01—Abstract
Summary
Summary of the 10-K filed July 16, 2010. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. (PAYX) reported fiscal 2010 (year ended May 31, 2010) results marked by a weak economy.
Total revenue declined 4% to $2.0 billiona, with service revenue down 3% and interest on funds held for clients down 27% to $55.0 million. Operating income fell 10% to $724.8 million, and net income decreased 11% to $477.0 million, or $1.32 per diluted share. The filing attributes the decline to lower client counts (about 536,000 clients, down 3.2%), reduced checks per client, and lower interest rates.
A $18.7 millionb charge to increase the Rapid Payroll litigation reserve reduced diluted earnings per share by $0.03. The company ended the year with cash and total corporate investments of $656.9 million and no debt. Cash flow from operations decreased 11% to $610.9 million, and dividends of $448.6 million were paid, representing 94% of net income.
Management indicated that the key indicators showed modest improvement as the year progressed, including client losses down 6%c and checks per client up 1.1% in the fourth quarter. For fiscal 2011, management projects payroll service revenue to be flat, Human Resource Services revenue to rise 10% to 13%, and interest on funds held for clients to fall 12% to 17%. Net income is expected to improve slightly over fiscal 2010.
The filing also discloses that CEO Jonathan J. Judge resigned effective July 31, 2010, and that the company faces a pending New York State tax audit in which proposed adjustments exceed the recorded reserve.
02—Key points
Key Highlights
- Total revenue fell 4% to $2,000.8 million, while service revenue declined 3% to $1,945.8 million.
- Operating income decreased 10% to $724.8 million; excluding interest on funds held for clients and the litigation charge, operating income decreased 6% to $688.5 million.
- Net income declined 11% to $477.0 million, or $1.32 per diluted share, including an $18.7 million litigation reserve charge.
- Client base decreased 3.2% to approximately 536,000 clients, though client losses fell 6% compared with fiscal 2009.
- Human Resource Services revenue increased 3% to $540.9 million, led by growth in Paychex HR Solutions and insurance services.
- Cash and total corporate investments were $656.9 million with no debt; dividends paid totaled $448.6 million, or 94% of net income.
- CEO Jonathan J. Judge announced his resignation effective July 31, 2010; the company also received proposed New York State tax audit adjustments in excess of its reserve.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed July 16, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $2.00B$2.08B | −3.9% |
| SG&A Expenses | $622.40M$597.10M | +4.2% |
| Operating Expenses | $1.28B$1.28B | −0.1% |
| Operating Income | $724.80M$805.20M | −10.0% |
| Net Income | $477.00M$533.50M | −10.6% |
| EPS (Basic) | $1.32$1.48 | −10.8% |
| EPS (Diluted) | $1.32$1.48 | −10.8% |
| Shares Outstanding (Basic) | 361.40M360.80M | +0.2% |
| Shares Outstanding (Diluted) | 361.70M361.00M | +0.2% |
05—Questions
Frequently Asked Questions
How did Paychex perform financially in fiscal 2010?
Total revenue declined 4% to $2.0 billion and net income fell 11% to $477.0 million, or $1.32 per diluted share. The decline reflected weak economic conditions that reduced the client base and check volumes, along with lower interest income on client funds.
What is the outlook for fiscal 2011?
Management expects payroll service revenue to be flat and Human Resource Services revenue to increase 10% to 13%. Interest on funds held for clients is expected to decrease 12% to 17%, and net income is expected to improve slightly over fiscal 2010.
Is Paychex carrying significant debt?
No. As of May 31, 2010, Paychex reported no debt, and cash and total corporate investments totaled $656.9 million. The company also had four uncommitted, secured short-term lines of credit totaling $900 million, none of which were drawn.
What legal and regulatory matters could affect the company?
The company recorded an $18.7 million charge to increase its Rapid Payroll litigation reserve after a California court upheld a jury verdict. Separately, a New York State tax audit has produced proposed adjustments that exceed the recorded reserve, and the outcome could be materially adverse if unfavorable.
Why did the CEO leave, and who is managing the company in the interim?
President and CEO Jonathan J. Judge resigned effective July 31, 2010, and signed a separation agreement that includes a $1.9 million severance payment. Until a replacement is in place, an executive committee comprised of Delbert M. Humenik, John M. Morphy, and Martin Mucci will manage the company, with oversight from Chairman B. Thomas Golisano and the Board.
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