Paychex, Inc. Reports Third Quarter Results



March 25, 2020 



Third Quarter Fiscal 2020 Highlights



(1)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 on page 4 of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable U.S. GAAP measures of net income and diluted earnings per share.

Rochester, N.Y., (March 25, 2020) — Paychex, Inc. (“Paychex,” “we,” “our,” or “us”) (Nasdaq:PAYX) today announced total revenue of $1.1 billion for the three months ended February 29, 2020 (the “third quarter”), an increase of 7% compared to the same period last year. Oasis Outsourcing Group Holdings, L.P. (“Oasis”), acquired in December 2018, contributed approximately 1% to the growth in total revenue compared to the same period last year. Net income and diluted earnings per share each increased 9% to $354.5 million and $0.98 per share, respectively, for the  third quarter. Adjusted net income and adjusted diluted earnings per share, both non-GAAP measures, each increased 9% to $351.2 million and $0.97 per share,  respectively, for the third quarter. 

Martin Mucci, President and Chief Executive Officer, commented, “During the third quarter, we experienced solid growth across our major business lines. We are benefiting from the investments we’ve made in both expanding our product offerings, like Pay-on-Demand, and our technology and mobile app enhancements. We realized continued momentum in the mid-market space and achieved record-level retention rates across many of our services.”

Mucci added, “We continue to invest in innovative solutions that help our customers better manage their time and talent, drive business growth, and streamline internal processes to support increasingly complex human resource (“HR”) needs and evolving employee expectations. Results for the third quarter largely predate the disruption caused by the COVID-19 outbreak. We are taking actions to maintain the safety of our employees and mitigate the impacts of this disruption on our clients. We believe the product solutions we have added over the last 18 months will also benefit clients as we help them navigate the unprecedented challenges of COVID-19 and its impact on their employees and their business.  Whether it's using HR Conversations, which allows employers to two-way message their remote workers through our mobile Flex® app or Pay-on-Demand that allows employers more flexibility to quickly pay employees for variable shifts, Paychex has made the investments that will support clients in this difficult environment. 

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In addition, our Paychex Flex Help Center provides users access to training resources and how-to tutorials within the application itself, using natural language processing and predictive learning to deliver a more tailored experience. Help Center integrates with Paychex Flex Assistant, our award-winning customer service chatbot, which provides a personalized service experience. And, as the industry’s largest provider of 401(k) recordkeeping services, we believe we are well-positioned to help businesses understand and navigate the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019 to incentivize employers to offer retirement savings plans, and to help them determine the best way to maximize the benefits provided.” 

Management Solutions revenue was $850.0 million for the third quarter, a 6% increase compared to the same period last year. The increase was primarily driven by increases in our client base and growth in revenue per client, which improved as a result of higher price realization and increased penetration of our suite of solutions, particularly retirement services, time and attendance, and HR outsourcing.

Professional employer organization (“PEO”) and Insurance Solutions revenue was $271.5 million for the third quarter, an increase of 10% compared to the same period last year. The increase was driven by growth in clients across our PEO business.  Insurance Solutions revenue benefited from an increase in the number of health and benefit clients and applicants, offset by the impact of softness in the workers’ compensation market as rates have declined.

Interest on funds held for clients decreased 7% to $21.2 million for the third quarter, compared to the same period last year. The decrease resulted from lower average interest rates earned, partially offset by higher average investment balances and realized gains. Funds held for clients average investment balances were impacted by wage inflation and increases within our client base, offset by changes in client base mix and timing of collections and remittances.

Average investment balances and interest rates are summarized below:







Total expenses increased 5% to $672.6 million for the third quarter compared to the same period last year.  Increases in compensation-related costs and PEO direct insurance costs contributed to total expense growth for the third quarter,  partially driven by the acquisition of Oasis. 

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Operating income increased 10% to $470.1 million for the third quarter compared to the same period last year. Operating margin was 41.1% for the third quarter, compared to 40.1% for the same period last year. Earnings before interest, taxes, depreciation, and amortization (“EBITDA”)(1) increased 8% to $520.5 million for the third quarter and EBITDA margin(1) was 45.6% for the third quarter,  compared to 45.0% for the same period last year. 

(1)EBITDA and EBITDA margin are not U.S. GAAP measures. Please refer to the “Non-GAAP Financial Measures” section on page 4 of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable U.S. GAAP measure of net income.



Other expense,  net for the third  quarter of $5.9 million includes interest expense related to our long-term borrowings.

Our effective income tax rate was 23.6% for the third quarter compared to 23.7% for the same period last year. The effective income tax rates in both periods were impacted by the recognition of net discrete tax benefits related to employee stock-based compensation payments. 

Year-To-Date Fiscal 2020 Highlights

The highlights for the nine months ended February 29, 2020 (the “nine months”) are as follows:



(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 on page 4 of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable U.S. GAAP measures of net income and diluted earnings per share.

Financial Position and Liquidity

Our financial position as of February 29, 2020 remained strong with cash, restricted cash, and total corporate investments of $930.4 million.  Total short-term and long-term borrowings, net of debt issuance costs, were $847.9 million as of February 29, 2020.  Our positive cash flows have historically allowed us to support our business and to pay substantial dividends to our stockholders.  We currently anticipate that cash, restricted cash, and total corporate investments as of February 29, 2020,  along with projected operating cash flows and available short-term financing, will support our normal business operations, capital purchases, share repurchases, and dividend payments for the foreseeable future. Given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 outbreak, we will continue to evaluate the nature and extent of the impact to our business and financial position.

Cash flows from operations were $1.1 billion for the nine months, an increase of 3% from the same period last year. The increase in our operating cash flows was the result of higher net income,  offset by timing fluctuations in operating assets and liabilities.  

During the nine months, we repurchased 2.0 million shares of our common stock for a total of $171.9 million.  In the respective prior year period, we repurchased 0.5 million shares for a total of $32.8 million.



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Non-GAAP Financial Measures













(1)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.

(2)Net tax windfall 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 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).  This event is not expected to recur.



In addition to reporting net income and diluted earnings per share, which are U.S. GAAP measures, we present adjusted net income, adjusted diluted earnings per share, EBITDA, and EBITDA margin (EBITDA as a percentage of total revenue), which are non-GAAP measures.  We believe these additional measures are indicators of our core business operations performance period over period.  Adjusted net income, adjusted diluted earnings per share, EBITDA, and EBITDA margin are not calculated through the application of U.S. GAAP and are not required forms of disclosure by the Securities and Exchange Commission (“SEC”).  As such, they should not be considered as a substitute for the U.S. GAAP measures of net income and diluted earnings per share,  and, therefore, should not be used in isolation, but in conjunction with the U.S. GAAP measures.  The use of any non-GAAP measure may produce results that vary from the U.S. GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

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Outlook

Our outlook for the fiscal year ending May 31, 2020 (“fiscal 2020”) incorporates known and some estimated impacts related to the COVID-19 virus, including the most recent reductions in the Federal Funds rate.  The impact from the rapidly changing market and economic conditions due to COVID-19 is uncertain and could impact our results of operations and financial condition in the future. That impact could alter our guidance, which is currently as follows:



(1)    EBITDA margin, adjusted net income, and adjusted diluted earnings per share are not U.S. GAAP measures. Please refer to   the “Non-GAAP Financial Measures” section on page 4 of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable U.S. GAAP measures of net income and diluted earnings per share.

Quarterly Report on Form 10-Q

We anticipate filing our Quarterly Report on Form 10-Q (“Form 10-Q”) for the third quarter within the next few days, and it will be available at http://www.paychex.com/investors.  This press release should be read in conjunction with the Form 10-Q and the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in that Form 10-Q.

Conference Call

Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for March 25, 2020 at 9:30 a.m. Eastern Time, at http://www.paychex.com/investors. The webcast will be archived for approximately one month. Our news releases, current financial information, SEC filings, and investor presentations are also accessible at http://www.paychex.com/investors.

For more information, contact:



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About Paychex

Paychex, Inc. (Nasdaq:PAYX) is a leading provider of integrated human capital management solutions for human resources, payroll, benefits, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by more than 45 years of industry expertise, Paychex serves approximately 670,000 payroll clients as of May 31, 2019 across more than 100 locations in the U.S. and Europe, and pays one out of every 12 American private sector employees. Learn more about Paychex by visiting paychex.com and stay connected on Twitter (www.twitter.com/paychex) and LinkedIn (www.linkedin.com/company/paychex).



Cautionary Note Regarding Forward-Looking Statements Pursuant to the U.S. Private Securities Litigation Reform Act of 1995

Certain written and oral statements made by us may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as “we expect,” “expected to,” “estimates,” “estimated,” “overview,” “outlook,” “guidance,” “we look forward to,” “would equate to,” “projects,” “projections,” “projected,” “projected to be,” “anticipates,” “anticipated,” “we believe,” “believes,” “could be,” “targeting,” and other similar words or phrases. Examples of forward-looking statements include, among others, statements we make regarding operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, or similar projections.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, many of which are outside our control. Our actual results and financial conditions may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance upon any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

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Any of these factors, as well as such other factors as discussed in our SEC filings, 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 as of the date of this press release, and any forward-looking statement made by us in this document speaks only as of the date on which it is made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of issuance of this press release to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.



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PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In millions, except per share amounts)









(1)Further information on interest on funds held for clients and other (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 Quarterly Reports on 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.

(2)Percentage changes are calculated based on unrounded numbers.



n/m – not meaningful



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PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions, except per share amounts)







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PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)















© 2020 Paychex, Inc. 

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