·

Total revenue increased 14% to $1.1  billion.

o

Total service revenue increased 14% to $1.0  billion.

o

Interest on funds held for clients increased 27% to $23.0 million.

·

Operating income increased 16% to $429.3 million and adjusted operating income(1) increased 7% to $429.3 million. 

·

Net income decreased 12% to $324.6 million and adjusted net income(1) increased 3% to $322.4  million. Net income and adjusted net income for the three months ended February 28, 2018 were impacted by one-time net tax benefits recognized as a result of the Tax Cuts and Jobs Act (the “Tax Act”).

·

Diluted earnings per share decreased 11% to $0.90 per share and adjusted diluted earnings per share(1) increased 3% to $0.89 per share. Diluted earnings per share and adjusted diluted earnings per share for the three months ended February 28, 2018 were also impacted by one-time net tax benefits recognized as a result of the Tax Act.

⁽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 U.S. 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

2019

2018

Change

2019

2018

Change

Average investment balances:

Funds held for clients

$

$

%

$

$

%

Corporate investments

$

$

%

$

$

%



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

Funds held for clients

%

%

%

%

Corporate investments

%

%

%

%



Total net realized gains/(losses)

$

$

$

$

·

Total revenue increased 10% to $2.8  billion.

o

Total service revenue increased 10% to $2.7  billion.    Oasis, HR Outsourcing Holdings, Inc. and Lessor Group combined contributed less than 5% to the total service revenue growth for the nine months. 

o

Interest on funds held for clients increased 28% to $58.4 million.

·

Operating income increased 7% to $1.1  billion and adjusted operating income(1) increased 3% to $1.1  billion.

·

Net income increased 4% to $804.0 million and adjusted net income(1) increased 12% to $799.7 million.

·

Diluted earnings per share increased 3% to $2.22 per share and adjusted diluted earnings per share(1) increased 12% to $2.21 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 page 5 of this press release for a discussion of these 

non-GAAP measures and a reconciliation to the most comparable U.S. 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,





2018

2018

$ in millions

2019

As adjusted(1)

Change

2019 (5)

As adjusted(1),(5)

Change

Operating income

$

$

%

$

$

%

Non-GAAP adjustments:

Termination of license
agreements (2)

 —

 —

Total non-GAAP adjustments

 —

 —

Adjusted operating income

$

$

%

$

$

%



Net income

$

$

%

$

$

%

Non-GAAP adjustments:

Excess tax benefit related to employee stock-based compensation payments (3)

Revaluation of net deferred tax liabilities (4)

 —

Termination of license
agreements (2)

 —

 —

Total non-GAAP adjustments

Adjusted net income

$

$

%

$

$

%



Diluted earnings per share

$

$

%

$

$

%

Non-GAAP adjustments:

Excess tax benefit related to employee stock-based compensation payments (3)

 —

Revaluation of net deferred tax liabilities (4)

 —

 —

Termination of license
agreements (2)

 —

 —

Total non-GAAP adjustments

Adjusted diluted earnings per share

$

$

%

$

$

%

⁽¹⁾

Amounts have been adjusted to reflect the adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”).

⁽²⁾

Additional expense and corresponding tax benefit recognized during the three months ended February 28, 2018 as a result of the termination of certain license agreements.  This event is not expected to recur.

⁽³⁾

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.

⁽⁴⁾

For the nine months, this includes a one-time tax charge that was recognized during the three months ended August 31, 2018 as a result of updated guidance on Internal Revenue Code Section 162(m).  For the three and nine months ended February 28, 2018, non-recurring net tax benefits were recognized as a result of the Tax Act related to the revaluation of net deferred tax liabilities.  These events are not expected to recur.

⁽⁵⁾

The calculation of the impact of non-GAAP adjustments on diluted earnings per share is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.

·

Management Solutions revenue is anticipated to increase approximately 4%;

·

PEO and Insurance Services revenue is anticipated to increase in the range of 18% to 20%;

·

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

·

Total revenue, including interest on funds held for clients, is expected to increase in the range of 6% to 7%;

·

Operating income as a percent of total revenue is anticipated to be approximately 37%;

·

Interest (expense)/income, net is anticipated to be in the range of $10 million to $15 million;

·

The effective income tax rate for fiscal 2019 is expected to be approximately 24%;

·

Net income and diluted earnings per share are expected to increase approximately 4%; and

·

Adjusted net income(1) and adjusted diluted earnings per share(1) are expected to increase in the range of 11% to 12%.

⁽¹⁾

Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. Please refer to the “Non-GAAP Financial Measures” section starting on the previous page of this press release for a discussion of these non-GAAP measures.   Fiscal 2019 growth rates for these non-GAAP measures are based on adjusted net income for the fiscal year ended May 31, 2018 as restated for the adoption of ASC Topic 606.  No assumptions were made in regards to discrete tax items in future months of fiscal 2019 for employee stock-based compensation payments. 



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 cyberattacks, 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 the 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 process 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 litigation and legislative matters;  

·

the expected impacts of the Tax Act;  and

·

risks related to the integration of the businesses we acquire, including the acquisition of Oasis.







For the three months ended

For the nine months ended



February 28,

February 28,



2018

2018



2019

As Adjusted(1)

Change

2019

As Adjusted(1)

Change

Revenue:

Management Solutions

$

$

%

$

$

%

PEO and Insurance Services (2)

%

%

Total service revenue

%

%

Interest on funds held for clients (3)

%

%

Total revenue

%

%

Expenses:

Operating expenses

%

%

Selling, general and administrative expenses

%

%

Total expenses

%

%

Operating income

%

%

Interest (expense)/income, net (3)

n/m

%

Income before income taxes

%

%

Income taxes

n/m

%

Net income

$

$

%

$

$

%



Basic earnings per share

$

$

%

$

$

%

Diluted earnings per share

$

$

%

$

$

%

Weighted-average common shares outstanding

Weighted-average common shares outstanding, assuming dilution

⁽¹⁾

Amounts have been adjusted to reflect the adoption of ASC Topic 606 and conform with current year presentation of revenues and expenses.

⁽²⁾

PEO and Insurance Services revenues is reported net of certain direct pass-through costs billed and incurred, which include payroll wages, payroll taxes, including state unemployment insurance, and certain guaranteed benefit plan direct costs. 

⁽³⁾

Further information on interest on funds held for clients and interest (expense)/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.







May 31,



February 28,

2018



2019

As Adjusted(1)

ASSETS

Cash and cash equivalents

$

$

Restricted cash

 —

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 restricted cash

 —

Long-term corporate investments

Property and equipment, net of accumulated depreciation

Intangible assets, net of accumulated amortization

Goodwill

Long-term deferred costs

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

Long-term borrowings

 —

Other long-term liabilities

Total liabilities



STOCKHOLDERS’ EQUITY

Common stock, $0.01 par value; Authorized: 600.0 shares;
   Issued and outstanding: 359.4 shares as of February 28, 2019
   and 359.0 shares as of May 31, 2018

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

$

$

⁽¹⁾

Amounts have been adjusted to reflect the adoption of ASC Topic 606.







For the nine months ended



February 28,



2018



2019(2)

As Adjusted(1)(2)

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

Amortization of deferred contract costs

Stock-based compensation costs

Provision/(benefit) for deferred income taxes

Provision for allowance for doubtful accounts

Net realized losses/(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

Deferred costs

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

Purchases of property and equipment

Acquisition of businesses, net of cash acquired

Purchases of other assets

Net cash (used in)/provided by investing activities

FINANCING ACTIVITIES

Net change in client fund obligations

Net proceeds from short-term borrowings

Proceeds from borrowings to fund acquisition

 —

Dividends paid

Repurchases of common shares

Activity related to equity-based plans

Net cash provided by/(used in) financing activities

Increase in cash, cash equivalents, restricted cash and restricted cash equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

$

$



Reconciliation of cash, cash equivalents, restricted cash and restricted cash
equivalents to the Consolidated Balance Sheets

Cash and cash equivalents

$

$

Restricted cash

 —

Restricted cash and restricted cash equivalents included in funds held for clients

Total cash, cash equivalents, restricted cash and restricted cash equivalents

$

$

⁽¹⁾

Amounts have been adjusted to reflect the adoption of ASC Topic 606.

⁽²⁾

Amounts have been adjusted to reflect the adoption of Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”