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 February 29, 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 247,532,832 Shares
- ---------------------------- ---------------------------------
CLASS OUTSTANDING AT February 29, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
For the three months ended For the nine months ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
Service revenues:
Payroll $171,821 $144,257 $477,639 $403,274
HRS-PEO
(Net of PEO direct costs
billed and incurred of
$193,047, $148,292,
$515,090 and $429,823,
respectively (A)) 20,362 14,166 53,294 37,386
------- ------- ------- -------
Total service revenues 192,183 158,423 530,933 440,660
Operating costs 45,964 40,989 126,686 113,737
Selling, general and
administrative expenses 78,316 68,941 215,152 191,791
------- ------- ------- -------
Operating income 67,903 48,493 189,095 135,132
Investment income 4,012 3,073 11,554 9,040
------- ------- ------- -------
Income before income taxes 71,915 51,566 200,649 144,172
Income taxes 22,294 15,366 62,201 42,963
------- ------- ------- -------
Net income $ 49,621 $ 36,200 $138,448 $101,209
======= ======= ======= =======
Basic earnings per share $ .20 $ .15 $ .56 $ .41
======= ======= ======= =======
Diluted earnings per share $ .20 $ .15 $ .55 $ .41
======= ======= ======= =======
Weighted-average common
shares outstanding 247,315 245,693 246,856 245,311
======= ======= ======= =======
Weighted-average shares
assuming dilution 251,815 248,934 250,206 248,683
======= ======= ======= =======
Cash dividends per common $ .09 $ .06 $ .24 $ .16
share ======= ======= ======= =======
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(A) PEO direct costs billed to clients are equal to PEO direct costs incurred
for the wages and payroll taxes of worksite employees and their related
benefit premiums and claims.
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
February 29, May 31,
2000 1999
ASSETS (UNAUDITED) (AUDITED)
Cash and cash equivalents $ 64,839 $ 52,692
Investments 373,682 290,555
Interest receivable 17,931 18,045
Accounts receivable 77,337 62,941
Deferred income taxes 9,654 1,364
Prepaid expenses and other current assets 5,038 6,000
--------- ---------
Current assets before ENS investments 548,481 431,597
ENS investments 1,830,485 1,361,523
--------- ---------
Total current assets 2,378,966 1,793,120
Property and equipment - net 72,757 65,931
Deferred income taxes 2,322 1,417
Other assets 15,560 12,633
--------- ---------
Total assets $2,469,605 $1,873,101
========= =========
LIABILITIES
Accounts payable $ 12,810 $ 10,328
Accrued compensation and related items 45,888 36,574
Deferred revenue 5,963 4,643
Accrued income taxes 12,062 4,281
Other current liabilities 21,846 17,905
--------- ---------
Current liabilities before ENS client deposits 98,569 73,731
ENS client deposits 1,837,599 1,358,605
--------- ---------
Total current liabilities 1,936,168 1,432,336
Long-term liabilities 5,154 4,965
--------- ---------
Total liabilities 1,941,322 1,437,301
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
600,000 authorized shares
Issued: 247,533/February 29, 2000 and
246,326/May 31, 1999 2,475 2,463
Additional paid-in capital 91,349 68,238
Retained earnings 441,435 362,269
Accumulated other comprehensive income/(loss) (6,976) 2,830
--------- ---------
Total stockholders' equity 528,283 435,800
--------- ---------
Total liabilities and stockholders' equity $2,469,605 $1,873,101
========= =========
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the nine months ended
February 29, February 28,
2000 1999
OPERATING ACTIVITIES
Net income $138,448 $101,209
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 17,639 16,206
Amortization of premiums and
discounts on available-for-sale securities 9,274 7,557
Provision for deferred income taxes (3,634) (2,058)
Provision for bad debts 1,359 1,363
Net realized (gains)/losses on sales
of available-for-sale securities 2,292 (2,813)
Changes in operating assets and liabilities:
Interest receivable 114 (1,298)
Accounts receivable (15,755) (6,063)
Prepaid expenses and other current assets 962 (1,595)
Accounts payable and other current liabilities 39,598 17,670
Net change in other assets and liabilities 2,588 (1,496)
------- -------
Net cash provided by operating activities 192,885 128,682
INVESTING ACTIVITIES
Purchases of available-for-sale securities (623,829) (571,285)
Proceeds from sales of
available-for-sale securities 443,225 352,013
Proceeds from maturities of
available-for-sale securities 15,770 31,135
Net change in ENS money market securities
and other cash equivalents (413,702) (184,548)
Net change in ENS client deposits 478,994 320,749
Purchases of property and equipment,
net of disposal proceeds (24,422) (18,482)
Purchases of other assets (6,416) (3,418)
------- -------
Net cash used in investing activities (130,380) (73,836)
FINANCING ACTIVITIES
Dividends paid (59,281) (39,280)
Proceeds from exercise of stock options 8,923 3,428
------- -------
Net cash used in financing activities (50,358) (35,852)
------- -------
Increase in Cash and cash equivalents 12,147 18,994
Cash and cash equivalents, beginning of period 52,692 35,571
------- -------
Cash and cash equivalents, end of period $ 64,839 $ 54,565
======= =======
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
February 29, 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 and
nine months ended February 29, 2000, are not necessarily indicative of the
results that may be expected for the full year ended May 31, 2000.
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, 1999. 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
services, section 125 plan administration, Professional Employer Organization
(PEO) services, workers' compensation, group benefits, state unemployment
insurance services, employee handbooks and management services. Corporate
expenses are primarily related to the Information Technology, Organizational
Development, Finance, Marketing and Senior Management functions of the Company.
For the three months ended For the nine months ended
(In thousands) February 29, February 28, February 29, February 28,
2000 1999 2000 1999
Service revenues:
Payroll $171,821 $144,257 $477,639 $403,274
HRS-PEO (A) 20,362 14,166 53,294 37,386
------- ------- ------- -------
Total service revenues $192,183 $158,423 $530,933 $440,660
======= ======= ======= =======
ENS investment revenue
included in Payroll revenue $ 16,355 $ 14,775 $ 40,595 $ 38,535
======= ======= ======= =======
Operating income:
Payroll $ 77,270 $ 60,993 $221,197 $171,556
HRS-PEO 7,244 3,236 18,301 8,422
------- ------- ------- -------
Segment operating income 84,514 64,229 239,498 179,978
Corporate expenses 16,611 15,736 50,403 44,846
------- ------- ------- -------
Total operating income 67,903 48,493 189,095 135,132
Investment income 4,012 3,073 11,554 9,040
------- ------- ------- -------
Income before income taxes $ 71,915 $ 51,566 $200,649 $144,172
======= ======= ======= =======
(A) Net of PEO direct costs billed and incurred of $193,047 and $148,292 for
the three months ended February 29, 2000 and February 28, 1999,
respectively, and $515,090 and $429,823 for the nine months ended
February 29, 2000 and February 28, 1999, respectively. PEO direct costs
billed to clients are equal to PEO direct costs incurred for the wages and
payroll taxes of worksite employees and their related benefit premiums and
claims.
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 and
nine months ended February 28, 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 13, 1999, and distributed on
May 21, 1999.
For the three months ended For the nine months ended
(In thousands, February 29, February 28, February 29, February 28,
except per share amounts) 2000 1999 2000 1999
Basic earnings per share:
Net income $ 49,621 $ 36,200 $138,448 $101,209
------- ------- ------- -------
Weighted-average common
share outstanding 247,315 245,693 246,856 245,311
------- ------- ------- -------
Basic earnings per share $ .20 $ .15 $ .56 $ .41
======= ======= ======= =======
Diluted earnings per share:
Net income $ 49,621 $ 36,200 $138,448 $101,209
------- ------- ------- -------
Weighted-average common
shares outstanding 247,315 245,693 246,856 245,311
Net effect of dilutive
stock options at
average market price 4,500 3,241 3,350 3,372
------- ------- ------- -------
Weighted-average shares
assuming dilution 251,815 248,934 250,206 248,683
------- ------- ------- -------
Diluted earnings per share $ .20 $ .15 $ .55 $ .41
======= ======= ======= =======
Weighted-average anti-
dilutive stock options $ -- $ -- $ 381 $ 90
======= ======= ======= =======
Weighted-average anti-dilutive stock options to purchase shares of common stock
were excluded from 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 and nine months ended February 29, 2000, stock options
were exercised for 396,000 and 1,207,000 shares of the Company's common stock,
respectively.
D) Investments and ENS investments:
February 29, May 31,
(In thousands) 2000 1999
(UNAUDITED) (AUDITED)
---------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
Type of issue:
Money market securities and
other cash equivalents $1,184,350 $1,184,350 $ 770,648 $ 770,648
Available-for-sale
securities:
General obligation
municipal bonds 434,786 429,791 313,485 314,636
Pre-refunded municipal
bonds 316,457 314,221 295,359 297,621
Revenue municipal bonds 277,133 273,431 266,264 267,290
Other securities 21 78 21 73
--------- --------- --------- ---------
Total available-for-sale
securities 1,028,397 1,017,521 875,129 879,620
Other 1,802 2,296 1,424 1,810
--------- --------- --------- ---------
Total Investments and
ENS investments $2,214,549 $2,204,167 $1,647,201 $1,652,078
========= ========= ========= =========
Classification of investments
on Consolidated Balance Sheets:
Investments $ 376,950 $ 373,682 $ 288,596 $ 290,555
ENS investments 1,837,599 1,830,485 1,358,605 1,361,523
--------- --------- --------- ---------
Total Investments and
ENS investments $2,214,549 $2,204,167 $1,647,201 $1,652,078
========= ========= ========= =========
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 as rate volatility will cause fluctuations in the
market value of held investments and the earnings potential of future
investments. The Company does not utilize derivative financial instruments to
manage interest rate risk. The Company attempts to limit these risks by
investing primarily in AAA and AA rated securities, A-1 rated short-term
securities, limiting amounts that can be invested in any single instrument, and
by investing in short- to intermediate-term instruments whose market value is
less sensitive to interest rate changes. At February 29, 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.
E) Property and equipment - net:
February 29, May 31,
(In thousands) 2000 1999
(UNAUDITED) (AUDITED)
Land and improvements $ 2,919 $ 2,896
Buildings and improvements 29,769 26,932
Data processing equipment and software 79,128 70,000
Furniture, fixtures and equipment 62,924 59,818
Leasehold improvements 10,159 8,838
------- -------
184,899 168,484
Less accumulated depreciation and amortization 112,142 102,553
------- -------
Property and equipment - net $ 72,757 $ 65,931
======= =======
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:
For the three months ended For the nine months ended
(In thousands) February 29, February 28, February 29, February 28,
2000 1999 2000 1999
Net income $ 49,621 $ 36,200 $138,448 $101,209
Unrealized gains/(losses)
on securities, net of
reclassification
adjustments (3,737) 253 (9,806) 3,213
------- ------- ------- -------
Total comprehensive
income $ 45,884 $ 36,453 $128,642 $104,422
======= ======= ======= =======
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 and nine months ended February 29, 2000, (fiscal 2000) and February 28,
1999 (fiscal 1999), and its financial condition at February 29, 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 February 29, 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
in Exhibit 99, contained in this Form 10-Q.
RESULTS OF OPERATIONS
(In thousands, except per share amounts)
For the three months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Service revenues $192,183 21.3% $158,423
Operating income $ 67,903 40.0% $ 48,493
Operating margin 35.3% 4.7 30.6%
Income before income taxes $ 71,915 39.5% $ 51,566
Net income $ 49,621 37.1% $ 36,200
% of service revenues 25.8% 2.9 22.9%
Basic earnings per share $ .20 33.3% $ .15
Diluted earnings per share $ .20 33.3% $ .15
==============================================================================
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Service revenues $530,933 20.5% $440,660
Operating income $189,095 39.9% $135,132
Operating margin 35.6% 4.9 30.7%
Income before income taxes $200,649 39.2% $144,172
Net income $138,448 36.8% $101,209
% of service revenues 26.1% 3.1 23.0%
Basic earnings per share $ .56 36.6% $ .41
Diluted earnings per share $ .55 34.1% $ .41
==============================================================================
The Company's continued ability to 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 service revenues and net income for the three months
and nine months ended February 29, 2000.
Payroll segment
(In thousands)
For the three months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Payroll service revenue $171,821 19.1% $144,257
ENS investment revenue included in
Payroll service revenue $ 16,355 10.7% $ 14,775
Payroll operating income $ 77,270 26.7% $ 60,993
Payroll operating margin 45.0% 2.7 42.3%
==============================================================================
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Payroll service revenue $477,639 18.4% $403,274
ENS investment revenue included in
Payroll service revenue $ 40,595 5.3% $ 38,535
Payroll operating income $221,197 28.9% $171,556
Payroll operating margin 46.3% 3.8 42.5%
==============================================================================
Client statistics at February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Payroll clients 345.9 9.2% 316.9
Taxpay clients 276.8 12.2% 246.7
% of Payroll clients 80.0% 2.2 77.8%
Flexible Pay Package clients 157.1 20.8% 130.1
% of Payroll clients 45.4% 4.3 41.1%
==============================================================================
Revenues: Payroll service revenue includes service fees and investment
revenue. Service fee revenue is earned primarily from Payroll, Taxpay,
Flexible Pay Package and other ancillary services. The Flexible Pay Package
includes the Direct Deposit, Readychex, and Access Card products. ENS
investment revenue is earned during the period between collecting client funds
(ENS investments) and remitting the funds to the applicable tax authorities for
Taxpay clients and employees of Flexible Pay Package clients. ENS investment
revenue also includes net realized gains and losses from the sale of
available-for-sale securities. Additional discussion on interest rates and
related risk is included in the Liquidity and Capital Resources section of this
review under the caption "Investments and ENS investments".
The increases in payroll service revenue are primarily related to the addition
of new clients, new services, price increases, and increased utilization of
ancillary services, such as Taxpay and Flexible Pay Package by both new and
existing clients. Client utilization of the Taxpay product is expected to
mature within the next several years within a range of 82% to 87%. Client
utilization of the Flexible Pay Package product is expected to provide growth
opportunities for fiscal 2000 and beyond.
ENS investment revenue increased in the third quarter due to the growth in
Taxpay and Flexible Pay Package utilization and higher comparative short-term
rates of return. These increases were offset by realized losses of $.8 million
recognized on the sale of securities compared with realized gains of $1.1
million which were recognized during the same period last year.
The percentage increase in ENS investment revenue for the first nine months of
fiscal 2000 was lower than the percentage growth experienced in the third
quarter. This was primarily due to lower comparable rates of return during the
first six months of the fiscal year. Realized losses for the nine-month period
were $1.6 million compared with realized gains of $2.3 million in the prior year
period.
Operating income: Operating income 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.
During the second quarter of fiscal 2000, the Company began the process of
expanding its Major Market Services payroll product offering to include
thirty-four cities that are currently serviced by its core Payroll product.
The Company will continue to evaluate additional expansion efforts for this
product in the future. Effective September 1, 1999, the Company increased its
sales force compensation package in an effort to increase the retention and
quality of its payroll sales representatives. The estimated impact of this
increase resulted in additional pre-tax expense of approximately $1.5 million
for the third quarter and $3.0 million year-to-date.
HRS-PEO segment
(In thousands)
For the three months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
HRS-PEO service revenue $ 20,362 43.7% $14,166
HRS-PEO operating income $ 7,244 123.9% $ 3,236
HRS-PEO operating margin 35.6% 12.8 22.8%
==============================================================================
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
HRS-PEO service revenue $ 53,294 42.6% $37,386
HRS-PEO operating income $ 18,301 117.3% $ 8,422
HRS-PEO operating margin 34.3% 11.8 22.5%
==============================================================================
Client Statistics at February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
401(k) recordkeeping clients 13.4 47.3% 9.1
401(k) client funds managed
externally (in millions) $1,178.5 93.0% $ 610.7
Section 125 clients 23.1 19.7% 19.3
Workers' compensation
insurance clients 8.8 450.0% 1.6
PEO worksite employees 20.1 18.9% 16.9
==============================================================================
Revenues: The increases in service revenue are primarily related to increasing
401(k) recordkeeping, Section 125 and Workers' compensation insurance 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 1999,
the Company began a national rollout of its Workers' compensation insurance
product, which provides insurance for qualified clients through a leading
insurance provider and a method to stabilize their cash flows throughout the
year.
Operating income: The increases in operating income are primarily related to
the service revenue gains, and the leveraging of operating expenses.
In the third quarter of fiscal 2000 the Company entered into a new contract for
Worker's compensation insurance coverage for the PEO worksite employees. Annual
pre-tax costs under the new contract are expected to be approximately $1.8
million higher than under the previous contract.
Full-year fiscal 2000's HRS-PEO service revenue and operating income are
expected to continue to grow at a rate that is higher than the Payroll
segment's. 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
(In thousands)
For the three months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Corporate expenses $16,611 5.6% $15,736
==============================================================================
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Corporate expenses $50,403 12.4% $44,846
==============================================================================
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. The increases in expenses are due to additional employees and
other expenditures required to support the continued growth of the Company's
business segments. These increases are reduced by the costs capitalized for
the development of internal-use software, in accordance with the adoption of
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", effective June 1, 1999.
Additional discussion related to SOP 98-1 is included in the Liquidity and
Capital Resources section of this document under the caption "Purchases of
property and equipment, net of disposal proceeds." During the third quarter,
Corporate expenses increased at a rate lower than in 1999 as a result of reduced
spending on national marketing efforts. The Company expects the lower spending
on national marketing efforts to continue in the fourth quarter.
Investment income
(In thousands)
For the three months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Investment income $ 4,012 30.6% $3,073
==============================================================================
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Investment income $11,554 27.8% $9,040
==============================================================================
Investment income represents earnings from the Company's cash and cash
equivalents and 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 increases in Investment
income are primarily due to the increases in average daily invested balances
generated from increases in overall cash flows offset by realized losses during
fiscal 2000. Realized losses were $.4 million and $.7 million for the third
quarter and nine-month period, respectively, compared with realized gains in the
third quarter and nine-months of fiscal 1999 of $.1 million and $.5 million,
respectively. For the three-month period, Investment income also benefited from
higher comparable rates of return. Average rates of return earned for the
nine-month period were slightly lower than in the prior year period.
Additional discussion on interest rates and related risk is included in the
Liquidity and Capital Resources section of this review under the caption
"Investments and ENS investments". Investment income for full-year fiscal
2000, subject to changes in market rates of interest, is expected to grow at a
rate lower than the Company's net income growth.
Income taxes
(In thousands)
For the three months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Income taxes $22,294 45.1% $15,366
Effective income tax rate 31.0% 1.2 29.8%
==============================================================================
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Income taxes $62,201 44.8% $42,963
Effective income tax rate 31.0% 1.2 29.8%
==============================================================================
The increases in the effective income tax rate are due to the growth in taxable
income exceeding the growth in tax-exempt income. Tax-exempt income is derived
primarily from the Taxpay and Flexible Pay Package products that provide ENS
investment revenue. Full-year fiscal 2000's effective income tax rate is
expected to approximate 31%.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
(In thousands)
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Operating cash flows $192,885 49.9% $128,682
==============================================================================
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 February 29, 2000, the
Company had $439 million in available cash and investments. The Company also
has $140 million of available, uncommitted, unsecured lines of credit and $350
million available under a uncommitted, secured line of credit which was
entered into during the third quarter of Fiscal 2000.
Investing activities
(In thousands)
For the nine months ended February 29, February 28,
2000 Change 1999
- -------------------------------------------------------------------------------
Net Investments and ENS activities $ (99,542) 91.7% $(51,936)
Purchases of P&E, net of disposal proceeds (24,422) 32.1% (18,482)
Purchases of other assets (6,416) 87.7% (3,418)
--------------------------------
Net cash used in investing activities $(130,380) 76.6% $(73,836)
==============================================================================
Investments and ENS investments: Investments are primarily available-for-sale
debt securities. ENS investments are primarily short-term funds and
available-for-sale debt securities. The portfolio of Investments and ENS
investments is detailed in Note D of the Notes to the Consolidated Financial
Statements.
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 the Flexible Pay Package. These increases in Investments and
ENS investments have been offset by unrealized losses during fiscal 2000. At
February 29, 2000 the available-for-sale debt securities in the Investments
portfolio and ENS investments portfolio had market values exceeding the cost
basis by $3.8 million and $7.1 million, respectively.
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.
The Company does not utilize derivative financial instruments to manage
interest rate risk. 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.
During the second quarter of fiscal 1999, the federal funds rate was reduced by
75 basis points to 4.75%. During the first quarter of fiscal 2000, the federal
funds rate was increased by 50 basis points to 5.25%. During the second
quarter of fiscal 2000, the rate was increased by 25 basis points to 5.50%, and
during the third quarter of fiscal 2000, the rate was increased by 25 basis
points to 5.75%. The earnings impact of these 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.
At February 29, 2000, the Company had $1.18 billion of ENS investment funds
invested in money market securities and other cash equivalents with an average
maturity of less than 30 days, and $1.02 billion invested in available-for-sale
securities with an average duration of 2.4 years. At February 29, 2000, the
available-for-sale securities portfolio had a market value less than its cost
basis by $10.9 million, compared with the portfolio at May 31, 1999, which had
a market value greater than its cost basis by $4.5 million. The decrease in
the portfolio's market value is due to the increase in relative interest rates
experienced during the nine months ended February 29, 2000.
As of February 29, 2000 and May 31, 1999, the Company had $1.02 billion and
$879.6 million invested in available-for-sale securities at fair value, with a
weighted-average yield to maturity of 4.4% and 4.1%, respectively. Assuming a
hypothetical increase in interest rates of 75 basis points given the February
29, 2000 and May 31, 1999 portfolio of securities, the resulting potential
decrease in fair value would be approximately $18.3 million and $16.2 million,
respectively. 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, 1999.
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, A-1 rated short-term securities and by limiting
amounts that can be invested in any single instrument. At February 29, 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.
Purchases of property and equipment, net of disposal proceeds: To support the
Company's continued client and ancillary product growth, purchases of property
and equipment were made for data processing and personal computer equipment,
and for the expansion and upgrade of various operating facilities. During the
first quarter ended August 31, 1999, the Company sold an office facility for
approximately $1.2 million in cash proceeds. The Company purchased a branch
office facility for $6.1 million during the quarter ended February 29, 2000.
Purchases of property and equipment in fiscal 2000 are expected to approximate
$35 million.
Through the end of 1999, the Company expensed as incurred certain costs to
develop and enhance its internal computer programs and software. In March 1998,
the Accounting Standards Executive Committee issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires the capitalization of internal use computer
software costs if certain criteria are met, including all external direct costs
for materials and services and certain payroll and related fringe benefit
costs. The Company adopted the SOP effective June 1, 1999. The effect of
adopting the SOP is expected to increase net income by approximately $2.0
million to $3.0 million for the year ended May 31, 2000.
Financing activities
(In thousands, except per share amounts)
For the nine months ended February 29, February 28,
2000 Change 1999
- ------------------------------------------------------------------------------
Dividends paid $(59,281) 50.9% $(39,280)
Proceeds from exercise of stock options 8,923 160.3% 3,428
-------------------------------
Net cash used in financing activities $(50,358) 40.5% $(35,852)
- ------------------------------------------------------------------------------
Cash dividends per common share $ .24 50.0% $ .16
==============================================================================
Dividends paid: On October 7, 1999, the Company's Board of Directors increased
the quarterly dividend rate from $.06 per share to $.09 per share. During the
quarter ended February 29, 2000 the Company's Board of Directors declared a
dividend which was paid February 15, 2000, for shareholders of record as of
February 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 five 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 $14.2 million and
$12.5 million for the nine months ended February 29, 2000 and February 28, 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.
OTHER
Year 2000 disclosure: The Company completed its year 2000 compliance program as
scheduled. The Company has not experienced any significant problems or
business disruptions resulting from year 2000 issues with either its internal
systems or its interfaces with external agencies and partners. The Company is
not aware that any of its external agencies and partners which include hardware
and software vendors, government agencies, financial institutions, service
providers, or other third parties, have experienced any significant year 2000
related problems.
There could be an adverse effect on the Company for year 2000 failures that
have not yet been discovered with either its internal systems or with
third-party systems. However, since the Company has not experienced any
significant year 2000 problems through this point in time, the Company believes
this risk is minimal. Contingency plans remain in place to provide guidelines
and instructions for reacting to any year 2000 issues that may be encountered.
The Company estimates that it spent approximately $5 million from 1997 through
the beginning of calendar year 2000 for its year 2000 compliance efforts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption
"Investments and ENS investments" at subheading "Interest rate risk:" under
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, within this Form 10-Q.
ITEM 4. OTHER INFORMATION
The text portion of the Company's press release dated March 16, 2000,
regarding its financial results for the three months and nine months ended
February 29, 2000, is attached. The related Consolidated Financial Statements
are contained in PART I. FINANCIAL INFORMATION of this Form 10-Q.
FOR IMMEDIATE RELEASE
John M. Morphy, Chief Financial Officer
Or
Jan Shuler 716-383-3406
Access Paychex, Inc. Third Quarter SEC Form 10-Q,
News Releases and related SEC filings at
http://www.paychex.com/paychex/finance/finance.html
PAYCHEX, INC. REPORTS RECORD THIRD QUARTER RESULTS
ROCHESTER, NY, March 16, 2000 -- Paychex, Inc. (NASDAQ: PAYX) today announced
record net income of $49.6 million or $.20 diluted earnings per share for the
third quarter ended February 29, 2000, a 37% increase over net income of $36.2
million or $.15 diluted earnings per share for the same period last year.
Total service revenues were $192.2 million, an increase of 21% over $158.4
million for the third quarter last year.
For the nine months ended February 29, 2000, net income increased 37% to $138.4
million or $.55 diluted earnings per share as compared to net income of $101.2
million or $.41 diluted earnings per share for the same period last year.
Total service revenues were $530.9 million, an increase of 20% over $440.7
million for the same period last year.
PAYROLL SEGMENT
For the third quarter ended February 29, 2000, operating income for the Payroll
segment increased 27% to $77.3 million from $61.0 million for the same period
last year. Payroll service revenue was $171.8 million, an increase of 19% over
$144.3 million for the third quarter last year.
For the nine months ended February 29, 2000, operating income from Payroll
services increased 29% to $221.2 million from $171.6 million for the same
period last year. Payroll service revenue was $477.6 million, an increase of
18% over $403.3 million for the same period last year.
The increases in service revenue and operating income were primarily the result
of continued growth in the Payroll client base, utilization of ancillary
services and leveraging of operating expenses. Paychex currently services
345,900 Payroll clients, a 9.2% increase over last year. The Major Market
Services client base increased by 39%. As of the end of the third quarter,
276,800 clients were using the Taxpay (registered trademark) product, the
Company's tax filing and payment feature, and 157,100 clients were taking
advantage of the Company's Flexible Pay Package, which includes Direct
Deposit, Readychex and Access Card products.
HRS-PEO SEGMENT
For the third quarter ended February 29, 2000, operating income for the HRS-PEO
segment increased 124% from $3.2 million to $7.2 million. HRS-PEO service
revenue was $20.4 million, an increase of 44% over $14.2 million for the third
quarter last year.
For the nine months ended February 29, 2000, operating income for the HRS-PEO
segment increased 117% from $8.4 million to $18.3 million. HRS-PEO service
revenue was $53.3 million, an increase of 43% over $37.4 million for the same
period last year.
The increases in service revenue and operating income are primarily related to
increasing 401(k) recordkeeping, Section 125 and Workers' compensation
insurance clients. As of February 29, 2000, 8,800 clients have taken advantage
of the Workers' compensation insurance product, since its national rollout in
the first quarter of fiscal 1999. As of February 29, 2000, the segment
serviced 13,400 401(k) recordkeeping clients, and 23,100 Section 125
administration plans, representing 47% and 20% year-over-year increases in
these client bases, respectively.
CORPORATE EXPENSES
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. For the third quarter ended February 29, 2000, Corporate
expenses increased 6% from $15.7 million to $16.6 million. For the nine months
ended February 29, 2000, Corporate expenses increased 12% from $44.8 million to
$50.4 million. The increases are primarily due to additional employees and
other expenditures to support the continued growth of the Company.
B. Thomas Golisano, Chairman, President and Chief Executive Officer of Paychex
said, "We are pleased with our financial results for the first nine months of
fiscal 2000. We continue to see opportunities in our payroll segment including
our program to expand the Major Market Services payroll product and our efforts
to increase utilization of ancillary services such as the Flexible Pay Package.
The 401(k) and Workers' compensation products continue to drive strong
increases in service revenues and operating income in our HRS-PEO segment. We
look forward to pursuing these and other growth opportunities in the future."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - "Financial Data Schedule" is filed electronically.
Exhibit 99 - "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated January 26, 2000 that
included the Company's press release on January 26, 2000 announcing
the election of Joseph M. Tucci to the Company's Board of Directors.
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: March 16, 2000 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: March 16, 2000 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FEBRUARY 29, 2000 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF PAYCHEX, INC., AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000723531
<NAME> PAYCHEX, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 64,829
<SECURITIES> 2,204,167
<RECEIVABLES> 95,268
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,378,966
<PP&E> 184,899
<DEPRECIATION> 112,142
<TOTAL-ASSETS> 2,469,605
<CURRENT-LIABILITIES> 1,936,168
<BONDS> 0
0
0
<COMMON> 2,475
<OTHER-SE> 525,808
<TOTAL-LIABILITY-AND-EQUITY> 2,469,605
<SALES> 0
<TOTAL-REVENUES> 1,046,023
<CGS> 0
<TOTAL-COSTS> 641,776
<OTHER-EXPENSES> 215,152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 200,649
<INCOME-TAX> 62,201
<INCOME-CONTINUING> 138,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,448
<EPS-BASIC> .56
<EPS-DILUTED> .55
</TABLE>
EXHIBIT 99: "Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995.
"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 "are expected to", "we look forward
to", "expects", "expected 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 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
statments in this document for new information subsequent to its issuance.
