PAYCHEX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the operating results of
Overview
We are a leading HCM software and services company, offering integrated solutions for HR, payroll, benefits, and insurance services for small- to medium-sized businesses. We offer a comprehensive portfolio of technology solutions and services, supported by HR and compliance expertise, that help our clients address the evolving challenges of HR. Our purpose is to allow our customers the freedom to succeed. The workplace is evolving, and we lead the way by making complex HR, payroll, and benefits simple for our clients.
We support our small-business clients, reducing the complexity and risk of running their own payroll, while ensuring greater accuracy with up-to-date tax rates and regulatory information. Clients may choose to have our service team handle everything for them, or process payroll themselves utilizing our proprietary, robust SaaS Paychex Flex® platform and our SurePayroll® SaaS-based products. 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 services and software that will meet the needs of their business.
Our portfolio of HCM and employee benefit-related services is disaggregated into two categories, (1) Management Solutions and (2) 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, payroll, benefits, and
insurance solutions by being an essential partner to small- and medium-sized
businesses across the
We continue to focus on driving growth in the number of clients, revenue per client, total revenue, and profits, while providing industry-leading service and technology solutions to our clients and their employees. 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 products, people, and service capabilities will position us to capitalize on opportunities for long-term growth.
A key component of our service delivery strategy is to be a proactive partner with our clients and to develop and release integrated solutions within Paychex Flex to meet their current and future needs. 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 service delivery, resulting in high levels of client satisfaction and retention.
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Fiscal 2022 Business Highlights
Highlights compared to fiscal 2021 are as follows:
Fiscal Year
In millions, except per share amounts 2022 2021 Change(3)
Total service revenue $ 4,554.0 $ 3,997.5 14 %
Total revenue $ 4,611.7 $ 4,056.8 14 %
Operating income $ 1,840.0 $ 1,460.7 26 %
Net income $ 1,392.8 $ 1,097.5 27 %
Adjusted net income(1) $ 1,367.8 $ 1,102.4 24 %
Diluted earnings per share $ 3.84 $ 3.03 27 %
Adjusted diluted earnings per share(1)
(1)
Adjusted net income and adjusted diluted earnings per share are not
(2)
Dividends paid to stockholders represented approximately 72% of net income for fiscal 2022 compared to approximately 83% of net income for fiscal 2021.
(3)
Percentage changes are calculated based on unrounded numbers.
For further analysis of our results of operations for fiscal years 2022 and
2021, and our financial position as of
Business Outlook
Our payroll and PEO client base was greater than 730,000 and 710,000 clients as
of
While our HR product offerings provide services to employers and employees beyond payroll, they effectively leverage payroll processing data. These services are included as part of the integrated HCM solution within Paychex Flex or provided through the PEO platform. The following table illustrates the growth in selected HR product offerings:
$ in billions As of May 31, 2022 2021 Change(1) Paychex HR Solutions and PEO client worksite employees 1,977,000 1,680,000 18 % Paychex HR Solutions and PEO clients 66,000 62,000 8 % Health and benefits services applicants 210,000 205,000 2 % Retirement services plans 104,000 96,000 9 % (1)
Percentage changes are calculated based on unrounded numbers.
We continue to make investments in technology a priority as companies look to leverage technology solutions to maintain operations, stay connected to employees, and increase productivity. In fiscal 2022, we enhanced our solutions to support businesses as they engage in digital transformation. We have continued to evolve our products to help business leaders find, hire, and retain employees quickly and effectively with an eye on driving engagement and managing labor costs. Our fiscal 2022 technology and solution developments provide a unique combination of data, technology, and service designed to meet the evolving needs of employers and employees, and include:
•
Paychex Pre-Check, a self-service solution that allows employees to review their paystubs and alert their employer of discrepancies before payday. This significantly reduces errors, increasing efficiency and employee satisfaction.
•
Retention Insights, which utilizes predictive analytics to help identify employees that may be more likely to consider leaving.
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•
Paychex Employee Retention Tax Credit ("ERTC") Service, which helps businesses retroactively identify tax credits, based on wages already paid, and file amended returns to claim the credit.
•
Talent Dashboard, which brings retention insights, time off balances, and performance ratings in one place. This allows employers to compare the performance rating and compensation of each job position to ensure they are rewarding employees appropriately and equitably.
•
Acquisition of a powerful state-of-the-art benefits administration software to help employers drive efficiencies in managing their employee benefits.
•
Vaccination Management, utilizing enhanced Document Management features, where employees can confidentially upload proof of vaccination or COVID-19 test results.
•
Additional tools that aid in talent management, including Total Compensation Summary, Pay Benchmarking, Time Off Management, Financial Wellness, etc.
We continue to strengthen 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.
COVID-19 Update
The COVID-19 pandemic continues, and our priority continues to be the health and safety of our employees. The overall recovery from the COVID-19 pandemic has been uneven and has presented many challenges and risks from general economic uncertainty, changes in consumer demand, disruption of supply chains and challenges with hiring, labor and supply cost inflation. We have maintained health and safety standards for employees meeting all regulatory requirements while providing greater levels of flexibility to employees.
We remain committed to proactively supporting our clients through any lingering uncertainties of the COVID-19 pandemic and navigating the challenges of the future business environment. Our unique blend of technology solutions and expertise provides valuable tools and resources to assist our clients and their employees. As the global economy continues to evolve, whether due to macroeconomic changes, legislative changes, the pandemic, or other factors, we are committed to supporting our clients to help them navigate these challenges.
As part of the COVID-19 CARES Act, the ERTC helps businesses claim tax credits
on qualified wages paid to employees and health plan expenses in 2020 and 2021.
The Company introduced the Paychex ERTC Service, which helped businesses
retroactively identify tax credits and file amended returns to claim the credits
based on wages already paid. As of
We continually evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and assess the potential impact on our business and financial position. Despite the emergence of vaccines and vaccine boosters, less virulent strains of COVID-19 such as the Omicron variant, and reduced positivity rates, the end of the COVID-19 pandemic is still uncertain. As such, we expect that the pandemic may continue to have an effect on our results, although the magnitude, duration, and full effects of the pandemic on our future results of operations or cash flows remain difficult to predict at this time.
For further information on the risks posed to our business from the COVID-19 pandemic, refer to Item 1A of this Form 10-K.
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Table of Contents Results of Operations
Summary of Results of Operations for Fiscal Years:
In millions, except per share amounts 2022 2021 Change(1)
Revenue:
Management Solutions$ 3,442.7 $ 3,023.4 14 % PEO and Insurance Solutions 1,111.3 974.1 14 % Total service revenue 4,554.0 3,997.5 14 % Interest on funds held for clients 57.7 59.3 (3 ) % Total revenue 4,611.7 4,056.8 14 % Total expenses 2,771.7 2,596.1 7 % Operating income 1,840.0 1,460.7 26 % Other expense, net (15.4 ) (26.5 ) n/m Income before income taxes 1,824.6 1,434.2 27 % Income taxes 431.8 336.7 28 % Effective income tax rate 23.7 % 23.5 % Net income$ 1,392.8 $ 1,097.5 27 % Diluted earnings per share$ 3.84 $ 3.03 27 % (1)
Percentage changes are calculated based on unrounded numbers. n/m - not meaningful
The changes in revenue as compared to the prior year period were primarily driven by the following factors:
•
Management Solutions revenue:
o
Growth in payroll client base and product penetration across our HCM offerings resulting from strong sales performance and high levels of retention, with continued strong demand for HR Solutions;
o
Increase in revenue per client driven by higher employment levels within our client base and price realization; and
o
Expansion of HCM ancillary services.
•
PEO and Insurance Solutions revenue:
o
Growth in the number of average worksite employees and increases in average wages per worksite employee;
o
Higher revenue from PEO health insurance; and
o
Higher state unemployment insurance revenues.
•
Interest on funds held for clients:
o
Lower average interest rates, partially offset by
o
Higher average investment balances.
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We invest in highly liquid, investment-grade fixed income securities and do not
utilize derivative instruments to manage interest rate risk. As of
Year ended May 31,
$ in millions 2022 2021
Average investment balances:
Funds held for clients $ 4,354.8 $ 3,941.9
Corporate cash equivalents and investments 1,303.3 1,043.3
Total $ 5,658.1 $ 4,985.2 Average interest rates earned (exclusive of net realized gains/(losses)): Funds held for clients
1.3 % 1.5 %
Corporate cash equivalents and investments 0.2 % 0.2 %
Combined funds held for clients and corporate cash
equivalents and investments 1.1 % 1.2 %
Total net realized gains $ 0.2 $ 1.2
$ in millions
As of May 31, 2022 2021
Net unrealized (losses)/gains on AFS securities(1)
1.00 % 0.25 %
Total fair value of AFS securities $ 4,029.2 $ 3,020.2
Weighted-average duration of AFS securities in years(3) 3.2 3.3
Weighted-average yield-to-maturity of AFS securities(3) 1.9 % 1.9 %
(1)
The net unrealized loss on our investment portfolios was approximately
(2)
The Federal Funds rate was in the range of 0.75% to 1.00% as of
(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 2022 2021 Change(1) Compensation-related expenses$ 1,632.2 $ 1,521.8 7 % PEO insurance costs 405.2 352.1 15 % Depreciation and amortization 191.8 192.0 (0 ) % Cost-saving initiatives - 32.2 n/m Other expenses 542.5 498.0 9 % Total expenses$ 2,771.7 $ 2,596.1 7 % (1)
Percentage changes are calculated based on unrounded numbers. n/m - not meaningful
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The changes in total expenses as compared to the prior year were primarily driven by the following factors:
•
Compensation-related expenses:
o
Higher compensation costs due to increases in headcount to support client growth and higher wage rates, performance-based compensation, and fringe benefits.
•
PEO insurance costs:
o
Growth in the number of PEO worksite employees and health insurance revenue.
•
Other expenses:
o
Continued investment in product development, technology, and marketing; and o Increase in travel-related expenses due to easing of pandemic-related restrictions.
Operating income: Fiscal 2022 operating income was
Fiscal Year
2022 2021
Operating Margin (operating income as a percentage of total revenue)
39.9 % 36.0 %
Adjusted operating margin (operating income, adjusted for one-time items, as a percentage of total revenue) 39.9 % 36.8 %
Fluctuations in these metrics were attributable to the factors previously discussed.
Income taxes: Our effective income tax rate was 23.7% and 23.5% for fiscal years 2022 and 2021, 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. The current fiscal year effective tax rate was also impacted by the recording of a tax benefit related to prior and current years' research and development expenses incurred in the production of customer-facing software. Refer to Note K 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
Adjusted net income(1) was
(1)
Adjusted operating income, adjusted operating margin, adjusted net income, and
adjusted diluted earnings per share are not
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Non-GAAP Financial Measures: Adjusted operating income, adjusted net income,
adjusted diluted earnings per share, earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), and adjusted EBITDA are summarized as
follows:
$ in millions 2022 2021 Change(1)
Operating income $ 1,840.0 $ 1,460.7 26 %
Non-GAAP adjustments:
Cost-saving initiatives(2) - 32.2
Total non-GAAP adjustments - 32.2
Adjusted operating income $ 1,840.0 $ 1,492.9 23 %
Net income $ 1,392.8 $ 1,097.5 27 %
Non-GAAP adjustments:
Excess tax benefit related to employee
stock-based compensation payments(3) (18.9 ) (19.4 )
Tax benefit derived from research and
development costs (4) (6.1 ) -
Cost-saving initiatives(2) - 24.3
Total non-GAAP adjustments (25.0 ) 4.9
Adjusted net income $ 1,367.8 $ 1,102.4 24 %
Diluted earnings per share(5) $ 3.84 $ 3.03 27 %
Non-GAAP adjustments:
Excess tax benefit related to employee
stock-based compensation payments(3) (0.05 ) (0.05 )
Tax benefit derived from research and
development costs (4) (0.02 ) -
Cost-saving initiatives(2) - 0.07
Total non-GAAP adjustments (0.07 ) 0.01
Adjusted diluted earnings per share $ 3.77 $ 3.04 24 %
Net income $ 1,392.8 $ 1,097.5 27 %
Non-GAAP adjustments:
Interest expense, net 33.7 33.5
Income taxes 431.8 336.7
Depreciation and amortization expense 191.8 192.0
Total non-GAAP adjustments 657.3 562.2
EBITDA 2,050.1 $ 1,659.7 24 %
Cost-saving initiatives(2) - 32.2
Adjusted EBITDA $ 2,050.1 $ 1,691.9 21 %
(1)
Percentage changes are calculated based on unrounded numbers.
(2)
One-time costs and corresponding tax benefit recognized related to the
acceleration of cost-saving initiatives, including the long-term strategy to
reduce our geographic footprint and headcount optimization. These events are not
expected to recur.
(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)
Non-recurring tax benefit derived from prior years' research and development
costs incurred in the production of customer-facing software.
(5)
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, net income, and diluted earnings per
share, which are
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conjunction with the
Liquidity and Capital Resources
Our financial position as of
We believe that our investments in an unrealized loss position as of
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 L 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, 2022
Amount Outstanding Available
Expiration
$ in millions Date Available Amount Amount
Credit facilities:
JP Morgan Chase Bank, N.A. ("JPM") July 31,
2024 $ 1,000.0 $ - $ 1,000.0
JPM September
17, 2026 $ 750.0 - 750.0
PNC Bank, National Association February 6,
("PNC") 2023 $ 250.0 8.7 241.3
Total Lines of Credit Outstanding
and Available $ 8.7 $ 1,991.3 Amounts outstanding under the PNC credit facility as of
Details of borrowings under each credit facility during the fiscal years ended 2022 and 2021 were as follows:
Year ended May 31, 2022
Credit Facility
$1 Billion $750 Million $250 Million
$ in millions JPM JPM PNC
Number of days borrowed - - 365
Maximum amount borrowed $ - $ - $ 106.5 Weighted-average amount borrowed $ - $ - $ 8.5 Weighted-average interest rate
- % - % 1.36 %
Year ended May 31, 2021
Credit Facility
$1 Billion $500 Million $250 Million
$ in millions JPM JPM PNC
Number of days borrowed 4 - 365
Maximum amount borrowed $ 217.5 $ - $ 246.9
Weighted-average amount borrowed
3.25 % - % 1.12 %
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Short-term borrowings are primarily used for the settlement of client fund obligations, rather than liquidating previously collected client funds that have been invested in AFS securities allocated to our long-term portfolio.
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
Letters of credit: As of
Long-term financing: We have borrowed
Senior Notes Senior Notes
Series A Series B
Stated interest rate 4.07% 4.25%
Effective interest rate 4.15% 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
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 long-term financing.
Other commitments: The Company has various long-term contractual obligations as
of
•
operating leases for
•
purchase obligations for
•
workers' compensation estimated obligations for
•
long-term Senior Notes debt obligations for
Refer to Notes H, M, and P 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
We are involved in three limited partnership agreements and committed to
contribute a maximum amount of
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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 guarantees. We have also entered into indemnification agreements with our officers and directors, 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
Operating, Investing, and Financing Cash Flow Activities
Year ended May 31,
In millions 2022 2021 Change
Net cash provided by operating activities
(1,420.9 ) (460.6 ) (960.3 )
Net cash used in financing activities (979.3 ) (636.4 ) (342.9 )
Net change in cash, restricted cash, and
equivalents $ (894.7 ) $ 163.3 $ (1,058.0 )
Cash dividends per common share $ 2.77 $ 2.52 The changes in our cash flows for fiscal 2022 and fiscal 2021 were primarily the result of the following key drivers:
Operating Cash Flow Activities
•
Higher net income attributable to the reasons discussed in the "Results of Operations" section of this Item 7;
•
Changes in income tax reserves for uncertain tax positions and a decrease in income tax payments. Higher payments in fiscal 2021 resulted from the deferral of payments normally due in fiscal 2020 under the Coronavirus Aid, Relief, and Economic Security Act and normalized in fiscal 2022; and
•
Changes in receivables due to funding of temporary staffing clients; offset by,
•
Increase in costs to obtain and fulfill customer contracts as a result of growth in our client base;
•
Net cash outflow for corporate payroll due to payments of deferred federal payroll taxes and higher incentive compensation payments, offset by higher payroll accruals due to the timing of payroll cutoff; and
•
Increase in net cash outflow for worksite employee compensation.
Investing Cash Flow Activities
•
The increase in cash used was primarily related to an increase in purchases of VRDNs; and
•
Additional investment in enhancements to our internal-use software.
Fluctuations in the net purchases and sales/maturities of AFS securities are also due to timing within the client funds portfolio and market conditions. Specific timing items impacting cash flows for fiscal 2022 and fiscal 2021 are discussed further in the financing cash flows discussion of net changes in client fund obligations. Amounts will vary based upon the timing of collection from clients, and the related remittance to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment services.
Discussion of interest rates and related risks is included in the "Market Risk Factors" section contained in Item 7A of this Form 10-K.
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Financing Cash Flow Activities
•
Increase in net cash outflows from changes in client fund obligations due to the timing of collections and remittances of client funds;
•
Dividends paid increased
•
Decrease in cash inflows from equity-based plans primarily due to less stock options exercised during fiscal 2022 when compared with fiscal 2021; offset by,
•
Decrease in cash outflows from repurchases of common shares as we repurchased 1.2 million shares during fiscal 2022 compared to 1.7 million during fiscal year 2021. The impact of the repurchased share decrease was partially offset by higher average stock purchase price paid during fiscal 2022 when compared to fiscal 2021.
The client fund obligations liability will also vary based on the timing of collecting client funds and the related required remittance of funds to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment services. Collections from clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days.
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.
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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
Revenue recognition: Service revenue is recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured. 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 funding payrolls of our clients in the temporary staffing industry via the purchase of accounts receivable 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 46 to 48 days. 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. 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"). 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
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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 independent 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. 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 2022 or 2021.
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 2022 or 2021 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 ("ROU") 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 2022 or
as of
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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
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 E 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 K 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.
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