01—Abstract
Summary
Summary of the 10-K filed July 20, 2009. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. filed its annual report on Form 10-K for the fiscal year ended May 31, 2009, describing itself as a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses.
As of May 31, 2009, it served approximately 554,000 clients and had about 12,500 employees. Fiscal 2009 was shaped by a weak U.S. economy, the credit crisis, and very low investment returns. Total revenue rose 1% to $2.08 billiona, service revenue grew 4% to $2.01 billion, and interest on funds held for clients fell to $75.5 million from $131.8 million.
Operating income declined 3% to $805.2 millionb and net income fell 7% to $533.5 million, or $1.48 per diluted share. Operating income net of certain items, a non-GAAP measure, rose 5% to $729.7 million. Client count fell 3.1% during the year, to roughly 554,000 from 572,000, and client retention was about 77%, slightly below historical levels.
Management cited lower new business starts, more clients going out of business, and pricing pressure. Human Resource Services revenue grew 11% to $523.6 millionc, led by health and benefits services and comprehensive human resource outsourcing, while payroll service revenue rose only 1% to $1.5 billion. The balance sheet remained conservative, with $574.7 million in cash and total corporate investments and no debt as of May 31, 2009.
Cash flow from operations was $688.8 milliond, and dividends of $447.7 million represented 84% of net income. The filing also notes a $20.4 million litigation reserve and an appeal of a $26.0 million jury verdict in the Brunskill Associates case against subsidiary Rapid Payroll. The company's outlook for fiscal 2010 projects lower total revenue (down 1% to 4%) and lower net income (down 10% to 12%), driven by declining interest income on client funds and investments.
02—Key points
Key Highlights
- Total revenue increased 1% to $2.08 billion, while net income declined 7% to $533.5 million and diluted EPS fell 5% to $1.48.
- Service revenue grew 4% to $2.01 billion, driven by an annual price increase and higher ancillary service utilization.
- Interest on funds held for clients fell to $75.5 million from $131.8 million, reflecting an average interest rate of 2.1% versus 3.7% a year earlier.
- Human Resource Services revenue rose 11% to $523.6 million, while payroll service revenue increased only 1% to $1.5 billion.
- Client base declined 3.1% to approximately 554,000 clients, and client retention was about 77%, slightly below historical levels.
- Balance sheet remained strong, with $574.7 million in cash and total corporate investments and no debt as of May 31, 2009.
- Fiscal 2010 guidance projects total revenue down 1% to 4% and net income down 10% to 12%, with interest on client funds expected to fall 25% to 30%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed July 20, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $2.08B$2.07B | +0.8% |
| SG&A Expenses | $597.10M$577.32M | +3.4% |
| Operating Expenses | $1.28B$1.24B | +3.2% |
| Operating Income | $805.20M$828.27M | −2.8% |
| Net Income | $533.50M$576.14M | −7.4% |
| EPS (Basic) | $1.48$1.56 | −5.1% |
| EPS (Diluted) | $1.48$1.56 | −5.1% |
| Shares Outstanding (Basic) | 360.80M368.42M | −2.1% |
| Shares Outstanding (Diluted) | 361.00M369.53M | −2.3% |
05—Questions
Frequently Asked Questions
Why did Paychex's net income decline in fiscal 2009?
The filing attributes the decline mainly to lower interest on funds held for clients and lower investment income, which fell as average interest rates dropped and client fund balances shrank. Interest on funds held for clients and investment income combined decreased 48%, or $76.0 million, and reduced diluted EPS by $0.14. Operating expenses rose 3% to $1.28 billion.
How did the client base and retention change?
The client base declined 3.1% to about 554,000 clients as of May 31, 2009, from about 572,000 a year earlier. New business starts fell 19%, and clients lost due to companies going out of business or having no employees rose 17%. Client retention was about 77%, slightly below historical levels.
What is the outlook for fiscal 2010?
Management projects total revenue down 1% to 4% and net income down 10% to 12%. It expects interest on funds held for clients to decline 25% to 30% and investment income to fall 30% to 35%, as lower rates and reinvestment of maturing securities reduce yields. Operating income net of certain items is expected to be 34% to 35% of service revenue.
Does Paychex carry debt, and how is it funded?
Paychex reported no debt as of May 31, 2009. Its primary cash source is operating cash flow, which was $688.8 million in fiscal 2009. The company also has four uncommitted short-term lines of credit and a $400 million credit facility for client fund obligations, none of which were drawn during fiscal 2009.
What legal risks does the filing disclose?
The company holds a $20.4 million reserve for pending litigation. The most significant matter is the Brunskill Associates case against subsidiary Rapid Payroll, in which a jury awarded $15.0 million in compensatory damages and $11.0 million in punitive damages in 2007. Paychex is appealing the verdict, and any final judgment could carry statutory interest.
06—Continue