Market Overview

Paychex, Inc. Reports Third Quarter Results

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Paychex, Inc. ("Paychex," "we," "our," or "us") (NASDAQ:PAYX) today
announced total service revenue of $782.6 million for the three months
ended February 28, 2017 (the "third quarter"), an increase of 6% from
$740.7 million for the same period last year. Net income and diluted
earnings per share each increased 12% to $202.5 million and $0.56 per
share, respectively.

Martin Mucci, President and Chief Executive Officer, commented, "During
the third quarter, we continued to experience solid growth across our
human capital management ("HCM") product lines. One particular area was
our time and attendance services, which reflected double-digit growth.
During the third quarter, we celebrated the one-year anniversary of our
acquisition of Advance Partners. We are pleased with the contribution
this acquisition has made to Paychex and with the future opportunities
in store for this business.

We are also encouraged by the growing confidence seen recently in the
small business environment. We are well positioned to address future
changes in the political and regulatory landscape and to assist our
clients in successfully navigating through these changes."

Payroll service revenue was $446.6 million for the third quarter, a 2%
increase compared to the same period last year. The increase was mainly
driven by growth in revenue per check and our client base. Revenue per
check improved as a result of price increases, net of discounts. Payroll
service revenue growth for the third quarter was tempered by
approximately 1% due to one less processing day compared to the same
period last year.

Human Resource Services ("HRS") revenue was $336.0 million for the third
quarter, an increase of 12% compared to the same period last year. HRS
revenue growth was primarily driven by increases in our client base
across all major HCM services, including: comprehensive human resource
outsourcing services; retirement services; time and attendance; and
human resource administration. Our largest HRS revenue stream is Paychex
HR Services, which includes our administrative services organization and
our professional employer organization ("PEO"). Demand for these
services resulted in strong growth in the number of client worksite
employees served as of February 28, 2017 as compared to February 29,
2016. Retirement services revenue also benefited from an increase in
asset fee revenue earned on the asset value of participants' funds.
Insurance services revenue benefited from higher revenue from our
full-service Affordable Care Act product and growth in the number of
health and benefit applicants, coupled with higher average premiums and
an increase in clients in our workers' compensation insurance product.

Interest on funds held for clients increased 11% to $13.2 million for
the third quarter, compared to the respective period last year. The
increase resulted primarily from slightly higher average interest rates
earned. The funds held for clients average investment balances were
relatively flat for the third quarter as the impact of client base
growth was offset by the impact of timing of certain remittances to
taxing authorities.

Average investment balances and interest rates are summarized below:

                       
 
For the three months ended For the nine months ended
February 28, February 29, February 28, February 29,
$ in millions 2017 2016 Change 2017 2016 Change
Average investment balances:
Funds held for clients $ 4,502.4 $ 4,518.7 % $ 3,985.0 $ 4,008.6 (1) %
Corporate investments $ 833.9 $ 826.6 1 % $ 899.8 $ 942.8 (5) %
 

Average interest rates earned (exclusive
of net realized
gains):

Funds held for clients 1.2 % 1.1 % 1.2 % 1.1 %
Corporate investments 1.1 % 1.0 % 1.1 % 0.9 %
 
Total net realized gains $ $ 0.1 $ 0.1 $ 0.1
 

Total expenses increased 4% to $489.2 million for the third quarter
compared to the same period last year. The primary driver of expense
growth was higher wages and related expenses resulting from increased
headcount in operations, partially offset by lower variable selling
expenses. Continued growth in our PEO also contributed to total expense
growth.

Operating income increased 10% to $306.6 million for the third quarter
compared to the same period last year. Operating income, as a percent of
total revenue, was 38.5% for the third quarter, compared with 37.2% for
the same period last year.

Our effective income tax rate was 34.2% for the third quarter compared
to 36.0% for the same period last year. The decrease in the effective
income tax rate was related to discrete tax items recognized during the
third quarter, including the excess tax benefit related to employee
stock-based compensation, which resulted in approximately $0.01
additional diluted earnings per share for the third quarter.

Year-To-Date Fiscal 2017 Highlights

The highlights for the nine months ended February 28, 2017 (the "nine
months") are as follows:

  • Total revenue increased 7% to $2.4 billion.
  • Total service revenue increased 7% to $2.3 billion.
    • Payroll service revenue increased 3% to $1.3 billion. The impact
      from Advance Partners payroll service revenue, partially offset by
      the impact of one less processing day during the nine months
      compared to the prior year period, contributed approximately
      one-half of a percent to this growth.
    • HRS revenue increased 13% to $977.7 million, with Advance Partners
      contributing approximately one and one-half percent to the growth.
  • Operating income increased 8% to $940.7 million.
  • The effective income tax rate was 34.1% for the nine months, compared
    to 33.9% for the same period last year.
  • Net income and diluted earnings per share each increased 7% to $622.0
    million and $1.71 per share, respectively.
  • Net income and diluted earnings per share were both impacted by
    changes in the effective income tax rate resulting from discrete tax
    items recognized during the respective periods.
  • Adjusted net income (non-GAAP)(1) and adjusted diluted
    earnings per share (non-GAAP)(1) each increased 8% to
    $604.7 million and $1.66 per share, respectively.
(1)   Adjusted net income and adjusted diluted earnings per share are not
United States ("U.S.") generally accepted accounting principles
("GAAP") measures. Please refer to the "Non-GAAP Financial Measures"
section on the next page for a discussion of these non-GAAP measures
and a reconciliation to the most comparable GAAP measures of net
income and diluted earnings per share.
 

Financial Position and Liquidity

Our financial position as of February 28, 2017 remained strong with cash
and total corporate investments of $844.1 million. Our primary source of
cash is generated from our ongoing operations. Short-term borrowings
totaled $55.4 million as of February 28, 2017. Our positive cash flows
have historically allowed us to support our business and to pay
substantial dividends to our stockholders. It is anticipated that cash
and total corporate investments as of February 28, 2017, along with
projected operating cash flows and available short-term financing, will
support our normal business operations, capital purchases, business
acquisitions, share repurchases, and dividend payments for the
foreseeable future.

Cash flows from operations were $769.3 million for the nine months, a
decrease of 3% from the same period last year. This decrease resulted
mainly from fluctuations in working capital, partially offset by higher
net income adjusted for non-cash items. Working capital fluctuations
contributed $28.2 million of cash outflows for the nine months, compared
with $44.7 million of cash inflows for the same period last year.

During the nine months, we repurchased 2.9 million shares of our common
stock for a total of $166.2 million. In the respective prior year
period, we repurchased 2.2 million shares for $107.9 million.

Outlook

Our outlook for the fiscal year ending May 31, 2017 ("fiscal 2017") is
based upon current market, economic, and interest rate conditions
continuing with no significant changes. Our guidance for fiscal 2017 is
summarized as follows:

  • Payroll service revenue is anticipated to increase in the range of 3%
    to 4%;
  • HRS revenue is anticipated to increase in the range of 12% to 14%;
  • Total service revenue is expected to increase in the range of 7% to 8%;
  • Interest on funds held for clients is expected to reflect
    upper-single-digit growth;
  • Net income (GAAP basis) is anticipated to increase approximately 7%
    and adjusted net income (non-GAAP)(1) is anticipated to
    increase approximately 8%.
  • The effective income tax rate for fiscal 2017 is expected to be
    approximately 35%.
(1)   Adjusted net income is a non-GAAP measure. Please refer to the
"Non-GAAP Financial Measures" section that follows for a discussion
of this non-GAAP measure and a reconciliation to the most comparable
GAAP measure of net income for the third quarter and nine months. We
have not provided a reconciliation of adjusted net income to GAAP
net income for the forward-looking guidance because information
related to the items excluded for future periods is subject to
uncertainty and is not readily available at this time without
unreasonable effort. Uncertainty primarily relates to employee
decisions regarding exercise of stock-based awards and the market
price of the Company's common stock at that time.
 

Non-GAAP Financial Measures

                       
 
For the three months ended For the nine months ended
February 28, February 29, February 28, February 29,
$ in millions 2017 2016 Change 2017 2016 Change
Net income (GAAP) $ 202.5 $ 180.4 12 % $ 622.0 $ 578.7 7 %
Non-GAAP adjustments:

Excess tax benefit related to
employee stock compensation

(3.2) (17.3)

Net tax benefit on income derived
from prior tax years for
customer-
facing software

              (21.1)  
Total non-GAAP adjustments   (3.2)         (17.3)     (21.1)  
Adjusted net income (non-GAAP) $ 199.3   $ 180.4   10 % $ 604.7   $ 557.6   8 %
 
Diluted earnings per share (GAAP) $ 0.56 $ 0.50 12 % $ 1.71 $ 1.60 7 %
Non-GAAP adjustments:

Excess tax benefit related to
employee stock compensation

(0.01) (0.05)

Net tax benefit on income derived
from prior tax years for
customer-
facing software

              (0.06)  
Total non-GAAP adjustments $ (0.01)   $   $ (0.05)   $ (0.06)  

Adjusted diluted earnings per
share (non-GAAP)

$ 0.55   $ 0.50   10 % $ 1.66   $ 1.54   8 %
 

In addition to reporting net income and diluted earnings per share, U.S.
GAAP measures, we present adjusted net income and adjusted diluted
earnings per share, which are non-GAAP measures. We believe adjusted net
income and adjusted diluted earnings per share are appropriate
additional measures, as they are indicators of our core business
operations performance period over period. Adjusted net income and
adjusted diluted earnings per share both exclude the additional tax
benefit or shortfall related to employee stock-based compensation
recognized in income taxes. This arose from early-adoption in June 2016
of new accounting guidance, but will be a recurring item going forward.
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 in the control of management. Also
excluded is a net tax benefit that was recorded for income derived in
prior tax years related to customer-facing software that we produced.
This was an unusual event that is not expected to recur. We believe
presenting net income and diluted earnings per share excluding these
particular discrete tax items allows a better understanding of core
business performance. Adjusted net income and adjusted diluted earnings
per share are not calculated through the application of GAAP and are not
a required form of disclosure by the Securities and Exchange Commission
("SEC"). As such, they should not be considered as a substitute for the
GAAP measures of net income and diluted earnings per share, and
therefore should not be used in isolation, but in conjunction with, the
GAAP measures. The use of any non-GAAP measure may produce results that
vary from the GAAP measure and may not be comparable to a similarly
defined non-GAAP measure used by other companies.

Quarterly Report on Form 10-Q

We anticipate filing our Quarterly Report on Form 10-Q ("Form 10-Q") for
the three and nine months ended February 28, 2017 within the next few
days and it will be available at our investor
relations page
. This press release should be read in conjunction
with the Form 10-Q and the related Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in that Form 10-Q.

Conference Call

Interested parties may access the webcast
of our Earnings Release Conference Call, scheduled for March 29, 2017 at
9:30 a.m. Eastern Time. The webcast will also be archived for
approximately one month. Our news releases, current financial
information, SEC filings, and investor presentation are also accessible
at our investor
relations page
.

About Paychex

Paychex, Inc. (NASDAQ:PAYX) is a leading provider of integrated human
capital management solutions for payroll, human resources, retirement,
and insurance services. By combining its innovative
software-as-a-service technology and mobility platform with dedicated,
personal service, Paychex empowers small- and medium-sized business
owners to focus on the growth and management of their business. Backed
by 45 years of industry expertise, Paychex serves approximately 605,000
payroll clients as of May 31, 2016 across more than 100 locations and
pays one out of every 12 American private sector employees. Learn more
about Paychex by visiting paychex.com
and stay connected on Twitter
and LinkedIn.

Cautionary Note Regarding Forward-Looking Statements Pursuant to the
U.S. Private Securities Litigation Reform Act of 1995

Certain written and oral statements made by us may constitute
"forward-looking statements" within the meaning of the safe harbor
provisions of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by such words and phrases
as "we expect," "expected to," "estimates," "estimated," "overview,"
"current outlook," "we look forward to," "would equate to," "projects,"
"projections," "projected," "projected to be," "anticipates,"
"anticipated," "we believe," "believes," "could be," and other similar
words or phrases. Examples of forward-looking statements include, among
others, statements we make regarding operating performance, events, or
developments that we expect or anticipate will occur in the future,
including statements relating to our outlook, revenue growth, earnings,
earnings-per-share growth, or similar projections.

Forward-looking statements are neither historical facts nor assurances
of future performance. Instead, they are based only on our current
beliefs, expectations, and assumptions regarding the future of our
business, future plans and strategies, projections, anticipated events
and trends, the economy, and other future conditions. Because
forward-looking statements relate to the future, they are subject to
inherent uncertainties, risks, and changes in circumstances that are
difficult to predict, many of which are outside our control. Our actual
results and financial conditions may differ materially from those
indicated in the forward-looking statements. Therefore, you should not
place undue reliance upon any of these forward-looking statements.
Important factors that could cause our actual results and financial
condition to differ materially from those indicated in the
forward-looking statements include, among others, the following:

  • general market and economic conditions including, among others,
    changes in U.S. employment and wage levels, changes to new hiring
    trends, legislative changes to stimulate the economy, changes in
    short- and long-term interest rates, changes in the fair value and the
    credit rating of securities held by us, and accessibility of financing;
  • changes in demand for our services and products, ability to develop
    and market new services and products effectively, pricing changes, and
    the impact of competition;
  • changes in the availability of skilled workers, in particular those
    supporting our technology and product development;
  • changes in the laws regulating collection and payment of payroll
    taxes, professional employer organizations, and employee benefits,
    including retirement plans, workers' compensation, health insurance
    (including health care reform legislation), state unemployment, and
    section 125 plans;
  • changes in health insurance and workers' compensation rates and
    underlying claims trends;
  • changes in technology that adversely affect our products and services
    and impact our ability to provide timely enhancements to services and
    products;
  • the possibility of cyber-attacks, security breaches, or other security
    vulnerabilities that could disrupt operations or expose confidential
    data, and could also result in reduced revenues, increased costs,
    liability claims, or harm to our competitive position;
  • the possibility of the closing of our operating facilities, or the
    failure of our computer systems, and communication systems during a
    catastrophic event;
  • the possibility of third-party service providers failing to perform
    their functions;
  • the possibility of a failure of internal controls or our inability to
    implement business processing improvements;
  • the possibility that we may be subject to liability for violations of
    employment or discrimination laws by our clients and acts or omissions
    of client employees who may be deemed to be our agents, even if we do
    not participate in any such acts or violations; and
  • potentially unfavorable outcomes related to pending or future
    (possible) legal matters.

Any of these factors, as well as such other factors as discussed in our
SEC filings, could cause our actual results to differ materially from
our anticipated results. The information provided in this document is
based upon the facts and circumstances known at this time, and any
forward-looking statement made by us in this document speaks only as of
the date on which it is made. Except as required by law, we undertake no
obligation to update these forward-looking statements after the date of
issuance of this press release to reflect events or circumstances after
such date, or to reflect the occurrence of unanticipated events.

                       

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In millions, except per share amounts)

 
For the three months ended For the nine months ended
February 28, February 29, February 28, February 29,
2017 2016 Change 2017 2016 Change
Revenue:
Payroll service revenue $ 446.6 $ 439.6 2 % $ 1,338.4 $ 1,299.5 3 %
Human Resource Services revenue   336.0     301.1 12 %   977.7   864.7 13 %
Total service revenue 782.6 740.7 6 % 2,316.1 2,164.2 7 %
Interest on funds held for clients (1)   13.2     11.9 11 %   36.6   33.8 8 %
Total revenue 795.8 752.6 6 % 2,352.7 2,198.0 7 %
Expenses:
Operating expenses 236.8 225.9 5 % 688.2 636.8 8 %
Selling, general and administrative expenses   252.4     246.7 2 %   723.8   690.9 5 %
Total expenses   489.2     472.6 4 %   1,412.0   1,327.7 6 %
Operating income 306.6 280.0 10 % 940.7 870.3 8 %
Investment income, net (1)   1.2     1.7 (36) %   3.6   4.7 (25) %
Income before income taxes 307.8 281.7 9 % 944.3 875.0 8 %
Income taxes   105.3   101.3 4 %   322.3   296.3 9 %
Net income $ 202.5 $ 180.4 12 % $ 622.0 $ 578.7 7 %
 
Basic earnings per share $ 0.56 $ 0.50 12 % $ 1.73 $ 1.60 8 %
Diluted earnings per share $ 0.56 $ 0.50 12 % $ 1.71 $ 1.60 7 %
Weighted-average common shares outstanding 359.0 360.5 360.0 360.8
Weighted-average common shares outstanding,
assuming
dilution
361.8 362.2 362.8 362.4
Cash dividends per common share $ 0.46 $ 0.42 $ 1.38 $ 1.26
 
(1)  

Further information on interest on funds held for clients and
investment income, net, and the short- and long-term effects of
changing interest rates can be found in our filings with the SEC,
including our Form 10-Q and our Annual Report on Form 10-K, as
applicable, under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
subheadings "Results of Operations" and "Market Risk Factors."
These filings are accessible at www.paychex.com.

 
       

PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions, except per share amount)

 
February 28, May 31,
2017 2016
ASSETS
Cash and cash equivalents $ 189.9 $ 131.5
Corporate investments 214.0 220.6
Interest receivable 32.0 36.1
Accounts receivable, net of allowance for doubtful accounts 429.9 408.6
Prepaid income taxes 33.4 10.5
Prepaid expenses and other current assets   68.0   58.8
Current assets before funds held for clients 967.2 866.1
Funds held for clients   4,784.6   3,997.5
Total current assets 5,751.8 4,863.6
Long-term corporate investments 440.2 441.1
Property and equipment, net of accumulated depreciation 341.6 353.0
Intangible assets, net of accumulated amortization 62.0 69.5
Goodwill 657.1 657.1
Prepaid income taxes 24.9 24.9
Other long-term assets   32.7   31.6
Total assets $ 7,310.3 $ 6,440.8
 
LIABILITIES
Accounts payable $ 55.9 $ 56.7
Accrued compensation and related items 278.1 247.8
Short-term borrowings 55.4
Deferred revenue 25.1 26.3
Other current liabilities   84.1   79.8
Current liabilities before client fund obligations 498.6 410.6
Client fund obligations   4,775.1   3,955.3
Total current liabilities 5,273.7 4,365.9
Accrued income taxes 48.0 72.8
Deferred income taxes 17.7 22.1
Other long-term liabilities   74.2   68.3
Total liabilities 5,413.6 4,529.1
 
STOCKHOLDERS' EQUITY

Common stock, $0.01 par value; Authorized: 600.0 shares;
  Issued
and outstanding: 359.2 shares as of February 28, 2017
  and
360.4 shares as of May 31, 2016

3.6 3.6
Additional paid-in capital 1,016.6 952.7
Retained earnings 871.9 926.2
Accumulated other comprehensive income   4.6   29.2
Total stockholders' equity   1,896.7   1,911.7
Total liabilities and stockholders' equity $ 7,310.3 $ 6,440.8
 
       

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

 
For the nine months ended
February 28, February 29,
2017 2016
OPERATING ACTIVITIES
Net income $ 622.0 $ 578.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization on property and equipment and
intangible assets
90.7 85.1
Amortization of premiums and discounts on available-for-sale
securities, net
55.0 57.2
Stock-based compensation costs 26.5 26.1
Benefit from deferred income taxes (2.2)
Provision for allowance for doubtful accounts 3.4 1.7
Net realized gains on sales of available-for-sale securities (0.1) (0.1)
Changes in operating assets and liabilities:
Interest receivable 4.1 6.3
Accounts receivable (24.6) 18.6
Prepaid expenses and other current assets (32.1) (8.6)
Accounts payable and other current liabilities 37.5 28.4
Net change in other long-term assets and liabilities   (13.1)  
Net cash provided by operating activities 769.3 791.2
INVESTING ACTIVITIES
Purchases of available-for-sale securities (36,029.5) (2,700.9)
Proceeds from sales and maturities of available-for-sale securities 35,617.4 3,303.6
Net change in funds held for clients' money market securities and
other cash equivalents
(459.8) (792.9)
Purchases of property and equipment (66.8) (70.0)
Acquisition of businesses, net of cash acquired (296.1)
Purchases of other assets   (8.4)   (7.3)
Net cash used in investing activities (947.1) (563.6)
FINANCING ACTIVITIES
Net change in client fund obligations 819.8 403.8
Net proceeds from short-term borrowings 55.4
Dividends paid (496.9) (455.0)
Repurchases of common shares (166.2) (107.9)
Activity related to equity-based plans   24.1   14.6
Net cash provided by/(used in) financing activities   236.2   (144.5)
Increase in cash and cash equivalents 58.4 83.1
Cash and cash equivalents, beginning of period   131.5   170.0
Cash and cash equivalents, end of period $ 189.9 $ 253.1

© 2017 Paychex, Inc.

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