·

Total revenue increased 9% to $866.5 million.

o

Payroll service revenue increased 2% to $455.0 million.

o

Human Resource Services revenue increased 17% to $393.4 million.

o

Interest on funds held for clients increased 37% to $18.1 million.

·

Operating income decreased 5% to $292.5 million and adjusted operating income(1) increased 6% to $325.1 million.

·

Net income increased 29% to $260.4 million and adjusted net income(1) increased 14% to $227.5 million.

·

Diluted earnings per share increased 29% to $0.72 per share and adjusted diluted earnings per share(1) increased 15% to $0.63 per share.

⁽¹⁾

Adjusted operating income, adjusted net income, and adjusted diluted earnings per share are not United States (“U.S.”) generally accepted accounting principles (“GAAP”) measures.  Please refer to the “Non-GAAP Financial Measures” section starting on page 5 of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable GAAP measures of operating income, net income, and diluted earnings per share.







For the three months ended

For the nine months ended



February 28,

February 28,

$ in millions

2018

2017

Change

2018

2017

Change

Average investment balances:

Funds held for clients

$

$

%

$

$

 —

%

Corporate investments

$

$

%

$

$

%



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

Funds held for clients

%

%

%

%

Corporate investments

%

%

%

%



Total net realized gains

$

$

 —

$

$

·

Total revenue increased 7% to $2.5 billion.

o

Payroll service revenue increased 1% to $1.4 billion.

o

HRS revenue increased 13% to $1.1 billion.    

o

HROI contributed approximately 2% to total revenue growth.

o

Interest on funds held for clients increased 25% to $45.8 million.

·

Operating income increased 3% to $969.7 million and adjusted operating income(1) increased 7% to $1.0 billion.

·

The effective income tax rate was 27.7% for the nine months, compared to 34.1% for the same period last year. The effective income tax rate was significantly impacted by the one-time net tax benefit recognized for the revaluation of net deferred tax liabilities as a result of the enactment of the Tax Act. 

·

Net income increased 13% to $705.2 million and adjusted net income(1) increased 16% to $700.8 million. 

·

Diluted earnings per share increased 14% to $1.95 per share and adjusted diluted earnings per share(1) increased 17% to $1.94 per share. 

⁽¹⁾

Adjusted operating income, adjusted net income, and adjusted diluted earnings per share are not U.S. GAAP measures.  Please refer to the “Non-GAAP Financial Measures” section starting on the next page of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable GAAP measures of operating income, net income, and diluted earnings per share.







For the three months ended

For the nine months ended



February 28,

February 28,

$ in millions

2018

2017

Change

2018

2017

Change

Operating income

$

$

%

$

$

%

Non-GAAP adjustments:

Termination of license 
 agreements (1)

 —

 —

Total non-GAAP adjustments

 —

 —

Adjusted operating income

$

$

%

$

$

%



Net income

$

$

%

$

$

%

Non-GAAP adjustments:

Excess tax benefit related to employee stock-based compensation payments (2)

Revaluation of net deferred tax liabilities (3)

 —

 —

Change in annual effective income tax rate (3)

 —

 —

 —

Termination of license
 agreements (1)

 —

 —

Total non-GAAP adjustments

Adjusted net income

$

$

%

$

$

%



Diluted earnings per share

$

$

%

$

$

%

Non-GAAP adjustments:

Excess tax benefit related to employee stock-based compensation payments (2)

 —

Revaluation of net deferred tax liabilities (3)

 —

 —

Change in annual effective income tax rate (3)

 —

 —

 —

Termination of license
 agreements (1)

 —

 —

Total non-GAAP adjustments

Adjusted diluted earnings per share

$

$

%

$

$

%

⁽¹⁾

Additional expense and corresponding tax benefit recognized in the third quarter as a result of the termination of certain license agreements.  This event is not expected to recur.

⁽²⁾

Net tax windfall or shortfall benefits related to employee stock-based compensation payments recognized in income taxes.  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 within the control of management.

⁽³⁾

One-time tax benefits recognized in the third quarter as a result of the Tax Act, including $20.8 million related to the revaluation of net deferred tax liabilities and $36.1 million related to the change in our annual effective tax rate for fiscal 2018.  The tax benefit related to the change in our annual effective tax rate represents amounts recognized in the third quarter to reflect the fiscal year-to-date effective tax rate.  These events are not expected to recur.

·

Payroll service revenue is anticipated to increase approximately 2%;

·

HRS revenue is anticipated to increase in the range of 13% to 14%;

·

Interest on funds held for clients is expected to increase in the range of 20% to 25%;

·

Total revenue is expected to grow approximately 7%;

·

Operating income, as a percent of total revenue, is expected to be approximately 38%;

·

Investment income, net is expected to be approximately $8.0 million;

·

The effective income tax rate is anticipated to be in the range of 28.5% to 29%;

·

Net income is expected to increase approximately 13% and adjusted net income(1) is expected to increase approximately 15%; and

·

Diluted earnings per share is expected to increase in the range of 13% to 14% and adjusted diluted earnings per share(1) is expected to increase in the range of 15% to 16%.

⁽¹⁾

Adjusted net income and adjusted diluted earnings per share are not U.S. GAAP measures.  Please refer to the “Non-GAAP Financial Measures” section beginning on the previous page 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 the exclusion of the impact of excess tax benefits related to employee stock-based compensation payments recognized in income taxes, the impact of termination of certain license agreements recognized during the third quarter, and certain one-time net tax benefits recognized during the third quarter as a result of the Tax Act.  We have not incorporated any assumptions regarding the discrete tax item related to stock-based compensation payments in our fiscal 2018 projections for the remainder of the fiscal year, as factors impacting the amount are subject to uncertainty.  The uncertainty primarily relates to employee decisions regarding exercise of stock-based awards and the market price of our common stock at the time. 



Investor Relations:

Efrain Rivera, CFO, or Terri Allen

585‑383‑3406

Media Inquiries:

Laura Saxby Lynch

585‑383‑3074

·

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, PEOs, and employee benefits, including retirement plans, workers’ compensation insurance, health insurance (including health care reform legislation), state unemployment, and section 125 plans;

·

changes in health insurance and workers’ compensation insurance 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;

·

potential outcomes related to pending or future legal and legislative matters;

·

the expected impacts of the Tax Act; and

·

risks related to the integration of the businesses we acquire.







For the three months ended

For the nine months ended



February 28,

February 28,



2018

2017

Change

2018

2017

Change

Revenue:

Payroll service revenue

$

$

%

$

$

%

Human Resource Services revenue

%

%

Total service revenue

%

%

Interest on funds held for clients (1)

%

%

Total revenue

%

%

Expenses:

Operating expenses

%

%

Selling, general and administrative expenses

%

%

Total expenses

%

%

Operating income

%

%

Investment income, net (1)

%

%

Income before income taxes

%

%

Income taxes

%

%

Net income

$

$

%

$

$

%



Basic earnings per share

$

$

%

$

$

%

Diluted earnings per share

$

$

%

$

$

%

Weighted-average common shares outstanding

Weighted-average common shares outstanding, assuming dilution

Cash dividends 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 our 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  www.paychex.com.







February 28,

May 31,



2018

2017

ASSETS

Cash and cash equivalents

$

$

Corporate investments

Interest receivable

Accounts receivable, net of allowance for doubtful accounts

Prepaid income taxes

Prepaid expenses and other current assets

Current assets before funds held for clients

Funds held for clients

Total current assets

Long-term corporate investments

Property and equipment, net of accumulated depreciation

Intangible assets, net of accumulated amortization

Goodwill

Prepaid income taxes

Other long-term assets

Total assets

$

$



LIABILITIES

Accounts payable

$

$

Accrued compensation and related items

Short-term borrowings

 —

Deferred revenue

Other current liabilities

Current liabilities before client fund obligations

Client fund obligations

Total current liabilities

Accrued income taxes

Deferred income taxes

Other long-term liabilities

Total liabilities



STOCKHOLDERS’ EQUITY

Common stock, $0.01 par value; Authorized: 600.0 shares;
   Issued and outstanding: 359.3 shares as of February 28, 2018
   and 359.4 shares as of May 31, 2017

Additional paid-in capital

Retained earnings

Accumulated other comprehensive (loss)/income

Total stockholders’ equity

Total liabilities and stockholders’ equity

$

$







For the nine months ended



February 28,



2018

2017

OPERATING ACTIVITIES

Net income

$

$

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization on property and equipment and intangible assets

Amortization of premiums and discounts on available-for-sale securities, net

Stock-based compensation costs

Provision for deferred income taxes

 —

Provision for allowance for doubtful accounts

Net realized gains on sales of available-for-sale securities

Changes in operating assets and liabilities:

Interest receivable

Accounts receivable

Prepaid expenses and other current assets

Accounts payable and other current liabilities

Net change in other long-term assets and liabilities

Net cash provided by operating activities

INVESTING ACTIVITIES

Purchases of available-for-sale securities

Proceeds from sales and maturities of available-for-sale securities

Net change in funds held for clients’ money market securities and other cash equivalents

Purchases of property and equipment

Acquisition of businesses, net of cash acquired

 —

Purchases of other assets

Net cash provided by/(used in) investing activities

FINANCING ACTIVITIES

Net change in client fund obligations

Net proceeds from short-term borrowings

Dividends paid

Repurchases of common shares

Activity related to equity-based plans

Net cash (used in)/provided by financing activities

Increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

$

$