Paychex, Inc. Reports Record Third Quarter Results
THIRD QUARTER FISCAL 2007 HIGHLIGHTS
-- Total revenue up 13% to $485.3 million.
-- Payroll service revenue up 8% to $345.4 million and Human Resource Services revenue grew 25% to $102.2 million.
-- Operating income excluding interest on funds held for clients, stock-based compensation costs, and an increase to the litigation reserve increased 18% to $155.3 million.
-- Diluted earnings per share of $0.33 was reduced by $0.02 per share due to the $13.0 million increase to the litigation reserve.
ROCHESTER, N.Y.--(BUSINESS WIRE)--
Paychex, Inc. ("we," "our," or "us") (NASDAQ:PAYX) today announced record net income of $126.6 million, or $0.33 diluted earnings per share, for the three months ended February 28, 2007 (the "third quarter"), an 11% increase over net income of $114.5 million, or $0.30 diluted earnings per share, for the same period last year. The third quarter results were impacted by an increase to the litigation reserve of $13.0 million, which reduced diluted earnings per share for the third quarter by approximately $0.02 per share.
"We have enjoyed another excellent quarter and look forward to our seventeenth consecutive year of record revenues and net income," commented Jonathan J. Judge, President and Chief Executive Officer of Paychex. "Our third quarter growth in operating income excluding interest on funds held for clients and certain items was very strong at 18%."
Human Resource Services revenue increased 25% to $102.2 million for the third quarter from the same period last year. The growth was generated from the following: retirement services client base increased 15% to 43,000 clients; comprehensive human resource outsourcing services increased 30% to 350,000 client employees; and workers' compensation insurance services client base increased 16% to 59,000 clients. Additionally, the asset value of the retirement services client employees' funds increased 24% to $7.6 billion.
Total expenses increased 16% to $312.3 million for the third quarter from the same period last year. Expense growth for the third quarter was impacted by the increase to the litigation reserve. Additionally, we incurred $7.0 million of stock-based compensation costs for the third quarter. Excluding stock-based compensation costs and the increase to the litigation reserve, total expense growth would have been 8%.
For the third quarter, interest on funds held for clients increased 31% to $37.7 million and corporate investment income increased 65% to $10.5 million, attributable to higher average interest rates and higher average investment balances, as summarized below:
For the three months For the nine months
ended February 28, ended February 28,
-------------------- -------------------
$ in millions 2007 2006 2007 2006
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Average investment balances:
Funds held for clients $3,633.5 $ 3,399.6 $3,165.6 $2,958.5
Corporate investments $1,137.1 $ 866.2 $1,069.6 $ 798.3
Average interest rates earned:
Funds held for clients 4.1% 3.3% 4.0% 3.1%
Corporate investments 3.7% 2.9% 3.7% 2.7%
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YEAR-TO-DATE FISCAL 2007 HIGHLIGHTS
The highlights for the nine months ended February 28, 2007 are as follows:
-- Net income of $394.3 million, or $1.03 diluted earnings per
share.
-- Net income and diluted earnings per share increased 15% and
14%, respectively.
-- Total revenue increased 13% to $1,399.6 million.
-- Payroll service revenue was up 9% to $1,012.9 million.
-- Human Resource Services revenue increased 24% to $289.5
million.
-- Operating income excluding interest on funds held for clients,
stock-based compensation costs, and an increase to the
litigation reserve increased 15% to $476.8 million.
-- Cash flow from operations was $532.2 million.
-- Utilization of our payroll tax administration services and
employee payment services as of February 28, 2007 was 92% and
70%, respectively.
OUTLOOK
Our current outlook for the full fiscal year ending May 31, 2007 is unchanged from the guidance provided in our Quarterly Report on Form 10-Q for the quarter ended August 31, 2006.
-- Total service revenue growth is projected to be in the range
of 11% to 13%.
-- Interest on funds held for clients is expected to increase
approximately 30% to 35%.
-- Total revenue growth is estimated to be in the range of 12% to
14%.
-- Corporate investment income is anticipated to increase
approximately 55% to 60%.
-- Stock-based compensation costs will be primarily included in
selling, general and administrative expenses, and are expected
to be in the range of $25.0 million to $30.0 million.
-- Net income growth is expected to be in the range of 13% to
15%.
Our projections are based on current economic and interest rate conditions continuing with no significant changes.
CONFERENCE CALL
Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for March 29, 2007 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 presentations 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, 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, the company has more than 100 offices and serves approximately 543,000 payroll clients nationwide. 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, those that are described in our filings with the Securities and Exchange Commission, including the most recent Annual Report on Form 10-K filed on July 21, 2006. 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.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
----------------------------------------------------------------------
For the three
months ended
February 28,
------------------
2007 2006 % Change
----------------------------------------------------------------------
Revenue:
Payroll service revenue $345,406 $319,992 8%
Human Resource Services revenue 102,162 81,891 25%
------------------
Total service revenue 447,568 401,883 11%
Interest on funds held for clients (A) 37,719 28,703 31%
------------------
Total revenue 485,287 430,586 13%
Expenses:
Operating expenses (B) 158,543 145,486 9%
Selling, general and administrative
expenses (B) 153,760 124,500 24%
------------------
Total expenses 312,303 269,986 16%
------------------
Operating income 172,984 160,600 8%
Investment income, net (A) 10,494 6,358 65%
------------------
Income before income taxes 183,478 166,958 10%
Income taxes 56,878 52,424 8%
------------------
Net income $126,600 $114,534 11%
==================
Basic earnings per share $ 0.33 $ 0.30 10%
Diluted earnings per share $ 0.33 $ 0.30 10%
Weighted-average common shares
outstanding 381,475 379,680
Weighted-average common shares
outstanding, assuming dilution 383,335 381,751
Cash dividends per common share $ 0.21 $ 0.16 31%
----------------------------------------------------------------------
For the nine months
ended February 28,
-----------------------
2007 2006 % Change
----------------------------------------------------------------------
Revenue:
Payroll service revenue $1,012,853 $ 932,512 9%
Human Resource Services revenue 289,504 232,814 24%
-----------------------
Total service revenue 1,302,357 1,165,326 12%
Interest on funds held for clients
(A) 97,259 68,790 41%
-----------------------
Total revenue 1,399,616 1,234,116 13%
Expenses:
Operating expenses (B) 457,497 414,257 10%
Selling, general and administrative
expenses (B) 400,453 337,834 19%
-----------------------
Total expenses 857,950 752,091 14%
-----------------------
Operating income 541,666 482,025 12%
Investment income, net (A) 29,851 16,769 78%
-----------------------
Income before income taxes 571,517 498,794 15%
Income taxes 177,170 156,620 13%
-----------------------
Net income $ 394,347 $ 342,174 15%
=======================
Basic earnings per share $ 1.04 $ 0.90 16%
Diluted earnings per share $ 1.03 $ 0.90 14%
Weighted-average common shares
outstanding 380,879 379,245
Weighted-average common shares
outstanding, assuming dilution 382,566 381,055
Cash dividends per common share $ 0.58 $ 0.45 29%
----------------------------------------------------------------------
(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
Securities and Exchange Commission, 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 www.paychex.com.
(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 $7.0 million for the third quarter and
$19.3 million for the nine months ended February 28, 2007. These
costs were reflected in the Consolidated Statements of Income with
$2.3 million for the third quarter and $6.4 million for the nine
months ended February 28, 2007 in operating expenses, and $4.7
million for the third quarter and $12.9 million for the nine months
ended February 28, 2007 in selling, general and administrative
expenses.
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share amount)
----------------------------------------------------------------------
February 28, May 31,
2007 2006
----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 80,921 $ 137,423
Corporate investments (A) 566,888 440,007
Interest receivable 38,628 38,139
Accounts receivable, net of allowance for
doubtful accounts 163,673 189,835
Deferred income taxes 20,503 18,314
Prepaid income taxes -- 7,574
Prepaid expenses and other current assets 25,759 21,398
------------------------
Current assets before funds held for clients 896,372 852,690
Funds held for clients (A) 3,547,269 3,591,611
------------------------
Total current assets 4,443,641 4,444,301
Long-term corporate investments (A) 578,896 384,481
Property and equipment, net of accumulated
depreciation 253,485 234,664
Intangible assets, net of accumulated
amortization 68,499 60,704
Goodwill 407,712 405,842
Deferred income taxes 13,632 12,783
Other long-term assets 5,949 6,527
------------------------
Total assets $5,771,814 $5,549,302
========================
LIABILITIES
Accounts payable $ 55,954 $ 46,668
Accrued compensation and related items 128,983 130,069
Deferred revenue 7,731 5,809
Accrued income taxes 12,516 --
Litigation reserve 13,168 15,625
Other current liabilities 41,342 34,008
------------------------
Current liabilities before client fund
deposits 259,694 232,179
Client fund deposits 3,551,790 3,606,193
------------------------
Total current liabilities 3,811,484 3,838,372
Deferred income taxes 11,659 15,481
Other long-term liabilities 45,635 40,606
------------------------
Total liabilities 3,868,778 3,894,459
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; Authorized:
600,000 shares; Issued and outstanding:
381,933 shares as of February 28, 2007, and
380,303 shares as of May 31, 2006,
respectively 3,819 3,803
Additional paid-in capital 348,929 284,395
Retained earnings 1,554,254 1,380,971
Accumulated other comprehensive loss (3,966) (14,326)
------------------------
Total stockholders' equity 1,903,036 1,654,843
------------------------
Total liabilities and stockholders' equity $5,771,814 $5,549,302
========================
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(A) The available-for-sale securities within the funds held for
clients and corporate investment portfolios reflected a net
unrealized loss position of $6.1 million at February 28, 2007,
compared with a net unrealized loss position of $22.0 million at May
31, 2006. During the first nine 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 $5.5 million at March 23, 2007.
Source: Paychex, Inc.
Released March 28, 2007