01—Abstract
Summary
Summary of the 10-K filed July 24, 2019. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. reported fiscal 2019 (year ended May 31, 2019) results marked by strong revenue growth driven by its PEO and Insurance Services business and the acquisition of Oasis Outsourcing Group Holdings, L.P., completed December 20, 2018 for a purchase price of $992.2 milliona net of cash acquired.
Total revenue rose 12% to $3.77 billionb, total service revenue increased 11% to $3.69 billion, and Management Solutions revenue grew 4% to $2.88 billion. PEO and Insurance Services revenue increased 46% to $814.2 million, or 19% excluding Oasis. Operating income increased 6% to $1.37 billion, and net income increased 4% to $1.03 billion, with diluted earnings per share of $2.86.
Adjusted diluted earnings per share, a non-GAAP measure, rose 11% to $2.84c. The Oasis acquisition was financed with cash on hand and $800.0 million of long-term private placement Senior Notes, Series A and B, carrying fixed rates of 4.07% and 4.25% and maturing in 2026 and 2029. As of May 31, 2019, the company had cash, restricted cash, and total corporate investments of $779.9 million and long-term borrowings, net, of $796.4 million.
Cash flows from operations were $1.3 billiond, and dividends paid totaled $826.8 million, equal to 80% of net income. The quarterly dividend was increased 11% to $0.62 per share in May 2019, and the Board approved a new repurchase program of up to $400.0 million running through May 31, 2022.
The filing reports that the company served approximately 670,000 payroll and PEO clients as of May 31, 2019, with client retention above 82% of the beginning client base. Management reported effective internal control over financial reporting, excluding Oasis, which represented 8% of total assets and 4% of revenues for the year.
02—Key points
Key Highlights
- Total revenue increased 12% to $3.77 billion; total service revenue increased 11% to $3.69 billion.
- PEO and Insurance Services revenue rose 46% to $814.2 million, or 19% excluding the Oasis acquisition; Management Solutions revenue grew 4% to $2.88 billion.
- Operating income increased 6% to $1.37 billion, with an operating margin of 36.3% versus 38.2% in fiscal 2018; net income increased 4% to $1.03 billion and diluted EPS was $2.86.
- Adjusted diluted EPS, a non-GAAP measure, increased 11% to $2.84, excluding a $0.02 per-share excess tax benefit from stock-based compensation.
- Acquired Oasis on December 20, 2018 for $992.2 million net of cash acquired, financed with cash on hand and $800.0 million of private placement Senior Notes due 2026 and 2029.
- Cash flows from operations were $1.3 billion; dividends paid totaled $826.8 million, or 80% of net income, and the quarterly dividend was raised 11% to $0.62 per share.
- Client base reached approximately 670,000 payroll and PEO clients, with client retention above 82%; a new $400.0 million share repurchase program runs through May 31, 2022.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Paychex kept $0.27.
- Revenue$3.77B100.0%
- Cost of revenue−$1.18B31.2%
- Gross profit$2.59B68.8%
- Operating costs−$1.22B32.4%
- Operating income$1.37B36.3%
- Interest, other & tax−$336.9M8.9%
- Net income$1.03B27.4%
Where FY2019 revenue went
$3.77B- SG&A: $1.22B, 32% of revenue
- Cost of revenue: $1.18B, 31% of revenue
- Net income: $1.03B, 27% of revenue
- Interest, other & tax: $336.9M, 8.9% of revenue
Kept 27% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed July 24, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $3.77B$3.38B | +11.7% |
| Cost of Revenue | $1.18B$1.02B | +15.7% |
| Gross Profit | $2.59B$2.36B | +10.0% |
| SG&A Expenses | $1.22B$1.07B | +14.6% |
| Operating Expenses | $2.40B$2.09B | +15.1% |
| Operating Income | $1.37B$1.29B | +6.2% |
| Interest Expense | $17.60M$3.90M | +351.3% |
| Net Income | $1.03B$994.10M | +4.1% |
| EPS (Basic) | $2.88$2.77 | +4.0% |
| EPS (Diluted) | $2.86$2.75 | +4.0% |
| Shares Outstanding (Basic) | 359.20M359.00M | +0.1% |
| Shares Outstanding (Diluted) | 361.80M361.50M | +0.1% |
05—Questions
Frequently Asked Questions
What drove the growth in Paychex's fiscal 2019 revenue?
Total revenue grew 12% to $3.77 billion. PEO and Insurance Services revenue increased 46% to $814.2 million, including the Oasis acquisition, with growth of 19% excluding Oasis and an impact of approximately 4% from the HROi acquisition. Management Solutions revenue increased 4%, driven by growth in the client base, revenue per check from price increases net of discounts, and increased revenue per client.
How was the Oasis acquisition financed and what are the debt terms?
The acquisition, completed December 20, 2018 for $992.2 million net of $262.3 million in cash acquired, was financed with cash on hand and temporary short-term borrowings that were refinanced in March 2019 with $800.0 million of unsecured Senior Notes. Series A ($400.0 million) carries a 4.07% fixed rate and matures March 13, 2026; Series B ($400.0 million) carries a 4.25% fixed rate and matures March 13, 2029. The filing states the company was in compliance with the covenants of the Notes as of May 31, 2019.
How much did Paychex return to shareholders in fiscal 2019?
Dividends paid totaled $826.8 million, equal to 80% of net income, and cash dividends declared were $2.30 per share. In May 2019 the Board raised the quarterly dividend 11% to $0.62 per share from $0.56. The company repurchased 0.7 million shares for $56.9 million during fiscal 2019, and the Board approved a new program to repurchase up to $400.0 million of common stock running from June 1, 2019 through May 31, 2022.
What are the main risks the filing highlights?
The filing highlights risks including changes in government regulations affecting payroll tax and benefit services, co-employment liabilities in the PEO business, rising health insurance and workers' compensation costs, cybersecurity and data privacy exposure, and sensitivity of client-fund interest income to interest rates and tax remittance rules. It also cites integration risk from the Oasis acquisition and covenants in the Senior Notes, which require a maximum leverage ratio of 3.50:1.00 and a minimum interest coverage ratio of 2.00:1.00.
How is the company's liquidity position described?
As of May 31, 2019, cash, restricted cash, and total corporate investments totaled $779.9 million, and long-term borrowings, net of debt issuance costs, were $796.4 million. The company maintained three committed unsecured credit facilities totaling $1.65 billion, with no borrowings outstanding at year-end. Management stated that these resources, along with projected operating cash flows and available short-term financing, will support normal operations, capital purchases, share repurchases, and dividends for the foreseeable future.
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