company’s estimated loss exposure under these insurance arrangements is recorded in other current liabilities on the Consolidated Balance Sheets. Historically, the amounts accrued have not been material and were not material as of May 31, 2024. 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.
Schedule II — Valuation and Qualifying Accounts
PAYCHEX, INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED MAY 31,
(In millions)
| Additions to/ | |||||||||||||||||||||||||
| Balance as of | Additions | (deductions | Balance as | ||||||||||||||||||||||
| beginning | charged to | from) other | Costs and | of end | |||||||||||||||||||||
| Description | of fiscal year | expenses | accounts | deductions**(1)** | of fiscal year | ||||||||||||||||||||
| 2024 | |||||||||||||||||||||||||
| Allowance for credit losses | $ | 20.5 | $ | 19.8 | $ | — | $ | 19.0 | $ | 21.3 | |||||||||||||||
| 2023 | |||||||||||||||||||||||||
| Allowance for credit losses | $ | 18.2 | $ | 17.7 | $ | — | $ | 15.4 | $ | 20.5 | |||||||||||||||
| 2022 | |||||||||||||||||||||||||
| Allowance for credit losses | $ | 16.0 | $ | 10.5 | $ | — | $ | 8.3 | $ | 18.2 |
(1)
Uncollectible amounts written off, net of recoveries, and other adjustments.
Ite****m 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
It****em 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, 2024, 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, 2024. Based on such evaluation, there have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter ended May 31, 2024, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
Ite****m 9B. Other Information
During the three months ended May 31, 2024, none of our directors or officers (as defined by Rule 16a-1 under the Exchange Act), adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any “non-Rule 10b5-1 trading arrangement” (as defined by Item 408(c) of Regulation S-K).
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