01—Abstract
Summary
Summary of the 10-K filed July 22, 2005. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. reported record fiscal 2005 results for the year ended May 31, 2005, its fifteenth consecutive year of record total revenues, net income, and diluted earnings per share.
Total revenues increased 12% to $1,445.1 milliona, service revenues rose 12% to $1,384.7 million, and net income increased 22% to $368.8 million, or $0.97 diluted earnings per share, compared with $0.80 in fiscal 2004. Operating income grew 23% to $533.8 million, though fiscal 2004 included a $35.8 million expense charge for pending legal matters, and fiscal 2005 included $3.2 million of captive insurance charges. Cash flow from operations was $467.9 million, and the company had $707.6 million in cash and corporate investments at May 31, 2005, with no debt.
Client growth continued, with approximately 522,000 clients at May 31, 2005, up from about 505,000 a year earlier. Client retention was slightly less than 80%b of the beginning base, and tax filing and payment services were used by 90% of clients. Management's outlook for fiscal 2006 projects total revenue growth of 11% to 12% and net income growth of 18% to 20%, with an expected effective tax rate of about 31.5%.
The main risk identified is litigation arising from Rapid Payroll, Inc., a wholly owned subsidiary, whose licensees sued over its decision to stop supporting payroll software. The company held a $25.3 millionc legal reserve at May 31, 2005, and had settled thirteen cases for approximately $8.0 million through June 27, 2005. Management believes resolution will not have a material adverse effect given the reserve.
02—Key points
Key Highlights
- Total revenues rose 12% to $1,445.1 million in fiscal 2005, and net income rose 22% to $368.8 million.
- Diluted earnings per share were $0.97 in fiscal 2005, compared with $0.80 in fiscal 2004.
- Operating income increased 23% to $533.8 million, and fiscal 2004 included a $35.8 million legal reserve charge.
- Clients grew to approximately 522,000 at May 31, 2005, from approximately 505,000 at May 31, 2004; retention was slightly less than 80%.
- Cash flow from operations was $467.9 million, and total cash and corporate investments were $707.6 million with no debt outstanding.
- Quarterly dividend increased to $0.13 per share in fiscal 2005 from $0.12, and total cash dividends declared were $0.51 per share.
- Fiscal 2006 outlook projects total revenue growth of 11% to 12% and net income growth of 18% to 20%.
03—Questions
Frequently Asked Questions
What drove Paychex's revenue growth in fiscal 2005?
Payroll service revenues grew 9% to $1,136.8 million, attributed to increased utilization of ancillary services, growth within the current client base, and price increases. Human Resource and Benefits service revenues grew 25% to $247.9 million, driven by Retirement Services, PAS and PEO growth, and the Stromberg time and attendance acquisition.
Why did net income grow faster than operating income in some comparisons?
Net income grew 22% in fiscal 2005, against operating income growth of 23%, with the comparison benefiting from the absence of the $35.8 million fiscal 2004 legal reserve charge. Investment income, net, fell 25% to $12.4 million, mainly because of lower net realized gains and lower average interest rates on longer-term investments.
What legal risks does Paychex face?
Rapid Payroll, a wholly owned subsidiary, and the company are defendants in lawsuits by licensees of payroll software that Rapid Payroll stopped supporting. The company held a $25.3 million legal reserve at May 31, 2005, and had settled thirteen cases for about $8.0 million through June 27, 2005. Management believes resolution will not have a material adverse effect, but uncertainty remains.
What is the company's outlook for fiscal 2006?
Management projects total service revenue growth of 11% to 12%, payroll service revenue growth of 7% to 9%, and Human Resource and Benefits service revenue growth of 24% to 26%. It expects net income growth of 18% to 20%, an effective tax rate of about 31.5%, and capital expenditures of $75 million to $80 million.
How exposed is the company to interest rate changes?
Paychex earns interest on client funds and corporate investments, which totaled about $3.8 billion in average expected balances for fiscal 2006. The company estimates that a 25-basis-point change in rates would affect fiscal 2006 earnings by $3.7 million to $4.2 million, and it does not use derivatives to manage interest rate risk.
04—Continue