Paychex, Inc. Reports Record Second Quarter Results

Paychex, Inc. ("we,” "our,” or "us”) (NASDAQ:PAYX) today announced record net income of $147.1 million for the three months ended November 30, 2007 (the "second quarter”), an 11% increase over net income of $132.7 million for the same period last year. Diluted earnings per share were $0.40, an increase of 14% over $0.35 per share for the same period last year. Total revenue was $507.8 million, a 12% increase over $455.0 million for the same period last year. "Fiscal 2008 continues to meet our expectations and we experienced excellent margins, with operating income excluding interest on funds held for clients improving 17% over the same period last year,” commented Jonathan J. Judge, President and Chief Executive Officer of Paychex. "Our results for the second quarter were strong and included the acquisition of Hawthorne Benefit Technologies, Inc., whose BeneTrac, a web-based benefits management and administration system, contributed to the growth in Human Resource Services revenue. "We are also pleased to announce the completion of our $1.0 billion stock repurchase program on December 14, 2007, for a total of 23.7 million shares of common stock, with fiscal year 2008 weighted-average outstanding shares expected to be 370 million,” added Mr. Judge. Payroll service revenue increased 9% to $361.6 million for the second quarter from the same period last year. The increase was due to client base growth, higher check volume, and price increases. Human Resource Services revenue increased 24% to $115.5 million for the second quarter from the same period last year. This growth was generated from the following: retirement services client base increased 17% to 46,000 clients; comprehensive human resource outsourcing services client employees increased 22% to 401,000 client employees served; and the workers’ compensation insurance client base increased 19% to 67,000 clients. Additionally, the asset value of the retirement services client employees’ funds increased 24% to $8.9 billion. Total expenses increased 9% to $298.3 million for the second quarter from the same period last year as a result of increases in personnel and other costs related to selling and retaining clients, and promoting new services. For the second quarter, our operating income was $209.5 million, an increase of 15% over the same period last year. Operating income excluding interest on funds held for clients increased 17% to $178.7 million and improved as a percent of service revenues to 37% from 36% for the same period last year. For the second quarter, interest on funds held for clients increased 4% to $30.7 million attributable primarily to higher average investment balances. Corporate investment income decreased 25% to $7.5 million due to lower average investment balances resulting from the funding of the stock repurchase program, offset by higher average interest rates earned. Average investment balances and interest rates are summarized below:             For the three months ended November 30,   For the six months ended November 30, $ in millions     2007     2006     2007     2006 Average investment balances:     Funds held for clients $ 3,065.4 $ 2,894.2 $ 3,080.0 $ 2,931.7 Corporate investments $ 753.8 $ 1,070.8 $ 990.7 $ 1,035.9   Average interest rates earned:   Funds held for clients 4.0% 4.0% 4.1% 4.0% Corporate investments     3.9%     3.7%     4.0%     3.7% YEAR-TO-DATE FISCAL 2008 HIGHLIGHTS The highlights for the six months ended November 30, 2007 are as follows: Record net income of $298.2 million, or $0.79 diluted earnings per share. Net income and diluted earnings per share increased 11% and 13%, respectively. Total revenue increased 11% to $1,014.9 million. Payroll service revenue increased 8% to $723.1 million. Human Resource Services revenue increased 22% to $228.8 million. Operating income increased 14% to $420.1 million, and operating income excluding interest on funds held for clients increased 15% to $357.0 million. Cash flow from operations was $358.2 million. OUTLOOK Our current outlook for the full fiscal year ending May 31, 2008 has been revised to reflect slightly lower payroll service revenue growth and the decreases in the Federal Funds rate of 100 basis points since June 1, 2007. Our projections are based on current economic and interest rate conditions continuing with no significant changes. Projected revenue and net income growth are as follows:   Payroll service revenue 8% — 9% Human Resource Services revenue 20% — 23% Total service revenue 11% — 13% Interest on funds held for clients (5%) — 0% Total revenue 9% — 11% Corporate investment income (40%) — (35%) Net income 11% — 13% The effective income tax rate is expected to approximate 32%. CONFERENCE CALL Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for December 20, 2007 at 10:30 a.m. Eastern Time, at www.paychex.com on the Investor Relations page. The webcast will also be archived on the Investor Relations page for approximately one month. Our news releases, current financial information, SEC filings, and investor presentation are also accessible at www.paychex.com. For more information, contact:     Investor Relations: John Morphy, CFO, or Terri Allen 585-383-3406   Media Inquiries: Laura Saxby Lynch 585-383-3074 ABOUT PAYCHEX Paychex, Inc. is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. We offer comprehensive payroll services, including payroll processing, payroll tax administration, and employee pay services, including direct deposit, check signing, and Readychex®. Human Resource Services include 401(k) plan recordkeeping, health insurance, workers’ compensation administration, section 125 plans, a professional employer organization, time and attendance solutions, and other administrative services for business. Paychex, Inc. was founded in 1971. With headquarters in Rochester, New York, the company has more than 100 offices and serves approximately 561,000 payroll clients nationwide. For more information about Paychex, Inc. and our products, visit www.paychex.com. "SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain written and oral statements made by us may constitute "forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act”). Forward-looking statements are identified by such words and phrases as "we expect,” "expected to,” "estimates,” "estimated,” "current outlook,” "we look forward to,” "would equate to,” "projects,” "projections,” "projected to be,” "anticipates,” "anticipated,” "we believe,” "could be,” and other similar phrases. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to revenue growth, earnings, earnings-per-share growth, or similar projections, are forward-looking statements within the meaning of the Reform Act. Because they are forward-looking, they should be evaluated in light of important risk factors. These risk factors include, but are not limited to, those that are described in our filings with the Securities and Exchange Commission ("SEC”), including the most recent Annual Report on Form 10-K ("Form 10-K”) filed on July 20, 2007. Any of these factors 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. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of issuance of this release, or to reflect occurrence of unanticipated events. PAYCHEX, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)                     For the three months ended November 30,     For the six months ended November 30,         2007     2006   % Change     2007     2006   % Change Revenue:     Payroll service revenue $ 361,588 $ 332,208 9% $ 723,074 $ 667,447 8% Human Resource Services revenue   115,451   93,038 24%   228,780   187,342 22% Total service revenue 477,039 425,246 12% 951,854 854,789 11% Interest on funds held for clients (1)   30,754   29,709 4%   63,069   59,540 6% Total revenue 507,793 454,955 12% 1,014,923 914,329 11%   Expenses: Operating expenses 162,452 150,870 8% 321,767 298,954 8% Selling, general and administrative expenses   135,865   121,757 12%   273,092   246,693 11% Total expenses   298,317   272,627 9%   594,859   545,647 9%   Operating income 209,476 182,328 15% 420,064 368,682 14%   Investment income, net (1)   7,503   9,941 (25%)   19,740   19,357 2% Income before income taxes 216,979 192,269 13% 439,804 388,039 13%   Income taxes   69,867   59,603 17%   141,617   120,292 18% Net income $ 147,112 $ 132,666 11% $ 298,187 $ 267,747 11%     Basic earnings per share $ 0.40 $ 0.35 14% $ 0.79 $ 0.70 13%   Diluted earnings per share $ 0.40 $ 0.35 14% $ 0.79 $ 0.70 13%   Weighted-average common shares outstanding 369,914 380,747 375,299 380,571   Weighted-average common shares outstanding, assuming dilution 371,404 382,433 376,903 382,172   Cash dividends per common share   $ 0.30   $ 0.21   43%   $ 0.60   $ 0.37   62% (1) Further information on interest on funds held for clients and investment income, net, and the short- and long-term effects of changing interest rates can be found in our filings with the SEC, including our Form 10-K and Quarterly Reports on Form 10-Q, as applicable, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations” and subheadings "Results of Operations” and "Market Risk Factors.” These filings are accessible at our website www.paychex.com. PAYCHEX, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amount)               November 30,2007 (unaudited)   May 31,2007 (audited) ASSETS     Cash and cash equivalents $ 52,926 $ 79,353 Corporate investments (1) 414,028 511,772 Interest receivable 38,564 53,624 Accounts receivable, net of allowance for doubtful accounts 213,787 186,273 Deferred income taxes — 23,840 Prepaid income taxes 14,272 8,845 Prepaid expenses and other current assets   24,307   24,515 Current assets before funds held for clients 757,884 888,222 Funds held for clients (1)   3,471,720   3,973,097 Total current assets 4,229,604 4,861,319 Long-term corporate investments (1) 9,117 633,086 Property and equipment, net of accumulated depreciation 264,902 256,087 Intangible assets, net of accumulated amortization 69,893 67,213 Goodwill 433,115 407,712 Deferred income taxes 14,143 15,209 Other long-term assets   5,581   5,893 Total assets $ 5,026,355 $ 6,246,519   LIABILITIES Accounts payable $ 63,359 $ 46,961 Accrued compensation and related items 111,845 125,268 Deferred revenue 5,948 7,758 Deferred income taxes 2,119 — Litigation reserve 23,522 32,515 Other current liabilities   47,080   42,638 Current liabilities before client fund deposits 253,873 255,140 Client fund deposits   3,457,867   3,982,330 Total current liabilities 3,711,740 4,237,470 Accrued income taxes (2) 14,620 — Deferred income taxes 7,318 9,567 Other long-term liabilities   48,266   47,234 Total liabilities 3,781,944 4,294,271   STOCKHOLDERS’ EQUITY Common stock, $.01 par value; Authorized: 600,000 shares; Issued and outstanding: 363,673 shares as of November 30, 2007, and 382,151 shares as of May 31, 2007, respectively 3,637 3,822 Additional paid-in capital 416,622 362,982 Retained earnings (2) 815,147 1,595,105 Accumulated other comprehensive income/(loss)   9,005   (9,661) Total stockholders’ equity   1,244,411   1,952,248 Total liabilities and stockholders’ equity $ 5,026,355 $ 6,246,519 (1) The available-for-sale securities within the funds held for clients and corporate investment portfolios reflected net unrealized gains of $13.9 million as of November 30, 2007, compared with net unrealized losses of $14.9 million as of May 31, 2007. During the first six months of fiscal 2008, the investment portfolios ranged from a net unrealized loss of $24.3 million to a net unrealized gain of $13.9 million. The net unrealized gain of our investment portfolios was approximately $15.1 million as of December 14, 2007. (2) Effective June 1, 2007, we adopted Financial Accounting Standards Board ("FASB”) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” Upon adoption, we recognized the cumulative effect of our uncertain tax positions of $8.4 million, with an offsetting decrease to opening retained earnings. Long-term liabilities on our Consolidated Balance Sheets include a reserve for uncertain tax positions as resolution of these matters is not expected within the next twelve months.