Paychex, Inc. Reports Revised Fiscal 2007 Results


Paychex, Inc. ("we," "our," "us," or the "Company") (NASDAQ:PAYX) has revised its previously announced earnings for the fiscal year ended May 31, 2007 ("fiscal 2007") to recognize an additional expense charge of $25.0 million to increase its litigation reserve during the three months ended May 31, 2007 (the "fourth quarter"). Disputes involving Rapid Payroll, Inc. ("Rapid Payroll"), a wholly owned subsidiary of the Company, arose in August 2001. These disputes resulted in litigation, as has been previously disclosed by the Company. At the present time, the Company has fully resolved its licensing responsibility and settled all litigation with 74 of the 76 licensees who were provided services by Rapid Payroll. A decision favorable to Paychex, Inc. was issued by the United States District Court for the Central District of California with respect to the Company's dispute with one of the remaining two licensees. That licensee is currently appealing the case. A verdict was issued on June 27, 2007 in litigation brought by the other remaining licensee. In that case, a California Superior Court, Los Angeles County (the "Superior Court") jury awarded to the plaintiff $15.0 million in compensatory damages and subsequently awarded an additional $11.0 million in punitive damages.

"We are disappointed with the recent jury decisions in the Superior Court. We believe there are substantial bases to reduce or overturn the verdict by post-trial motions to the trial court and, if necessary, on appeal. We will continue to defend our position and remain committed to resolving this case," commented Jonathan J. Judge, President and Chief Executive Officer.


Net income of $515.4 million, or $1.35 diluted earnings per share, for fiscal 2007, increased 11% over net income of $464.9 million, or $1.22 diluted earnings per share for the prior fiscal year. The fiscal 2007 results were impacted by the increases to the litigation reserve totaling $38.0 million, which reduced diluted earnings per share for the year by approximately $0.06 per share. In addition, with the adoption of the new accounting standard for stock-based compensation on June 1, 2006, fiscal 2007 also included $25.7 million of stock-based compensation costs.

For fiscal 2007, operating income increased 8% to $701.5 million. Operating income excluding interest on funds held for clients, stock-based compensation costs, and the increases to the litigation reserve increased 15% to $631.1 million for fiscal 2007. Total expenses increased 16% to $1.2 billion for fiscal 2007. Stock-based compensation costs of $25.7 million for fiscal 2007 and increases to the litigation reserve of $38.0 million account for approximately 7% of the 16% increase in total expenses. Increases in personnel and technology as we continue our investments in new products and services account for most of the remaining increase in expenses.


Net income was $121.1 million for the fourth quarter, or $0.32 diluted earnings per share, down slightly from net income of $122.7 million for the same period last year. Operating income was $159.9 million. Operating income excluding interest on funds held for clients ($36.8 million), stock-based compensation costs ($6.4 million), and the increase to the litigation reserve ($25.0 million) was up 14% for the fourth quarter to $154.5 million.


Our current outlook for the fiscal year ending May 31, 2008 is based upon current economic conditions and interest rate levels. The outlook is unchanged from that included in our June 27, 2007 press release except for net income, which has been impacted by the expense charge of $25.0 million to increase the litigation reserve. 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                            6% -- 9%
Total revenue                                               11% -- 13%
Corporate investment income                                 20% -- 25%
Net income                                                  18% -- 20%
    The effective income tax rate is expected to approximate 31.5%.


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, Readychex(R), and check signing. Human Resource Services include 401(k) plan recordkeeping, 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, we have more than 100 offices and serve approximately 561,000 payroll clients nationwide. For more information about Paychex, Inc. and our products, visit


For more information, contact:

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

  Media Inquiries:       Laura Saxby Lynch                585-383-3074

Our news releases, current financial information, SEC filings, and investor presentation are also accessible at


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 filings with the Securities and Exchange Commission ("SEC"): general market and economic conditions, including, among others, changes in United States employment and wage levels, changes in new hiring trends, changes in short- and long-term interest rates, and changes in the market value and the credit rating of securities held by us; changes in demand for our products and services, ability to develop and market new products and services effectively, pricing changes and 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, worker's compensation, state unemployment, and section 125 plans; changes in Professional Employer Organization direct costs, including, but not limited to, workers' compensation rates and underlying claims trends; the possibility of failure to keep pace with technological changes and provide timely enhancements to products and services; 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 possibility of penalties and losses resulting from errors and omissions in performing services; the possible inability of our clients to meet their payroll obligations; 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 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 May 31,
                                           2007       2006    % Change
  Payroll service revenue               $  343,793 $  316,412       9%
  Human Resource Services revenue          106,718     92,059      16%
  Total service revenue                    450,511    408,471      10%
  Interest on funds held for clients
   (A)                                      36,837     32,009      15%
  Total revenue                            487,348    440,480      11%

  Operating expenses (B)                   157,982    145,998       8%
  Selling, general and administrative
  expenses (B)                             169,484    126,936      34%
  Total expenses                           327,466    272,934      20%

Operating income                           159,882    167,546      -5%

Investment income, net (A)                  11,870      8,426      41%
Income before income taxes                 171,752    175,972      -2%

Income taxes                                50,652     53,232      -5%
Net income                              $  121,100 $  122,740      -1%

Basic earnings per share                $     0.32 $     0.32       --

Diluted earnings per share              $     0.32 $     0.32       --

Weighted-average common shares
 outstanding                               382,019    380,092

Weighted-average common shares
 outstanding, assuming dilution            383,568    382,207

Cash dividends per common share         $     0.21 $     0.16      31%

                                        For the twelve months
                                            ended May 31,
                                           2007       2006    % Change
  Payroll service revenue               $1,356,646 $1,248,924       9%
  Human Resource Services revenue          396,222    324,873      22%
  Total service revenue                  1,752,868  1,573,797      11%
  Interest on funds held for clients
   (A)                                     134,096    100,799      33%
  Total revenue                          1,886,964  1,674,596      13%

  Operating expenses (B)                   615,479    560,255      10%
  Selling, general and administrative
  expenses (B)                             569,937    464,770      23%
  Total expenses                         1,185,416  1,025,025      16%

Operating income                           701,548    649,571       8%

Investment income, net (A)                  41,721     25,195      66%
Income before income taxes                 743,269    674,766      10%

Income taxes                               227,822    209,852       9%
Net income                              $  515,447 $  464,914      11%

Basic earnings per share                $     1.35 $     1.23      10%

Diluted earnings per share              $     1.35 $     1.22      11%

Weighted-average common shares
 outstanding                               381,149    379,465

Weighted-average common shares
 outstanding, assuming dilution            382,802    381,351

Cash dividends per common share         $     0.79 $     0.61      30%

(A) 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 Annual Reports on 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

(B) Effective June 1, 2006, we adopted Statement of Financial
 Accounting Standard No. 123 (R), "Share-Based Payment." In accordance
 with this standard, we recognized compensation costs for the fair
 value of stock-based awards of $6.4 million for the fourth quarter
 and $25.7 million for fiscal 2007. These costs were reflected in the
 Consolidated Statements of Income with $1.9 million for the fourth
 quarter and $8.3 million for fiscal 2007 in operating expenses, and
 $4.5 million for the fourth quarter and $17.4 million for fiscal 2007
 in selling, general and administrative expenses.
                            PAYCHEX, INC.
               (In thousands, except per share amount)

                                                  May 31,    May 31,
                                                    2007       2006
Cash and cash equivalents                        $   79,353 $  137,423
Corporate investments (A)                           511,772    440,007
Interest receivable                                  53,624     38,139
Accounts receivable, net of allowance for
 doubtful accounts                                  186,273    189,835
Deferred income taxes                                23,840     18,314
Prepaid income taxes                                  8,845      7,574
Prepaid expenses and other current assets            24,515     21,398
   Current assets before funds held for clients     888,222    852,690
Funds held for clients (A)                        3,973,097  3,591,611
   Total current assets                           4,861,319  4,444,301
Long-term corporate investments (A)                 633,086    384,481
Property and equipment, net of accumulated
 depreciation                                       256,087    234,664
Intangible assets, net of accumulated
 amortization                                        67,213     60,704
Goodwill                                            407,712    405,842
Deferred income taxes                                15,209     12,783
Other long-term assets                                5,893      6,527
Total assets                                     $6,246,519 $5,549,302

Accounts payable                                 $   46,961 $   46,668
Accrued compensation and related items              125,268    130,069
Deferred revenue                                      7,758      5,809
Litigation reserve                                   32,515     15,625
Other current liabilities                            42,638     34,008
   Current liabilities before client fund
    deposits                                        255,140    232,179
Client fund deposits                              3,982,330  3,606,193
   Total current liabilities                      4,237,470  3,838,372
Deferred income taxes                                 9,567     15,481
Other long-term liabilities                          47,234     40,606
Total liabilities                                 4,294,271  3,894,459

Common stock, $.01 par value; Authorized:
 600,000 shares; Issued and outstanding: 382,151
 shares as of May 31, 2007, and 380,303 shares
 as of May 31, 2006, respectively                     3,822      3,803
Additional paid-in capital                          362,982    284,395
Retained earnings                                 1,595,105  1,380,971
Accumulated other comprehensive loss                (9,661)   (14,326)
Total stockholders' equity                        1,952,248  1,654,843
Total liabilities and stockholders' equity       $6,246,519 $5,549,302

(A) The available-for-sale securities within the funds held for
 clients and corporate investment portfolios reflected a net
 unrealized loss position of $14.9 million as of May 31, 2007,
 compared with a net unrealized loss position of $22.0 million as of
 May 31, 2006. During the twelve months of fiscal 2007, the net
 unrealized loss position ranged from $29.5 million to $1.1 million.
 The net unrealized loss position of our investment portfolios was
 approximately $21.8 million as of June 22, 2007.

Source: Paychex, Inc.