01—Abstract
Summary
Summary of the 10-K filed July 20, 2018. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. reported fiscal 2018 (year ended May 31, 2018) total revenue of $3.38 billiona, up 7% from $3.15 billion in fiscal 2017, and net income of $933.7 million, up 14%.
Diluted earnings per share rose 15% to $2.58b. Service revenue was $3.32 billion, with Human Resource Services (HRS) revenue up 14% to $1.5 billion and payroll service revenue up 2% to $1.8 billion. Operating income increased 4% to $1.29 billion.
Results include a one-time $32.6 millionc expense for terminating certain license agreements and a net tax benefit from the Tax Cut and Jobs Act; the effective tax rate fell to 28.0% from 34.3%. The company ended the year with cash and total corporate investments of $719.7 million, no debt, and cash flow from operations of $1.28 billion. It paid $739.7 million in dividends, equal to 79% of net income, and raised its quarterly dividend to $0.56 per share.
It repurchased $143.1 milliond of stock during the year. The company served over 650,000 payroll clients as of May 31, 2018, including the Lessor Group acquisition, up from approximately 605,000 a year earlier. Excluding Lessor, the payroll client base was relatively flat.
The filing highlights risks tied to regulatory change, cybersecurity and data privacy, PEO co-employment liability, and interest income on client funds, which depends on interest rates and tax remittance timing. Management believes pending legal matters will not have a material adverse effect on financial position or results of operations.
02—Key points
Key Highlights
- Total revenue rose 7% to $3.38 billion; HRS revenue grew 14% to $1.5 billion, while payroll service revenue grew 2% to $1.8 billion.
- Net income increased 14% to $933.7 million, and diluted EPS rose 15% to $2.58; adjusted diluted EPS was $2.55 (a non-GAAP measure).
- Operating income increased 4% to $1.29 billion; the fiscal 2018 result includes a one-time $32.6 million expense for terminating certain license agreements.
- The Tax Act reduced the effective income tax rate to 28.0% from 34.3%, with a non-recurring net tax benefit of $25.5 million from revaluing net deferred tax liabilities.
- Cash flow from operations was $1.28 billion; the company held $719.7 million in cash and corporate investments with no debt outstanding.
- Dividends paid totaled $739.7 million, or 79% of net income; the quarterly dividend was raised to $0.56 per share from $0.50.
- Payroll clients exceeded 650,000 as of May 31, 2018, up from approximately 605,000, including the Lessor acquisition; client retention was approximately 81%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Paychex kept $0.29.
- Revenue$3.38B100.0%
- Cost of revenue−$1.02B30.1%
- Gross profit$2.36B69.9%
- Operating costs−$1.07B31.6%
- Operating income$1.29B38.2%
- Interest, other & tax−$297.4M8.8%
- Net income$994.1M29.4%
Where FY2018 revenue went
$3.38B- SG&A: $1.07B, 32% of revenue
- Cost of revenue: $1.02B, 30% of revenue
- Net income: $994.1M, 29% of revenue
- Interest, other & tax: $297.4M, 8.8% of revenue
Kept 29% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed July 20, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $3.38B$3.15B | +7.1% |
| Cost of Revenue | $1.02B— | — |
| Gross Profit | $2.36B— | — |
| SG&A Expenses | $1.07B$979.70M | +9.0% |
| Operating Expenses | $2.09B$1.90B | +9.9% |
| Operating Income | $1.29B$1.25B | +3.0% |
| Interest Expense | $3.90M$2.50M | +56.0% |
| Net Income | $994.10M$826.30M | +20.3% |
| EPS (Basic) | $2.77$2.30 | +20.4% |
| EPS (Diluted) | $2.75$2.28 | +20.6% |
| Shares Outstanding (Basic) | 359.00M359.80M | −0.2% |
| Shares Outstanding (Diluted) | 361.50M362.60M | −0.3% |
05—Questions
Frequently Asked Questions
What drove revenue growth in fiscal 2018?
Growth was driven mainly by Human Resource Services, which rose 14% to $1.5 billion, helped by the HR Outsourcing Holdings acquisition (contributing about 6% to HRS growth) and growth in comprehensive HR outsourcing, retirement services, time and attendance, and insurance services. Payroll service revenue rose 2%, mainly from higher revenue per check due to price increases, net of discounts.
How did the Tax Act affect results?
The Tax Act lowered the statutory federal rate from 35% to 21% (a blended 29.2% for fiscal 2018). The filing cites a net tax benefit of $102.6 million in total, including $25.5 million from revaluing deferred tax liabilities and $77.1 million from the lower statutory rate. The effective tax rate fell to 28.0% from 34.3%, which boosted net income.
What is the company's capital position and shareholder return?
Paychex reported cash and total corporate investments of $719.7 million and no debt as of May 31, 2018. It paid $739.7 million in dividends, equal to 79% of net income, and repurchased $143.1 million of common stock during fiscal 2018, with $100.5 million remaining under the July 2016 program.
What are the main risks highlighted in the filing?
Key risks include changes in government regulations affecting payroll tax and benefit services, cybersecurity and data privacy breaches, PEO co-employment liability and changes in health insurance and workers' compensation costs, and the effect of interest rates on interest earned on client funds. The filing also flags the risk that clients may have insufficient funds to cover payments the company makes on their behalf.
What were the one-time items in fiscal 2018?
The company recorded a $32.6 million expense, with a corresponding tax benefit, for terminating certain license agreements to resolve a contractual dispute with licensees, and it acquired client list rights for about $30.0 million. It also recorded the $25.5 million Tax Act deferred tax revaluation benefit. Excluding these items, adjusted net income was $920.0 million, a non-GAAP figure.
06—Continue