Market Overview

Paychex, Inc. Reports Fourth Quarter and Fiscal 2017 Results

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Paychex, Inc. ("Paychex," "we," "our," or "us") (NASDAQ:PAYX) today
announced its results of operations for the three months ended May 31,
2017 (the "fourth quarter"), as well as the full fiscal year ended
May 31, 2017 ("fiscal 2017" or the "fiscal year"). Total revenue and
total service revenue both increased 6% for the fourth quarter to $798.6
million and $784.6 million, respectively. For the fiscal year, total
revenue and total service revenue both increased 7% to $3.2 billion and
$3.1 billion, respectively. Net income and diluted earnings per share
both increased 10% for the fourth quarter to $195.3 million and $0.54
per share, respectively. For the fiscal year, net income and diluted
earnings per share both increased 8% to $817.3 million and $2.25 per
share, respectively.

Martin Mucci, President and Chief Executive Officer, commented, "Fiscal
2017 was another year of solid growth in revenue and earnings. Our
business model remains strong as evidenced by our industry-leading
margins. We continue to focus on providing our clients the value of our
complete human capital management, or HCM, solutions with a combination
of leading technology and dedicated service."

Mr. Mucci added, "We recently announced that we are among the first to
be certified to provide professional employer organization, or PEO,
services under the Small Business Efficiency Act. With more than 20
years in the PEO industry as a trusted partner to small- and mid-size
businesses, this certification reaffirms Paychex as a leading provider
of PEO services in the U.S."

Payroll service revenue increased 2% to $440.9 million for the fourth
quarter and 3% to $1.8 billion for the fiscal year, compared to the
respective periods last year. These increases were primarily driven by
growth in revenue per check, which improved as a result of price
increases, net of discounts. As of May 31, 2017, we served approximately
605,000 payroll clients, consistent with a year ago. New sales were
challenged when compared to the fiscal year ended May 31, 2016 ("fiscal
2016"), which benefited from the implementation of the Affordable Care
Act ("ACA"). In addition, we experienced a slight increase in client
attrition for fiscal 2017 as compared to the prior year. The acquisition
of Advance Partners in December 2015 contributed approximately 1% to the
growth in payroll service revenue for the fiscal year.

Human Resource Services ("HRS") revenue increased 10% to $343.7 million
for the fourth quarter and 12% to $1.3 billion for the fiscal year,
compared to the respective periods last year. HRS revenue growth was
primarily driven by increases in our client base across all major HCM
services, including: comprehensive 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 PEO. Demand for these
services resulted in strong growth in the number of client worksite
employees served as of May 31, 2017 as compared to May 31, 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 continued growth of our full-service ACA
product and growth in health and benefit applicants, coupled with higher
average premiums in our workers' compensation insurance product. Advance
Partners contributed approximately 1% to the growth in HRS revenue for
the fiscal year.

Interest on funds held for clients increased 14% to $14.0 million for
the fourth quarter and 10% to $50.6 million for the fiscal year,
compared to the respective periods last year. The increases resulted
primarily from higher average interest rates earned. The funds held for
clients average investment balances were down 2% for the fourth quarter
and 1% for the fiscal year, with growth impacted by the timing of
certain remittances due to taxing authorities and client mix.

Average investment balances and interest rates are summarized below:

 
  For the three months ended     For the twelve months ended  
May 31, May 31,
$ in millions 2017   2016 Change 2017   2016 Change
Average investment balances:
Funds held for clients $ 4,310.4 $ 4,396.0 (2) % $ 4,066.3 $ 4,105.5 (1) %
Corporate investments $ 927.5 $ 862.2 8 % $ 906.7 $ 922.6 (2) %
 

Average interest rates earned(1)
(exclusive of net
realized gains):

Funds held for clients 1.3 % 1.1 % 1.2 % 1.1 %
Corporate investments 1.2 % 1.1 % 1.1 % 0.9 %
 
Total net realized gains $ $ $ 0.1 $ 0.1
 

(1)

    For further discussion of the impact of interest rate changes,
please refer to the "Market Risk Factors" Section of our Annual
Report on Form 10-K ("Form 10-K"), which we expect to file with the
Securities and Exchange Commission ("SEC") by the end of July 2017.
 

Total expenses increased 5% to $499.7 million for the fourth quarter and
6% to $1.9 billion for the fiscal year, compared to the respective
periods 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 along with our investment in technology also contributed to
total expense growth. Advance Partners contributed approximately 1% to
the growth in total expenses for the fiscal year.

Operating income increased 8% for both the fourth quarter and fiscal
year, compared to the respective periods last year. Operating income, as
a percent of total revenue, was 37.4% for the fourth quarter and 39.3%
for the fiscal year, compared to 36.6% and 38.8% for the respective
prior year periods.

Our effective income tax rate was 35.0% for the fourth quarter and 34.3%
for the fiscal year, compared to 35.5% and 34.3% for the respective
prior year periods. The decrease in the effective income tax rate for
the fourth quarter was related to discrete tax items recognized during
the period, including the excess tax benefit related to employee
stock-based compensation payments.

Financial Position and Liquidity

Our financial position as of May 31, 2017 remained strong with cash and
total corporate investments of $777.4 million and no debt. Our primary
source of cash is generated from our ongoing operations. The slight
decrease in cash and total corporate investments from $793.2 million as
of May 31, 2016 is primarily the result of share repurchases and an
increase in the rate for quarterly dividend payments, which offset cash
generated from operations during fiscal 2017. Historically, we have
funded our operations, capital purchases, business acquisitions, share
repurchases, and dividend payments from our operating activities. Our
positive cash flows have 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 May 31, 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 $960.4 million for fiscal 2017, a
decrease of 6% over the prior year. This decrease was the result of
fluctuations in working capital, partially offset by higher net income
adjusted for non-cash items. Working capital fluctuations resulted in
$104.1 million of cash outflows for fiscal 2017, compared with $26.5
million of cash inflows in the prior year. This change was largely
related to the timing of collections from clients and payments for
compensation, PEO payroll, and income taxes. In addition, the larger
outflows were impacted by higher accounts receivable balances related to
growth in our payroll funding business for temporary staffing agency
clients.

During fiscal 2017, 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.

Non-GAAP Financial Measures

 
  For the three months ended     For the twelve months ended  
May 31, May 31,
$ in millions 2017   2016 Change 2017   2016 Change
Net income (GAAP) $ 195.3 $ 178.1 10 % $ 817.3 $ 756.8 8 %
Non-GAAP adjustments:
Excess tax benefit related to employee stock compensation (1.0) (18.3)
Net tax benefit on income derived from prior tax years for
customer-facing software
              (21.1)  
Total non-GAAP adjustments   (1.0)         (18.3)     (21.1)  
Adjusted net income (non-GAAP) $ 194.3   $ 178.1   9 % $ 799.0   $ 735.7   9 %
 
Diluted earnings per share (GAAP) $ 0.54 $ 0.49 10 % $ 2.25 $ 2.09 8 %
Non-GAAP adjustments:
Excess tax benefit related to employee stock compensation (0.05)
Net tax benefit on income derived from prior tax years for
customer-facing software
              (0.06)  
Total non-GAAP adjustments           (0.05)     (0.06)  

Adjusted diluted earnings per share (non-GAAP)

$ 0.54   $ 0.49   10 % $ 2.20   $ 2.03   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 in fiscal 2016 for
income derived from 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
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.

Outlook

Our outlook for the fiscal year ending May 31, 2018 ("fiscal 2018") is
based upon current market, economic, and interest rate conditions
continuing with no significant changes. Our guidance for fiscal 2018 is
as follows:

  • Payroll service revenue is anticipated to increase in the range of 1%
    to 2%;
  • HRS revenue is anticipated to increase in the range of 8% to 10%;
  • Interest on funds held for clients is expected to reflect growth in
    the mid- to upper-teens;
  • Total revenue, including interest on funds held for clients, is
    expected to increase approximately 5%;
  • Operating income, as a percent of total revenue, is anticipated to be
    approximately 40%;
  • Investment income, net is anticipated to be in the range of $9.0
    million to $11.0 million;
  • The effective income tax rate for fiscal 2018 is expected to be in the
    range of 35.5% to 36.0%;
  • Net income (GAAP basis) is expected to increase approximately 5%;
  • Adjusted net income (non-GAAP)(1) is expected to increase
    approximately 7%; and
  • Adjusted diluted earnings per share (non-GAAP)(1) are
    expected to increase in the range of 7% to 8%.

(1)

    Adjusted net income and adjusted diluted earnings per share are
non-GAAP measures. Please refer to the "Non-GAAP Financial Measures"
section on page 4 of this press release for a discussion of these
non-GAAP measures. The difference between our guidance for the GAAP
measures of net income and diluted earnings per share and the
related non-GAAP measures of adjusted net income and adjusted
diluted earnings per share is limited to the tax benefit recognized
in fiscal 2017 related to employee stock-based compensation
payments. We have not incorporated any assumptions regarding such a
discrete tax benefit in our fiscal 2018 projections, as factors
impacting the amount are subject to uncertainty. 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.
 

Annual Report on Form 10-K

We anticipate filing our Form 10-K before the end of July 2017, and this
will be available at our investor
relations page
. This press release should be read in conjunction
with the Form 10-K 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-K.

Conference Call

Interested parties may access the webcast
of our Earnings Release Conference Call, scheduled for June 28, 2017 at
9:30 a.m. Eastern Time. The webcast will 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, 2017 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
    client data, and could also result in reduced revenues, increased
    costs, liability claims, or harm to our competitive position;
  • the possibility of failure 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, including possible
    liability related to our co-employment relationship with our PEO; and
  • potentially unfavorable outcomes related to pending 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 twelve months ended  
May 31, May 31,
2017   2016 Change 2017   2016 Change
Revenue:
Payroll service revenue $ 440.9 $ 430.4 2 % $ 1,779.3 $ 1,729.9 3 %
Human Resource Services revenue   343.7     311.2 10 %   1,321.4   1,175.9 12 %
Total service revenue 784.6 741.6 6 % 3,100.7 2,905.8 7 %
Interest on funds held for clients (1)   14.0     12.3 14 %   50.6   46.1 10 %
Total revenue 798.6 753.9 6 % 3,151.3 2,951.9 7 %
Expenses:
Operating expenses 231.4 220.3 5 % 919.6 857.1 7 %
Selling, general and administrative expenses   268.3     257.3 4 %   992.1   948.2 5 %
Total expenses   499.7     477.6 5 %   1,911.7   1,805.3 6 %
Operating income 298.9 276.3 8 % 1,239.6 1,146.6 8 %
Investment income/(expense), net (1)   1.6     (0.2) n/m   5.2   4.5 13 %
Income before income taxes 300.5 276.1 9 % 1,244.8 1,151.1 8 %
Income taxes   105.2   98.0 7 %   427.5   394.3 8 %
Net income $ 195.3 $ 178.1 10 % $ 817.3 $ 756.8 8 %
 
Basic earnings per share $ 0.54 $ 0.49 10 % $ 2.27 $ 2.10 8 %
Diluted earnings per share $ 0.54 $ 0.49 10 % $ 2.25 $ 2.09 8 %
Weighted-average common shares

outstanding

359.3 360.3 359.8 360.7
Weighted-average common shares

outstanding, assuming dilution

362.1 362.6 362.6 362.5
Cash dividends per common share $ 0.46 $ 0.42 $ 1.84 $ 1.68
 

(1)

   

Further information on interest on funds held for clients and
investment income/(expense), net, and the short- and long-term
effects of changing interest rates can be found in our filings
with the SEC, including our Quarterly Reports on Form 10-Q and our
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)
 
 
    May 31,
2017   2016
ASSETS
Cash and cash equivalents $ 184.6 $ 131.5
Corporate investments 138.8 220.6
Interest receivable 35.9 36.1
Accounts receivable, net of allowance for doubtful accounts 507.5 408.6
Prepaid income taxes 45.0 10.5
Prepaid expenses and other current assets   58.3   58.8
Current assets before funds held for clients 970.1 866.1
Funds held for clients   4,301.9   3,997.5
Total current assets 5,272.0 4,863.6
Long-term corporate investments 454.0 441.1
Property and equipment, net of accumulated depreciation 337.2 353.0
Intangible assets, net of accumulated amortization 57.6 69.5
Goodwill 657.1 657.1
Prepaid income taxes 24.9 24.9
Other long-term assets   30.9   31.6
Total assets $ 6,833.7 $ 6,440.8
 
LIABILITIES
Accounts payable $ 57.2 $ 56.7
Accrued compensation and related items 280.5 247.8
Deferred revenue 22.9 26.3
Other current liabilities   91.9   79.8
Current liabilities before client fund obligations 452.5 410.6
Client fund obligations   4,272.6   3,955.3
Total current liabilities 4,725.1 4,365.9
Accrued income taxes 45.6 72.8
Deferred income taxes 33.9 22.1
Other long-term liabilities   73.8   68.3
Total liabilities 4,878.4 4,529.1
 
STOCKHOLDERS' EQUITY

Common stock, $0.01 par value; Authorized: 600.0 shares;
Issued
and outstanding: 359.4 shares as of May 31, 2017
and 360.4
shares as of May 31, 2016

3.6 3.6
Additional paid-in capital 1,030.0 952.7
Retained earnings 901.7 926.2
Accumulated other comprehensive income   20.0   29.2
Total stockholders' equity   1,955.3   1,911.7
Total liabilities and stockholders' equity $ 6,833.7 $ 6,440.8
 
 
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
 
 
  For the twelve months ended
May 31,
2017   2016
OPERATING ACTIVITIES
Net income $ 817.3 $ 756.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization on property and equipment and
intangible assets
126.9 115.1
Amortization of premiums and discounts on available-for-sale
securities, net
72.5 75.7
Stock-based compensation costs 35.4 34.6
Provision from deferred income taxes 7.6 7.1
Provision for allowance for doubtful accounts 4.9 2.5
Net realized gains on sales of available-for-sale securities (0.1) (0.1)
Changes in operating assets and liabilities:
Interest receivable 0.2 1.8
Accounts receivable (103.7) (37.5)
Prepaid expenses and other current assets (34.1) (5.0)
Accounts payable and other current liabilities 48.9 63.3
Net change in other long-term assets and liabilities   (15.4)   3.9
Net cash provided by operating activities 960.4 1,018.2
INVESTING ACTIVITIES
Purchases of available-for-sale securities (50,462.3) (12,572.2)
Proceeds from sales and maturities of available-for-sale securities 49,903.0 11,984.3
Net change in funds held for clients' money market securities and
other cash equivalents
237.6 927.6
Purchases of property and equipment (94.3) (97.7)
Acquisition of businesses, net of cash acquired (296.1)
Purchases of other assets   (8.6)   (9.0)
Net cash used in investing activities (424.6) (63.1)
FINANCING ACTIVITIES
Net change in client fund obligations 317.3 (304.8)
Dividends paid (662.3) (606.5)
Repurchases of common shares (166.2) (107.9)
Activity related to equity-based plans   28.5   25.6
Net cash used in financing activities   (482.7)   (993.6)
Increase/(decrease) in cash and cash equivalents 53.1 (38.5)
Cash and cash equivalents, beginning of period   131.5   170.0
Cash and cash equivalents, end of period $ 184.6 $ 131.5
 

© 2017 Paychex, Inc.

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