10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2007
Commission file number 0-11330
PAYCHEX, INC.
911 Panorama Trail South
Rochester, New York 14625-2396
(585) 385-6666
A Delaware Corporation
IRS Employer Identification Number: 16-1124166
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 þ No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Common Stock, $0.01 Par Value
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374,715,831 Shares |
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CLASS
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OUTSTANDING AS OF AUGUST 31, 2007 |
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In thousands, except per share amounts
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For the three months ended |
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August 31, |
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August 31, |
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2007 |
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2006 |
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Revenue: |
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Service revenue |
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$ |
474,815 |
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$ |
429,543 |
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Interest on funds held for clients |
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32,315 |
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29,831 |
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Total revenue |
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507,130 |
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459,374 |
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Expenses: |
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Operating expenses |
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159,315 |
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148,084 |
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Selling, general and administrative expenses |
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137,227 |
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124,936 |
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Total expenses |
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296,542 |
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273,020 |
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Operating income |
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210,588 |
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186,354 |
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Investment income, net |
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12,237 |
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9,416 |
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Income before income taxes |
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222,825 |
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195,770 |
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Income taxes |
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71,750 |
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60,689 |
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Net income |
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$ |
151,075 |
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$ |
135,081 |
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Basic earnings per share |
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$ |
0.40 |
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$ |
0.36 |
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Diluted earnings per share |
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$ |
0.40 |
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$ |
0.35 |
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Weighted-average common shares outstanding |
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380,539 |
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380,360 |
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Weighted-average common shares outstanding,
assuming dilution |
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382,255 |
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381,876 |
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Cash dividends per common share |
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$ |
0.30 |
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$ |
0.16 |
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See Notes to Consolidated Financial Statements.
2
PAYCHEX, INC .
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In thousands, except per share amounts
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August 31, |
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May 31, |
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2007 |
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2007 |
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ASSETS |
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Cash and cash equivalents |
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$ |
110,614 |
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$ |
79,353 |
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Corporate investments |
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338,639 |
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511,772 |
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Interest receivable |
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35,373 |
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53,624 |
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Accounts receivable, net of allowance for doubtful accounts |
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210,982 |
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186,273 |
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Deferred income taxes |
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13,085 |
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23,840 |
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Prepaid income taxes |
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8,845 |
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Prepaid expenses and other current assets |
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26,098 |
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24,515 |
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Current assets before funds held for clients |
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734,791 |
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888,222 |
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Funds held for clients |
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3,525,070 |
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3,973,097 |
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Total current assets |
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4,259,861 |
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4,861,319 |
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Long-term corporate investments |
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510,465 |
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633,086 |
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Property and equipment, net of accumulated depreciation |
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260,943 |
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256,087 |
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Intangible assets, net of accumulated amortization |
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64,767 |
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67,213 |
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Goodwill |
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440,308 |
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407,712 |
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Deferred income taxes |
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15,068 |
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15,209 |
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Other long-term assets |
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6,525 |
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5,893 |
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Total assets |
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$ |
5,557,937 |
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$ |
6,246,519 |
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LIABILITIES |
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Accounts payable |
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$ |
91,807 |
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$ |
46,961 |
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Accrued compensation and related items |
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99,643 |
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125,268 |
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Deferred revenue |
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6,705 |
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7,758 |
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Accrued income taxes |
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47,943 |
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Litigation reserve |
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25,662 |
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32,515 |
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Other current liabilities |
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45,357 |
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42,638 |
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Current liabilities before client fund deposits |
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317,117 |
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255,140 |
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Client fund deposits |
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3,528,373 |
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3,982,330 |
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Total current liabilities |
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3,845,490 |
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4,237,470 |
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Accrued income taxes |
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12,885 |
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Deferred income taxes |
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7,318 |
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9,567 |
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Other long-term liabilities |
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48,122 |
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47,234 |
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Total liabilities |
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3,913,815 |
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4,294,271 |
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COMMITMENTS AND CONTINGENCIES NOTE H |
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STOCKHOLDERS EQUITY |
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Common stock, $0.01 par value; Authorized: 600,000 shares;
Issued and outstanding: 374,716
shares as of August 31, 2007
and 382,151 shares as of May 31, 2007,
respectively |
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3,747 |
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3,822 |
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Additional paid-in capital |
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408,883 |
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362,982 |
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Retained earnings |
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1,235,588 |
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1,595,105 |
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Accumulated other comprehensive loss |
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(4,096 |
) |
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(9,661 |
) |
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Total stockholders equity |
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1,644,122 |
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1,952,248 |
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Total liabilities and stockholders equity |
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$ |
5,557,937 |
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$ |
6,246,519 |
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See Notes to Consolidated Financial Statements.
3
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands
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For the three months ended |
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August 31, |
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August 31, |
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2007 |
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2006 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
151,075 |
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$ |
135,081 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization on property and equipment and
intangible assets |
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19,131 |
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16,869 |
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Amortization of premiums and discounts on
available-for-sale securities |
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3,965 |
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6,341 |
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Stock-based compensation costs |
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6,322 |
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6,527 |
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Provision for deferred income taxes |
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5,634 |
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567 |
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Provision for allowance for doubtful accounts |
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700 |
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733 |
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Net realized gains on sales of available-for-sale securities |
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(143 |
) |
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(236 |
) |
Changes in operating assets and liabilities: |
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Interest receivable |
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18,251 |
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12,205 |
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Accounts receivable |
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(25,409 |
) |
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(5,935 |
) |
Prepaid expenses and other current assets |
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7,262 |
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3,081 |
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Accounts payable and other current liabilities |
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66,542 |
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26,868 |
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Net change in other assets and liabilities |
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(117 |
) |
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(2,186 |
) |
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Net cash provided by operating activities |
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253,213 |
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199,915 |
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INVESTING ACTIVITIES |
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Purchases of available-for-sale securities |
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(33,300,803 |
) |
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(23,348,338 |
) |
Proceeds from sales and maturities of available-for-sale
securities |
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34,381,101 |
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24,536,781 |
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Net change in funds held for clients money market securities
and other cash equivalents |
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(331,244 |
) |
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(1,305,123 |
) |
Net change in client fund deposits |
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(453,957 |
) |
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199,605 |
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Purchases of property and equipment |
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(20,775 |
) |
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(16,165 |
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Proceeds from sales of property and equipment |
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708 |
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111 |
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Acquisition of businesses, net of cash acquired |
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(32,596 |
) |
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Purchases of other assets |
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(1,684 |
) |
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(2,650 |
) |
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Net cash provided by investing activities |
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240,750 |
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64,221 |
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FINANCING ACTIVITIES |
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Repurchases of common stock |
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(396,484 |
) |
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Dividends paid |
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(114,988 |
) |
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(60,876 |
) |
Proceeds from exercise of stock options |
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44,402 |
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|
2,926 |
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Excess tax benefit related to exercise of stock options |
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|
4,368 |
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|
302 |
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Net cash used in financing activities |
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(462,702 |
) |
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(57,648 |
) |
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Increase in cash and cash equivalents |
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31,261 |
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206,488 |
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Cash and cash equivalents, beginning of period |
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79,353 |
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137,423 |
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Cash and cash equivalents, end of period |
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$ |
110,614 |
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$ |
343,911 |
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See Notes to Consolidated Financial Statements.
4
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2007
Note A: Description of Business and Significant Accounting Policies
Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the
Company or Paychex) is a leading provider of comprehensive payroll and integrated human
resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the
United States (U.S.) The Company also has a subsidiary in Germany.
Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the
Companys revenue is generated within the U.S. The Company also generates revenue within Germany,
which was less than one percent of its total revenue for the three months ended August 31, 2007.
Long-lived assets in Germany are insignificant in relation to total long-lived assets of the
Company as of August 31, 2007.
Basis of presentation: The accompanying Consolidated Financial Statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statement presentation. The Consolidated Financial Statements include
the consolidated accounts of the Company with all significant intercompany transactions eliminated.
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. These financial statements should be read in conjunction with
the Companys Consolidated Financial Statements and related Notes to Consolidated Financial
Statements presented in the Companys Annual Report on Form 10-K as of and for the year ended May
31, 2007 (fiscal 2007). Operating results and cash flows for the three months ended August 31,
2007 are not necessarily indicative of the results that may be expected for other interim periods
or the full fiscal year ending May 31, 2008 (fiscal 2008).
PEO revenue recognition: Professional Employer Organization (PEO) revenue is included in service
revenue and is reported net of direct costs billed and incurred for PEO worksite employees, which
include wages, taxes, benefit premiums, and workers compensation costs and claims of PEO worksite
employees. Direct costs billed and incurred were $635.7 million and $629.6 million for the three
months ended August 31, 2007 and 2006, respectively.
PEO workers compensation insurance: Workers compensation insurance for PEO worksite employees is
provided under a deductible workers compensation policy with a national insurance company. Claims
are paid as incurred and the Companys maximum individual claims liability is $1,000,000 under the
fiscal 2008 policy and $750,000 under the fiscal 2007 policy.
5
Note A: Description of Business and Significant Accounting Policies-continued
The Company has recorded the following amounts on its Consolidated Balance Sheets for workers
compensation claims as of:
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August 31, |
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May 31, |
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In thousands |
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2007 |
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2007 |
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Prepaid expense |
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$ |
2,832 |
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$ |
2,717 |
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Current liability |
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$ |
6,720 |
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$ |
7,001 |
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Long-term liability |
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$ |
19,778 |
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$ |
21,280 |
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The amount included in prepaid expense on the Consolidated Balance Sheets primarily relates to the policy for
the fiscal year ended May 31, 2004, which was a pre-funded policy.
Estimated losses under the workers compensation policies, based on historical loss experience and
independent actuarial loss projections, are subject to change based on changes in claims experience
trends and other factors that the Company monitors on a regular basis. Adjustments to previously
established reserves are reflected in the operating results of the period in which the adjustment
is identified. Such adjustments could possibly be significant, reflecting any variety of new and
adverse or favorable trends.
Stock-based compensation costs: The Company has stock-based awards to employees
consisting of stock options, restricted stock awards, and restricted stock units. The Company
typically makes grants to its officers, directors, and management in July. The grants approved by
the Board of Directors (the Board) were as follows:
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For the three months ended |
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August 31, |
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2007 |
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2006 |
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Shares |
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Fair value |
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Shares |
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Fair value |
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In thousands, except per share amounts |
|
granted |
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per share |
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granted |
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per share |
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Stock options |
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|
472 |
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$ |
11.77 |
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|
3,442 |
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$ |
12.88 |
|
Restricted stock |
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|
134 |
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$ |
43.91 |
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|
106 |
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$ |
36.87 |
|
Restricted stock units |
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|
499 |
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$ |
40.60 |
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$ |
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|
The Company accounts for all stock-based awards to employees, including grants of employee
stock options, as compensation costs in the Consolidated Financial Statements based on their fair
values as measured as of the date of grant. These costs are recognized as an expense in the
Consolidated Statements of Income over the requisite service period and increase additional paid-in
capital. Stock-based compensation costs recognized were $6.3 million and $6.5 million for the
three months ended August 31, 2007 and 2006, respectively. As of August 31, 2007, the total
unrecognized compensation cost related to all unvested stock-based awards was $81.6 million and is
expected to be recognized over a weighted-average period of 2.8 years.
The fair value of restricted stock awards is equal to the closing market price of the underlying
common stock as of the date of grant. The fair value of restricted stock units is equal to the
closing market price of the underlying common stock as of the date of grant, adjusted for the
present value of expected dividends over the vesting period, as these awards do not earn dividend
equivalents.
6
Note A: Description of Business and Significant Accounting Policies-continued
The fair value of stock option grants is estimated as of the date of grant using a
Black-Scholes option pricing model. The weighted-average assumptions used for valuation
under the Black-Scholes model were as follows:
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For the three months ended |
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August 31, |
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2007 |
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|
2006 |
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|
Risk-free interest rate |
|
|
5.0 |
% |
|
|
5.1 |
% |
Dividend yield |
|
|
2.7 |
% |
|
|
1.7 |
% |
Volatility factor |
|
|
.27 |
|
|
|
.32 |
|
Expected option term life in years |
|
|
6.5 |
|
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|
6.5 |
|
|
Risk-free
interest rates are yields for zero-coupon U.S. Treasury notes maturing approximately at
the end of the expected option life. The estimated volatility factor is based on a combination of
historical volatility using weekly stock prices and implied market volatility, both over a period
equal to the expected option life. The expected option life is based on historical exercise
patterns.
The Company has determined that the Black-Scholes option pricing model, as well as the underlying
assumptions used in its application, is appropriate in estimating the fair value of its stock
option grants. The Company periodically assesses its assumptions as well as its choice of valuation
model, and will reconsider use of this model if additional information becomes available in the
future indicating that another model would provide a more accurate estimate of fair value, or if
characteristics of future grants would warrant such a change.
Income taxes: The Company accounts for deferred taxes by recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the
Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. The Company records a deferred tax asset related to the stock-based
compensation costs recognized for certain stock-based awards. At the time of exercise of
non-qualified stock options or vesting of restricted stock awards, the Company accounts for the
resulting tax deduction by reducing its accrued income tax liability with an offset to the deferred
tax asset and any excess tax benefit increasing additional paid-in capital. The Company currently
has a sufficient pool of excess tax benefits in additional paid-in capital to absorb any
deficient tax benefits related to stock-based awards.
Effective June 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109, and a related amendment, FASB Staff Position (FSP) No. 48-1, Definition
of Settlement in FASB Interpretation No. 48. FIN 48 and FSP No. 48-1 prescribe minimum
recognition thresholds for evaluating uncertain income tax positions, and provide guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
7
Note A: Description of Business and Significant Accounting Policies-continued
Upon adoption, the Company recorded a cumulative effect adjustment by increasing its reserve for
uncertain tax positions by $8.4 million, with an offsetting decrease to opening retained earnings.
The total reserve for uncertain tax positions of $12.8 million as of August 31, 2007 is included in long-term liabilities on the Consolidated
Balance Sheets as the resolution of these matters is not expected within the next twelve months.
The Company is subject to U.S. federal income tax as well as income tax in one foreign and numerous
state jurisdictions. Uncertain tax positions relate primarily to state income tax matters. The
Company believes that there is a possibility that the reserve for uncertain tax positions will
increase for the full year fiscal 2008, resulting from the settlement of open periods and the
effect of current year operations on anticipated tax benefits. This increase will impact the tax
provision in the range of $6.0 million to $8.0 million.
The Company has concluded all U.S. federal income tax matters through its fiscal year ended May 31,
2005, with fiscal years ended May 31, 2006 and 2007 still subject to potential audit. With limited
exceptions, state income tax audits by taxing authorities are closed through the fiscal year ended
May 31, 2003, primarily due to expiration of the statute of limitations. Audit outcomes and the
timing of audit settlements are subject to a high degree of uncertainty. As of August 31, 2007,
materially all of the $12.8 million reserve for uncertain tax positions, if recognized, would
favorably affect the Companys effective income tax rate.
The Company continues to follow its policy of recognizing interest and penalties accrued on tax
positions as a component of income taxes on the Consolidated Statements of Income. Upon adoption,
the amount of accrued interest and penalties associated with the Companys tax positions was
immaterial to the Consolidated Balance Sheets. The amount of interest and penalties recognized for
the three months ended August 31, 2007 was immaterial to the Companys results of operations.
Newly issued accounting pronouncements: In June 2007, the FASB ratified Emerging Issues Task Force
Issue No. 06-11 (EITF 06-11), Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards. EITF 06-11 applies to share-based payment arrangements, with dividend protection
features, that entitle an employee to receive dividends or dividend equivalents on nonvested
equity-based shares or units, when those dividends or dividend equivalents are charged to retained
earnings and result in an income tax deduction for the employer under Statement of Financial
Accounting Standard No. 123(R), Share-Based Payment. Under EITF 06-11, a realized
income tax benefit from dividends or dividend equivalents charged to retained earnings and paid to
an employee for nonvested equity-based shares or units should be recognized as an increase in
additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15,
2007 with early adoption permitted. EITF 06-11 was adopted on June 1, 2007 and did not have a
material effect on the Companys results of operations or financial position.
In June 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 07-1, Clarification of the Scope of the Audit
and Accounting Guide Investment
Companies and Accounting by Parent Companies and Equity Method Investors for Investments in
Investment Companies (SOP 07-1). SOP 07-1 clarifies when an entity may apply the provisions of
the AICPA Audit and Accounting Guide Investment Companies and addresses the retention of
specialized investment company accounting by a parent company in consolidation or by an equity
method investor. SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007
and is applicable to the Company for its fiscal year beginning June 1, 2008. The Company does not
expect the adoption of this standard to have an impact on its results of operations or financial
position.
8
Note A: Description of Business and Significant Accounting Policies-continued
Reclassifications: Certain prior period amounts have been reclassified to conform to the current
period presentation and had no effect on reported consolidated earnings.
Note B: Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
August 31, |
|
In thousands, except per share amounts |
|
2007 |
|
|
2006 |
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
151,075 |
|
|
$ |
135,081 |
|
|
|
|
Weighted-average common
shares outstanding |
|
|
380,539 |
|
|
|
380,360 |
|
|
|
|
Basic earnings per share |
|
$ |
0.40 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
151,075 |
|
|
$ |
135,081 |
|
|
|
|
Weighted-average common
shares outstanding |
|
|
380,539 |
|
|
|
380,360 |
|
Dilutive effect of common
share equivalents at
average market price |
|
|
1,716 |
|
|
|
1,516 |
|
|
|
|
Weighted-average common
shares outstanding,
assuming dilution |
|
|
382,255 |
|
|
|
381,876 |
|
|
|
|
Diluted earnings per share |
|
$ |
0.40 |
|
|
$ |
0.35 |
|
|
|
|
Weighted-average
anti-dilutive common
share equivalents |
|
|
5,126 |
|
|
|
7,970 |
|
|
Weighted-average common share equivalents that have an anti-dilutive impact are excluded from the
computation of diluted earnings per share.
For the three months ended August 31, 2007, 1.5 million shares of the Companys common stock were
issued for stock option exercises and vesting of restricted stock compared with 0.1 million shares
issued for stock option exercises for the three months ended August 31, 2006.
In July 2007, the Company announced its program to repurchase up to $1.0 billion of its common
stock. During the three months ended August 31, 2007, the Company repurchased 8.9 million shares
for $396.5 million.
9
Note C: Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
unrealized |
|
|
Market |
|
In thousands |
|
Cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and other
cash equivalents |
|
$ |
464,414 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
464,414 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligation municipal bonds |
|
|
740,710 |
|
|
|
1,131 |
|
|
|
(5,385 |
) |
|
|
736,456 |
|
Pre-refunded municipal bonds |
|
|
316,823 |
|
|
|
440 |
|
|
|
(1,914 |
) |
|
|
315,349 |
|
Revenue municipal bonds |
|
|
383,613 |
|
|
|
371 |
|
|
|
(2,509 |
) |
|
|
381,475 |
|
Auction rate securities and
variable rate demand notes |
|
|
2,206,951 |
|
|
|
169 |
|
|
|
|
|
|
|
2,207,120 |
|
U.S. government securities |
|
|
258,131 |
|
|
|
1,358 |
|
|
|
(8 |
) |
|
|
259,481 |
|
Other equity securities |
|
|
20 |
|
|
|
67 |
|
|
|
|
|
|
|
87 |
|
|
|
|
Total available-for-sale securities |
|
|
3,906,248 |
|
|
|
3,536 |
|
|
|
(9,816 |
) |
|
|
3,899,968 |
|
Other |
|
|
9,097 |
|
|
|
741 |
|
|
|
(46 |
) |
|
|
9,792 |
|
|
|
|
Total funds held for clients and
corporate investments |
|
$ |
4,379,759 |
|
|
$ |
4,277 |
|
|
$ |
(9,862 |
) |
|
$ |
4,374,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
unrealized |
|
|
Market |
|
In thousands |
|
Cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and other cash
equivalents |
|
$ |
133,169 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
133,169 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligation municipal bonds |
|
|
807,189 |
|
|
|
288 |
|
|
|
(8,160 |
) |
|
|
799,317 |
|
Pre-refunded municipal bonds |
|
|
291,943 |
|
|
|
94 |
|
|
|
(3,182 |
) |
|
|
288,855 |
|
Revenue municipal bonds |
|
|
443,123 |
|
|
|
25 |
|
|
|
(4,014 |
) |
|
|
439,134 |
|
Auction rate securities and variable
rate demand notes |
|
|
3,038,317 |
|
|
|
153 |
|
|
|
|
|
|
|
3,038,470 |
|
U.S. government securities |
|
|
409,777 |
|
|
|
599 |
|
|
|
(726 |
) |
|
|
409,650 |
|
Other equity securities |
|
|
20 |
|
|
|
67 |
|
|
|
|
|
|
|
87 |
|
|
|
|
Total available-for-sale securities |
|
|
4,990,369 |
|
|
|
1,226 |
|
|
|
(16,082 |
) |
|
|
4,975,513 |
|
Other |
|
|
8,234 |
|
|
|
1,044 |
|
|
|
(5 |
) |
|
|
9,273 |
|
|
|
|
Total funds held for clients and corporate
investments |
|
$ |
5,131,772 |
|
|
$ |
2,270 |
|
|
$ |
(16,087 |
) |
|
$ |
5,117,955 |
|
|
10
Note C: Funds Held for Clients and Corporate Investments-continued
Classification of investments on the Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, |
|
|
May 31, |
|
In thousands |
|
2007 |
|
|
2007 |
|
|
Funds held for clients |
|
$ |
3,525,070 |
|
|
$ |
3,973,097 |
|
Corporate investments |
|
|
338,639 |
|
|
|
511,772 |
|
Long-term corporate investments |
|
|
510,465 |
|
|
|
633,086 |
|
|
|
|
Total funds held for clients and
corporate investments |
|
$ |
4,374,174 |
|
|
$ |
5,117,955 |
|
|
The Company is exposed to credit risk in connection with these investments through the possible
inability of 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 in the earnings potential of future investments. The Company attempts to mitigate
these risks by investing primarily in high credit quality securities with AAA and AA ratings and
short-term securities with an A-1 rating, limiting amounts that can be invested in any single
issuer, and by investing in short- to intermediate-term instruments whose market value is less
sensitive to interest rate changes. The Company does not invest in any collateralized debt
obligations or asset-backed securities that have exposure to the sub-prime
mortgage market. The Company does not utilize derivative financial instruments to manage interest
rate risk.
The Companys available-for-sale securities reflected a net unrealized loss position of $6.3
million as of August 31, 2007 compared with $14.9 million as of May 31, 2007. The gross unrealized
losses as of August 31, 2007 were comprised of 308 available-for-sale securities, which had a total
market value of $1.1 billion. The gross unrealized losses as of May 31, 2007 were comprised of 447
available-for-sale securities, which had a total market value of $1.6 billion.
The Company periodically reviews its investment portfolio to determine if any investment is
other-than-temporarily impaired due to changes in credit risk or other potential valuation
concerns. The Company believes that the investments it held as of August 31, 2007 were not
other-than-temporarily impaired. While certain available-for-sale securities had market values
that were below cost, the Company believes that it is probable that the principal and interest will
be collected in accordance with contractual terms, and that the decline in the market value was due
to changes in interest rates and was not due to increased credit risk. As of August 31, 2007 and
May 31, 2007, substantially all of the securities in an unrealized loss position held an AA rating
or better. The Company currently believes that it has the ability and intent to hold these
investments until the earlier of market price recovery or maturity. The Companys assessment that
an investment is not other-than-temporarily impaired could change in the future due to new
developments or changes in the Companys strategies or assumptions related to any particular
investment.
The cost and market value of available-for-sale securities that have stated maturities as of August
31, 2007 are shown below by contractual maturity. Expected maturities can differ from contractual
maturities because borrowers may have the right to prepay obligations without prepayment penalties.
11
Note C: Funds Held for Clients and Corporate Investments-continued
|
|
|
|
|
|
|
|
|
|
|
August 31, 2007 |
|
|
|
|
|
|
|
Market |
|
In thousands |
|
Cost |
|
|
value |
|
|
Maturity date: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
343,370 |
|
|
$ |
341,771 |
|
Due after one year through three years |
|
|
539,017 |
|
|
|
536,387 |
|
Due after three years through five years |
|
|
508,708 |
|
|
|
506,974 |
|
Due after five years |
|
|
2,464,247 |
|
|
|
2,463,863 |
|
|
|
|
Total |
|
$ |
3,855,342 |
|
|
$ |
3,848,995 |
|
|
Variable rate demand notes and auction rate securities are primarily categorized as due after five
years in the table above as the contractual maturities on these securities are typically 20 to 30
years. Although these securities are issued as long-term securities, they are priced and traded as
short-term instruments because of the liquidity provided through the auction or tender feature.
Note D: Property and Equipment, Net of Accumulated Depreciation
The components of property and equipment, at cost, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
August 31, |
|
|
May 31, |
|
In thousands |
|
2007 |
|
|
2007 |
|
|
Land and improvements |
|
$ |
3,306 |
|
|
$ |
3,557 |
|
Buildings and improvements |
|
|
83,157 |
|
|
|
81,892 |
|
Data processing equipment |
|
|
154,371 |
|
|
|
150,206 |
|
Software |
|
|
87,918 |
|
|
|
81,607 |
|
Furniture, fixtures, and equipment |
|
|
126,238 |
|
|
|
124,339 |
|
Leasehold improvements |
|
|
65,315 |
|
|
|
59,925 |
|
Construction in progress |
|
|
44,930 |
|
|
|
46,512 |
|
|
|
|
Total property and equipment, gross |
|
|
565,235 |
|
|
|
548,038 |
|
Less: Accumulated depreciation and amortization |
|
|
304,292 |
|
|
|
291,951 |
|
|
|
|
Property and equipment, net of accumulated depreciation |
|
$ |
260,943 |
|
|
$ |
256,087 |
|
|
Depreciation expense was $15.0 million and $13.5 million for the three months ended August 31, 2007
and 2006, respectively.
Within construction in progress, there are costs for software being developed for internal use of
$42.6 million and $39.5 million as of August 31, 2007 and May 31, 2007, respectively.
Capitalization of costs ceases when the software is ready for its intended use, at which time the
Company begins amortization of the costs.
12
Note E: Goodwill and Intangible Assets, Net of Accumulated Amortization
The Company had goodwill balances on its Consolidated Balance Sheets of $440.3 million and $407.7
million as of August 31, 2007 and May 31, 2007, respectively. During the three months ended August
31, 2007, the Company recorded $32.6 million of goodwill related to an immaterial acquisition.
The Company has certain intangible assets with finite lives. The components of intangible assets,
at cost, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
August 31, |
|
|
May 31, |
|
In thousands |
|
2007 |
|
|
2007 |
|
|
Client lists and associate office license agreements |
|
$ |
150,079 |
|
|
$ |
148,395 |
|
Other intangible assets |
|
|
1,765 |
|
|
|
1,765 |
|
|
|
|
Total intangible assets, gross |
|
|
151,844 |
|
|
|
150,160 |
|
Less: Accumulated amortization |
|
|
87,077 |
|
|
|
82,947 |
|
|
|
|
Intangible assets, net of accumulated amortization |
|
$ |
64,767 |
|
|
$ |
67,213 |
|
|
Amortization expense relating to intangible assets was $4.1 million and $3.4 million for the three
months ended August 31, 2007 and 2006, respectively.
The estimated amortization expense relating to intangible asset balances for the full fiscal year
2008 and the following four fiscal years, as of August 31, 2007, is as follows:
|
|
|
|
|
|
|
Estimated |
|
In thousands |
|
amortization |
|
Year ended May 31, |
|
expense |
|
|
2008 |
|
$ |
16,721 |
|
2009 |
|
$ |
14,283 |
|
2010 |
|
$ |
12,093 |
|
2011 |
|
$ |
9,833 |
|
2012 |
|
$ |
7,852 |
|
|
Note F: Business Acquisition Reserves
During the fiscal year ended May 31, 2003, the Company recorded reserves related to acquisitions in
the amounts of $10.0 million for severance and $5.9 million for redundant lease costs. Activity
for the three months ended August 31, 2007 for these reserves is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
|
|
|
Balance as of |
|
|
|
May 31, |
|
|
Utilization of |
|
|
August 31, |
|
In thousands |
|
2007 |
|
|
reserve |
|
|
2007 |
|
|
Severance costs |
|
$ |
149 |
|
|
$ |
|
|
|
$ |
149 |
|
Redundant lease costs |
|
$ |
1,121 |
|
|
$ |
(119 |
) |
|
$ |
1,002 |
|
|
13
Note F: Business Acquisition Reserves-continued
The remaining severance payments will be substantially completed during fiscal 2008. Redundant lease payments
are expected to be complete during the fiscal year ending May 31, 2016. Payments of $0.7 million
extend beyond one year and are included in other long-term liabilities on the Consolidated Balance
Sheets as of August 31, 2007.
Note G: 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 change in unrealized gains and losses, net of applicable taxes,
related to available-for-sale securities is the primary component reported in accumulated other
comprehensive loss in the Consolidated Balance Sheets.
Comprehensive income, net of related tax effects, is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
August 31, |
|
In thousands |
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
151,075 |
|
|
$ |
135,081 |
|
Change in unrealized
gains and losses of
available-for-sale
securities, net of taxes |
|
|
5,565 |
|
|
|
6,771 |
|
|
|
|
Total comprehensive income |
|
$ |
156,640 |
|
|
$ |
141,852 |
|
|
As of August 31, 2007, the accumulated other comprehensive loss was $4.1 million, which was net of
taxes of $2.2 million. As of May 31, 2007, the accumulated other comprehensive loss was $9.7
million, which was net of taxes of $5.2 million.
Note H: Commitments and Contingencies
Commitments: The Company has unused borrowing capacity available under four uncommitted, secured,
short-term lines of credit at market rates of interest with financial institutions as follows:
|
|
|
|
|
|
|
|
|
Financial institution |
|
Amount available |
|
Expiration date |
|
JP Morgan Chase Bank, N.A. |
|
$ 350 million |
|
February 2008 |
Bank of America, N.A. |
|
$ 250 million |
|
February 2008 |
PNC Bank, National Association |
|
$ 150 million |
|
February 2008 |
Wells Fargo Bank, National Association |
|
$ 150 million |
|
February 2008 |
|
The primary uses of the lines of credit would be to meet short-term funding requirements related to
deposit account overdrafts and client fund deposit obligations arising from electronic payment
transactions on behalf of clients in the ordinary course of business, if necessary. No amounts
were outstanding against these lines of credit as of or during the three months ended August 31,
2007.
14
Note H: Commitments and Contingencies-continued
As of
August 31, 2007 and May 31, 2007, the Company had irrevocable standby letters of credit outstanding totaling
$62.4 million, required to secure commitments for certain insurance policies. These letters of
credit expire at various dates between December 2007 and
July 2008 and are secured by securities held in the Companys corporate investment portfolio. No amounts were
outstanding on these letters of credit as of or during the three months ended August 31, 2007.
The Company enters into various purchase commitments with vendors in the ordinary course of
business. As of August 31, 2007, the Company had outstanding commitments to purchase approximately
$8.3 million of capital assets.
The Company guarantees performance of service on annual maintenance contracts for clients who
financed their service contracts through a third party. In the normal course of business, the
Company makes representations and warranties that guarantee the performance of its services under
service arrangements with clients. In addition, the Company has entered into indemnification
agreements with its officers and directors, which require it to defend and, if necessary, indemnify
these individuals for matters related to their services provided to the Company. Historically,
there have been no material losses related to such guarantees and indemnifications.
The Company currently self-insures the deductible portion of various insured exposures under
certain employee benefit plans. The Companys estimated loss exposure under these insurance
arrangements is recorded in other current liabilities on the Consolidated Balance Sheets.
Historically, the amounts accrued have not been material. The Company also has insurance coverage
in addition to its purchased primary insurance policies for gap coverage for employment practices
liability, errors and omissions, warranty liability, and acts of terrorism; and capacity for
deductibles and self-insured retentions through its captive insurance company.
Contingencies: The Company is subject to various claims and legal matters that arise in the normal
course of its business. These include disputes or potential disputes related to breach of
contract, employment-related claims, tax claims, and other matters.
In August 2001, the Companys wholly owned subsidiary, Rapid Payroll, Inc. (Rapid Payroll)
informed 76 licensees that it intended to stop supporting their payroll processing software in
August of 2002. Thereafter, lawsuits were commenced by licensees asserting various claims,
including breach of contract and related tort and fraud causes of action. As previously reported
in the prior periodic reports, these lawsuits sought compensatory damages, punitive damages, and
injunctive relief against Rapid Payroll, the Company, the Companys former Chief Executive Officer,
and its Senior Vice President of Sales and Marketing. In accordance with the Companys
indemnification agreements with its senior executives, the Company has agreed to defend and, if
necessary, indemnify them in connection with these pending matters.
At the present time, the Company has fully resolved its licensing responsibility and settled all
litigation with 74 of the 76 licensees who were provided services by Rapid Payroll. A decision
favorable to Paychex, Inc. was issued by the United States District Court for the Central District
of California with respect to the Companys dispute with one of the remaining two licensees. That
licensee is currently appealing the case. A verdict was issued on June 27, 2007 in litigation
brought by the other remaining licensee. In that case, the California Superior Court, Los Angeles
County jury awarded to the plaintiff $15.0 million in compensatory damages and subsequently awarded
an additional $11.0 million in punitive damages. The Company will
seek to have the verdict reduced or reversed through post-trial motions and, if necessary, an
appeal.
15
Note H: Commitments and Contingencies-continued
The Company has recorded a reserve for pending litigation matters. The litigation reserve has been
adjusted in fiscal 2008 to account for settlements and incurred litigation expenditures. The Companys reserve for
all pending litigation totaled $25.7 million as of August 31, 2007, and is included in current
liabilities on the Consolidated Balance Sheets.
In light of the reserve for all pending litigation matters, the Companys management currently
believes that resolution of outstanding legal matters will not have a material adverse effect on
the Companys financial position or results of operations. However, legal matters are subject to
inherent uncertainties and there exists the possibility that the ultimate resolution of these
matters could have a material adverse impact on the Companys financial position and the results of
operations in the period in which any such effect is recorded.
Note I: Supplemental Cash Flow Information
Income taxes paid were $0.4 million and $0.6 million for the three months ended August 31, 2007 and
2006, respectively.
Note J: Related Party Transactions
During the three months ended August 31, 2007 and 2006, the Company purchased approximately $2.2
million and $0.4 million, respectively, of data processing equipment and software from EMC
Corporation. The Chairman, President, and Chief Executive Officer of EMC Corporation is a member
of the Companys Board.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations reviews the
operating results of Paychex, Inc. and its wholly owned subsidiaries (we, our, or us) for the
three months ended August 31, 2007 and August 31, 2006, and our financial condition as of August
31, 2007. The focus of this review is on the underlying business reasons for significant changes
and trends affecting our revenue, expenses, net income, and financial condition. This review
should be read in conjunction with the August 31, 2007 Consolidated Financial Statements and the
related Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q
(Form 10-Q). This review should also be read in conjunction with our Annual Report on Form 10-K
(Form 10-K) for the year ended May 31, 2007 (fiscal 2007). Forward-looking statements in this
review are qualified by the cautionary statement included in this review under the next
sub-heading, Safe-Harbor Statement under the Private Securities Litigation Reform Act of 1995.
16
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Certain written
and oral statements made by management 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 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 after the date of
filing of this Form 10-Q with the SEC to reflect events or circumstances after such date, or to
reflect the occurrence of unanticipated events.
Overview
We are a leading provider of comprehensive payroll and integrated human resource and employee
benefits outsourcing solutions for small-to medium-sized businesses. Our Payroll and Human
Resource Services offer a portfolio of services and products that allow our clients to meet their
diverse payroll and human resource needs.
Our Payroll services are provided through either our Core Payroll or Major Market Services, which
is utilized by clients that have more sophisticated payroll and benefit needs, and include:
|
|
|
payroll processing; |
|
|
|
|
payroll tax administration services; |
|
|
|
|
employee payment services; and |
|
|
|
|
other payroll-related services including regulatory compliance (new-hire reporting and
garnishment processing). |
Our Human Resource Services primarily include:
|
|
|
comprehensive human resource outsourcing services, which include Paychex
PremierSM Human Resources and our Professional Employer Organization (PEO); |
|
|
|
|
retirement services administration; |
|
|
|
|
workers compensation insurance services; |
|
|
|
|
health and benefits services; |
|
|
|
|
time and attendance solutions; and |
|
|
|
|
other human resource services and products. |
17
We mainly earn revenue through recurring fees for services performed. Service revenue is primarily
driven by the number of clients, utilization of ancillary services, and checks or transactions per
client per pay period. We also earn interest on funds held for clients between the time of
collection from our clients and remittance to the applicable tax or regulatory agencies or client
employees. Our strategy is focused on achieving strong long-term financial performance by providing
high-quality, timely, accurate, and affordable services, growing our client base, increasing
utilization of our ancillary services, leveraging our technological and operating infrastructure,
and expanding our service offerings.
Our financial results for the three months ended August 31, 2007 as compared to the three months
ended August 31, 2006 include the following:
|
|
|
Net income increased 12% to $151.1 million. |
|
|
|
|
Diluted earnings per share increased 14% to $0.40 per share. |
|
|
|
|
Total revenue increased 10% to $507.1 million. |
|
|
|
|
Payroll service revenue increased 8% to $361.5 million. |
|
|
|
|
Human Resource Services revenue increased 20% to $113.3 million. |
|
|
|
|
Operating income excluding interest on funds held for clients increased 14% to $178.3
million. |
|
|
|
|
Cash flow from operations increased 27% to $253.2 million. |
|
|
|
|
Our regular quarterly dividend increased 43% to $0.30 per
share from $0.21 per share. |
Our financial performance during the three months ended August 31, 2007 was largely due to strong
service revenue growth of 11% over the same period last year. This growth in service revenue was
attributable to client base growth, higher check volume, price increases, and growth in the
utilization of ancillary services.
In July 2007, we announced our program to repurchase up to $1.0 billion of Paychex, Inc. common
stock. During the three months ended August 31, 2007, we repurchased 8.9 million shares for a
total of $396.5 million. Through September 26, 2007, we repurchased 11.2 million shares for a total of $500.0 million. Subject to changes in market conditions,
we expect to complete our repurchase program in 2007 and anticipate that our weighted average outstanding shares for the full fiscal year ending
May 31, 2008 (fiscal 2008) will be approximately 370 million.
As of August 31, 2007, we maintained a strong financial position with cash and total corporate
investments of $959.7 million. Our primary source of cash is from our ongoing operations. Cash
flow from operations was $253.2 million for the three months ended August 31, 2007, as compared
with $199.9 million for the three months ended August 31, 2006. Historically, we have funded
operations, capital purchases, and dividend payments from our operating activities. It is
anticipated that cash and total corporate investments as of August 31, 2007, along with
projected operating cash flows, will support our normal business operations, completion of our
stock repurchase program, capital purchases, and dividend payments for the foreseeable future.
For further analysis of our results of operations for the three months ended August 31, 2007, and
our financial position as of August 31, 2007, refer to the analysis and discussion in the Results
of Operations, Liquidity and Capital Resources, and Critical Accounting Policies sections of
this review.
18
Outlook
Our current outlook for fiscal 2008 has been revised from that provided in our Form
10-K for fiscal 2007, incorporating the anticipated impact of lower investment income as a result of funding the stock repurchase program. In addition,
this revised guidance reflects a reduction in pre-tax income of approximately $6.5 million from the 50 basis point decrease in the Federal Funds rate announced on
September 18, 2007. Our anticipated effective income tax rate
increased as a result of the lower expected tax-exempt income earned
on our investment portfolios as well as the adoption of new
accounting guidance related to uncertain tax positions. Our projections are based on current economic and interest rate conditions
continuing with no significant changes. Projected revenue and net income growth is as follows:
|
|
|
|
|
|
Payroll service revenue |
|
9 |
|
10 |
% |
Human Resource Services revenue |
|
20 |
% |
23 |
% |
Total service revenue |
|
11 |
% |
13 |
% |
Interest on funds held for clients |
|
relatively flat |
Total revenue |
|
11 |
% |
13 |
% |
Corporate investment income |
|
(40 |
%) |
(35 |
%) |
Net income |
|
12 |
% |
14 |
% |
The effective income tax rate is expected to be approximately 32.5%. Remaining unchanged,
purchases of property and equipment for fiscal 2008 are expected to be in the range of $80 million
to $85 million, in line with our growth rates. Fiscal 2008 depreciation expense is projected to be
approximately $65 million, and we project amortization of intangible assets to be approximately $17
million.
19
RESULTS OF OPERATIONS
Summary of Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
August 31, |
|
|
|
$ in millions |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll service revenue |
|
$ |
361.5 |
|
|
$ |
335.2 |
|
|
|
8 |
% |
Human Resource Services revenue |
|
|
113.3 |
|
|
|
94.3 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
Total service revenue |
|
|
474.8 |
|
|
|
429.5 |
|
|
|
11 |
% |
Interest on funds held for clients |
|
|
32.3 |
|
|
|
29.9 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
Total revenue |
|
|
507.1 |
|
|
|
459.4 |
|
|
|
10 |
% |
Combined operating and SG&A expenses |
|
|
296.5 |
|
|
|
273.0 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
Operating income |
|
|
210.6 |
|
|
|
186.4 |
|
|
|
13 |
% |
As a % of total revenue |
|
|
42 |
% |
|
|
41 |
% |
|
|
|
|
Investment income, net |
|
|
12.2 |
|
|
|
9.4 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
Income before income taxes |
|
|
222.8 |
|
|
|
195.8 |
|
|
|
14 |
% |
As a % of total revenue |
|
|
44 |
% |
|
|
43 |
% |
|
|
|
|
Income taxes |
|
|
71.7 |
|
|
|
60.7 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
Net income |
|
$ |
151.1 |
|
|
$ |
135.1 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
As a % of total revenue |
|
|
30 |
% |
|
|
29 |
% |
|
|
|
|
Diluted earnings per share |
|
$ |
0.40 |
|
|
$ |
0.35 |
|
|
|
14 |
% |
|
20
Details regarding our combined funds held for clients and corporate investment portfolios are
as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
August 31, |
$ in millions |
|
2007 |
|
|
2006 |
|
|
Average investment balances: |
|
|
|
|
|
|
|
|
Funds held for clients |
|
$ |
3,094.6 |
|
|
$ |
2,969.2 |
|
Corporate investments |
|
|
1,227.6 |
|
|
|
1,001.0 |
|
|
|
|
Total |
|
$ |
4,322.2 |
|
|
$ |
3,970.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rates earned
(exclusive of realized gains/losses): |
|
|
|
|
|
|
|
|
Funds held for clients |
|
|
4.2 |
% |
|
|
4.0 |
% |
Corporate investments |
|
|
4.0 |
% |
|
|
3.7 |
% |
Combined funds held for clients
and corporate investments |
|
|
4.1 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
Net realized gains: |
|
|
|
|
|
|
|
|
Funds held for clients |
|
$ |
0.1 |
|
|
$ |
0.2 |
|
Corporate investments |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
As of : |
|
August 31, |
|
|
May 31, |
|
$ in millions |
|
2007 |
|
|
2007 |
|
|
Net unrealized loss on available-for-sale securities |
|
$ |
(6.3 |
) |
|
$ |
(14.9 |
) |
Federal Funds rate (1) |
|
|
5.25 |
% |
|
|
5.25 |
% |
Three-year AAA municipal securities yield |
|
|
3.64 |
% |
|
|
3.71 |
% |
Total market value of available-for-sale securities |
|
$ |
3,900.0 |
|
|
$ |
4,975.5 |
|
Average duration of available-for-sale securities in years (2) |
|
|
2.8 |
|
|
|
2.5 |
|
Weighted-average yield-to-maturity of available-for-sale securities (2) |
|
|
3.7 |
% |
|
|
3.7 |
% |
|
|
|
|
(1) |
|
On September 18, 2007, the Federal Funds rate was decreased
to 4.75%. |
|
(2) |
|
These items exclude the impact of variable rate demand notes (VRDNs) and auction
rate securities as they are tied to short-term interest rates. |
21
Revenue: The 8% increase in Payroll service revenue for the three months ended August 31, 2007
compared with the same period last year was attributable to client base growth, higher check
volume, price increases, and growth in utilization of our ancillary payroll services.
As of August 31, 2007, 93% of all clients utilized our payroll tax administration services,
compared with 92% as of August 31, 2006. We believe our client utilization percentage of these
services is near maturity. Our employee payment services were utilized by 72% of all clients as of
August 31, 2007, compared with 69% as of August 31, 2006. Nearly all new clients purchase our
payroll tax administration services and more than 80% of new clients select a form of our employee
payment services.
Human Resource Services revenue increased 20% to $113.3 million for the three months ended August
31, 2007. The growth was generated from the following:
|
|
|
retirement services client base increased 18% to 45,000 clients; |
|
|
|
|
comprehensive human resource outsourcing services client employees increased 22% to
381,000 client employees served; |
|
|
|
|
workers compensation insurance client base increased 19% to 65,000 clients; and |
|
|
|
|
the asset value of the retirement services client employees funds increased 30% to
$8.5 billion. |
For the three months ended August 31, 2007, interest on funds held for clients increased due to
higher average interest rates earned and higher average portfolio balances. The higher average
investment balances were driven by client base growth, wage inflation, check volume growth within
our current client base, and increased utilization of our payroll tax administration services and
employee payment services.
Combined operating and SG&A expenses: The following table summarizes total combined operating and
selling, general and administrative (SG&A) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
August 31, |
|
|
|
|
$ in millions |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
Compensation-related expenses,
including stock-based compensation
costs |
|
$ |
196.5 |
|
|
$ |
176.4 |
|
|
|
11 |
% |
Facilities expense |
|
|
13.7 |
|
|
|
12.8 |
|
|
|
7 |
% |
Depreciation of property and equipment |
|
|
15.0 |
|
|
|
13.5 |
|
|
|
11 |
% |
Amortization of intangible assets |
|
|
4.1 |
|
|
|
3.4 |
|
|
|
22 |
% |
Other expenses |
|
|
67.2 |
|
|
|
66.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating and SG&A expenses |
|
$ |
296.5 |
|
|
$ |
273.0 |
|
|
|
9 |
% |
|
Combined operating and SG&A expenses for the three months ended August 31, 2007 increased 9% as a
result of increases in personnel costs related to selling to new clients, retaining clients, and
promoting new services. As of August 31, 2007, we had approximately 11,900 employees compared
with approximately 11,200 employees as of August 31, 2006.
22
Depreciation expense is primarily related to buildings, furniture and fixtures, data processing
equipment, and software. Amortization of intangible assets is primarily related to client list
acquisitions, which are amortized using either straight-line or accelerated methods. The increase
in amortization was mainly due to the termination of our client servicing arrangement with New
England Business Services, Inc. and the purchasing of the right to service the related clients in
fiscal 2007. Other expenses include such items as delivery, forms and supplies, communications,
travel and entertainment, professional services, and other costs incurred to support our business.
Operating income: Operating income growth was 13% for the three months ended August 31, 2007, as
compared with the same period last year. The increase in operating income was attributable to the
factors previously discussed. In evaluating managements
performance and our results of operations, we believe that operating income excluding interest on
funds held for clients is an appropriate measure as fluctuations in interest rates impact our
results of operations and are not within our control. Operating income excluding interest on funds
held for clients increased 14% to $178.3 million for the three months ended August 31, 2007 from $156.5 million for the same period last year.
Investment income, net: Investment income, net primarily represents earnings from our cash and cash
equivalents and investments in available-for-sale securities. Investment income does not include
interest on funds held for clients, which is included in total revenue. The increase in investment
income for the three months ended August 31, 2007 as compared to the same period last year is due
to higher average interest rates earned and higher average portfolio balances resulting
from investment of cash generated from our ongoing operations.
Income taxes: Our effective income tax rate was 32.2% for the three months ended August 31, 2007
compared with 31.0% for the same period last year. The increase in the effective income tax rate
is a result of lower expected levels of tax-exempt income derived on municipal securities
held in our investment portfolios as well as the adoption of new
accounting guidance related to uncertain tax positions.
Net income: Net income growth was 12% for the three months ended August 31, 2007, as compared with
the three months ended August 31, 2006. The increase in net income was attributable to the factors
previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
As of
August 31, 2007, we had $959.7 million in cash and total
corporate investments. We anticipate that cash and
total corporate investments as of August 31, 2007, along with
projected operating cash flows, will support our normal business operations, completion of our stock repurchase program, capital
purchases, and dividend payments for the foreseeable future.
In July 2007, we announced our program to repurchase up to $1.0 billion of Paychex, Inc. common
stock. During the three months ended August 31, 2007, we repurchased 8.9 million shares for a
total of $396.5 million. Through September 26, 2007, we repurchased 11.2 million shares for a total
of $500.0 million.
23
We have unused borrowing capacity available under four uncommitted, secured, short-term lines of
credit at market rates of interest with financial institutions as follows:
|
|
|
|
|
|
|
|
|
Financial institution |
|
Amount available |
|
Expiration date |
|
JP Morgan Chase Bank, N.A. |
|
$350 million
|
|
February 2008 |
Bank of America, N.A. |
|
$250 million
|
|
February 2008 |
PNC Bank, National Association |
|
$150 million
|
|
February 2008 |
Wells Fargo Bank, National Association |
|
$150 million
|
|
February 2008 |
|
The primary uses of the lines of credit would be to meet short-term funding requirements related to
deposit account overdrafts and client fund deposit obligations arising from electronic payment
transactions on behalf of our clients in the ordinary course of business, if necessary. No amounts
were outstanding against these lines of credit as of or during the three months ended August 31,
2007.
As of August 31, 2007, we had irrevocable standby letters of credit outstanding totaling $62.4
million, required to secure commitments for certain of our insurance policies. These letters of
credit expire at various dates between December 2007 and
July 2008 and are secured by securities held in our corporate investment portfolio. No amounts were outstanding on these
letters of credit as of or during the three months ended August 31, 2007.
We enter into various purchase commitments with vendors in the ordinary course of business. As of
August 31, 2007, we had outstanding commitments to purchase approximately $8.3 million of capital
assets.
We guarantee performance of service on annual maintenance contracts for clients who financed their
service contracts through a third party. In the normal course of business, we make representations
and warranties that guarantee the performance of our services under service arrangements with
clients. In addition, we have entered into indemnification agreements with our officers and
directors, which require us to defend and, if necessary, indemnify these individuals for matters
related to their services provided to us. Historically, there have been no material losses related
to such guarantees and indemnifications.
We currently self-insure the deductible portion of various insured exposures under certain employee
benefit plans. Our estimated loss exposure under these insurance arrangements is recorded in other
current liabilities on our Consolidated Balance Sheets. Historically, the amounts accrued have not
been material. We also have insurance coverage in addition to our purchased primary insurance
policies for gap coverage for employment practices liability, errors and omissions, warranty
liability, and acts of terrorism; and capacity for deductibles and self-insured retentions through
our captive insurance company.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions with unconsolidated entities
such as special purpose entities or structured finance entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other limited purposes. We do
maintain investments as a limited partner in low-income housing projects that are not considered
part of our ongoing operations. These investments are accounted for under the equity method of
accounting.
24
Operating Cash Flow Activities
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
August 31, |
In millions |
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
151.1 |
|
|
$ |
135.1 |
|
Non-cash adjustments to net income |
|
|
35.6 |
|
|
|
30.8 |
|
Cash provided by changes in operating assets and liabilities |
|
|
66.5 |
|
|
|
34.0 |
|
|
|
|
Net cash provided by operating activities |
|
$ |
253.2 |
|
|
$ |
199.9 |
|
|
The increase in our operating cash flows for the three months ended August 31, 2007 reflects higher
net income adjusted for non-cash items, and changes in operating assets and liabilities. The
fluctuation in operating assets and liabilities between periods was primarily the result of timing
of accounts receivable billing and collections and timing of payments for compensation, PEO
payroll, income tax, and other liabilities. Other operating
liabilities increased as a result of timing of payments for our stock
repurchase program.
Investing Cash Flow Activities
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
August 31, |
In millions |
|
2007 |
|
|
2006 |
|
|
Net change in funds held for clients and corporate investment activities |
|
$ |
295.1 |
|
|
$ |
82.9 |
|
Purchases of property and equipment, net of proceeds
from the sale of property and equipment |
|
|
(20.0 |
) |
|
|
(16.1 |
) |
Acquisition of businesses, net of cash acquired |
|
|
(32.6 |
) |
|
|
|
|
Purchases of other assets |
|
|
(1.7 |
) |
|
|
(2.6 |
) |
|
|
|
Net cash provided by investing activities |
|
$ |
240.8 |
|
|
$ |
64.2 |
|
|
Funds held for clients and corporate investments: Funds held for clients consist of short-term
funds and available-for-sale securities. Corporate investments consist of available-for-sale
securities. The portfolio of funds held for clients and corporate investments is detailed in Note
C of the Notes to Consolidated Financial Statements.
The amount of funds held for clients will vary based upon the timing of collecting client funds,
and the related remittance of funds to applicable tax or regulatory agencies for payroll tax
administration services and to employees of clients utilizing employee payment services.
Fluctuations in net funds held for clients and corporate investment activities mainly relate to
timing of purchases, sales, or maturities of corporate investments. Additional discussion of
interest rates and related risks is included in the Market Risk Factors section of this review.
Purchases of long-lived assets: To support our 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. Construction in progress totaled
$44.9 million as of August 31, 2007 and $46.5 million as of May 31, 2007. Of these costs, $42.6
million and $39.5 million represent software being developed for internal use as of August 31, 2007
and May 31, 2007, respectively. Capitalization of costs ceases when software is ready for its
intended use, at which time we will begin amortization of the costs.
During the three months ended August 31, 2007, we paid $32.6 million related to an
immaterial acquisition.
25
We purchased approximately $2.2 million and $0.4 million of data processing equipment and software
from EMC Corporation during the three months ended August 31, 2007 and 2006, respectively. The
Chairman, President, and Chief Executive Officer of EMC Corporation is a member of our Board of
Directors (the Board).
Financing Cash Flow Activities
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
August 31, |
In millions, except per share amounts |
|
2007 |
|
|
2006 |
|
|
Repurchases of common stock |
|
$ |
(396.5 |
) |
|
$ |
|
|
Dividends paid |
|
|
(115.0 |
) |
|
|
(60.8 |
) |
Proceeds from exercise of stock options |
|
|
44.4 |
|
|
|
2.9 |
|
Excess tax benefit related to exercise of stock options |
|
|
4.4 |
|
|
|
0.3 |
|
|
|
|
Net cash used in financing activities |
|
$ |
(462.7 |
) |
|
$ |
(57.6 |
) |
|
|
|
Cash dividends per common share |
|
$ |
0.30 |
|
|
$ |
0.16 |
|
|
Repurchases of common stock: In July 2007, we announced our program to repurchase up to $1.0
billion of Paychex, Inc. common stock. During the three months ended August 31, 2007, we
repurchased 8.9 million shares for a total of $396.5 million.
Dividends
paid: In October 2006, our Board declared an increase of 31% in the
quarterly dividend payment to $0.21 per share from $0.16 per share. In July 2007, our Board declared an increase of 43% in the quarterly dividend
payment to $0.30 per share from $0.21 per share, which was paid August 15, 2007 to stockholders of
record as of August 1, 2007. The payment of future dividends is dependent on our future earnings
and cash flow, and is subject to the discretion of our Board.
Exercise of stock options: The increase in proceeds from the exercise of stock options and the
excess tax benefit related to exercise of stock options is due to an increase in the number of
shares exercised to 1.4 million shares during the three months ended August 31, 2007 from 0.1
million shares during the three months ended August 31, 2006, and an increase in the average
exercise price per share.
MARKET RISK FACTORS
Changes in interest rates and interest rate risk: Funds held for clients consist primarily of
short-term funds and available-for-sale securities. Corporate investments consist primarily of
available-for-sale securities. As a result of our operating and investing activities, we are
exposed to changes in interest rates that may materially affect our results of operations and
financial position. Changes in interest rates will impact the earnings potential of future
investments and will cause fluctuations in the market value of our longer-term available-for-sale
securities. In seeking to minimize the risks and/or costs associated with such activities, we
generally direct investments towards high credit quality, fixed-rate municipal and government
securities and manage the available-for-sale securities to a benchmark duration of two and one-half
to three years. We do not invest in any collateralized debt obligations or asset-backed
securities that have exposure to the sub-prime mortgage market. We do not utilize
derivative financial instruments to manage our interest rate risk.
26
During the three months ended August 31, 2007, the average interest rate earned on our combined
funds held for clients and corporate investment portfolios was 4.1% compared with 3.9% for the same
period last year. When interest rates are falling, the full impact of lower interest rates will
not immediately be reflected in net income due to the interaction of long-and short-term interest
rate changes as discussed below.
During a falling interest rate environment, the decreases in interest rates decrease earnings from
our short-term investments and over time decrease earnings from our longer-term
available-for-sale securities. Earnings from the available-for-sale-securities,
which as of August 31, 2007 had an average duration of 2.8 years, excluding the impact of VRDNs and
auction rate securities tied to short-term interest rates, will not reflect decreases in interest
rates until the investments are sold or mature and the proceeds are reinvested at lower rates.
The cost and market value of available-for-sale securities that had stated maturities as of August
31, 2007 are shown below by contractual maturity. Expected maturities can differ from contractual
maturities because borrowers may have the right to prepay obligations without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
August 31, 2007 |
|
|
|
|
|
|
|
Market |
|
In millions |
|
Cost |
|
|
value |
|
|
Maturity date: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
343.4 |
|
|
$ |
341.8 |
|
Due after one year through three years |
|
|
539.0 |
|
|
|
536.4 |
|
Due after three years through five years |
|
|
508.7 |
|
|
|
507.0 |
|
Due after five years |
|
|
2,464.2 |
|
|
|
2,463.8 |
|
|
|
|
Total |
|
$ |
3,855.3 |
|
|
$ |
3,849.0 |
|
|
VRDNs and auction rate securities are primarily categorized as due after five years in the table
above as the contractual maturities on these securities are typically 20 to 30 years. Although
these securities are issued as long-term securities, they are priced and traded as short-term
instruments because of the liquidity provided through the auction or tender feature.
The following table summarizes recent changes in the Federal Funds rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year |
|
|
Fiscal year |
|
|
Fiscal year |
|
|
|
through |
|
|
ended |
|
|
ended |
|
|
|
August 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2006 |
|
|
Federal Funds rate-beginning of period |
|
|
5.25 |
% |
|
|
5.00 |
% |
|
|
3.00 |
% |
Rate increase: |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
|
|
|
|
|
0.25 |
% |
|
|
0.50 |
% |
Second quarter |
|
NA |
|
|
|
|
|
|
|
0.50 |
% |
Third quarter |
|
NA |
|
|
|
|
|
|
|
0.50 |
% |
Fourth quarter |
|
NA |
|
|
|
|
|
|
|
0.50 |
% |
|
|
|
Federal Funds rate-end of period |
|
|
5.25 |
% |
|
|
5.25 |
% |
|
|
5.00 |
% |
|
|
|
Three-year AAA municipal securities
yield-end of period |
|
|
3.64 |
% |
|
|
3.71 |
% |
|
|
3.65 |
% |
|
On September 18, 2007, the Federal Funds rate was decreased to 4.75%.
27
Calculating the future effects of changing interest rates involves many factors. These factors
include, but are not limited to:
|
|
|
daily interest rate changes; |
|
|
|
|
seasonal variations in investment balances; |
|
|
|
|
actual duration of short-term and available-for-sale securities; |
|
|
|
|
the proportional mix of taxable and tax-exempt investments; and |
|
|
|
|
changes in tax-exempt municipal rates as compared to taxable investment rates, which are
not synchronized or simultaneous. |
Subject to these factors, a 25-basis-point change generally affects our tax-exempt interest rates
by approximately 17 basis points.
Our total investment portfolio (funds held for clients and corporate investments) is expected to
average approximately $4.2 billion for fiscal 2008. Our
anticipated allocation for fiscal 2008 is
approximately 55% invested in short-term and available-for-sale securities with an average duration
of 35 days and 45% invested in available-for-sale securities with an average duration of two and
one-half to three years. Based on these current assumptions, we estimate that the earnings effect
of a 25-basis-point change in interest rates (17 basis points for tax-exempt investments) at this
point in time would be approximately $4.5 million for the next twelve-month period.
The combined funds held for clients and corporate available-for-sale securities reflected a net
unrealized loss position of $6.3 million as of August 31, 2007, compared with a net unrealized loss
position of $14.9 million as of May 31, 2007. During the three months ended August 31, 2007, the
net unrealized loss position ranged from $24.3 million to $6.3 million. Our investment portfolios
reflected a net unrealized loss position of approximately $0.5 million as of September 21, 2007.
As of August 31, 2007 and May 31, 2007, we had $3.9 billion and $5.0 billion, respectively,
invested in available-for-sale securities at market value. Excluding auction rate securities and
VRDNs classified as available-for-sale securities, which are tied to short-term interest rates, the
weighted-average yield-to-maturity was 3.7% as of both August 31, 2007 and May 31, 2007.
Assuming a hypothetical decrease in both short-term and longer-term interest rates of 25 basis
points, the resulting potential increase in market value for our available-for-sale securities held
as of August 31, 2007 would be in the range of $11.5 million to $12.0 million. Conversely, a
corresponding increase in interest rates would result in a comparable decrease in market value.
This hypothetical increase or decrease in the market value of the portfolio would be recorded as an
adjustment to the portfolios recorded value, with an offsetting amount recorded in stockholders
equity. These fluctuations in market value would have no related or immediate impact on the
results of operations, unless any declines in market value were considered to be
other-than-temporary.
Credit Risk: We are exposed to credit risk in connection with our
available-for-sale securities from the possible inability of the borrowers to
meet the terms of their bonds. We attempt to mitigate this risk by investing primarily in high
credit quality securities with AAA and AA ratings and short-term securities with an A-1 rating, and
by limiting amounts that can be invested in any single issuer. We do not invest in any collateralized
debt obligations or asset-backed securities that have exposure to the sub-prime
mortgage market.
28
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are described in Item 7 of our Form 10-K for fiscal 2007, filed
with the SEC on July 20, 2007. On an ongoing basis, we evaluate the critical accounting policies
used to prepare our Consolidated Financial Statements, including, but not limited to, those related
to:
|
|
|
revenue recognition; |
|
|
|
|
PEO workers compensation insurance; |
|
|
|
|
valuation of investments; |
|
|
|
|
goodwill and other intangible assets; |
|
|
|
|
accrual for client fund losses; |
|
|
|
|
contingent liabilities; |
|
|
|
|
stock-based compensation costs; and |
|
|
|
|
income taxes. |
There have
been no material changes in these aforementioned critical accounting policies, other
than as required by adoption of new accounting pronouncements as described below.
On
June 1, 2007, we adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, and a
related amendment, FASB Staff Position (FSP) No. 48-1, Definition of Settlement in FASB
Interpretation No. 48. FIN 48 and FSP No. 48-1 prescribe minimum recognition thresholds for
evaluating uncertain income tax positions, and provide guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Upon
adoption, we recorded a cumulative effect adjustment by increasing our reserve for uncertain
tax positions by $8.4 million, with an offsetting decrease to opening retained earnings. The
total reserve for uncertain tax positions of $12.8 million as of August 31, 2007 is included in long-term liabilities on the Consolidated
Balance Sheets as the resolution of these matters is not expected within the next twelve months.
We are subject to United States (U.S.) federal income tax as well as income tax in one foreign and
numerous state jurisdictions. Uncertain tax positions relate primarily to state income tax
matters. We believe that there is a possibility that the reserve for uncertain tax positions will
increase for the full year fiscal 2008, resulting from the settlement of open periods and the
effect of current year operations on anticipated tax benefits. This increase will impact the tax
provision in the range of $6.0 million to $8.0 million.
We have
concluded all U.S. federal income tax matters through our fiscal year ended May 31, 2005,
with fiscal years ended May 31, 2006 and 2007 still subject to potential audit. With limited
exception, state income tax audits by taxing authorities are closed
through our fiscal year ended
May 31, 2003, primarily due to expiration of the statute of limitations. Audit outcomes and the
timing of audit settlements are subject to a high degree of uncertainty. As of August 31, 2007,
materially all of the $12.8 million reserve for uncertain tax positions, if recognized, would
favorably affect our effective income tax rate.
We continue to follow our policy of recognizing interest and penalties accrued on tax positions as
a component of income taxes on the Consolidated Statements of Income. Upon adoption, the amount of
accrued interest and penalties associated with our tax positions was immaterial to the Consolidated
Balance Sheets. The amount of interest and penalties recognized for the three months ended August
31, 2007 was immaterial to our results of operations.
29
NEW ACCOUNTING PRONOUNCEMENTS
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (EITF 06-11),
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11
applies to share-based payment arrangements, with dividend protection features, that entitle an
employee to receive dividends or dividend equivalents on nonvested equity-based shares or units,
when those dividends or dividend equivalents are charged to retained earnings and result in an
income tax deduction for the employer under Statement of Financial
Accounting Standard No. 123 (R), Share-Based Payment. Under EITF
06-11, a realized income tax benefit from dividends or dividend equivalents charged to retained
earnings and paid to an employee for nonvested equity-based shares or units should be recognized as
an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning
after December 15, 2007 with early adoption permitted. EITF 06-11 was adopted on June 1, 2007 and
did not have a material effect on our results of operations or financial position.
In June 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 07-1, Clarification of the Scope of the Audit and
Accounting Guide Investment
Companies and Accounting by Parent Companies and Equity Method Investors for Investments in
Investment Companies (SOP 07-1). SOP 07-1 clarifies when an entity may apply the provisions of
the AICPA Audit and Accounting Guide Investment Companies and addresses the retention of
specialized investment company accounting by a parent company in consolidation or by an equity
method investor. SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007
and is applicable to our fiscal year beginning June 1, 2008. We do not expect the adoption of this
standard to have an impact on our results of operations or financial position.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under the caption Market Risk Factors under
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations and
is incorporated herein by reference.
Item 4. Controls and Procedures
Disclosure Controls and Procedures and Internal Control Over Financial Reporting:
Disclosure controls and procedures are designed with the objective of ensuring that
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, as amended (the Exchange Act), such as this report, is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures are also designed with the objective of ensuring that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the
end of the period covered by this report, our disclosure controls and procedures were effective.
30
Changes in Internal Control over Financial Reporting: We also carried out an evaluation of the
internal control over financial reporting to determine whether any changes occurred during the
period covered by this report. Based on such evaluation, there has been no change in our internal
control over financial reporting that occurred during the most recently completed fiscal quarter
ended August 31, 2007, that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note H of the Notes to Consolidated Financial Statements, which is incorporated herein by
reference thereto, for information regarding legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information relating to our repurchase of common stock during the
three months ended August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
Total number of |
|
|
dollar value of |
|
|
|
|
|
|
|
|
|
|
|
shares |
|
|
shares that |
|
|
|
Total |
|
|
Average |
|
|
purchased as |
|
|
may yet be |
|
|
|
number of |
|
|
price |
|
|
part of publicly |
|
|
purchased |
|
|
|
shares |
|
|
paid per |
|
|
announced |
|
|
under the |
|
|
|
purchased |
|
|
share |
|
|
program (1) |
|
|
program |
|
|
August 6, 2007
August 31, 2007 |
|
|
8,899,772 |
|
|
$ |
44.55 |
|
|
|
8,899,772 |
|
|
$ |
603,515,474 |
|
|
|
|
Total for the period |
|
|
8,899,772 |
|
|
$ |
44.55 |
|
|
|
8,899,772 |
|
|
$ |
603,515,474 |
|
|
|
|
|
(1) |
|
In July 2007, our Board approved a program to repurchase up to $1.0
billion of our common stock. The stock repurchase program may be suspended or discontinued by
management at any time. There is currently no expiration date for our stock repurchase
program. Stock repurchases during the three months ended August 31, 2007 were retired. |
Item 5. Other Information
On July 17, 2007, our Board approved the grant of restricted stock to outside members
of the Board as provided under our 2002 Stock Incentive Plan, as amended and restated
effective October 12, 2005.
Additional information regarding compensation awarded to our directors for the year ended May 31,
2007 was provided in our Proxy Statement for our 2007 Annual Meeting of Stockholders, which was
filed with the SEC on August 31, 2007.
31
Item 6. Exhibits
|
|
Exhibit 10.1: Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective
October 12, 2005) 2007 Master Restricted Stock Unit Agreement. |
|
|
|
Exhibit 31.1: Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 31.2: Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.1: Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.2: Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32
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 26, 2007 |
/s/ Jonathan J. Judge
|
|
|
Jonathan J. Judge |
|
|
President and Chief Executive
Officer |
|
|
|
|
|
Date: September 26, 2007 |
/s/ John M. Morphy
|
|
|
John M. Morphy |
|
|
Senior Vice President, Chief
Financial Officer, and Secretary |
|
|
33