Paychex, Inc. Reports Record First Quarter Results

First Quarter Fiscal 2008 Highlights:

-- Net income increased 12% to $151.1 million and diluted earnings per share increased 14% to $0.40 per share.

-- Total revenue increased 10% to $507.1 million.

-- Payroll service revenue increased 8% to $361.5 million and Human Resource Services revenue grew 20% to $113.3 million.

-- Operating income excluding interest on funds held for clients increased 14% to $178.3 million.

-- The Company's regular quarterly dividend increased 43% to $0.30 per share from $0.21 per share.

-- The Company repurchased $396.5 million, or 8.9 million shares, of its common stock as of August 31, 2007.


Paychex, Inc. ("we," "our," or "us") (NASDAQ:PAYX) today announced record net income of $151.1 million, or $0.40 diluted earnings per share, for the three months ended August 31, 2007 (the "first quarter"), a 12% increase over net income of $135.1 million, or $0.35 diluted earnings per share, for the same period last year. Total revenue was $507.1 million, a 10% increase over $459.4 million for the same period last year.

"We continued our tradition of record financial results as demonstrated by an excellent first quarter, on track to achieve our eighteenth consecutive year of record revenues and net income," commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.

"Our strong balance sheet and liquidity position have allowed us to continue to support our ongoing operations while returning value to our stockholders in the form of dividends and stock repurchases. We increased our quarterly dividend by 43% and commenced a program to repurchase $1.0 billion of our common stock, reflecting our confidence in the long-term growth opportunities of our business. In the first quarter, we repurchased $396.5 million of our common stock for a total of 8.9 million shares and we expect to complete the stock repurchase program in 2007," added Mr. Judge.

Payroll service revenue increased 8% to $361.5 million for the first quarter from the same period last year. The increase was due to client base growth, higher check volume, and price increases.

Human Resource Services revenue increased 20% to $113.3 million for the first quarter from the same period last year. The growth was generated from the following: retirement services client base increased 18% to 45,000 clients; comprehensive human resource outsourcing services client employees increased 22% to 381,000 client employees served; and workers' compensation insurance client base increased 19% to 65,000 clients. Additionally, the asset value of the retirement services client employees' funds increased 30% to $8.5 billion.

Total expenses increased 9% to $296.5 million for the first quarter from the same period last year. Growth in total expenses was a result of increases in personnel related to selling to new clients, retaining clients, and promoting new services.

For the first quarter, our operating income was $210.6 million, an increase of 13% over the same period last year. Operating income excluding interest on funds held for clients increased 14% to $178.3 million and improved as a percent of service revenues to 38% from 36% for the same period last year.

Interest on funds held for clients increased 8% to $32.3 million and corporate investment income increased 30% to $12.2 million, attributable to higher average interest rates and higher average investment balances, as summarized below:

                                            For the three months ended
                                                    August 31,
$ in millions                                    2007          2006
Average investment balances:
   Funds held for clients                    $   3,094.6   $   2,969.2
   Corporate investments                     $   1,227.6   $   1,001.0

Average interest rates earned:
   Funds held for clients                           4.2%          4.0%
   Corporate investments                            4.0%          3.7%


In July 2007, we announced our program to repurchase up to $1.0 billion of Paychex, Inc. common stock. Through September 26, 2007, we repurchased 11.2 million shares for a total of $500.0 million. Subject to changes in market conditions, we expect to complete our repurchase program in 2007 and anticipate that our weighted average outstanding shares for the full fiscal year ending May 31, 2008 ("fiscal 2008") will be approximately 370 million.


Our current outlook for fiscal 2008, has been revised from that provided in our Annual Report on Form 10-K ("Form 10-K") for the year ended May 31, 2007, incorporating the anticipated impact of lower investment income as a result of funding the stock repurchase program. In addition, this revised guidance reflects the 50 basis point decrease in the Federal Funds rate announced on September 18, 2007. Our anticipated effective income tax rate increased as a result of the lower expected tax-exempt income earned on our investment portfolios as well as the adoption of new accounting guidance related to uncertain tax positions. Our projections are based on current economic and interest rate conditions continuing with no significant changes. Projected revenue and net income growth is as follows:

     Payroll service revenue                          9% -- 10%
     Human Resource Services revenue                 20% -- 23%
     Total service revenue                           11% -- 13%
     Interest on funds held for clients            relatively flat
     Total revenue                                   11% -- 13%
     Corporate investment income                   (40%) -- (35%)
     Net income                                      12% -- 14%
    The effective income tax rate is expected to approximate 32.5%.


Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for September 27, 2007 at 10:30 a.m. Eastern Time, at 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 For more information, contact:

    Investor Relations:     John Morphy, CFO, or
                            Terri Allen             585-383-3406

    Media Inquiries:        Laura Saxby Lynch       585-383-3074


Paychex, Inc. is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. We offer 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 561,000 payroll clients nationwide. For more information about Paychex, Inc. and our products, visit


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, those that are described in our filings with the Securities and Exchange Commission ("SEC"), including the most recent Form 10-K filed on July 20, 2007. 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 to reflect events or circumstances after the date of issuance of this release, or to reflect occurrence of unanticipated events.

                            PAYCHEX, INC.
               (In thousands, except per share amounts)

                                   For the three months ended
                                           August 31,
                                       2007           2006    % Change
   Payroll service revenue         $   361,486    $   335,239       8%
   Human Resource Services revenue     113,329         94,304      20%
   Total service revenue               474,815        429,543      11%
   Interest on funds held for
    clients (1)                         32,315         29,831       8%
   Total revenue                       507,130        459,374      10%

   Operating expenses                  159,315        148,084       8%
   Selling, general and
    administrative expenses            137,227        124,936      10%
   Total expenses                      296,542        273,020       9%

Operating income                       210,588        186,354      13%

Investment income, net (1)              12,237          9,416      30%
Income before income taxes             222,825        195,770      14%

Income taxes                            71,750         60,689      18%

Net income                         $   151,075    $   135,081      12%

Basic earnings per share           $      0.40    $      0.36      11%

Diluted earnings per share         $      0.40    $      0.35      14%

Weighted-average common shares
 outstanding                           380,539        380,360

Weighted-average common shares
 outstanding, assuming dilution        382,255        381,876

Cash dividends per common share(2) $      0.30    $      0.16      88%
(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-K and Quarterly Reports on Form 10-Q, 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

(2) In October 2006, the Board of Directors declared a 31% increase in
 the quarterly dividend from $0.16 per share to $0.21 per share. In
 July 2007, the Board of Directors declared a 43% increase in the
 quarterly dividend from $0.21 per share to $0.30 per share.
                            PAYCHEX, INC.
               CONSOLIDATED BALANCE SHEETS (Unaudited)
               (In thousands, except per share amount)

                                               August 31,    May 31,
                                                  2007        2007
Cash and cash equivalents                      $  110,614  $   79,353
Corporate investments (1)                         338,639     511,772
Interest receivable                                35,373      53,624
Accounts receivable, net of allowance for
 doubtful accounts                                210,982     186,273
Deferred income taxes                              13,085      23,840
Prepaid income taxes                                   --       8,845
Prepaid expenses and other current assets          26,098      24,515
   Current assets before funds held for clients   734,791     888,222
Funds held for clients (1)                      3,525,070   3,973,097
   Total current assets                         4,259,861   4,861,319
Long-term corporate investments (1)               510,465     633,086
Property and equipment, net of accumulated
 depreciation                                     260,943     256,087
Intangible assets, net of accumulated
 amortization                                      64,767      67,213
Goodwill                                          440,308     407,712
Deferred income taxes                              15,068      15,209
Other long-term assets                              6,525       5,893
Total assets                                   $5,557,937  $6,246,519

Accounts payable                               $   91,807  $   46,961
Accrued compensation and related items             99,643     125,268
Deferred revenue                                    6,705       7,758
Accrued income taxes                               47,943          --
Litigation reserve                                 25,662      32,515
Other current liabilities                          45,357      42,638
   Current liabilities before client fund
    deposits                                      317,117     255,140
Client fund deposits                            3,528,373   3,982,330
   Total current liabilities                    3,845,490   4,237,470
Accrued income taxes (2)                           12,885          --
Deferred income taxes                               7,318       9,567
Other long-term liabilities                        48,122      47,234
Total liabilities                               3,913,815   4,294,271

Common stock, $.01 par value; Authorized:
 600,000 shares; Issued and outstanding:
 374,716 shares as of August 31, 2007, and
 382,151 shares as of May 31, 2007,
 respectively                                       3,747       3,822
Additional paid-in capital                        408,883     362,982
Retained earnings (2)                           1,235,588   1,595,105
Accumulated other comprehensive loss               (4,096)     (9,661)
Total stockholders' equity                      1,644,122   1,952,248
Total liabilities and stockholders' equity     $5,557,937  $6,246,519

(1) The available-for-sale securities within the funds held for
 clients and corporate investment portfolios reflected net unrealized
 losses of $6.3 million as of August 31, 2007, compared with net
 unrealized losses of $14.9 million as of May 31, 2007. During the
 first three months of fiscal 2008, the net unrealized loss position
 ranged from $24.3 million to $6.3 million. The net unrealized loss
 position of our combined investment portfolios was approximately $0.5
 million as of September 21, 2007.

(2) Effective June 1, 2007, we adopted Financial Accounting Standards
 Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
 Income Taxes, an interpretation of FASB Statement No. 109." Upon
 adoption, we recognized the cumulative effect of our uncertain tax
 positions of $8.4 million, with an offsetting decrease to opening
 retained earnings. Long-term liabilities on our Consolidated Balance
 Sheets include a reserve for uncertain tax positions as resolution of
 these matters is not expected within the next twelve months.

Source: Paychex, Inc.