FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
COMMISSION FILE NUMBER 0-11330
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1124166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397
(Address of principal executive offices) (Zip Code)
(716)385-6666
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 372,255,164 Shares
---------------------------- ---------------------------------
CLASS OUTSTANDING AT AUGUST 31, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
For the three months ended
August 31, August 31,
2000 1999
-------- --------
<S> <C> <C>
Service revenues:
Payroll $164,521 $138,712
ENS investment revenue 17,413 12,207
-------- --------
Total payroll service revenues 181,934 150,919
HRS-PEO 21,949 15,473
-------- --------
Total service revenues 203,883 166,392
Operating costs 45,927 39,366
Selling, general and administrative expenses 79,130 68,342
------- -------
Operating income 78,826 58,684
Investment income 5,534 3,688
------- -------
Income before income taxes 84,360 62,372
Income taxes 25,730 19,335
------- -------
Net income $ 58,630 $ 43,037
======= =======
Basic earnings per share $ .16 $ .12
======= =======
Diluted earnings per share $ .16 $ .12
======= =======
Weighted-average common shares outstanding 372,015 369,627
======= =======
Weighted-average shares assuming dilution 377,165 373,493
======= =======
Cash dividends per common share $ .06 $ .04
======= =======
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
August 31, May 31,
2000 2000
(UNAUDITED) (AUDITED)
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 48,003 $ 47,136
Corporate investments 461,919 412,357
Interest receivable 20,453 22,436
Accounts receivable 93,970 87,608
Deferred income taxes - 9,539
Prepaid expenses and other current assets 6,700 6,531
--------- ---------
Current assets before ENS investments 631,045 585,607
ENS investments 1,785,287 1,776,968
--------- ---------
Total current assets 2,416,332 2,362,575
Property and equipment - net 75,576 75,375
Goodwill and intangible assets - net 6,731 5,584
Deferred income taxes 2,770 2,494
Other assets 9,493 9,549
--------- ---------
Total assets $2,510,902 $2,455,577
========= =========
LIABILITIES
Accounts payable $ 14,020 $ 17,086
Accrued compensation and related items 40,720 52,631
Deferred revenue 3,514 4,719
Accrued income taxes 18,461 2,969
Deferred income taxes 150 -
Other current liabilities 24,865 24,400
--------- ---------
Current liabilities before ENS client deposits 101,730 101,805
ENS client deposits 1,783,446 1,785,140
--------- ---------
Total current liabilities 1,885,176 1,886,945
Long-term liabilities 5,615 5,200
--------- ---------
Total liabilities 1,890,791 1,892,145
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
600,000 authorized shares
Issued: 372,255/August 31, 2000 and
371,769/May 31, 2000 3,723 3,718
Additional paid-in capital 107,941 98,904
Retained earnings 505,681 469,385
Accumulated other comprehensive income/(loss) 2,766 (8,575)
--------- ---------
Total stockholders' equity 620,111 563,432
--------- ---------
Total liabilities and stockholders' equity $2,510,902 $2,455,577
========= =========
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the three months ended
August 31, August 31,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 58,630 $ 43,037
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 6,272 5,669
Amortization of premiums and
discounts on available-for-sale securities 3,037 3,091
Provision for deferred income taxes 3,015 1,391
Provision for bad debts 488 344
Net realized (gains)/losses on sales
of available-for-sale securities 177 343
Changes in operating assets and liabilities:
Interest receivable 1,983 4,031
Accounts receivable (6,850) (12,123)
Prepaid expenses and other current assets (169) 495
Accounts payable and other current liabilities 6,697 12,471
Net change in other assets and liabilities 310 1,849
------- -------
Net cash provided by operating activities 73,590 60,598
------- -------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (196,941) (171,248)
Proceeds from sales of
available-for-sale securities 87,982 164,558
Proceeds from maturities of
available-for-sale securities 8,420 7,540
Net change in ENS money market securities
and other cash equivalents 57,348 (84,002)
Net change in ENS client deposits (1,694) 57,847
Purchases of property and equipment (6,066) (6,156)
Proceeds from sale of property and equipment 3 1,201
Purchases of other assets (2,994) (425)
------- -------
Net cash used in investing activities (53,942) (30,685)
------- -------
FINANCING ACTIVITIES
Dividends paid (22,334) (14,784)
Proceeds from exercise of stock options 3,553 1,417
------- -------
Net cash used in financing activities (18,781) (13,367)
------- -------
Increase in Cash and cash equivalents 867 16,546
Cash and cash equivalents, beginning of period 47,136 52,692
------- -------
Cash and cash equivalents, end of period $ 48,003 $ 69,238
======= =======
------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 31, 2000
A) The accompanying unaudited Consolidated Financial Statements of Paychex,
Inc., and its wholly-owned subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the Consolidated Financial Statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
information furnished herein reflects all adjustments (consisting of items of a
normal recurring nature) which are necessary for a fair presentation of the
results for the interim period. Operating results for the three months ended
August 31, 2000, are not necessarily indicative of the results that may be
expected for the full year ended May 31, 2001.
Service revenues are recognized in the period services are rendered. Total
payroll service revenues include service fees and investment revenue. Service
fee revenue is earned primarily from Payroll, Taxpay (Registered Trademark),
Employee Pay Services and other ancillary services. Employee Pay Services
includes the Direct Deposit, Readychex (Service Mark) and Access Card
products. In addition to fees paid by clients for these services, the Company
earns investment revenue on Taxpay and Employee Pay Services funds that are
collected by the Company's Electronic Network Services division (ENS) before
due dates and invested (ENS investments) until remittance to the applicable
tax authorities for Taxpay clients and employees of Employee Pay Services
clients. Investment revenue from these ENS investments is included in
Total payroll service revenues on the Consolidated Statements of Income as
the collection, holding and remittance of these funds is a critical component
of providing these particular product services. ENS investment revenue also
includes net realized gains and losses from the sale of available-for-sale
securities.
PEO revenues are reported net of direct costs billed and incurred, which
include wages, taxes, benefit premiums and claims of worksite employees.
Direct costs billed and incurred for the three months ended August 31, 2000 and
1999 were $193,812 and $160,987, respectively.
There is no significant seasonality to the Company's business. However, during
the third fiscal quarter, the number of new payroll segment clients and new PEO
worksite employees tends to be higher than the rest of the fiscal year.
Consequently, greater sales commission expenses are reported in the third
quarter.
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and related Notes
presented in the Company's Annual Report on Form 10-K for the year ended May
31, 2000. Certain amounts from the prior year are reclassified to conform to
current year presentations.
B) Segment Financial Information: The Company has two business segments:
Payroll and Human Resource Services-Professional Employer Organization
(HRS-PEO). The Payroll segment is engaged in the preparation of payroll
checks, internal accounting records, federal, state and local payroll tax
returns, and collection and remittance of payroll obligations for small- to
medium-sized businesses. The HRS-PEO segment specializes in providing small-
to medium-sized businesses with cost-effective outsourcing solutions for their
employee benefits. HRS-PEO products include 401(k) plan recordkeeping, workers'
compensation, section 125 plan administration, group benefits, state
unemployment insurance, employee handbooks and management services, and Paychex
Administrative Services (PAS) and Professional Employer Organization (PEO)
services. Corporate expenses are primarily related to the Information
Technology, Organizational Development, Finance, Marketing and Senior
Management functions of the Company.
<TABLE>
<CAPTION>
For the three months ended
(In thousands) August 31, August 31,
2000 1999
------- -------
<S> <C> <C>
Service revenues:
Payroll $164,521 $138,712
ENS investment revenue 17,413 12,207
------- -------
Total payroll service revenues 181,934 150,919
HRS-PEO 21,949 15,473
------- -------
Total service revenues $203,883 $166,392
======= =======
Operating income:
Payroll $ 87,534 $ 72,184
HRS-PEO 8,394 4,504
------- -------
Segment operating income 95,928 76,688
Corporate expenses 17,102 18,004
------- -------
Total operating income 78,826 58,684
Investment income 5,534 3,688
------- -------
Income before income taxes $ 84,360 $ 62,372
======= =======
</TABLE>
C) Basic and diluted earnings per share and stock split information: Basic
earnings per share, diluted earnings per share, cash dividends per common
share, weighted-average common shares outstanding, weighted-average shares
assuming dilution and all other applicable information for the three months
ended August 31, 1999, have been adjusted to reflect a three-for-two stock
split effected in the form of 50% stock dividends on outstanding shares payable
to shareholders of record as of May 12, 2000, and distributed on May 22, 2000.
<TABLE>
<CAPTION>
For the three months ended
August 31, August 31,
(In thousands, except per share amounts) 2000 1999
------- -------
<S> <C> <C>
Basic earnings per share:
Net income $ 58,630 $ 43,037
------- -------
Weighted-average common shares outstanding 372,015 369,627
------- -------
Basic earnings per share $ .16 $ .12
======= =======
Diluted earnings per share:
Net income $ 58,630 $ 43,037
------- -------
Weighted-average common shares outstanding 372,015 369,627
Net effect of dilutive stock options at
average market price 5,150 3,866
------- -------
Weighted-average shares assuming dilution 377,165 373,493
------- -------
Diluted earnings per share $ .16 $ .12
======= =======
</TABLE>
For the three months ended August 31, 2000 and August 31, 1999,
weighted-average options to purchase shares of common stock in the amount of
403,000 and 1,716,000, respectively, were not included in the computation of
diluted earnings per share. These options had an exercise price that was
greater than the average market price of the common shares for the period and,
therefore, the effect would have been anti-dilutive.
For the three months ended August 31, 2000, stock options were exercised for
486,000 shares of the Company's common stock.
D) Corporate investments and ENS investments:
<TABLE>
<CAPTION>
August 31, May 31,
(In thousands) 2000 2000
(UNAUDITED) (AUDITED)
---------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
Type of issue:
Money market securities and
other cash equivalents $1,145,316 $1,145,316 $1,202,664 $1,202,664
Available-for-sale
securities:
General obligation
municipal bonds 459,039 460,693 405,214 399,190
Pre-refunded municipal
bonds 298,483 300,249 301,271 298,706
Revenue municipal bonds 337,446 338,322 291,157 286,294
Other securities 20 82 20 92
--------- --------- --------- ---------
Total available-for-sale
securities 1,094,988 1,099,346 997,662 984,282
Other 1,802 2,544 1,802 2,379
--------- --------- --------- ---------
Total Corporate investments
and ENS investments $2,242,106 $2,247,206 $2,202,128 $2,189,325
========= ========= ========= =========
Classification of investments
on Consolidated Balance Sheets:
Corporate investments $ 458,661 $ 461,919 $ 416,988 $ 412,357
ENS investments 1,783,445 1,785,287 1,785,140 1,776,968
--------- --------- --------- ---------
Total Corporate investments
and ENS investments $2,242,106 $2,247,206 $2,202,128 $2,189,325
========= ========= ========= =========
</TABLE>
The Company is exposed to credit risk from the possible inability of the
borrowers to meet the terms of their bonds. In addition, the Company is
exposed to interest rate risk from rate volatility causing fluctuations in the
market value of held investments and the earnings potential of future
investments. The Company attempts to limit these risks by investing primarily
in AAA and AA rated securities and A-1 rated short-term securities, limiting
amounts that can be invested in any single instrument, and investing in short-
to intermediate-term instruments whose market value is less sensitive to
interest rate changes. At August 31, 2000, approximately 98% of the
available-for-sale bond securities held an AA rating or better, and all short-
term securities classified as cash equivalents held an A-1 or equivalent rating.
The Company does not utilize derivative financial instruments to manage
interest rate risk.
E) Property and equipment - net:
<TABLE>
<CAPTION>
August 31, May 31,
(In thousands) 2000 2000
(UNAUDITED) (AUDITED)
--------- -------
<S> <C> <C>
Land and improvements $ 2,919 $ 2,919
Buildings and improvements 30,204 30,195
Data processing equipment and software 88,902 84,490
Furniture, fixtures and equipment 66,237 64,729
Leasehold improvements 10,487 10,536
------- -------
198,749 192,869
Less accumulated depreciation and amortization 123,173 117,494
------- -------
Property and equipment - net $ 75,576 $ 75,375
======= =======
</TABLE>
F) Comprehensive income: Comprehensive income is comprised of two components:
net income and other comprehensive income. Comprehensive income includes all
changes in equity during a period except those resulting from transactions with
owners of the Company. The unrealized gains and losses, net of applicable
taxes, related to available-for-sale securities is the only component reported
in accumulated other comprehensive income in the Consolidated Balance Sheets for
the Company. Comprehensive income, net of related tax effects, is as follows:
<TABLE>
<CAPTION>
For the three months ended
(In thousands) August 31, August 31,
2000 1999
------- -------
<S> <C> <C>
Net income $ 58,630 $ 43,037
Unrealized gains/(losses) on securities, net of
reclassification adjustments 11,341 (5,237)
------- -------
Total comprehensive income $ 69,971 $ 37,800
======= =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis reviews the operating results for the three
months ended August 31, 2000 (fiscal 2001) and 1999 (fiscal 2000), and its
financial condition at August 31, 2000 for Paychex, Inc. and its subsidiaries
(the "Company"). The focus of this review is on the underlying business reasons
for significant changes and trends affecting revenues, net income and financial
condition. This review should be read in conjunction with the accompanying
August 31, 2000 Consolidated Financial Statements, and the related Notes to
Consolidated Financial Statements contained in this Form 10-Q. Forward-looking
statements in this Management's Discussion and Analysis are qualified by the
cautionary statement included in the "Other" section of this review under
the sub-heading "Safe-Harbor Statement under the Private Securities Litigation
Reform Act of 1995."
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Service revenues $203,883 22.5% $166,392
Operating income $ 78,826 34.3% $ 58,684
Operating margin 38.7% 35.3%
Income before income taxes $ 84,360 35.3% $ 62,372
Net income $ 58,630 36.2% $ 43,037
% of service revenues 28.8% 25.9%
Basic earnings per share $ .16 33.3% $ .12
Diluted earnings per share $ .16 33.3% $ .12
==============================================================================
</TABLE>
The Company's ability to continually grow its client base, increase client
utilization of ancillary services, develop new services, implement price
increases and decrease operating expenses as a percent of service revenues has
resulted in record first quarter service revenues and net income for the three
months ended August 31, 2000.
Payroll segment
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Payroll service revenue $164,521 18.6% $138,712
ENS investment revenue 17,413 42.6% 12,207
--------------------------------
Total payroll service revenues $181,934 20.6% $150,919
Payroll operating income $ 87,534 21.3% $ 72,184
Payroll operating margin 48.1% 47.8%
==============================================================================
</TABLE>
Revenues: Total payroll service revenues include service fees and investment
revenue. Service fee revenue is earned primarily from Payroll, Taxpay, Employee
Pay Services and other ancillary services. Employee Pay Services include the
Direct Deposit, Readychex and Access Card products. In addition to fees paid
by clients for these services, the Company earns investment revenue on Taxpay
and Employee Pay Services funds that are collected by the Company's Electronic
Network Services division (ENS) before due dates and invested (ENS investments)
until remittance to the applicable tax authorities for Taxpay clients and
employees of Employee Pay Services clients. Investment revenue from these ENS
investments is included in Total payroll service revenues on the Consolidated
Statements of Income as the collection, holding and remittance of these funds is
a critical component of providing these particular product services. ENS
investment revenue also includes net realized gains and losses from the sale of
available-for-sale securities.
The increase in Payroll service revenue is primarily related to the addition of
new clients, price increases and increased utilization of ancillary services by
both new and existing clients. As of August 31, 2000, 82% of Paychex clients
utilized Taxpay, the Company's tax filing and payment feature. Client
utilization of the Taxpay product is expected to mature within the next several
years within a range of 82% to 87%.
The Company's Employee Pay Services, which includes Direct Deposit, Readychex
and Access Card products was utilized by 48% of its clients. During the first
quarter of fiscal 2001, the Company continued expansion efforts of its Major
Market Services (MMS) payroll product offering. First quarter MMS revenue was
$9.6 million compared to $6.3 million a year ago. Employee Pay Services and MMS
are expected to provide growth opportunities for the remainder of fiscal 2001
and beyond. The Company is also in the process of introducing new payroll
product enhancements including employee garnishments and after-the-fact
payroll.
ENS investment revenue increased in the first quarter due to the growth in
Taxpay and Employee Pay Services utilization and higher comparative rates of
return. Realized gains and losses on the sale of available-for-sale securities
were not significant in the first quarter of both fiscal 2001 and fiscal 2000.
Full year fiscal 2001's percentage growth in Total payroll service revenues is
expected to be toward the upper end of a range of 18% to 20%.
Operating income: Operating income in the first quarter of fiscal 2001
increased as a result of the increases in revenue and continued leveraging of
the segment's operating expense base as evidenced by the improvement in
operating margins. The first quarter fiscal 2001 Payroll operating margin
demonstrated strong growth.
Effective September 1, 1999, the Company increased its sales force compensation
package by approximately $6.0 million on an annualized basis to increase the
retention and quality of its payroll sales representatives. This compensation
increase resulted in an additional expense of approximately $1.5 million in the
first quarter of fiscal 2001.
For the last nine months of fiscal 2001, the Company expects to produce Payroll
segment operating margins close to what was experienced in the first quarter.
HRS-PEO segment
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
HRS-PEO service revenue $ 21,949 41.9% $15,473
HRS-PEO operating income $ 8,394 86.4% $ 4,504
HRS-PEO operating margin 38.2% 29.1%
==============================================================================
</TABLE>
Revenues: The increase in service revenue is primarily related to increasing
401(k) recordkeeping, workers' compensation insurance and Section 125 clients,
and PEO worksite employees. The increase in 401(k) clients reflects the
continuing interest of small- to medium-sized businesses to offer retirement
savings benefits to their employees. During the first quarter of fiscal 2001,
401(k) recordkeeping revenues grew to $9.5 million from $6.5 million a year
ago.
The Company continued its expansion of its workers' compensation insurance
product, which provides insurance for qualified clients through leading
insurance providers and a method to stabilize their cash flows throughout the
year. The Company expects full year fiscal 2001 revenues for this product to
exceed $5 million. The Company also continued expansion efforts related to its
Paychex Administrative Services (PAS) product, a combined payroll and human
resource outsourcing solution designed to make it easier for small businesses
to manage their payroll and benefit costs.
Operating income: The increase in operating income is primarily related to the
service revenue gains, and the leveraging of operating expenses.
We expect full year fiscal 2001's HRS-PEO service revenue to be just slightly
under $100 million. Segment operating income is expected to continue to grow
at a rate lower than in fiscal 2000, but at a rate that is much higher than the
Payroll segment's growth rate. Quarter-over-quarter percentage comparisons in
HRS-PEO service revenue and operating income may vary significantly throughout
the year, and any one quarter's results may not be indicative of expected
full-year results.
Corporate expenses
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate expenses 17,102 -5.0% $18,004
==============================================================================
</TABLE>
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. The decrease in expenses is due to lower spending on national
marketing efforts in the first quarter of fiscal 2001, and higher than normal
spending and expenditures in the first quarter of fiscal 2000.
Corporate expense quarter-over-quarter percentage comparisons may fluctuate
throughout the year due to timing and other factors. Corporate expenses for
the full year fiscal 2001 are expected to grow modestly, as the Company expects
that the last nine months of fiscal 2001 will be slightly higher when compared
to the same period in fiscal 2000.
Investment income
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income $5,534 50.1% $3,688
==============================================================================
</TABLE>
Investment income represents earnings from the Company's Cash and cash
equivalents and Corporate investments in available-for-sale securities.
Investment income does not include earnings from the ENS investments which are
recorded as ENS investment revenue within the Payroll segment. The increase
in Investment income is primarily due to the increase in average daily
invested balances and higher comparable rates of return. Realized gains and
losses on available-for-sale securities were not significant in the first
quarter of both fiscal 2001 and fiscal 2000. Investment income for the full
year fiscal 2001 is expected to grow at a rate higher than in fiscal 2000.
Income taxes
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $25,730 33.1% $19,335
Effective income tax rate 30.5% 31.0%
==============================================================================
</TABLE>
The decrease in the effective income tax rate is due to the growth in tax-exempt
income exceeding the growth in taxable income. Tax-exempt income is derived
primarily from income earned on municipal debt securities. Full-year fiscal
2001's effective income tax rate is expected to approximate 30.5%.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating cash flows $73,590 21.4% $60,598
==============================================================================
</TABLE>
The increase in operating cash flows resulted primarily from the consistent
achievement of higher net income. Projected operating cash flows are expected
to adequately support normal business operations, forecasted growth, purchases
of property and equipment and dividend payments. At August 31, 2000, the
Company had $510 million in available cash and Corporate investments. The
Company also has $140 million of available, uncommitted, unsecured lines of
credit and $350 million available under an uncommitted, secured line of credit.
Investing activities
<TABLE>
<CAPTION>
(In thousands)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investments and ENS activities $(44,885) 77.4% $(25,305)
Purchases of P&E (6,066) -1.5% (6,156)
Proceeds on the sale of P&E 3 -99.8% 1,201
Purchases of other assets (2,994) 604.5% (425)
-------------------------------
Net cash used in investing activities $(53,942) 75.8% $(30,685)
==============================================================================
</TABLE>
Corporate investments and ENS investments: Investments are primarily comprised
of available-for-sale debt securities, and ENS investments are primarily
comprised of short-term funds and available-for-sale debt securities. The
portfolio of Corporate investments and ENS investments is detailed in Note D
of the Notes to the Consolidated Financial Statements.
Corporate investments have increased due to the investment of increasing cash
balances provided by operating activities less purchases of property and
equipment and dividend payments. The reported amount of ENS investments will
vary significantly based upon the timing of collecting client funds, and
remitting the funds to the applicable tax authorities for Taxpay clients and
employees of clients utilizing Employee Pay Services. At August 31, 2000, the
available-for-sale debt securities in the Corporate investments portfolio and
ENS investments portfolio had market values exceeding the cost basis by $2.6
million and $1.8 million, respectively. Additional discussion of interest
rates and related risks is included in the "Market Risk Factors" section of
this review.
Purchases of property and equipment: To support the Company's continued client
and ancillary product growth, purchases of property and equipment were made for
data processing equipment and software, and for the expansion and upgrade of
various operating facilities. Purchases of property and equipment in fiscal
2001 are expected to range from $30 to 35 million. The Company expects to
proceed with the construction of an additional facility at Corporate
headquarters at an estimated cost ranging from $20 to $30 million. The
building will be primarily occupied by employees who are currently occupying
leased facilities and is scheduled for completion in the summer of 2002.
Financing activities
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
For the three months ended August 31, 2000 Change 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends paid $(22,334) 51.1% $(14,784)
Proceeds from exercise of stock options 3,553 150.7% 1,417
-------------------------------
Net cash used in financing activities $(18,781) 40.5% $(13,367)
------------------------------------------------------------------------------
Cash dividends per common share $ .06 50.0% $ .04
==============================================================================
</TABLE>
Dividends paid: During the quarter ended August 31, 2000, the Company's Board
of Directors declared a dividend which was paid August 15, 2000, for share-
holders of record as of August 1, 2000. The Company has increased its quarterly
cash dividend rate per share by 50% in each of the last eight fiscal years. The
Company has distributed three-for-two stock splits effected in the form of 50%
stock dividends on outstanding shares each May in the past six fiscal years.
Proceeds from exercise of stock options: The increase in proceeds from the
exercise of stock options is primarily due to higher comparable exercise prices
per share, plus an increase in the number of shares exercised. The Company has
recognized a tax benefit from the exercise of stock options of $5.5 million and
$2.2 million for the three months ended August 31, 2000 and 1999, respectively.
This tax benefit reduces the accrued income tax liability and increases
additional paid-in capital, with no impact on the expense amount for income
taxes.
MARKET RISK FACTORS
Interest rate risk - The Company's available-for-sale debt securities are
exposed to market risk from changes in interest rates, as rate volatility will
cause fluctuations in the market value of held investments. Increases in
interest rates normally decrease the market value of the available-for-sale
securities, while decreases in interest rates increase the market value of the
available-for-sale securities.
In addition, the Company's available-for-sale securities and short-term funds
are exposed to earnings risk from changes in interest rates, as rate
volatility will cause fluctuations in the earnings potential of future
investments. Increases in interest rates quickly increase earnings from
short-term funds, and over time increase earnings from the available-for-sale
securities portfolio. Earnings from the available-for-sale securities do not
reflect changes in rates until the investments are sold or mature, and the
proceeds are reinvested at current rates. Decreases in interest rates have
the opposite earnings effect on the available-for-sale securities and
short-term funds.
During the first quarter of fiscal 2001, the federal funds rate has remained
unchanged at 6.50%. During fiscal 2000, the federal funds rate was increased
175 basis points from 4.75% to 6.5%, the timing of which is shown in the
following table:
-------------------------------------------------------------------------------
2000
--------
Federal funds rate - beginning of fiscal year 4.75%
Rate increase:
First quarter .50
Second quarter .25
Third quarter .25
Fourth quarter .75
-------
Federal funds rate - end of fiscal year 6.50%
===============================================================================
The earnings impact of these interest rate changes is not precisely
quantifiable, because many factors influence the return on the Company's
portfolio. These factors include, among others, daily interest rate changes,
the proportional mix of taxable and tax-exempt investments, and changes in
tax-exempt and taxable investment rates, which are not synchronized, nor do
they change simultaneously. Subject to the aforementioned factors, a 25
basis point change normally affects the Company's tax-exempt interest rates
by approximately 17 basis points.
The Company directs investments towards high credit-quality, tax-exempt
securities to mitigate the risk that earnings from the portfolio could be
adversely impacted by changes in interest rates in the near term. The Company
invests in short- to intermediate-term, fixed-rate municipal and government
securities, which typically have lower interest rate volatility, and manages
the securities portfolio to a benchmark duration of 2.5 to 3.0 years. The
Company does not utilize derivative financial instruments to manage interest
rate risk.
At August 31, 2000, the available-for-sale securities portfolio had a market
value greater than its cost basis by $4.4 million, compared with the portfolio
at May 31, 2000, which had a market value less than its cost basis by $13.4
million. In fiscal 2000, the available-for-sale portfolio had a market value
less than its cost basis as a result of the upward trend in interest rates
throughout the year. In the first quarter of fiscal 2001, short-term rates
have remained stable and certain intermediate-term rates have decreased when
compared to rates as of May 31, 2000, driving the improvement in the market
value of the available-for-sale portfolio.
As of August 31, 2000 and May 31, 2000, the Company had $1,099.3 million and
$984.3 million invested in available-for-sale securities at fair value, both
with a weighted-average yield to maturity of 4.5%. Assuming a hypothetical
increase in interest rates of 25 basis points given the August 31, 2000
portfolio of securities, the resulting potential decrease in fair value would
be approximately $6.8 million. Conversely, a corresponding decrease in interest
rates would result in a comparable increase in fair value. This hypothetical
increase or decrease in the fair value of the portfolio would be recorded as an
adjustment to the portfolio's recorded value, with an offsetting amount
recorded in stockholders' equity, and with no related or immediate impact to
the results of operations. The Company's interest rate risk exposure has not
changed materially since May 31, 2000.
Credit risk - The Company is exposed to credit risk in connection with these
investments through the possible inability of the borrowers to meet the terms
of the bonds. The Company attempts to limit credit risk by investing primarily
in AAA and AA rated securities and A-1 rated short-term securities, and by
limiting amounts that can be invested in any single instrument. At August 31,
2000, approximately 98% of the available-for-sale securities held an AA rating
or better, and all short-term securities classified as cash equivalents held an
A-1 or equivalent rating.
OTHER
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Certain written and oral statements made by Paychex, Inc., (the
"Company") management may constitute "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are identified by such words and phrases as "we expect", "expects",
"expected to","we look forward to", "we believe" and "could be." Because
they are forward-looking, they should be evaluated in light of important risk
factors. These risk factors include general market conditions, including demand
for the Company's products and services, availability of internal and external
resources, executing expansion plans, competition, and price levels; changes in
the laws regulating collection and payment of payroll taxes, professional
employer organizations, and employee benefits, including 401(k) plans, workers'
compensation, state unemployment, and section 125 plans; delays in the
development, timing of the introduction, and marketing of new products and
services; changes in technology including the use of the Internet; the
possibility of catastrophic events that could impact the Company's operating
facilities, computer technology and communication systems; and changes in
short- and long-term interest rates and the credit rating of cash, cash
equivalents, and securities held in the Company's investment portfolios. The
information provided in this document is based upon the facts and circumstances
known at this time. The Company is under no obligation to update
forward-looking statements in this document for new information subsequent to
its issuance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption
"Market Risk Factors" at subheading "Interest rate risk:" under
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
The text portion of the Company's press release dated September 20, 2000,
regarding its financial results for the three months ended August 31, 2000, is
attached. The related Consolidated Financial Statements are contained in Part
I. FINANCIAL INFORMATION in this Form 10-Q.
--------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
John M. Morphy, Chief Financial Officer
Or
Jan Shuler 716-383-3406
Access Paychex, Inc. News Releases, current financial information and
related SEC filings at http://www.paychex.com/paychex/finance/finance.html
Access the Webcast of the Paychex, Inc. First Quarter Earnings Release
Conference Call scheduled for September 20, 2000 at 10:30 a.m. Eastern
Standard Time, at http://www.paychex.com/paychex/finance/finance.html.
The Webcast will remain on our Web site until our next quarterly earnings
release in December 2000.
PAYCHEX, INC. REPORTS RECORD FIRST QUARTER RESULTS
ROCHESTER, NY, September 20, 2000 -- Paychex, Inc. (NASDAQ: PAYX) today
announced record net income of $58.6 million, or $.16 diluted earnings per
share, for the quarter ended August 31, 2000, a 36% increase over net income
of $43.0 million, or $.12 diluted earnings per share, for the same period last
year. Total service revenues were $203.9 million, an increase of 23% over
$166.4 million for the first quarter last year.
PAYROLL SEGMENT
For the quarter ended August 31, 2000, operating income for the Payroll segment
increased 21% to $87.5 million from $72.2 million for the first quarter last
year. Total payroll service revenues were $181.9 million, an increase of 21%
over $150.9 million for the prior year period.
The increases in Total payroll service revenues and operating income were
primarily the result of continued growth in the Payroll client base, increased
utilization of ancillary services, higher rates of return on ENS investments
(funds held for clients) and leveraging of operating expenses.
As of August 31, 2000, 82% of Paychex clients utilized Taxpay (Registered
Trademark), the Company's tax filing and payment feature. The Company's
Employee Pay Services, which includes Direct Deposit, Readychex, and Access
Card Products was utilized by 48% of its clients. First quarter Major Market
Services revenue was $9.6 million compared to $6.3 million a year ago.
The Company is also in the process of introducing new payroll product
enhancements including employee garnishments and after-the-fact payroll.
HRS-PEO SEGMENT
For the quarter ended August 31, 2000, operating income for the HRS-PEO segment
increased 86% from $4.5 million to $8.4 million. HRS-PEO service revenue was
$21.9 million, an increase of 42% over $15.5 million for the first quarter last
year.
The increases in service revenue and operating income are primarily related to
increasing 401(k) recordkeeping, workers' compensation insurance and section
125 clients. During the first quarter of fiscal 2001, 401(k) recordkeeping
revenues grew to $9.5 million from $6.5 million a year ago. The first quarter
also reflected strong customer acceptance of our workers' compensation
insurance program where we expect full year fiscal 2001 revenues to exceed $5
million.
CORPORATE EXPENSES
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. For the quarter ended August 31, 2000, Corporate expenses
decreased 5% to $17.1 million from $18.0 million. The decrease is primarily
due to lower spending on national marketing efforts in the first quarter of
fiscal 2001, and higher than normal levels of spending and expenditures in the
first quarter of fiscal 2000.
INVESTMENT INCOME
Investment income for the quarter ended August 31, 2000 increased 50% to $5.5
million from $3.7 million in the first quarter of last year. The increase is
due to higher invested balances and higher comparable rates of return.
B. Thomas Golisano, Chairman, President and Chief Executive Officer of Paychex
said, "Fiscal 2001 is off to a very good start as growth of our client base,
increased utilization of ancillary services and leveraging of our
infrastructure continue to generate excellent results. Expansion and results
for our Major Market Services product are proceeding as expected. Our HRS-PEO
revenue and profits continue to grow as a result of increasing customer
acceptance of our 401(k) recordkeeping and worker's compensation insurance
services."
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain written and oral statements made by Paychex, Inc., (the "Company")
management may constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are identified by such words and phrases as "we expect", "expects", "expected
to", "we look forward to", "we believe" and "could be." Because they are
forward-looking, they should be evaluated in light of important risk factors.
These risk factors include general market conditions, including demand for the
Company's products and services, availability of internal and external
resources, executing expansion plans, competition, and price levels; changes in
the laws regulating collection and payment of payroll taxes, professional
employer organizations, and employee benefits, including 401(k) plans, workers'
compensation, state unemployment, and section 125 plans; delays in the
development, timing of the introduction, and marketing of new products and
services; changes in technology including the use of the Internet; the
possibility of catastrophic events that could impact the Company's operating
facilities, computer technology and communication systems; and changes in
short- and long-term interest rates and the credit rating of cash, cash
equivalents, and securities held in the Company's investment portfolios. The
information provided in this document is based upon the facts and circumstances
known at this time. The Company is under no obligation to update
forward-looking statements in this document for new information subsequent to
its issuance.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - "Financial Data Schedule" is filed electronically.
(b) Reports on Form 8-K:
(1) The Company filed a report on Form 8-K on June 26, 2000, that
included the Company's press release dated June 26, 2000, with the
financial results for the year ended May 31, 2000, and a preliminary
Management Discussion and Analysis of the Financial Condition and
Results of Operations for the years ended May 31, 2000, 1999 and 1998.
(2) The Company filed a report on Form 8-K on June 27, 2000, that included
quarterly data for fiscal 2000 and 1999 restated for the 3-for-2 stock
split distributed on May 22, 2000, and quarterly segment financial
data for fiscal 2000 and 1999 restated for an operating facilities
cost reallocation from the Payroll segment to the HRS-PEO segment.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAYCHEX, INC.
Date: September 20, 2000 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: September 20, 2000 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
