Paychex, Inc. ("Paychex," "we," "our," or "us") (NASDAQ:PAYX) today
announced its results of operations for the three months ended May 31,
2014 (the "fourth quarter"), as well as the full year ended May 31, 2014
("fiscal 2014" or the "fiscal year"). Martin Mucci, President and Chief
Executive Officer of Paychex, commented, "We are pleased with our strong
finish to fiscal 2014. Payroll service revenue continued to advance for
the fiscal year, driven by higher revenue per check, client base, and
checks per payroll. Our Human Resource Services revenue continued to
grow at a double-digit rate, driven largely by demand for human resource
outsourcing solutions. We again finished the year with client retention
at record levels."
Mr. Mucci added, "In fiscal 2014, we continued our investment in
software-as-a-service solutions and mobility applications with new
product releases that position us for long-term growth. Our focus on
client service, coupled with our leading-edge technology and full suite
of product offerings, distinguishes us from our competitors and
positions us as a valuable partner for small- to medium-sized
businesses. The recent launch of our Paychex | IHS Small Business Jobs
Index provides data on macro-economic trends, and we are encouraged by
results that show a trend of continuing steady growth."
With the introduction of a new health insurance offering within our
professional employer organization ("PEO") during fiscal 2014, we began
classifying certain PEO direct costs as operating expenses rather than a
reduction in service revenue. This change had no impact on operating
income. In evaluating Human Resource Services ("HRS") revenue, we
historically have evaluated PEO revenue net of direct costs. Growth
rates within this discussion of our results of operations are based on
results assuming we had continued to report PEO revenue net of these
direct costs. In future periods, all discussion will utilize numbers
reflecting this change in classification. Refer to the Supplemental
Schedule on page 6 for a presentation of the impact of this change in
classification on our Consolidated Statements of Income.
Total service revenue increased 6% for both the fourth quarter and
fiscal year, compared to the respective periods last year. Net income
and diluted earnings per share both increased 18% for the fourth quarter
and 10% for the fiscal year, compared to the respective periods last
year. The growth rates for net income and diluted earnings per share
were positively impacted by comparison to the prior year fourth quarter,
in which we recorded an increase to our tax provision for the settlement
of a state income tax matter, which reduced diluted earnings per share
by approximately $0.04 per share for both the prior year fourth quarter
and fiscal year ended May 31, 2013 ("fiscal 2013").
Payroll service revenue increased 3% for the fourth quarter and 4% for
the fiscal year, compared to the respective periods last year. These
increases were driven by growth in revenue per check, client base, and
checks per payroll. Revenue per check improved as a result of price
increases, partially offset by discounting, coupled with the impact of
increased product penetration. As of May 31, 2014, we served
approximately 580,000 payroll clients, an increase of approximately 2%
from May 31, 2013. Checks per payroll increased 1.1% for the fourth
quarter. The rate of growth in payroll service revenue for the fourth
quarter was slightly lower than for the fiscal year due to one less
processing day in the quarter compared to the same period last year.
HRS revenue increased 10% for the fourth quarter and 12% for the fiscal
year, compared to the respective periods last year. The growth in HRS
revenue was driven primarily by client base growth, particularly in
Paychex HR Solutions, retirement services, and online HR administration
products. Our Paychex HR Solutions was the largest contributor to this
growth, experiencing increases of 13% in clients and 14% in client
employees served as of May 31, 2014 compared to May 31, 2013. Retirement
services revenue was positively impacted by a 5% increase in plans as of
May 31, 2014 compared to May 31, 2013, and also benefited from a 13%
increase in the average asset value of participants' funds. Insurance
services revenue growth reflected higher average premiums in workers'
compensation insurance services and a modest increase in the number of
health and benefits applicants. Our online HR administration products
contributed to growth through strong sales of software-as-a-service
Total expenses increased 4% for the fourth quarter and 5% for the fiscal
year, compared to the respective periods last year. This growth was
primarily in compensation-related expenses both in wages and
performance-based compensation costs. The increase in wages was largely
due to continued investment in product development and supporting
technology, as well as sales force investment initiatives that began
during fiscal 2013.
Operating income increased 8% for the fourth quarter and 9% for the
fiscal year, compared to the respective periods last year. Operating
income, net of certain items (see Note 1 on page 4 for further
description of this Non-GAAP financial measure) also increased 8% for
the fourth quarter and 9% for the fiscal year, compared to the
respective periods last year.
Interest on funds held for clients increased 2% for the fourth quarter,
compared to the same period last year. This increase was a result of a
3% increase in average investment balances, partially offset by slightly
lower average interest rates earned. For the fiscal year, interest on
funds held for clients decreased 1% compared to last year. This decrease
was due to lower average interest rates earned and lower net realized
gains on the sale of available-for-sale securities, partially offset by
a 4% increase in average investment balances. The increases in average
investment balances for the fourth quarter and fiscal year were mainly
driven by increases in checks per payroll, growth in client base, and
wage inflation. In addition, average invested balances for the fiscal
year were impacted by the expiration of certain payroll tax cuts on
December 31, 2012, which resulted in higher employee social security
Investment income, net, increased 6% for the fourth quarter, compared to
the same period last year. This increase was primarily driven by higher
average investment balances and slightly higher average interest rates
earned. Investment income, net, decreased 18% for the fiscal year,
compared to last year. The decrease was due to lower average interest
rates earned, partially offset by higher average investment balances.
The higher average investment balances are the result of investment of
cash generated from operations.
Average investment balances and interest rates are summarized below:
The available-for-sale securities within the funds held for clients and
corporate investment portfolios reflected a net unrealized gain of $34.5
million as of May 31, 2014, compared with a net unrealized gain of $34.7
million as of May 31, 2013. During fiscal 2014, the net unrealized
gain/(loss) position of our investment portfolio ranged from a net
unrealized loss of $12.8 million to a net unrealized gain of $42.7
million. The net unrealized gain on our investment portfolios was
approximately $31.8 million as of June 27, 2014.
Financial results as reported on the Consolidated Statements of Income
on page 7 included the adjustment to classify certain PEO direct costs
as operating expenses rather than a reduction in service revenue.
Service revenue, as reported, increased 9% for the fourth quarter and 8%
for the fiscal year, as compared to the respective periods last year.
Total expenses, as reported, increased 10% for the fourth quarter and 8%
for the fiscal year, as compared to the respective periods last year.
There was no impact to operating income as a result of this adjustment.
Our financial position as of May 31, 2014 remained strong with cash and
total corporate investments of $936.8 million and no debt. Our primary
source of cash is generated from our ongoing operations. Historically,
we have funded our operations, capital purchases, business acquisitions,
share repurchases, and dividend payments from our operating activities.
Our positive cash flows have allowed us to support our business and to
pay substantial dividends to our stockholders. It is anticipated that
cash and total corporate investments as of May 31, 2014, along with
projected operating cash flows, will support our normal business
operations, capital purchases, business acquisitions, share repurchases,
and dividend payments for the foreseeable future.
Cash flows from operations were $880.9 million for fiscal 2014, an
increase of 30% over the prior year. This increase was the result of
higher net income adjusted for non-cash items, and fluctuations in
working capital. Working capital fluctuations contributed $54.8 million
of cash inflows for fiscal 2014, compared with $77.0 million of cash
outflows in the prior year. This was largely related to timing of
collections from clients and payments for compensation, PEO payroll, and
income taxes. The fluctuations in income tax payments related to the
settlement of a state income tax matter in the fourth quarter of fiscal
In October 2012, our Board of Directors approved a stock repurchase
program to purchase up to $350 million of Paychex common stock, with
authorization for this program expiring May 31, 2014. During the fourth
quarter, we repurchased 1.1 million shares of common stock for a total
of $46.8 million. A total of $249.7 million of common stock, or 6.2
million shares, has been repurchased under this program in fiscal 2014.
In May 2014, the Board approved a new stock repurchase program to
purchase up to $350 million of common stock, with authorization expiring
May 31, 2017.
Our outlook for the fiscal year ending May 31, 2015 ("fiscal 2015") is
based upon current market, economic, and interest rate conditions
continuing with no significant changes. Our expected full year fiscal
2015 payroll revenue growth rate is based upon anticipated client base
growth and increases in revenue per check. HRS revenue and total service
revenue reflect the classification of certain PEO direct costs as
operating expenses rather than a reduction in service revenue. The
impact of this change in classification will add approximately 5% to the
HRS revenue growth rate and approximately 2% to the total service
revenue growth rate, but will have no impact on net income growth.
Our guidance is as follows:
Operating income, net of certain items, as a percent of total service
revenue is expected to be in the range of 37% to 38% for fiscal 2015.
The effective income tax rate for fiscal 2015 is expected to be
consistent with that experienced for fiscal 2014. Interest on funds held
for clients for fiscal 2015 is expected to be relatively flat as it
continues to be impacted by the low interest rate environment, with
funds reinvested at lower yields.
Note 1: In addition to reporting operating
income, a United States ("U.S.") generally accepted accounting principle
("GAAP") measure, we present operating income, net of certain items,
which is a non-GAAP measure. We believe operating income, net of certain
items, is an appropriate additional measure, as it is an indicator of
our core business operations performance period over period. It is also
the basis of the measure used internally for establishing the following
year's targets and measuring management's performance in connection with
certain performance-based compensation payments and awards. Operating
income, net of certain items, excludes interest on funds held for
clients. Interest on funds held for clients is an adjustment to
operating income due to the volatility of interest rates, which are not
within the control of management. Operating income, net of certain
items, is not calculated through the application of GAAP and is not the
required form of disclosure by the Securities and Exchange Commission
("SEC"). As such, it should not be considered as a substitute for the
GAAP measure of operating income and, therefore, should not be used in
isolation, but in conjunction with, the GAAP measure. The use of any
non-GAAP measure may produce results that vary from the GAAP measure and
may not be comparable to a similarly defined non-GAAP measure used by
ANNUAL REPORT ON FORM 10-K
We anticipate filing our Annual Report on Form 10-K ("Form 10-K") before
the end of July 2014, and this will be available at www.paychex.com.
This press release should be read in conjunction with the Form 10-K 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-K.
Interested parties may access the webcast of our Earnings Release
Conference Call, scheduled for July 2, 2014 at 10:30 a.m. Eastern Time,
The webcast will also be archived for approximately one month. Our news
releases, current financial information, SEC filings, and investor
presentation are also accessible at www.paychex.com.
Paychex, Inc. is a leading provider of payroll, human resource,
insurance, 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, check signing, and Readychex®.
Human Resource Services include 401(k) plan recordkeeping, section 125
plans, a professional employer organization, time and attendance
solutions, and other administrative services for business. A variety of
business insurance products, including group health and workers'
compensation, are made available through Paychex Insurance Agency, Inc.
Paychex, Inc. was founded in 1971. With headquarters in Rochester, New
York, the company has more than 100 offices and serves approximately
580,000 payroll clients as of May 31, 2014. For more information about
Paychex, Inc. and our products, visit www.paychex.com.
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," "current
outlook," "we look forward to," "would equate to," "projects,"
"projections," "projected to be," "anticipates," "anticipated," "we
believe," "could be," and other similar 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
revenue growth, earnings, earnings-per-share growth, or similar
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 condition 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:
Any of these factors, as well as such other factors as discussed in our
periodic filings with the SEC, 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, and any forward-looking statement made by us in this document
speaks only as of the date on which it is made. 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.
PAYCHEX, INC.SUPPLEMENTAL SCHEDULE (Unaudited)(In
With the introduction of a new health insurance offering within our PEO
during fiscal 2014, we began classifying certain PEO direct costs as
operating expenses rather than a reduction in service revenue. This
change had no impact on operating income. In evaluating HRS revenue, we
historically have evaluated PEO revenue net of direct costs. The
following tables show the impact of this change in classification on the
fourth quarter and fiscal 2014 results of operations.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In millions, except per share amounts)
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 Quarterly Report on Form 10-Q and our 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 our website www.paychex.com.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except per share amount)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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