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Paychex, Inc. Reports Third Quarter ResultsPaychex, Inc. ("Paychex," "we," "our," or "us") (NASDAQ:PAYX) today announced total service revenue of $782.6 million for the three months ended February 28, 2017 (the "third quarter"), an increase of 6% from $740.7 million for the same period last year. Net income and diluted earnings per share each increased 12% to $202.5 million and $0.56 per share, respectively. Martin Mucci, President and Chief Executive Officer, commented, "During the third quarter, we continued to experience solid growth across our human capital management ("HCM") product lines. One particular area was our time and attendance services, which reflected double-digit growth. During the third quarter, we celebrated the one-year anniversary of our acquisition of Advance Partners. We are pleased with the contribution this acquisition has made to Paychex and with the future opportunities in store for this business. We are also encouraged by the growing confidence seen recently in the small business environment. We are well positioned to address future changes in the political and regulatory landscape and to assist our clients in successfully navigating through these changes." Payroll service revenue was $446.6 million for the third quarter, a 2% increase compared to the same period last year. The increase was mainly driven by growth in revenue per check and our client base. Revenue per check improved as a result of price increases, net of discounts. Payroll service revenue growth for the third quarter was tempered by approximately 1% due to one less processing day compared to the same period last year. Human Resource Services ("HRS") revenue was $336.0 million for the third quarter, an increase of 12% compared to the same period last year. HRS revenue growth was primarily driven by increases in our client base across all major HCM services, including: comprehensive human resource outsourcing services; retirement services; time and attendance; and human resource administration. Our largest HRS revenue stream is Paychex HR Services, which includes our administrative services organization and our professional employer organization ("PEO"). Demand for these services resulted in strong growth in the number of client worksite employees served as of February 28, 2017 as compared to February 29, 2016. Retirement services revenue also benefited from an increase in asset fee revenue earned on the asset value of participants' funds. Insurance services revenue benefited from higher revenue from our full-service Affordable Care Act product and growth in the number of health and benefit applicants, coupled with higher average premiums and an increase in clients in our workers' compensation insurance product. Interest on funds held for clients increased 11% to $13.2 million for the third quarter, compared to the respective period last year. The increase resulted primarily from slightly higher average interest rates earned. The funds held for clients average investment balances were relatively flat for the third quarter as the impact of client base growth was offset by the impact of timing of certain remittances to taxing authorities. Average investment balances and interest rates are summarized below:
Total expenses increased 4% to $489.2 million for the third quarter compared to the same period last year. The primary driver of expense growth was higher wages and related expenses resulting from increased headcount in operations, partially offset by lower variable selling expenses. Continued growth in our PEO also contributed to total expense growth. Operating income increased 10% to $306.6 million for the third quarter compared to the same period last year. Operating income, as a percent of total revenue, was 38.5% for the third quarter, compared with 37.2% for the same period last year. Our effective income tax rate was 34.2% for the third quarter compared to 36.0% for the same period last year. The decrease in the effective income tax rate was related to discrete tax items recognized during the third quarter, including the excess tax benefit related to employee stock-based compensation, which resulted in approximately $0.01 additional diluted earnings per share for the third quarter. Year-To-Date Fiscal 2017 Highlights The highlights for the nine months ended February 28, 2017 (the "nine months") are as follows:
Financial Position and Liquidity Our financial position as of February 28, 2017 remained strong with cash and total corporate investments of $844.1 million. Our primary source of cash is generated from our ongoing operations. Short-term borrowings totaled $55.4 million as of February 28, 2017. Our positive cash flows have historically allowed us to support our business and to pay substantial dividends to our stockholders. It is anticipated that cash and total corporate investments as of February 28, 2017, along with projected operating cash flows and available short-term financing, will support our normal business operations, capital purchases, business acquisitions, share repurchases, and dividend payments for the foreseeable future. Cash flows from operations were $769.3 million for the nine months, a decrease of 3% from the same period last year. This decrease resulted mainly from fluctuations in working capital, partially offset by higher net income adjusted for non-cash items. Working capital fluctuations contributed $28.2 million of cash outflows for the nine months, compared with $44.7 million of cash inflows for the same period last year. During the nine months, we repurchased 2.9 million shares of our common stock for a total of $166.2 million. In the respective prior year period, we repurchased 2.2 million shares for $107.9 million. Outlook Our outlook for the fiscal year ending May 31, 2017 ("fiscal 2017") is based upon current market, economic, and interest rate conditions continuing with no significant changes. Our guidance for fiscal 2017 is summarized as follows:
Non-GAAP Financial Measures
In addition to reporting net income and diluted earnings per share, U.S. GAAP measures, we present adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures. We believe adjusted net income and adjusted diluted earnings per share are appropriate additional measures, as they are indicators of our core business operations performance period over period. Adjusted net income and adjusted diluted earnings per share both exclude the additional tax benefit or shortfall related to employee stock-based compensation recognized in income taxes. This arose from early-adoption in June 2016 of new accounting guidance, but will be a recurring item going forward. This item is subject to volatility and will vary based on employee decisions on exercising employee stock options and fluctuations in our stock price, neither of which is in the control of management. Also excluded is a net tax benefit that was recorded for income derived in prior tax years related to customer-facing software that we produced. This was an unusual event that is not expected to recur. We believe presenting net income and diluted earnings per share excluding these particular discrete tax items allows a better understanding of core business performance. Adjusted net income and adjusted diluted earnings per share are not calculated through the application of GAAP and are not a required form of disclosure by the Securities and Exchange Commission ("SEC"). As such, they should not be considered as a substitute for the GAAP measures of net income and diluted earnings per share, and therefore should not be used in isolation, but in conjunction with, the GAAP measures. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies. Quarterly Report on Form 10-Q We anticipate filing our Quarterly Report on Form 10-Q ("Form 10-Q") for the three and nine months ended February 28, 2017 within the next few days and it will be available at our investor relations page. This press release should be read in conjunction with the Form 10-Q and the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in that Form 10-Q. Conference Call Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for March 29, 2017 at 9:30 a.m. Eastern Time. The webcast will also be archived for approximately one month. Our news releases, current financial information, SEC filings, and investor presentation are also accessible at our investor relations page. About Paychex Paychex, Inc. (NASDAQ:PAYX) is a leading provider of integrated human capital management solutions for payroll, human resources, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by 45 years of industry expertise, Paychex serves approximately 605,000 payroll clients as of May 31, 2016 across more than 100 locations and pays one out of every 12 American private sector employees. Learn more about Paychex by visiting paychex.com and stay connected on Twitter and LinkedIn. Cautionary Note Regarding Forward-Looking Statements Pursuant to the U.S. Private Securities Litigation Reform Act of 1995 Certain written and oral statements made by us may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as "we expect," "expected to," "estimates," "estimated," "overview," "current outlook," "we look forward to," "would equate to," "projects," "projections," "projected," "projected to be," "anticipates," "anticipated," "we believe," "believes," "could be," and other similar words or phrases. Examples of forward-looking statements include, among others, statements we make regarding operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, or similar projections. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, many of which are outside our control. Our actual results and financial conditions may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance upon any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
Any of these factors, as well as such other factors as discussed in our SEC filings, could cause our actual results to differ materially from our anticipated results. The information provided in this document is based upon the facts and circumstances known at this time, and any forward-looking statement made by us in this document speaks only as of the date on which it is made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of issuance of this press release to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.
© 2017 Paychex, Inc.
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