Company Quick10K Filing
Quick10K
Paychex
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$84.31 359 $30,300
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-K 2018-05-31 Annual: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-Q 2017-08-31 Quarter: 2017-08-31
10-K 2017-05-31 Annual: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-K 2016-05-31 Annual: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-Q 2015-08-31 Quarter: 2015-08-31
10-K 2015-05-31 Annual: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-Q 2014-08-31 Quarter: 2014-08-31
10-K 2014-05-31 Annual: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
8-K 2019-05-03 Amend Bylaw, Other Events, Exhibits
8-K 2019-01-09 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-12-19 Earnings, Exhibits
8-K 2018-11-26 Enter Agreement, Regulation FD, Exhibits
8-K 2018-10-11
8-K 2018-10-02 Earnings, Exhibits
8-K 2018-06-27 Earnings, Exhibits
8-K 2018-06-27 Regulation FD, Exhibits
8-K 2018-04-26 Officers, Exhibits
8-K 2018-03-26 Earnings, Exhibits
8-K 2018-03-01 Regulation FD, Exhibits
ENB Enbridge 73,960
BCS Barclays 35,390
IVZ Invesco 8,340
SJI South Jersey Industries 2,950
PARR Par Pacific Holdings 1,010
CENB CEN Biotech 0
AAPC Atlantic Alliance Partnership 0
CSAF Campbell Strategic Allocation Fund 0
STMM Stemcell Holdings 0
KTEL Konatel 0
PAYX 2019-02-28
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
EX-4.1 payx-20190228xex4_1.htm
EX-4.2 payx-20190228xex4_2.htm
EX-10.1 payx-20190228xex10_1.htm
EX-31.1 payx-20190228xex31_1.htm
EX-31.2 payx-20190228xex31_2.htm
EX-32.1 payx-20190228xex32_1.htm
EX-32.2 payx-20190228xex32_2.htm

Paychex Earnings 2019-02-28

PAYX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 payx-20190228x10q.htm 10-Q PAYX-22819-Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

_________________________________________



FORM 10‑Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended February 28, 2019 



Commission file number 0-11330

_________________________________________



PAYCHEX, INC.



911 Panorama Trail South

Rochester, New York 14625-2396

(585) 385-6666

A Delaware Corporation



IRS Employer Identification Number: 16-1124166

_________________________________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

 

 

Large accelerated filer    

 

Accelerated filer    

 

Non-accelerated filer    

 

Smaller reporting company     



 

 

 

 

 

Emerging growth company   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  



The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:





 

 

 

 

 



Common Stock, $0.01 Par Value

 

359,392,757 

 Shares

 



CLASS

 

OUTSTANDING AS OF 

February 28, 2019

 

 



 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

In millions, except per share amounts







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

February 28,

 

February 28,



 

 

 

 

2018

 

 

 

 

2018



 

2019

 

As Adjusted(1)

 

2019

 

As Adjusted(1)

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Management Solutions

 

$

801.6 

 

$

768.8 

 

$

2,174.7 

 

$

2,088.2 

PEO and Insurance Services(2)

 

 

245.8 

 

 

149.2 

 

 

559.0 

 

 

398.0 

Total service revenue

 

 

1,047.4 

 

 

918.0 

 

 

2,733.7 

 

 

2,486.2 

Interest on funds held for clients

 

 

23.0 

 

 

18.1 

 

 

58.4 

 

 

45.8 

Total revenue

 

 

1,070.4 

 

 

936.1 

 

 

2,792.1 

 

 

2,532.0 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

325.3 

 

 

272.2 

 

 

855.7 

 

 

752.8 

Selling, general and administrative expenses

 

 

315.8 

 

 

294.9 

 

 

879.6 

 

 

789.8 

Total expenses

 

 

641.1 

 

 

567.1 

 

 

1,735.3 

 

 

1,542.6 

Operating income

 

 

429.3 

 

 

369.0 

 

 

1,056.8 

 

 

989.4 

Interest (expense)/income, net

 

 

(3.7)

 

 

2.3 

 

 

0.7 

 

 

6.1 

Income before income taxes

 

 

425.6 

 

 

371.3 

 

 

1,057.5 

 

 

995.5 

Income taxes

 

 

101.0 

 

 

4.1 

 

 

253.5 

 

 

219.1 

Net income

 

$

324.6 

 

$

367.2 

 

$

804.0 

 

$

776.4 



 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income/(loss), net of tax

 

 

28.1 

 

 

(17.5)

 

 

16.9 

 

 

(46.7)

Comprehensive income

 

$

352.7 

 

$

349.7 

 

$

820.9 

 

$

729.7 



 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.90 

 

$

1.02 

 

$

2.24 

 

$

2.16 

Diluted earnings per share

 

$

0.90 

 

$

1.01 

 

$

2.22 

 

$

2.15 

Weighted-average common shares outstanding

 

 

359.2 

 

 

359.2 

 

 

359.1 

 

 

359.1 

Weighted-average common shares outstanding,
    assuming dilution

 

 

361.6 

 

 

362.0 

 

 

361.6 

 

 

361.6 



(1) Amounts have been adjusted to reflect the adoption of Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”).

(2) Professional Employer Organization (“PEO”) revenue is reported net of certain direct pass-through costs billed and incurred, which include payroll wages, payroll taxes, including federal and state unemployment insurance, and certain guaranteed benefit plan direct costs. Refer to Note B for further details.



See Notes to Consolidated Financial Statements.

1

 


 

PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In millions, except per share amounts







 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

May 31,



 

February 28,

 

2018



 

2019

 

As Adjusted(1)

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

696.4 

 

$

358.2 

Restricted cash

 

 

68.9 

 

 

 —

Corporate investments

 

 

35.6 

 

 

66.0 

Interest receivable

 

 

23.7 

 

 

32.2 

Accounts receivable, net of allowance for doubtful accounts

 

 

821.0 

 

 

492.4 

Prepaid income taxes

 

 

5.9 

 

 

17.0 

Prepaid expenses and other current assets

 

 

235.0 

 

 

224.0 

Current assets before funds held for clients

 

 

1,886.5 

 

 

1,189.8 

Funds held for clients

 

 

5,405.5 

 

 

4,703.8 

Total current assets

 

 

7,292.0 

 

 

5,893.6 

Long-term restricted cash

 

 

65.5 

 

 

 —

Long-term corporate investments

 

 

20.0 

 

 

295.5 

Property and equipment, net of accumulated depreciation

 

 

404.7 

 

 

393.5 

Intangible assets, net of accumulated amortization

 

 

420.9 

 

 

141.4 

Goodwill

 

 

1,781.5 

 

 

814.0 

Long-term deferred costs

 

 

360.0 

 

 

361.0 

Other long-term assets

 

 

18.4 

 

 

16.4 

Total assets

 

$

10,363.0 

 

$

7,915.4 

Liabilities

 

 

 

 

 

 

Accounts payable

 

$

73.9 

 

$

73.7 

Accrued compensation and related items

 

 

840.3 

 

 

320.6 

Short-term borrowings

 

 

53.6 

 

 

 —

Deferred revenue

 

 

39.4 

 

 

34.6 

Other current liabilities

 

 

127.1 

 

 

132.9 

Current liabilities before client fund obligations

 

 

1,134.3 

 

 

561.8 

Client fund obligations

 

 

5,415.4 

 

 

4,734.9 

Total current liabilities

 

 

6,549.7 

 

 

5,296.7 

Accrued income taxes

 

 

20.4 

 

 

18.4 

Deferred income taxes

 

 

229.2 

 

 

154.4 

Long-term borrowings

 

 

800.0 

 

 

 —

Other long-term liabilities

 

 

165.7 

 

 

89.1 

Total liabilities

 

 

7,765.0 

 

 

5,558.6 

Commitments and contingencies — Note M

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.01 par value; Authorized: 600.0 shares;
   Issued and outstanding: 359.4 shares as of February 28, 2019
   and 359.0 shares as of May 31, 2018

 

 

3.6 

 

 

3.6 

Additional paid-in capital

 

 

1,187.9 

 

 

1,126.8 

Retained earnings

 

 

1,425.8 

 

 

1,262.6 

Accumulated other comprehensive loss

 

 

(19.3)

 

 

(36.2)

Total stockholders’ equity

 

 

2,598.0 

 

 

2,356.8 

Total liabilities and stockholders’ equity

 

$

10,363.0 

 

$

7,915.4 



(1) Amounts have been adjusted to reflect the adoption of ASC Topic 606.



See Notes to Consolidated Financial Statements. 





PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

In millions, except per share amounts











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the nine months ended February 28, 2019



 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 



 

Common stock

 

paid-in

 

Retained

 

comprehensive

 

 

 



 

Shares

 

Amount

 

capital

 

earnings(1)

 

(loss) / income

 

Total

Balance as of May 31, 2018

 

359.0 

 

$

3.6 

 

$

1,126.8 

 

$

1,262.6 

 

$

(36.2)

 

$

2,356.8 

Net income

 

 —

 

 

 —

 

 

 —

 

 

804.0 

 

 

 —

 

 

804.0 

Unrealized gains on securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

22.2 

 

 

22.2 

Cash dividends declared ($1.68 per share)

 

 —

 

 

 —

 

 

 —

 

 

(603.9)

 

 

 —

 

 

(603.9)

Repurchases of common shares

 

(0.5)

 

 

 —

 

 

(0.8)

 

 

(32.0)

 

 

 —

 

 

(32.8)

Stock-based compensation costs

 

 —

 

 

 —

 

 

33.6 

 

 

 —

 

 

 —

 

 

33.6 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5.3)

 

 

(5.3)

Activity related to equity-based plans

 

0.9 

 

 

 —

 

 

28.3 

 

 

(4.9)

 

 

 —

 

 

23.4 

Balance as of February 28, 2019

 

359.4 

 

$

3.6 

 

$

1,187.9 

 

$

1,425.8 

 

$

(19.3)

 

$

2,598.0 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended February 28, 2019

Balance as of November 30, 2018

 

359.1

 

$

3.6 

 

$

1,165.7 

 

$

1,302.6 

 

$

(47.4)

 

$

2,424.5 

Net income

 

 —

 

 

 —

 

 

 —

 

 

324.6 

 

 

 —

 

 

324.6 

Unrealized gains on securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27.4 

 

 

27.4 

Cash dividends declared ($0.56 per share)

 

 —

 

 

 —

 

 

 —

 

 

(201.2)

 

 

 —

 

 

(201.2)

Stock-based compensation costs

 

 —

 

 

 —

 

 

10.8 

 

 

 —

 

 

 —

 

 

10.8 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

0.7 

 

 

0.7 

Activity related to equity-based plans

 

0.3 

 

 

 —

 

 

11.4 

 

 

(0.2)

 

 

 —

 

 

11.2 

Balance as of February 28, 2019

 

359.4 

 

$

3.6 

 

$

1,187.9 

 

$

1,425.8 

 

$

(19.3)

 

$

2,598.0 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the nine months ended February 28, 2018

Balance as of May 31, 2017

 

359.4

 

$

3.6 

 

$

1,030.0 

 

$

1,173.6 

 

$

20.0 

 

$

2,227.2 

Net income

 

 —

 

 

 —

 

 

 —

 

 

776.4 

 

 

 

 

 

776.4 

Unrealized losses on securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(46.7)

 

 

(46.7)

Cash dividends declared ($1.50 per share)

 

 —

 

 

 —

 

 

 —

 

 

(538.7)

 

 

 —

 

 

(538.7)

Repurchases of common shares

 

(1.6)

 

 

 —

 

 

(3.0)

 

 

(91.1)

 

 

 —

 

 

(94.1)

Acquisition of business

 

0.6 

 

 

 —

 

 

33.2 

 

 

 

 

 

 

 

 

33.2 

Stock-based compensation costs

 

 —

 

 

 —

 

 

29.4 

 

 

 —

 

 

 —

 

 

29.4 

Activity related to equity-based plans

 

0.9 

 

 

 —

 

 

17.6 

 

 

(15.7)

 

 

 —

 

 

1.9 

Balance as of February 28, 2018

 

359.3 

 

$

3.6 

 

$

1,107.2 

 

$

1,304.5 

 

$

(26.7)

 

$

2,388.6 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended February 28, 2018

Balance as of November 30, 2017

 

359.2 

 

$

3.6 

 

$

1,093.5 

 

$

1,117.3 

 

$

(9.2)

 

$

2,205.2 

Net income

 

 —

 

 

 —

 

 

 —

 

 

367.2 

 

 

 

 

 

367.2 

Unrealized losses on securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17.5)

 

 

(17.5)

Cash dividends declared ($0.50 per share)

 

 —

 

 

 —

 

 

 —

 

 

(179.8)

 

 

 —

 

 

(179.8)

Stock-based compensation costs

 

 —

 

 

 —

 

 

10.3 

 

 

 —

 

 

 —

 

 

10.3 

Activity related to equity-based plans

 

0.1 

 

 

 —

 

 

3.4 

 

 

(0.2)

 

 

 —

 

 

3.2 

Balance as of February 28, 2018

 

359.3 

 

$

3.6 

 

$

1,107.2 

 

$

1,304.5 

 

$

(26.7)

 

$

2,388.6 



(1) Amounts have been adjusted to reflect the adoption of ASC Topic 606.



See Notes to Consolidated Financial Statements.

2

 


 

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In millions





 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

February 28,



 

 

 

 

2018



 

2019(1)

 

As Adjusted(1)(2)

Operating activities

 

 

 

 

 

 

Net income

 

$

804.0 

 

$

776.4 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization on property and equipment and intangible assets

 

 

125.7 

 

 

102.3 

Amortization of premiums and discounts on available-for-sale securities, net

 

 

38.8 

 

 

50.1 

Amortization of deferred contract costs

 

 

134.8 

 

 

130.5 

Stock-based compensation costs

 

 

33.6 

 

 

29.4 

Provision/(benefit) for deferred income taxes

 

 

10.7 

 

 

(45.0)

Provision for allowance for doubtful accounts

 

 

2.1 

 

 

3.3 

Net realized losses/(gains) on sales of available-for-sale securities

 

 

0.1 

 

 

(0.1)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Interest receivable

 

 

8.5 

 

 

4.4 

Accounts receivable

 

 

(110.2)

 

 

(27.8)

Prepaid expenses and other current assets

 

 

8.4 

 

 

9.7 

Accounts payable and other current liabilities

 

 

108.4 

 

 

81.4 

Deferred costs

 

 

(134.1)

 

 

(128.5)

Net change in other long-term assets and liabilities

 

 

(8.0)

 

 

2.8 

Net cash provided by operating activities

 

 

1,022.8 

 

 

988.9 

Investing activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(26,247.6)

 

 

(36,422.2)

Proceeds from sales and maturities of available-for-sale securities

 

 

26,784.6 

 

 

37,162.9 

Purchases of property and equipment

 

 

(88.0)

 

 

(122.0)

Acquisition of businesses, net of cash acquired

 

 

(984.1)

 

 

(178.5)

Purchases of other assets

 

 

(3.5)

 

 

(6.7)

Net cash (used in)/provided by investing activities

 

 

(538.6)

 

 

433.5 

Financing activities

 

 

 

 

 

 

Net change in client fund obligations

 

 

680.5 

 

 

(300.7)

Net proceeds from short-term borrowings

 

 

53.6 

 

 

57.7 

Proceeds from borrowings to fund acquisition

 

 

800.0 

 

 

 —

Dividends paid

 

 

(603.9)

 

 

(538.7)

Repurchases of common shares

 

 

(32.8)

 

 

(94.1)

Activity related to equity-based plans

 

 

23.4 

 

 

1.8 

Net cash provided by/(used in) financing activities

 

 

920.8 

 

 

(874.0)

Increase in cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

1,405.0 

 

 

548.4 

Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of fiscal year

 

 

2,300.5 

 

 

449.4 

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

 

$

3,705.5 

 

$

997.8 



 

 

 

 

 

 

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

 

 

 

 

to the Consolidated Balance Sheets

 

 

 

 

 

 

Cash and cash equivalents

 

$

696.4 

 

$

323.9 

Restricted cash

 

 

134.4 

 

 

 —

Restricted cash and restricted cash equivalents included in funds held for clients

 

 

2,874.7 

 

 

673.9 

Total cash, cash equivalents, restricted cash and restricted cash equivalents

 

$

3,705.5 

 

$

997.8 



 

 

 

 

 

 



(1) Amounts have been adjusted to reflect the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”

(2) Amounts have been adjusted to reflect the adoption of ASC Topic 606.





See Notes to Consolidated Financial Statements.

 



 

PAYCHEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

February 28, 2019

 

Note A: Description of Business, Basis of Presentation, and Significant Accounting Policies



Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Paychex”) is a leading provider of integrated human capital management (“HCM”) solutions for payroll, benefits, human resource (“HR”), and insurance services for small- to medium-sized businesses in the United States (“U.S.”). The Company also has operations in Europe. 

Paychex, a Delaware corporation formed in 1979, reports as one segment.  Substantially all of the Company’s revenue is generated within the U.S.  The Company also generates revenue within Europe, which represented approximately one percent of the Company’s total revenue for both the three and nine months ended February 28, 2019 and was less than one percent of the Companys total revenue for both the three and nine months ended February 28, 2018.  Long-lived assets in Europe were approximately 6% and 10% of total long-lived assets of the Company as of February 28, 2019 and May 31, 2018, respectively. 



Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q (“Form 10-Q”) and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation. The consolidated financial statements include the consolidated accounts of the Company with all intercompany transactions eliminated. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature), which are necessary for a fair statement of the results for the interim period. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related Notes to Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended May 31, 2018 (“fiscal 2018”).  Operating results and cash flows for the nine months ended February 28, 2019 are not necessarily indicative of the results that may be expected for other interim periods or for the fiscal year ending May 31, 2019 (“fiscal 2019”).



Effective June 1, 2018, the Company adopted the requirements of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” and ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force),” as discussed in “Recently adopted accounting pronouncements” section of this Form 10-Q report.  All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards.



Reclassifications:  Certain prior period amounts have been reclassified to conform to the current period presentation in connection with the adoption of ASU Nos. 2014-09 and 2016-18, and had no material effect on reported consolidated earnings.



Restricted cash and restricted cash equivalents: Restricted cash and restricted cash equivalents are recorded at fair value, and consist of money market securities and cash and cash equivalents that are restricted in use for the payment of workers’ compensation claims and those included in funds held for clients.  The estimated fair value of restricted cash and restricted cash equivalents as of February 28, 2019 and May 31, 2018 was $3.0 billion and $1.9 billion, respectively.



PEO insurance reserves: As part of the PEO, the Company offers workers compensation insurance and health benefits insurance to client companies for the benefit of client employees. For workers compensation insurance, reserves are established to provide for the estimated costs of paying claims up to per occurrence liability limits. The Company’s maximum individual claims liability, excluding Oasis Outsourcing Group Holdings, L.P. (“Oasis”) and HR Outsourcing Holdings, Inc. (“HROI”), was $1.0 million and $1.3 million under its fiscal 2019 and fiscal 2018 workers compensation insurance policies, respectively. Oasis’ maximum individual claims liability was $1.0 million under its workers’ compensation insurance policies for the annual fiscal period ending May 31, 2019.  HROI’s maximum individual claims liability was $0.8 million and $0.5 million under its workers’ compensation insurance policies for the annual periods ending September 30, 2019 and ended September 30, 2018, respectively.



Under the medical minimum premium insurance plan offering within the PEO, the Company's health benefits insurance reserves are established to provide for the payment of claims liability charges in accordance with its service contract with the insurance carrier. The Company's maximum individual claims liability, excluding Oasis and HROI, was $0.3 million under both its calendar 2019 and 2018 minimum premium insurance plan policies. HROI’s maximum individual claims liability was $0.3 million under its minimum premium insurance plan policies for the annual periods ended June 30, 2018 and ending June 30, 2019.  Oasis has no minimum premium insurance plan policies in effect. In addition, the Company also provides self-insured dental and vision plans to certain of its PEO clients.



Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and actuarial loss projections, and is subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present estimates, particularly with workers compensation insurance where those payments may not occur until well into the future. The Company regularly reviews the adequacy of its estimated insurance reserves. Adjustments to previously established insurance reserves are reflected in the results of operations for the period in which such adjustments are identified. Such adjustments could be significant, reflecting any combination of new and adverse or favorable trends.



Stock-based compensation costs: The Company has issued stock-based awards to employees and directors consisting of stock options, restricted stock awards, restricted stock units, performance shares, performance-based restricted stock, and performance-based stock options. The Company accounts for all stock-based awards to employees and directors as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized over the requisite service period. Stock-based compensation costs recognized were $10.8 million and $33.6 million for the three and nine months ended February 28, 2019, respectively, as compared with $10.3 million and $29.4 million for the three and nine months ended February 28, 2018,  respectively. The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company’s fiscal 2018 Form 10-K.



Recently adopted accounting pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  This guidance, as amended by subsequent ASUs on the topic, outlines a single comprehensive model for determining revenue recognition for contracts with customers, and supersedes guidance on revenue recognition in ASC Topic 605, “Revenue Recognition.”  The Company adopted the new standard on June 1, 2018, utilizing the full retrospective method, which required the Company to recast each prior reporting period presented and included a cumulative adjustment to increase stockholders’ equity by $262.9 million as of June 1, 2016. See “Impact on Previously Reported Results” section of this Form 10-Q report for revisions to previously reported Consolidated Financial Statements related to this standard.  The Company has updated its control framework for new internal controls and made changes to existing internal controls related to the new standard.



In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”  This guidance requires that the Consolidated Statements of Cash Flows explain the change during the reporting period of the totals of cash, cash equivalents, restricted cash and restricted cash equivalents.  Therefore, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statements of Cash Flows.  The guidance in this standard was effective for the Company on June 1, 2018 and should be applied using the retrospective transition method to each period presented.  During the three months ended February 28, 2019, the Company concluded, upon further evaluation, that cash equivalents and money market securities included in funds held for clients should be included with cash, cash equivalents, restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on its Consolidated Statements of Cash Flows. See “Impact on Previously Reported Results” and “Revision of Previously Reported Financial Information” sections of this Form 10-Q report for the impact and revisions to previously reported Consolidated Statements of Cash Flows related to this standard.    



Impact on Previously Reported Results:  The provisions of ASU No. 2014-09 do not materially impact the timing or the amount of revenue the Company recognizes on an annual basis in its Consolidated Statements of Income and Comprehensive Income. However, it does have an impact on the timing and amount of revenue the Company recognizes on a quarterly basis due to changes in the way it accounts for certain revenues where performance obligations are satisfied at a point in time. The provisions of the new standard have a material impact on the Company’s Consolidated Balance Sheets. The primary impact of adopting the new standard is on the Company’s treatment of certain costs to obtain and fulfill contracts.  In relation to those items, the new standard resulted in the Company deferring additional costs on its Consolidated Balance Sheets and amortizing them in the Consolidated Statements of Income and Comprehensive Income over the estimated average life of the client.  Refer to Note B for further details. 



The provisions of ASU No. 2016-18 impacted the presentation of the cash equivalents and money market securities included in funds held for clients on our Consolidated Statements of Cash Flows.  Historically, the Company recorded the change in cash equivalents and money market securities included in funds held for clients as Investing Activities.  Under the new guidance, amounts classified as restricted cash and restricted cash equivalents are included with cash and cash equivalents in the reconciliation of total cash balances during the period.

 

The following tables present a recast of selected unaudited Consolidated Statements of Income and Comprehensive Income line items after giving effect to the adoption of ASU No. 2014-09: 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

For the three months ended February 28, 2018



 

As Previously

 

 

 

 

In millions, except per share amounts

 

Reported

 

Adjustments

 

As Adjusted

Service revenue

 

$

848.4 

 

$

69.6 

 

$

918.0 

Operating expenses

 

 

270.7 

 

 

1.5 

 

 

272.2 

Selling, general and administrative expenses

 

 

303.3 

 

 

(8.4)

 

 

294.9 

    Total expenses

 

 

574.0 

 

 

(6.9)

 

 

567.1 

Operating income

 

 

292.5 

 

 

76.5 

 

 

369.0 

Income taxes

 

 

34.4 

 

 

(30.3)

 

 

4.1 

Net income

 

$

260.4 

 

$

106.8 

 

$

367.2 

Basic earnings per share

 

$

0.72 

 

$

0.30 

 

$

1.02 

Diluted earnings per share

 

$

0.72 

 

$

0.29 

 

$

1.01 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

For the nine months ended February 28, 2018



 

As Previously

 

 

 

 

In millions, except per share amounts

 

Reported

 

Adjustments

 

As Adjusted

Service revenue

 

$

2,464.0 

 

$

22.2 

 

$

2,486.2 

Operating expenses

 

 

751.5 

 

 

1.3 

 

 

752.8 

Selling, general and administrative expenses

 

 

788.6 

 

 

1.2 

 

 

789.8 

    Total expenses

 

 

1,540.1 

 

 

2.5 

 

 

1,542.6 

Operating income

 

 

969.7 

 

 

19.7 

 

 

989.4 

Income taxes

 

 

270.6 

 

 

(51.5)

 

 

219.1 

Net income

 

$

705.2 

 

$

71.2 

 

$

776.4 

Basic earnings per share

 

$

1.96 

 

$

0.20 

 

$

2.16 

Diluted earnings per share

 

$

1.95 

 

$

0.20 

 

$

2.15 



The following table presents a recast of selected unaudited Consolidated Balance Sheet line items after giving effect to the adoption of ASU No. 2014-09:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

May 31, 2018



 

 

 

 

 

 

 

 

 



 

As Previously

 

 

 

 

In millions

 

Reported

 

Adjustments

 

As Adjusted

Assets

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

$

531.4 

 

$

(39.0)

 

$

492.4 

Prepaid expenses and other current assets

 

$

75.8 

 

$

148.2 

 

$

224.0 

Long-term deferred costs(1)

 

$

18.5 

 

$

342.5 

 

$

361.0 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

74.5 

 

$

(0.8)

 

$

73.7 

Deferred revenue

 

$

24.3 

 

$

10.3 

 

$

34.6 

Deferred income taxes

 

$

48.8 

 

$

105.6 

 

$

154.4 

Other long-term liabilities

 

$

84.8 

 

$

4.3 

 

$

89.1 

Retained earnings

 

$

930.3 

 

$

332.3 

 

$

1,262.6 



(1) Amounts were previously reported as a component of other long-term assets on the Consolidated Balance Sheets included in the Company’s fiscal 2018 Form 10-K.  Long-term deferred costs are separately presented on the Consolidated Balance Sheets contained in this Form 10-Q.



The following table presents a recast of selected unaudited Consolidated Statement of Cash Flow line items after giving effect to the adoption of ASU Nos. 2014-09 and 2016-18:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the nine months ended February 28, 2018



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

ASU No.

 

ASU No.

 

 

 



 

As Previously

 

2014-09

 

2016-18

 

 

 

In millions

 

Reported

 

Adjustments

 

Adjustments

 

As Adjusted

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

705.2 

 

$

71.2 

 

$

 —

 

$

776.4 

Amortization of deferred contract costs

 

$

 —

 

$

130.5 

 

$

 —

 

$

130.5 

Provision/(benefit) for deferred income taxes

 

$

6.5 

 

$

(51.5)

 

$

 —

 

$

(45.0)

Accounts receivable

 

$

(6.2)

 

$

(21.6)

 

$

 —

 

$

(27.8)

Accounts payable and other current liabilities

 

$

80.9 

 

$

0.5 

 

$

 —

 

$

81.4 

Deferred costs

 

$

 —

 

$

(128.5)

 

$

 —

 

$

(128.5)

Net change in other long-term assets and liabilities

 

$

3.4 

 

$

(0.6)

 

$

 —

 

$

2.8 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Net change in funds held for clients' money market securities and

  other cash equivalents

 

$

(409.1)

 

$

 —

 

$

409.1 

 

$

 —

Net cash provided by investing activities

 

$

24.4 

 

$

 —

 

$

409.1 

 

$

433.5 

Increase in cash, cash equivalents, restricted

  cash and restricted cash equivalents

 

$

139.3 

 

$

 —

 

$

409.1 

 

$

548.4 

Cash, cash equivalents, restricted cash and restricted cash

  equivalents, beginning of fiscal year

 

$

184.6 

 

$

 —

 

$

264.8 

 

$

449.4 

Cash, cash equivalents, restricted cash and restricted

  cash equivalents, end of period

 

$

323.9 

 

$

 —

 

$

673.9 

 

$

997.8 



Revision of Previously Reported Financial Information:  During the three months ended February 28, 2019, the Company determined it should have presented cash equivalents and money market securities included in funds held for clients within cash, cash equivalents, restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on its Consolidated Statements of Cash Flows for the three months ended August 31, 2018 and August 31, 2017, and six months ended November 30, 2018 and November 30, 2017 in accordance with ASU No. 2016-18.  The Company assessed the materiality of this correction on prior periods’ consolidated financial statements in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 99, Materiality”, codified in ASC Topic 250, “Accounting Changes and Error Corrections.” Based on this assessment, the Company concluded that the correction is not material to any previously issued interim financial statements. The correction had no impact on the Company’s Consolidated Statements of Income and Comprehensive Income or Consolidated Balance Sheets in previously issued consolidated financial statements. 

 











































The Company will revise its previously issued Consolidated Statements of Cash Flows in future Quarterly Reports on Form 10-Q as applicable, as follows:









 

 

 

 

 

 

 

 

 



 

For the three months ended August 31, 2018



 

As Previously

 

 

 

 

 

In millions

 

Reported

 

Adjustments

 

As Revised

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Net change in funds held for clients money market securities and
  other cash equivalents

 

$

762.5 

 

$

(762.5)

 

$

 —

Net cash provided by investing activities

 

$

918.5 

 

$

(762.5)

 

$

156.0 

Increase/(decrease) in cash, cash equivalents, restricted
  cash and restricted cash equivalents

 

$

81.9 

 

$

(762.5)

 

$

(680.6)

Cash, cash equivalents, restricted cash and restricted cash
  equivalents, beginning of fiscal year

 

$

358.2 

 

$

1,942.3 

 

$

2,300.5 

Cash, cash equivalents, restricted cash and restricted
  cash equivalents, end of period

 

$

440.1 

 

$

1,179.8 

 

$

1,619.9 



 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, restricted cash and restricted cash
  equivalents to the Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

$

440.1 

Restricted cash and restricted cash equivalents included in funds held for clients

 

 

 

 

 

 

 

 

1,179.8 

Total cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

 

 

 

 

 

$

1,619.9 







 

 

 

 

 

 

 

 

 



 

For the six months ended November 30, 2018



 

As Previously

 

 

 

 

 

In millions

 

Reported

 

Adjustments

 

As Revised

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Net change in funds held for clients money market securities and

  other cash equivalents

 

$

985.1 

 

$

(985.1)

 

$

 —

Net cash provided by investing activities

 

$

1,038.8 

 

$

(985.1)

 

$

53.7 

Increase/(decrease) in cash, cash equivalents, restricted

  cash and restricted cash equivalents

 

$

152.4 

 

$

(985.1)

 

$

(832.7)

Cash, cash equivalents, restricted cash and restricted cash

  equivalents, beginning of fiscal year

 

$

358.2 

 

$

1,942.3 

 

$

2,300.5 

Cash, cash equivalents, restricted cash and restricted

  cash equivalents, end of period

 

$

510.6 

 

$

957.2 

 

$

1,467.8 



 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, restricted cash and restricted cash

   equivalents to the Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

$

510.6 

Restricted cash and restricted cash equivalents included in funds held for clients

 

 

 

 

 

 

 

 

957.2 

Total cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

 

 

 

 

 

$

1,467.8 



In June 2018, the Company also adopted the following ASUs, none of which had a material impact on its consolidated financial statements:



·

ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”



·

ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”



·

ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).”



·

ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”



Recently issued accounting pronouncements: In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.”  ASU No. 2018-18 was issued to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement.  This guidance is effective for public entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted.  This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.



In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.



In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.”  ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits.  This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.



In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This guidance, as amended by subsequent ASUs on the topic, improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted.  The Company will adopt ASU No. 2016-02 in its fiscal year beginning June 1, 2019, and currently anticipates using the alternative transition method provided by the FASB in ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.”  Under this transition method, the Company will apply the new standard at adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings on June 1, 2019.



The Company is gathering data and assessing the impact of the new lease accounting standard and anticipates that the adoption of the new lease accounting standard will result in recording additional assets and liabilities on its Consolidated Balance Sheets.  The Company is still in the process of quantifying the impact the new standard will have on its Consolidated Balance Sheets, but expects the provisions of the new standard will result in a material increase in lease-related assets and liabilities recognized on the Consolidated Balance Sheets.  The Company does not anticipate that the new standard will have a material impact on its Consolidated Statements of Income and Comprehensive Income.  In addition, the Company is in the process of completing its evaluation of available practical expedients and the impact of the new guidance on its business processes, systems, and controls.  The adoption of this standard will not have an impact on the financial covenants set forth in the Company’s credit agreements.



Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the SEC during the nine months ended February 28, 2019 did not, or are not expected to, have a material effect on the Company’s consolidated financial statements. 

 

Note B: Service Revenue



Service revenue is primarily attributable to fees for providing services to the Company’s clients and is recognized when control of the promised services are transferred to its clients, in an amount that reflects the consideration it expects to receive in exchange for such services. The Company’s service revenue is largely attributable to processing services where the fee is based on a fixed amount per processing period or a fixed amount per processing period plus a fee per employee or transaction processed. The Company’s contracts generally have a term of 30 days as they are cancellable at any time by either party with 30-days’ notice of termination. Sales and other applicable 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 Services as reported on 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.



Revenue earned from delivery service for the distribution of certain client payroll checks and reports is included in Management Solutions revenue on 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. 



The following table, consistent with the Consolidated Statements of Income and Comprehensive Income, disaggregates service revenue by Management Solutions and PEO and Insurance Services:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

February 28,

 

February 28,



 

 

 

 

2018

 

 

 

 

2018

In millions

 

2019

 

As Adjusted(1)

 

2019

 

As Adjusted(1)

Management Solutions

 

$

801.6 

 

$

768.8 

 

$

2,174.7 

 

$

2,088.2 

PEO and Insurance Services

 

 

245.8 

 

 

149.2 

 

 

559.0