Paychex, Inc. Reports Third Quarter Results

  Paychex, Inc. Reports Third Quarter Results

THIRD QUARTER FISCAL 2013 HIGHLIGHTS

  *Total service revenue increased 4% to $582.4 million.
  *Payroll service revenue increased 2% to $393.7 million.
  *Human Resource Services revenue increased 10% to $188.7 million.
  *Operating income and operating income, net of certain items, both
    increased 7% to $225.0 million and $214.1 million, respectively.
  *Net income increased 7% to $144.5 million and diluted earnings per share
    increased 8% to $0.40 per share.

Business Wire

ROCHESTER, N.Y. -- March 27, 2013

Paychex, Inc. (“Paychex,” “we,” “our,” or “us”) (NASDAQ: PAYX) today announced
total service revenue of $582.4 million for the three months ended
February28, 2013 (the “third quarter”), an increase of 4% from $558.5 million
for the same period last year. Net income increased 7% to $144.5 million and
diluted earnings per share increased 8% to $0.40 per share.

Martin Mucci, President and Chief Executive Officer, commented, “Paychex made
good progress again in the third quarter. We saw improvement in payroll
services revenue with growth of 2% for the third quarter, up from 1% growth
experienced for the first half of the fiscal year. Checks per payroll were
strong for the third quarter, increasing over 2% compared to the prior year
third quarter. Our Human Resource Services revenue continued to grow at a
double-digit rate. We completed our peak selling season and were pleased with
our positive growth in new Core payroll sales revenue."

Mr. Mucci added, "The Company continues to invest in our market-leading
software-as-a-solution ("SaaS") technology and mobile applications through
both product development and acquisitions of companies with SaaS-based
business models, including our SurePayroll product which continues to perform
well. A focus on new and enhanced technology coupled with our outstanding
service model has led to retention success. Our client retention remains at
record levels, generated by our employees' commitment to client satisfaction."

Payroll service revenue increased 2% to $393.7 million for the third quarter
compared to the same period last year. Checks per payroll increased 2.3% for
the third quarter compared to 1.8% for the same period last year, partially
due to higher calendar year-end bonus payment activity. Revenue per check grew
modestly, as a result of price increases, partially offset by discounting.
Growth in payroll service revenue was tempered by one less day of payroll
processing in the quarter due to the leap year last year.

Human Resource Services (“HRS”) revenue increased 10% to $188.7 million for
the third quarter compared to the same period last year. The following factors
contributed to this growth:

  *Retirement services revenue benefited from client growth, price increases,
    and an increase in the average asset value of retirement services client
    employees’ funds, offset partially by the impact from a shift in the mix
    of assets within these funds to investments that earn lower fees from
    external fund managers.
  *Paychex HR Solutions revenue increased due to growth in both clients and
    client employees and price increases. The rate of growth for Paychex HR
    Solutions revenue was tempered by fewer client employees on average within
    our professional employer organization ("PEO") compared to the same period
    last year. However, we have seen an improvement in both new sales and
    client retention in the PEO during our peak selling season, and both PEO
    clients and client employees were higher at the end of the third quarter
    compared to a year ago.
  *Insurance services revenue continues to improve as a result of growth in
    health and benefits services applicants, though at moderating rates.
    Growth also resulted from increases in both clients and premiums in
    workers’ compensation insurance services.
  *Our eServices revenue growth reflects higher client base and price
    increases, particularly as we continue to focus on adding SaaS-based
    solutions.

Total expenses increased 3% to $368.3 million for the third quarter compared
to the same period last year. We continued to invest in product development
and supporting technology, with those expenses growing at a faster rate than
total expenses during the third quarter. This was offset by increased
productivity within operations, which has allowed us to maintain solid
operating margins.

For the third quarter, our operating income was $225.0 million, an increase of
7% from the same period last year. Operating income, net of certain items,
(see Note 1 on page 3 for further description of this Non-GAAP financial
measure) also increased 7% to $214.1 million for the third quarter compared to
$199.4 million for the same period last year.

           For the three months          For the nine months     
            ended                             ended
$ in        February   February    Change    February   February    Change
millions    28, 2013    29, 2012              28, 2013    29, 2012
Operating   $ 225.0     $ 210.4         7 %   $ 693.0     $ 658.0         5  %
income
Excluding
interest
on funds    (10.9   )   (11.0   )       —     (31.0   )   (32.8   )       (6 )%
held for
clients
Operating
income,
net of      $ 214.1    $ 199.4        7 %   $ 662.0    $ 625.2        6  %
certain
items
Operating
income,
net of
certain
items, as   36.8    %   35.7    %             38.7    %   38.0    %
a percent
of total
service
revenue


Interest on funds held for clients was flat at $10.9 million for the third
quarter, compared to the same period last year. This was due to lower average
interest rates earned, offset by a 6% increase in average investment balances.
The increase in average investment balances was driven primarily by the
expiration of certain payroll tax cuts on December 31, 2012, which resulted in
higher employee social security withholdings, growth in checks per payroll,
and wage inflation. The decrease in average interest rates earned resulted
from declines in average yields on high credit quality financial securities.
Also, the lower rate of return reflected the mix in the short-term investment
portfolio, with a greater percentage of the portfolio invested in tax-exempt
securities. Tax-exempt securities typically earn a lower pre-tax rate of
return, but are expected to generate lower income tax expense on interest
earned. Investment income, net, decreased 11% to $1.4 million for the third
quarter, primarily as a result of lower average interest rates earned and
lower average investment balances resulting from the accelerated dividend
payment to stockholders in December 2012.

Average investment balances and interest rates are summarized below:

             For the three months                For the nine months ended   
              ended
$ in          February     February      Change      February     February      Change
millions      28, 2013      29, 2012                  28, 2013      29, 2012
Average
investment
balances:
Funds held    $ 4,151.8     $ 3,916.1         6  %    $ 3,561.6     $ 3,427.2         4  %
for clients
Corporate     $ 676.6       $ 693.7           (2 )%   $ 738.9       $ 662.1           12 %
investments

Average
interest
rates
earned
(exclusive
of net
realized
gains):
Funds held    1.0       %   1.1       %               1.1       %   1.3       %
for clients
Corporate     0.8       %   0.9       %               0.9       %   0.9       %
investments
                                                                                      
Total net
realized      $ 0.6         $ 0.4                     $ 0.9         $ 0.6
gains


Our investment strategy focuses on protecting principal and optimizing
liquidity. Yields on high quality instruments remain low, negatively impacting
our income earned on funds held for clients and corporate investments. A
substantial portion of our portfolio is invested in high credit quality
securities with AAA and AA ratings, and with A-1/P-1 ratings on short-term
securities.

The available-for-sale securities within the funds held for clients and
corporate investment portfolios reflected a net unrealized gain of $51.9
million as of February28, 2013, compared with a net unrealized gain of $59.5
million as of May31, 2012. During the nine months ended February28, 2013,
the net unrealized gain on our investment portfolio ranged from $47.3 million
to $64.1 million. The net unrealized gain on our investment portfolios was
approximately $45.5 million as of March 22, 2013.

YEAR-TO-DATE FISCAL 2013 HIGHLIGHTS

The highlights for the nine months ended February28, 2013 are as follows:

  *Payroll service revenue increased 1.4% to $1.2 billion, with checks per
    payroll increasing 1.9% compared to the same period last year. Checks per
    payroll for the nine-month period was tempered by the impact of Hurricane
    Sandy in our second fiscal quarter.
  *HRS revenue increased 10% to $553.3 million.
  *Total service revenue increased 4% to $1.7 billion.
  *Total revenue increased 4% to $1.7 billion.
  *Combined interest on funds held for clients and investment income, net,
    decreased $1.2 million, or 3%.
  *Operating income increased 5% to $693.0 million, and operating income, net
    of certain items, increased 6% to $662.0 million.
  *Net income increased 5% to $445.5 million and diluted earnings per share
    increased 4% to $1.22 per share.
  *Cash flow from operations was $606.4 million.

OUTLOOK

Our outlook for the fiscal year ending May31, 2013 (“fiscal 2013”) is based
upon current market, economic, and interest rate conditions continuing with no
significant changes. Our expected full year fiscal 2013 payroll revenue growth
rate is based upon anticipated client base growth and modest increases in
revenue per check. HRS revenue growth is expected to remain in line with our
historical organic experience. Revenue growth is expected to be stronger in
the fourth quarter. Prior acquisitions are expected to have minimal impact on
projected revenue growth rates for fiscal 2013.

Our guidance is as follows:

                                    Low             High
Payroll service revenue                 2  %    —      3  %
HRS revenue                                9  %    —         11 %
Total service revenue                      5  %    —         6  %
Interest on funds held for clients         (8 )%   —         (6 )%
Investment income, net                     —       —         5  %
Net income                                 5  %    —         7  %


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 2013. The effective
income tax rate for fiscal 2013 is expected to approximate the tax rate for
the first nine months.

Interest on funds held for clients and investment income for fiscal 2013 are
expected to continue to be impacted by changes in the interest rate
environment. Our rate of return will continue to be impacted by an anticipated
change in mix in our short-term portfolio to a greater percentage of
tax-exempt securities. Tax-exempt securities typically earn a lower rate of
return, but are expected to lower income tax expense on interest earned.
Investment income growth reflects the impact of anticipated lower average
investment balances in the second half of the fiscal year.

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 other companies.

QUARTERLY REPORT ON FORM 10-Q

Our Quarterly Report on Form 10-Q (“Form 10-Q”) is normally filed by the close
of business on the same day as this press release is issued, and is available
at www.paychex.com. 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 28, 2013 at 10:30 a.m. Eastern Time, at
http://investor.paychex.com/webcasts. 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.

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, 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 567,000 payroll
clients as of May31, 2012. 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 (the “Reform Act”).
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
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:

  *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;
  *changes in the laws regulating collection and payment of payroll taxes,
    professional employer organizations, and employee benefits, including
    retirement plans, workers’ compensation, health insurance, state
    unemployment, and section125 plans;
  *changes in health insurance and workers’ compensation 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 a security breach that disrupts operations or exposes
    client confidential data;
  *the possibility of failure of our operating facilities, 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; and
  *potentially unfavorable outcomes related to pending legal matters.

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.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In millions, except per share amounts)

                  For the three months             For the nine months ended   
                   ended
                   February   February    Change       February     February      Change
                   28, 2013    29, 2012                 28, 2013      29, 2012
Revenue:                                                            
Payroll service    $ 393.7     $ 386.5         2   %    $ 1,156.6     $ 1,140.5         1  %
revenue
Human Resource     188.7      172.0          10  %    553.3        505.0            10 %
Services revenue
Total service      582.4       558.5           4   %    1,709.9       1,645.5           4  %
revenue
Interest on
funds held for     10.9       11.0           —        31.0         32.8             (6 )%
clients ^(1)
Total revenue      593.3       569.5           4   %    1,740.9       1,678.3           4  %
Expenses:
Operating          172.1       174.2           (1  )%   500.6         501.0             —
expenses
Selling, general
and                196.2      184.9          6   %    547.3        519.3            5  %
administrative
expenses
Total expenses     368.3      359.1          3   %    1,047.9      1,020.3          3  %
Operating income   225.0       210.4           7   %    693.0         658.0             5  %
Investment         1.4        1.6            (11 )%   5.2          4.6              13 %
income, net ^(1)
Income before      226.4       212.0           7   %    698.2         662.6             5  %
income taxes
Income taxes       81.9       76.6           7   %    252.7        237.9            6  %
Net income         $ 144.5    $ 135.4        7   %    $ 445.5      $ 424.7          5  %
                                                                                        
Basic earnings     $ 0.40      $ 0.37          8   %    $ 1.23        $ 1.17            5  %
per share
Diluted earnings   $ 0.40      $ 0.37          8   %    $ 1.22        $ 1.17            4  %
per share
Weighted-average
common shares      363.8       362.5                    363.5         362.4
outstanding
Weighted-average
common shares
outstanding,       364.6       363.1                    364.2         362.9
assuming
dilution
Cash dividends     $ 0.66      $ 0.32          106 %    $ 1.31        $ 0.95            38 %
per common share

          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,
  (1)  including our Form 10-Q and our Annual Report on Form10-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.


PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except per share amount)

                                             February 28, 2013  May 31, 2012
ASSETS
Cash and cash equivalents                     $   100.4           $   108.8
Corporate investments                         470.2               207.5
Interest receivable                           25.3                30.6
Accounts receivable, net of allowance for     125.1               142.4
doubtful accounts
Deferred income taxes                         6.8                 1.6
Prepaid income taxes                          —                   5.6
Prepaid expenses and other current assets     35.6               35.2
Current assets before funds held for          763.4               531.7
clients
Funds held for clients                        5,556.2            4,544.2
Total current assets                          6,319.6             5,075.9
Long-term corporate investments               227.0               473.7
Property and equipment, net of accumulated    341.7               324.3
depreciation
Intangible assets, net of accumulated         49.9                55.8
amortization
Goodwill                                      533.9               517.4
Deferred income taxes                         32.6                29.2
Other long-term assets                        2.8                3.3
Total assets                                  $   7,507.5        $   6,479.6
                                                                  
LIABILITIES
Accounts payable                              $   47.6            $   69.7
Accrued compensation and related items        139.3               130.9
Deferred revenue                              3.9                 3.0
Accrued income taxes                          9.9                 —
Deferred income taxes                         11.1                13.9
Other current liabilities                     34.5               33.8
Current liabilities before client fund        246.3               251.3
obligations
Client fund obligations                       5,510.2            4,494.4
Total current liabilities                     5,756.5             4,745.7
Accrued income taxes                          49.6                35.9
Deferred income taxes                         47.0                40.6
Other long-term liabilities                   48.5               52.9
Total liabilities                             5,901.6             4,875.1
                                                                  
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; Authorized:
600.0 shares; Issued and outstanding: 363.9   3.6                 3.6
shares as of February 28, 2013 and 362.6
shares as of May 31, 2012, respectively.
Additional paid-in capital                    604.7               561.1
Retained earnings                             964.9               1,002.1
Accumulated other comprehensive income        32.7               37.7
Total stockholders’ equity                    1,605.9            1,604.5
Total liabilities and stockholders’ equity    $   7,507.5        $   6,479.6


PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)

                                        For the nine months ended
                                         February 28, 2013  February 29, 2012
OPERATING ACTIVITIES
Net income                               $     445.5         $     424.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization on
property and equipment and intangible    73.3                72.9
assets
Amortization of premiums and discounts   41.4                31.3
on available-for-sale securities, net
Stock-based compensation costs           16.9                17.6
(Benefit)/provision for deferred         (4.8          )     5.2
income taxes
Provision for allowance for doubtful     0.8                 0.6
accounts
Net realized gains on sales of           (0.9          )     (0.6          )
available-for-sale securities
Changes in operating assets and
liabilities:
Interest receivable                      5.3                 7.9
Accounts receivable                      17.4                24.8
Prepaid expenses and other current       5.2                 (4.6          )
assets
Accounts payable and other current       (2.4          )     (18.2         )
liabilities
Net change in other assets and           8.7                1.0           
liabilities
Net cash provided by operating           606.4               562.6
activities
INVESTING ACTIVITIES
Purchases of available-for-sale          (18,655.1     )     (7,636.2      )
securities
Proceeds from sales and maturities of    16,792.3            6,732.3
available-for-sale securities
Net change in funds held for clients’
money market securities and other cash   787.8               182.1
equivalents
Purchases of property and equipment      (74.2         )     (62.5         )
Acquisition of businesses, net of cash   (21.3         )     (6.0          )
acquired
Purchases of other assets                (5.1          )     (0.9          )
Net cash used in investing activities    (1,175.6      )     (791.2        )
FINANCING ACTIVITIES
Net change in client fund obligations    1,015.8             595.5
Dividends paid                           (476.7        )     (344.3        )
Equity activity related to stock-based   21.7               4.9           
awards
Net cash provided by financing           560.8              256.1         
activities
(Decrease)/increase in cash and cash     (8.4          )     27.5
equivalents
Cash and cash equivalents, beginning     108.8              119.0         
of period
Cash and cash equivalents, end of        $     100.4        $     146.5   
period

Contact:

Paychex, Inc.
Investor Relations:
Efrain Rivera, CFO, or Terri Allen
585-383-3406
or
Media Inquiries:
Laura Saxby Lynch
585-383-3074
 
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