Paychex, Inc. Reports Second Quarter Results
SECOND QUARTER FISCAL 2010 HIGHLIGHTS
-- Total service revenue decreased 4% to $483.0 million.
-- Total revenue was $496.6 million.
-- Operating income decreased 9% to $193.1 million, as interest on funds
held for clients decreased 31%.
-- Operating income excluding interest on funds held for clients decreased
7% to $179.5 million.
-- Net income and diluted earnings per share decreased 10% to $125.8
million and $0.35 per share, respectively.
ROCHESTER, N.Y.--(BUSINESS WIRE)-- Paychex, Inc. ("Paychex," "we," "our," or "us") (NASDAQ:PAYX) today announced total revenue of $496.6 million for the three months ended November 30, 2009 (the "second quarter"), a 5% decrease from the same period last year. Net income and diluted earnings per share decreased 10% to $125.8 million and $0.35 per share, respectively.
"Our financial results for the second quarter were in line with our expectations, and our guidance for the full year fiscal 2010 remains unchanged. The economic environment has continued to influence our results causing unfavorable year-over-year comparisons. On a positive note, our key indicators have been stable for the second quarter in a row," commented Jonathan J. Judge, President and Chief Executive Officer of Paychex. "We continue to provide excellent customer service, invest in our business while remaining cost conscious, and are positioned to capitalize on our opportunities as the economy recovers," added Mr. Judge.
Payroll service revenue decreased 7% to $350.8 million for the second quarter from the same period last year as the impact of the weakened economic environment negatively impacted our client base and check volume. Our checks per client decreased 3.7% for the second quarter compared to the same period last year, an improvement from the 5.0% year-over-year decline for the three months ended August 31, 2009 (the "first quarter"). Our client base has been adversely impacted by weak new business starts.
Human Resource Services revenue increased 3% to $132.2 million for the second quarter from the same period last year. The following factors contributed to Human Resource Services revenue growth:
As of: November 30, % November 30, % $ in billions 2009 Change 2008 Change Comprehensive human resource outsourcing services client 468,000 5% 445,000 11% employees served Comprehensive human resource 19,000 8% 17,000 15% outsourcing services clients Workers' compensation insurance 78,000 5% 75,000 11% clients Retirement services clients 50,000 (1%) 50,000 10% Asset value of retirement services $10.3 43% $7.2 (22%) client employees' funds
In addition, Human Resource Services revenue for the second quarter was positively impacted by a 54% increase in health and benefits services revenue and favorability in PEO net service revenue from fluctuations in workers' compensation claims.
Offsetting some of this revenue growth has been the impact from weak economic conditions. The most significant impacts have been to retirement services and comprehensive human resource outsourcing services. The asset value of retirement services client employees' funds has increased 43% from the same period last year to $10.3 billion as of November 30, 2009, as a result of recovery in the financial markets. The positive impact of the market recovery on second quarter revenue was offset by retirement services client employees shifting the mix of assets invested to funds earning lower fees. Also, retirement services revenue growth was impacted by $3.4 million for billings in the second quarter of fiscal 2009 related to statutory required restatements of clients' retirement plans which are not expected to recur for approximately six years.
During the second quarter, we sold Stromberg time and attendance, an immaterial component of Paychex. Human Resource Services revenue growth excluding Stromberg revenue and retirement plan restatement billings would have been 2% for the first quarter, 9% for the second quarter, and 5% for the six months ended November 30, 2009.
Total expenses decreased 3% to $303.5 million for the second quarter compared to the same period last year. This decline was primarily due to overall cost control measures and lower headcount, offset slightly by costs related to continued investment in our sales force for key areas, customer service, and technological infrastructure.
For the second quarter, our operating income was $193.1 million, a decrease of 9% from the same period last year. Operating income excluding interest on funds held for clients (see Note 1 on page 3 for further description of this non-GAAP measure) decreased 7% to $179.5 million for the second quarter as compared to $192.1 million for the same period last year.
For the three months ended For the six months ended
November 30, November 30,
$ in millions 2009 2008 % Change 2009 2008 % Change
Operating income $ 193.1 $ 211.9 (9 %) $ 382.9 $ 433.5 (12 %)
Excluding
interest on (13.6 ) (19.8 ) (31 %) (27.3 ) (44.0 ) (38 %)
funds held for
clients
Operating income
excluding
interest on $ 179.5 $ 192.1 (7 %) $ 355.6 $ 389.5 (9 %)
funds held for
clients
For the second quarter, interest on funds held for clients decreased 31% to $13.6 million due to lower average interest rates earned and lower average investment balances. Average investment balances for funds held for clients decreased 10% for the second quarter compared to the prior year period. This decline was a result of overall economic factors, which have negatively impacted our client base, and the impact of the American Recovery and Reinvestment Act of 2009 (the "2009 economic stimulus package") generating lower tax withholdings for client employees. Investment income decreased 41% to $1.1 million for the second quarter due to lower average interest rates earned, offset somewhat by higher average investment balances resulting from investment of cash generated from operations.
Average investment balances and interest rates are summarized below:
For the three months For the six months ended
ended November 30, November 30,
$ in 2009 2008 % 2009 2008 %
millions Change Change
Average
investment
balances:
Funds held $ 2,790.8 $ 3,088.3 (10 %) $ 2,849.0 $ 3,154.2 (10 %)
for clients
Corporate $ 627.1 $ 510.2 23 % $ 622.8 $ 497.3 25 %
investments
Average
interest
rates
earned
(exclusive
of net
realized
gains):
Funds held 1.8 % 2.5 % 1.8 % 2.7 %
for clients
Corporate 0.9 % 1.6 % 0.8 % 2.1 %
investments
Net
realized
gains:
Funds held $ 0.7 $ 0.4 $ 1.0 $ 0.7
for clients
Corporate $ -- $ -- $ -- $ --
investments
We continue to follow our investment strategy of maximizing liquidity and protecting principal. With the turmoil in the financial markets, this has translated to significantly lower yields on high quality instruments, impacting our income earned on our funds held for clients and corporate investments. We invest primarily in high credit quality securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings. We limit the amounts that can be invested in any single issuer. All the investments we held as of November 30, 2009 are traded in active markets. During the past year, our primary short-term investment vehicle has been United States ("U.S.") agency discount notes. We have seen gradual improvements in liquidity in certain money market sectors, and during the second quarter we began to invest in select A-1/P-1-rated variable rate demand notes.
The available-for-sale securities within the funds held for clients and corporate investment portfolios reflected a net unrealized gain of $78.8 million as of November 30, 2009, compared with a net unrealized gain of $66.7 million as of May 31, 2009. During the six months ended November 30, 2009, the net unrealized gain on our investment portfolios ranged from $55.1 million to $78.8 million. The net unrealized gain on our investment portfolios was approximately $79.2 million as of December 11, 2009.
YEAR-TO-DATE FISCAL 2010 HIGHLIGHTS
The highlights for the six months ended November 30, 2009 are as follows:
-- Payroll service revenue decreased 7% to $705.2 million.
-- Human Resource Services revenue increased 2% to $264.3 million.
-- Total revenue decreased 6% to $996.8 million.
-- Combined interest on funds held for clients and investment income, net
decreased $19.7 million, or 40%.
-- Operating income decreased 12% to $382.9 million, and operating income
excluding interest on funds held for clients decreased 9% to $355.6
million.
-- Net income and diluted earnings per share decreased 14% to $249.5
million and $0.69 per share, respectively.
-- Cash flow from operations was $279.2 million.
OUTLOOK
Our outlook for the fiscal year ending May 31, 2010 ("fiscal 2010") remains unchanged from the guidance provided at the end of the first quarter. This guidance reflects the impact of current economic and financial conditions, and assumes these conditions will continue through the remainder of the fiscal year. Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates.
Projected changes in revenue and net income for fiscal 2010 are as follows:
Low High
Payroll service revenue (7 %) -- (5 %)
Human Resource Services revenue 3 % -- 6 %
Total service revenue (5 %) -- (2 %)
Interest on funds held for clients (30 %) -- (25 %)
Total revenue (5 %) -- (2 %)
Investment income, net (35 %) -- (30 %)
Net income (12 %) -- (10 %)
Operating income excluding interest on funds held for clients as a percentage of service revenue is expected to range from 34% to 35% for fiscal 2010. The effective income tax rate is expected to approximate 35% throughout fiscal 2010. The higher tax rate in fiscal 2010 is driven by higher state income tax rates resulting from state legislative changes.
Interest on funds held for clients and investment income for fiscal 2010 are expected to be impacted by interest rate volatility, and comparisons to prior year are expected to improve in the second half of fiscal 2010. Interest on funds held for clients will be further impacted by a projected 8% decline in average invested balances for fiscal 2010 compared to the prior year. This decline is the result of overall economic factors, which have negatively impacted our client base, and the 2009 economic stimulus package generating lower tax withholdings for client employees.
Note 1: In addition to reporting operating income, a U.S. generally accepted accounting principle ("GAAP") measure, we present operating income excluding interest on funds held for clients, which is a non-GAAP measure. We believe operating income excluding interest on funds held for clients is an appropriate additional measure, as it is an indicator of our core business operations performance period over period. It is also the measure used internally for establishing the following year's targets and measuring management's performance in connection with certain performance-based compensation payments and awards. Interest on funds held for clients is an adjustment to operating income due to the volatility of interest rates which are not within the control of management. Operating income excluding interest on funds held for clients is not calculated through the application of GAAP and is not the required form of disclosure by the Securities and Exchange Commission ("SEC"). As such, it should not be considered as a substitute for the GAAP measure of operating income and, therefore, should not be used in isolation, but in conjunction with the GAAP measure. 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
Our Quarterly Report on Form 10-Q ("Form 10-Q") is normally filed by the close of business on the same day as this press release is issued, and is available at www.paychex.com. 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 December 17, 2009 at 10:30 a.m. Eastern Time, at www.paychex.com on the Investor Relations page. The webcast will also be archived on the Investor Relations page for approximately one month. Our news releases, current financial information, SEC filings, and investor presentation are also accessible at www.paychex.com.
ABOUT PAYCHEX
Paychex, Inc. is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. The company offers comprehensive payroll services, including payroll processing, payroll tax administration, and employee pay services, including direct deposit, check signing, and Readychex(R). Human Resource Services include 401(k) plan recordkeeping, health insurance, workers' compensation administration, section 125 plans, a professional employer organization, time and attendance solutions, and other administrative services for business. Paychex, Inc. was founded in 1971. With headquarters in Rochester, New York, the company has more than 100 offices and serves approximately 554,000 payroll clients nationwide as of May 31, 2009. For more information about Paychex, Inc. and our products, visit www.paychex.com.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by us may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements are identified by such words and phrases as "we expect," "expected to," "estimates," "estimated," "current outlook," "we look forward to," "would equate to," "projects," "projections," "projected to be," "anticipates," "anticipated," "we believe," "could be," and other similar phrases. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to revenue growth, earnings, earnings-per-share growth, or similar projections, are forward-looking statements within the meaning of the Reform Act. Because they are forward-looking, they should be evaluated in light of important risk factors. These risk factors include, but are not limited to, the following risks, as well as those that are described in our periodic filings with the SEC:
-- general market and economic conditions including, among others, changes
in U.S. employment and wage levels, changes in 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, and the availability of skilled workers;
-- changes in the laws regulating collection and payment of payroll taxes,
professional employer organizations, and employee benefits, including
retirement plans, workers' compensation, health insurance, state
unemployment, and section 125 plans;
-- changes in workers' compensation rates and underlying claims trends;
-- the possibility of failure to keep pace with technological changes and
provide timely enhancements to services and products;
-- the possibility of failure of our operating facilities, computer
systems, and communication systems during a catastrophic event;
-- the possibility of third-party service providers failing to perform
their functions;
-- the possible failure of internal controls or our inability to implement
business processing improvements; and
-- potentially unfavorable outcomes related to pending legal matters.
Any of these factors 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. We undertake no obligation to update these forward-looking statements after the date of issuance of this 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 thousands, except per share amounts)
For the three months For the six months
ended ended
November 30, November 30,
2009 2008 % 2009 2008 % Change
Change
Revenue:
Payroll service $ 350,817 $ 376,090 (7 %) $ 705,238 $ 754,548 (7 %)
revenue
Human Resource 132,207 128,293 3 % 264,277 259,702 2 %
Services revenue
Total service 483,024 504,383 (4 %) 969,515 1,014,250 (4 %)
revenue
Interest on
funds held for 13,552 19,777 (31 %) 27,275 43,995 (38 %)
clients (1)
Total revenue 496,576 524,160 (5 %) 996,790 1,058,245 (6 %)
Expenses:
Operating 162,648 170,675 (5 %) 325,994 339,143 (4 %)
expenses
Selling, general
and 140,863 141,585 (1 %) 287,864 285,617 1 %
administrative
expenses
Total expenses 303,511 312,260 (3 %) 613,858 624,760 (2 %)
Operating income 193,065 211,900 (9 %) 382,932 433,485 (12 %)
Investment 1,147 1,932 (41 %) 2,052 4,983 (59 %)
income, net (1)
Income before 194,212 213,832 (9 %) 384,984 438,468 (12 %)
income taxes
Income taxes 68,362 73,590 (7 %) 135,514 149,517 (9 %)
Net income $ 125,850 $ 140,242 (10 %) $ 249,470 $ 288,951 (14 %)
Basic earnings $ 0.35 $ 0.39 (10 %) $ 0.69 $ 0.80 (14 %)
per share
Diluted earnings $ 0.35 $ 0.39 (10 %) $ 0.69 $ 0.80 (14 %)
per share
Weighted-average
common shares 361,392 360,812 361,288 360,710
outstanding
Weighted-average
common shares
outstanding, 361,692 360,977 361,515 360,998
assuming
dilution
Cash dividends $ 0.31 $ 0.31 - $ 0.62 $ 0.62 -
per common share
(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 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 our website www.paychex.com.
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share amount)
November 30, May 31,
2009 2009
ASSETS
Cash and cash equivalents $ 225,304 $ 472,769
Corporate investments 62,011 19,710
Interest receivable 29,107 27,722
Accounts receivable, net of allowance for doubtful 221,711 177,958
accounts
Deferred income taxes -- 10,180
Prepaid income taxes -- 2,198
Prepaid expenses and other current assets 27,958 27,913
Current assets before funds held for clients 566,091 738,450
Funds held for clients 2,996,115 3,501,376
Total current assets 3,562,206 4,239,826
Long-term corporate investments 317,430 82,234
Property and equipment, net of accumulated 262,024 274,530
depreciation
Intangible assets, net of accumulated amortization 71,478 76,641
Goodwill 421,559 433,316
Deferred income taxes 18,488 16,487
Other long-term assets 3,947 4,381
Total assets $ 4,657,132 $ 5,127,415
LIABILITIES
Accounts payable $ 36,494 $ 37,334
Accrued compensation and related items 136,777 135,064
Deferred revenue 2,516 9,542
Accrued income taxes 1,739 --
Deferred income taxes 23,683 17,159
Litigation reserve 20,396 20,411
Other current liabilities 42,138 44,704
Current liabilities before client fund obligations 263,743 264,214
Client fund obligations 2,922,986 3,437,679
Total current liabilities 3,186,729 3,701,893
Accrued income taxes 26,580 25,730
Deferred income taxes 7,743 12,773
Other long-term liabilities 43,890 45,541
Total liabilities 3,264,942 3,785,937
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; Authorized: 600,000
shares;
Issued and outstanding: 361,407 shares as of November 3,614 3,610
30, 2009
and 360,976 shares as of May 31, 2009, respectively
Additional paid-in capital 485,853 466,427
Retained earnings 853,084 829,501
Accumulated other comprehensive income 49,639 41,940
Total stockholders' equity 1,392,190 1,341,478
Total liabilities and stockholders' equity $ 4,657,132 $ 5,127,415
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
For the six months ended
November 30,
2009 2008
OPERATING ACTIVITIES
Net income $ 249,470 $ 288,951
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization on property and 43,313 41,678
equipment and intangible assets
Amortization of premiums and discounts on 16,801 11,940
available-for-sale securities
Stock-based compensation costs 13,310 13,942
Provision for deferred income taxes 4,263 13,089
Provision for allowance for doubtful accounts 1,958 1,084
Net realized gains on sales of available-for-sale (1,014 ) (705 )
securities
Changes in operating assets and liabilities:
Interest receivable (1,385 ) 4,644
Accounts receivable (44,641 ) (35,836 )
Prepaid expenses and other current assets 1,665 5,501
Accounts payable and other current liabilities (1,422 ) (18,712 )
Net change in other assets and liabilities (3,147 ) 2,809
Net cash provided by operating activities 279,171 328,385
INVESTING ACTIVITIES
Purchases of available-for-sale securities (756,826 ) (16,284,599 )
Proceeds from sales and maturities of 284,071 17,493,183
available-for-sale securities
Net change in funds held for clients' money 697,664 (820,736 )
market securities and other cash equivalents
Purchases of property and equipment (23,091 ) (39,207 )
Proceeds from sale of business 13,050 --
Purchases of other assets (9,168 ) (13,445 )
Net cash provided by investing activities 205,700 335,196
FINANCING ACTIVITIES
Net change in client fund obligations (514,693 ) (279,002 )
Dividends paid (224,234 ) (223,840 )
Proceeds from and excess tax benefit related to 6,591 5,657
exercise of stock options
Net cash used in financing activities (732,336 ) (497,185 )
(Decrease)/increase in cash and cash equivalents (247,465 ) 166,396
Cash and cash equivalents, beginning of period 472,769 164,237
Cash and cash equivalents, end of period $ 225,304 $ 330,633
Source: Paychex, Inc.
Released December 16, 2009