01—Abstract
Summary
Summary of the 10-K filed July 20, 2004. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. reported fiscal 2004 (year ended May 31, 2004) as its fourteenth consecutive year of record total revenues, net income, and diluted earnings per share.
Total revenues grew 18% year-over-year to $1,294.3 milliona, net income rose 3% to $303.0 million, and diluted earnings per share were $.80. Operating income increased 8% to $433.3 million. Service revenues were $1,240.1 million, and the company served approximately 505,000 clients at May 31, 2004, with approximately 9,400 employees.
Results were affected by $35.8 millionb in expense charges to increase the reserve for pending legal matters, mainly related to lawsuits against subsidiary Rapid Payroll, Inc. by licensees of its payroll software. A June 18, 2004 jury awarded approximately $6.4 million in compensatory damages to Payroll Partnership, L.P. and related entities, and the legal reserve stood at $35.0 million at May 31, 2004. The company also recorded approximately $6.4 million of net incremental PEO revenue, which the filing says reduced diluted earnings per share impact from the legal charges by roughly $.06 net of the legal reserve charge.
The balance sheet remained debt-free, with total assets of $3.95 billionc and stockholders' equity of $1.20 billion. Cash and corporate investments totaled $523.8 million, and operating cash flow was $390.1 million. The company guided fiscal 2005 total revenue growth of 9% to 11% and net income growth of 16% to 18%, based on current economic and interest rate conditions.
02—Key points
Key Highlights
- Total revenues of $1,294.3 million, up 18% year-over-year; service revenues of $1,240.1 million, up 19%
- Net income of $303.0 million, up 3%; diluted EPS of $.80 versus $.78 in fiscal 2003
- Operating income of $433.3 million, up 8%; operating income excluding interest on funds held for clients and unusual items was $408.5 million, up 17%
- $35.8 million in expense charges to increase the legal reserve, reducing diluted EPS by approximately $.06
- Approximately 505,000 clients at May 31, 2004, up from about 490,000 a year earlier; 89% of clients use tax filing and payment services and 63% use employee payment services
- No total debt; cash and corporate investments of $523.8 million; cash flow from operations of $390.1 million
- Fiscal 2005 outlook: total revenue growth of 9% to 11% and net income growth of 16% to 18%
03—Questions
Frequently Asked Questions
What drove the fiscal 2004 revenue growth?
Total revenues grew 18% to $1,294.3 million. The filing attributes Payroll service revenue growth to the Advantage and InterPay acquisitions, organic client base growth, increased use of ancillary services, and price increases. Human Resource and Benefits service revenues rose 33%, helped by Retirement Services and PAS/PEO growth and the $6.4 million net incremental PEO revenue recorded in the third quarter.
What is the Rapid Payroll litigation and how much has been reserved?
Rapid Payroll, Inc., a wholly owned subsidiary, and the company face 22 pending lawsuits by licensees of payroll software that Rapid Payroll said it would stop supporting. On June 18, 2004, a jury found Rapid Payroll breached a license agreement with Payroll Partnership, L.P. and related entities, awarding approximately $6.4 million in compensatory damages. The company recorded $9.2 million in the third quarter and $26.6 million in the fourth quarter of fiscal 2004, and the legal reserve totaled $35.0 million at May 31, 2004. Management believes resolution will not have a material adverse effect, though outcomes are uncertain.
How strong is the company's financial position?
At May 31, 2004, total assets were $3.95 billion and stockholders' equity was $1.20 billion. The company reported no total debt and had no amounts outstanding under its lines of credit. Cash and corporate investments totaled $523.8 million, and net cash provided by operating activities was $390.1 million. The company paid cash dividends of $.47 per share in fiscal 2004.
How is interest rate exposure affecting earnings?
Interest on funds held for clients was $54.2 million, up slightly from $53.1 million, and the filing notes that lower interest rates have hurt earnings over the past three fiscal years. The Federal Funds rate fell to 1.00% at May 31, 2004, and was raised to 1.25% on June 29, 2004. Investment income, net fell 46% to $16.5 million. The company expects interest on funds held for clients to decrease approximately 10% to 15% and corporate investment income to decrease approximately 25% to 30% in fiscal 2005.
What is the outlook for fiscal 2005?
Management projects payroll service revenue growth of 9% to 11%, Human Resource and Benefits service revenue growth of 12% to 14%, and total service revenue growth of 10% to 12%. Net income growth is expected to be 16% to 18%, and operating income growth excluding interest on funds held for clients and the specified unusual items is expected to exceed 15%. These projections assume current economic and interest rate conditions continue with no significant changes.
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