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Paychex Annual Report, Year Ended May 31, 2006

Filing Date
Filed July 21, 2006
Period End
May 31, 2006
Security
PAYX
In the record · 2016–202610-K1110-Q328-K99

PAYX filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 99 current reports (8-K) between 2016 and 2026.

  1. Leadership change8-K · Jul ’17Jul ’17
  2. Material agreement8-K · Aug ’19Aug ’19
  3. Material agreement8-K · Sep ’21Sep ’21
  4. Leadership change8-K · Jul ’25Jul ’25

01—Abstract

Summary

Summary of the 10-K filed July 21, 2006. Cited figures are marked; the original filing is the authoritative source.

Paychex, Inc. reported fiscal 2006 (year ended May 31, 2006) as a record year: total revenue rose 16% to $1,674.6 milliona, net income increased 26% to $464.9 million, and diluted earnings per share were $1.22, up 26%.

Service revenue grew 14% to $1,573.8 millionb, driven by growth in clients (approximately 543,000 at May 31, 2006), check volume, and ancillary services. Payroll service revenue increased 10% to $1,248.9 million and Human Resource Services revenue increased 29% to $324.9 million. The company noted that interest on funds held for clients rose as interest rates increased; the average combined portfolio yield rose to 3.2% from 2.2% in fiscal 2005.

Operating income grew 22% to $649.6 millionc, and cash flow from operations rose 22% to $569.2 million. Paychex paid $231.5 million in dividends, equal to 50% of net income, and the quarterly dividend was raised to $0.16 per share. The company carries no debt, and its total assets were $5.55 billion against stockholders' equity of $1.65 billion at May 31, 2006.

Management's fiscal 2007 outlook projects total revenue growth of 12% to 14% and net income growth of 12% to 14%. The filing notes that adopting SFAS No. 123(R) on June 1, 2006 is expected to reduce net income by 4% to 5% in fiscal 2007. Key risks include errors in processing client funds, client insolvency, regulatory changes, and a pending Rapid Payroll software licensee litigation matter for which the company holds a $15.6 milliond legal reserve.

02—Key points

Key Highlights

  1. Total revenue increased 16% to $1,674.6 million; service revenue rose 14% to $1,573.8 million in fiscal 2006.
  2. Net income increased 26% to $464.9 million, and diluted EPS was $1.22, up 26%.
  3. Operating income grew 22% to $649.6 million; cash flow from operations rose 22% to $569.2 million.
  4. Human Resource Services revenue increased 29% to $324.9 million, led by Paychex Premier, PEO, and other HR services growth.
  5. Approximately 543,000 clients at May 31, 2006, up from approximately 522,000 a year earlier; client retention was slightly less than 80%.
  6. Fiscal 2007 outlook projects total revenue growth of 12% to 14% and net income growth of 12% to 14%, with SFAS No. 123(R) expected to reduce net income by 4% to 5%.
  7. The company has no debt and paid $231.5 million in dividends, representing 50% of net income.

03—Questions

Frequently Asked Questions

  1. What drove Paychex's revenue growth in fiscal 2006?

    Growth came from client base expansion, higher check volume, and increased utilization of ancillary services. Payroll service revenue rose 10% to $1,248.9 million, Human Resource Services revenue rose 29% to $324.9 million, and interest on funds held for clients rose to $100.8 million from $60.5 million, reflecting higher interest rates and larger portfolio balances.

  2. How did interest rates affect Paychex's results?

    The Federal Reserve raised the Federal Funds rate by 200 basis points in fiscal 2005 and another 200 basis points in fiscal 2006, to 5.00% at May 31, 2006. The average combined yield on funds held for clients and corporate investments rose to 3.2% in fiscal 2006 from 2.2% in fiscal 2005. Combined interest on funds held for clients and corporate investment income increased 73% for the year.

  3. What is the outlook for fiscal 2007?

    Management projects payroll service revenue growth of 9% to 11%, Human Resource Services revenue growth of 20% to 23%, and total revenue growth of 12% to 14%. Net income growth is expected to be 12% to 14%, with an effective tax rate of approximately 31.0%. Stock-based compensation expensing under SFAS No. 123(R), effective June 1, 2006, is expected to reduce net income by 4% to 5%.

  4. What legal risks does Paychex face?

    Rapid Payroll, Inc., a wholly owned subsidiary, and Paychex are defendants in lawsuits brought by licensees of payroll processing software that Rapid Payroll stopped supporting. Rapid Payroll filed for Chapter 11 protection on May 4, 2006. The company holds a legal reserve of $15.6 million and management believes resolution will not have a material adverse effect, though outcomes remain uncertain.

  5. Does Paychex carry debt or face liquidity concerns?

    No. Total debt was zero at May 31, 2006 and 2005. The company had $577.4 million in cash and corporate investments, plus $384.5 million in long-term corporate investments. It also has four uncommitted, short-term lines of credit totaling $900 million, none of which were drawn during fiscal 2006.

04—Continue

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