01—Abstract
Summary
Summary of the 10-K filed July 17, 2020. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. (PAYX) reported fiscal 2020 results for the year ended May 31, 2020, with total revenue of $4.04 billiona, up 7% from $3.77 billion in fiscal 2019.
Operating income rose 7% to $1.46 billionb, net income increased 6% to $1.10 billion, and diluted earnings per share increased 6% to $3.04. Growth was helped by the Oasis acquisition, which contributed approximately 4% to total revenue growth. PEO and Insurance Solutions revenue grew 22% to $990.6 million, while Management Solutions revenue grew 3% to $2.96 billion.
The filing describes a COVID-19 impact on the fourth quarter. Management Solutions revenue was hurt by lower check volumes, and PEO and Insurance Solutions revenue declined on fewer worksite employees. Management reported sequential improvement in key business metrics since the end of April.
Client retention was at record levels of over 83%, and the company served more than 680,000 payroll and PEO clients as of May 31, 2020. The balance sheet remained strong, with cash, restricted cash and total corporate investments of $1.01 billionc and total debt of $801.9 million. Operating cash flow was $1.44 billion, and the company paid $889.4 million in dividends, about 81% of net income.
The company also repurchased $171.9 milliond of stock during the year, with $228.1 million remaining under its authorization. Risk factors highlighted COVID-19 exposure, client financial pressure, cybersecurity, PEO co-employment liabilities and covenant compliance under its Oasis-related senior notes.
02—Key points
Key Highlights
- Total revenue rose 7% to $4.04 billion; operating income rose 7% to $1.46 billion, with operating margin of 36.1% versus 36.3% in fiscal 2019.
- Net income rose 6% to $1.10 billion; diluted EPS rose 6% to $3.04, and adjusted diluted EPS rose 6% to $3.00.
- PEO and Insurance Solutions revenue grew 22% to $990.6 million, helped by the Oasis acquisition, which contributed approximately 4% to total revenue growth.
- Management Solutions revenue grew 3% to $2.96 billion; the fourth quarter was hurt by COVID-19-related declines in check volumes.
- Client retention reached record levels of over 83% of the beginning client base, with more than 680,000 payroll and PEO clients as of May 31, 2020.
- Operating cash flow was $1.44 billion; dividends paid totaled $889.4 million, and $171.9 million was used for share repurchases.
- Total debt was $801.9 million, consisting of unsecured Senior Notes with fixed rates of 4.07% and 4.25%; the company was in compliance with its covenants as of May 31, 2020.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Paychex kept $0.27.
- Revenue$4.04B100.0%
- Cost of revenue−$1.28B31.7%
- Gross profit$2.76B68.3%
- Operating costs−$1.30B32.2%
- Operating income$1.46B36.1%
- Interest, other & tax−$362.4M9.0%
- Net income$1.10B27.2%
Where FY2020 revenue went
$4.04B- SG&A: $1.30B, 32% of revenue
- Cost of revenue: $1.28B, 32% of revenue
- Net income: $1.10B, 27% of revenue
- Interest, other & tax: $362.4M, 9.0% of revenue
Kept 27% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed July 17, 2020Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $4.04B$3.77B | +7.1% |
| Cost of Revenue | $1.28B$1.18B | +8.7% |
| Gross Profit | $2.76B$2.59B | +6.4% |
| SG&A Expenses | $1.30B$1.22B | +6.2% |
| Operating Expenses | $2.58B$2.40B | +7.4% |
| Operating Income | $1.46B$1.37B | +6.5% |
| Interest Expense | $38.80M$17.60M | +120.5% |
| Net Income | $1.10B$1.03B | +6.2% |
| EPS (Basic) | $3.06$2.88 | +6.3% |
| EPS (Diluted) | $3.04$2.86 | +6.3% |
| Shares Outstanding (Basic) | 358.50M359.20M | −0.2% |
| Shares Outstanding (Diluted) | 361.00M361.80M | −0.2% |
05—Questions
Frequently Asked Questions
How did COVID-19 affect Paychex's fiscal 2020 results?
The filing says the pandemic adversely affected fourth-quarter results as businesses suspended operations. Management Solutions revenue declined due to lower check volumes, and PEO and Insurance Solutions revenue fell with fewer worksite employees serviced. Management noted sequential improvement in key metrics since the end of April 2020, and the company moved 95% of its workforce to remote work.
What drove the growth in PEO and Insurance Solutions revenue?
PEO and Insurance Solutions revenue increased 22% to $990.6 million. The filing attributes the growth to the acquisition of Oasis and to growth in PEO clients, while insurance revenue benefited from more health and benefit clients, offset by declining workers' compensation rates.
How is Paychex returning cash to shareholders?
Dividends paid totaled $889.4 million in fiscal 2020, representing about 81% of net income. The company repurchased 2.0 million shares for $171.9 million, leaving $228.1 million available under its $400.0 million repurchase program, which expires in May 2022.
What are the main risks highlighted in the filing?
Key risks include COVID-19's effect on clients and operations, clients' ability to pay for services, cybersecurity and data privacy exposure, the co-employment liabilities of the PEO business, changes in health and workers' compensation costs, and compliance with 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 much debt does Paychex have and what are its terms?
Total debt was $801.9 million as of May 31, 2020, consisting of $400.0 million of Senior Notes, Series A, due March 13, 2026 at a 4.07% stated rate, and $400.0 million of Senior Notes, Series B, due March 13, 2029 at a 4.25% stated rate. Paychex also had $5.1 million of short-term borrowings under its credit facilities.
06—Continue