01—Abstract
Summary
Summary of the 10-K filed July 22, 2016. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. reported fiscal 2016 (year ended May 31, 2016) results showing growth across its core business.
Total revenue rose 8% to $2.95 billiona, service revenue rose 8% to $2.91 billion, and operating income rose 9% to $1.15 billion ($1,146.6 million). Net income increased 12% to $756.8 million, and diluted earnings per share increased 13% to $2.09. Payroll service revenue grew 4% to $1.73 billion, while HRS revenue grew 13% to $1.18 billion.
Payroll client base grew 2% to approximately 605,000 clients, and client retention was in excess of 82%. The filing attributes part of the earnings growth to a first-quarter net tax benefit of about $0.05b per diluted share related to prior-year income from customer-facing software. Excluding this benefit, net income and diluted EPS would have increased 9% and 10%, respectively.
Paychex acquired Advance Partners in December 2015 for a base purchase price of $190.5 millionc plus debt settlement of $118.4 million, net of $12.8 million cash acquired. The company carries no debt, held cash and total corporate investments of $793.2 million, and paid dividends of $606.5 million, equal to 80% of net income. Operating cash flow exceeded $1.0 billion for the first time, at $1,018.2 million.
For fiscal 2017, management guided to total service revenue growth of 7% to 8%, HRS revenue growth of 12% to 14%, and net income growth of approximately 8% excluding the prior-year tax benefit. The filing also notes that the quarterly dividend was raised to $0.46d per share from $0.42, announced July 7, 2016. The company's interest on funds held for clients is sensitive to interest rates, which remained low, with a combined average return of 1.1% for fiscal 2016.
02—Key points
Key Highlights
- Total revenue of $2,951.9 million, up 8%; net income of $756.8 million, up 12%; diluted EPS of $2.09, up 13%.
- Operating income of $1,146.6 million, up 9%; service revenue of $2,905.8 million, up 8%.
- HRS revenue rose 13% to $1.18 billion, led by Paychex HR Services with 944,000 client worksite employees and 35,000 clients.
- Net tax benefit in Q1 added about $0.05 to diluted EPS; excluding it, net income and diluted EPS would have grown 9% and 10%.
- Operating cash flow was $1,018.2 million, the first year above $1.0 billion; the company has no debt and $793.2 million in cash and corporate investments.
- Shareholder returns: dividends of $606.5 million (80% of net income) and $107.9 million of share repurchases; quarterly dividend raised to $0.46 from $0.42 after year-end.
- Fiscal 2017 guidance: total service revenue growth of 7% to 8%, net income growth of about 8% excluding the prior-year tax benefit, and an effective tax rate of 35.5% to 36%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed July 22, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $2.95B$2.74B | +7.7% |
| SG&A Expenses | $948.20M$878.00M | +8.0% |
| Operating Expenses | $1.81B$1.69B | +7.1% |
| Operating Income | $1.15B$1.05B | +8.8% |
| Interest Expense | $1.10M$700K | +57.1% |
| Net Income | $756.80M$674.90M | +12.1% |
| EPS (Basic) | $2.10$1.86 | +12.9% |
| EPS (Diluted) | $2.09$1.85 | +13.0% |
| Shares Outstanding (Basic) | 360.70M362.90M | −0.6% |
| Shares Outstanding (Diluted) | 362.50M364.60M | −0.6% |
05—Questions
Frequently Asked Questions
What drove revenue growth in fiscal 2016?
Total service revenue rose 8% to $2.91 billion. Payroll service revenue increased 4% to $1.73 billion, driven by client base growth and higher revenue per check. HRS revenue increased 13% to $1.18 billion, driven by growth across comprehensive outsourcing, retirement services, time and attendance, and HR services.
How much of the fiscal 2016 earnings growth came from the one-time tax benefit?
The first-quarter net tax benefit for income derived in prior tax years from customer-facing software increased full-year diluted EPS by approximately $0.05. Excluding it, net income would have increased 9% and diluted EPS 10%, rather than 12% and 13%.
What is Paychex's financial position and capital allocation?
Paychex had cash and total corporate investments of $793.2 million and no debt as of May 31, 2016. It paid $606.5 million in dividends, equal to 80% of net income, and repurchased $107.9 million of common stock. Operating cash flow was $1,018.2 million, and a new $350 million repurchase program was approved in July 2016.
What did the company acquire and what are the financial terms?
In December 2015 a subsidiary acquired substantially all net assets of Advance Partners, a provider of services to independent staffing firms. The consideration was a base purchase price of $190.5 million plus immediate settlement of $118.4 million of debt, net of $12.8 million in cash acquired. The company concluded the acquisition was not material to its results.
What is the outlook for fiscal 2017?
Management expects payroll service revenue to increase about 4%, HRS revenue to grow 12% to 14%, and total service revenue to grow 7% to 8%. Net income is expected to rise about 8% excluding the fiscal 2016 tax benefit, with capital expenditures of $110 million to $120 million and an effective tax rate of 35.5% to 36%.
06—Continue