SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 25, 2001
(Date of earliest event reported)
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-11330 16-1124166
(State of incorporation) (Commission (IRS Employer
File Number) Identification Number)
911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397
(Address of principal executive offices) (Zip Code)
(716) 385-6666
(Registrant's telephone number, including area code)
ITEM 9. REGULATION FD DISCLOSURE
The registrant's press release dated June 25, 2001, which reports its financial
results for the fiscal year ended May 31, 2001, is attached. In addition, this
report includes Management's Discussion and Analysis of Financial Condition and
Results of Operations, which reviews the Company's results of operations for the
three years ended May 31, 2001, 2000 and 1999, and its financial condition at
May 31, 2001.
The attached Management's Discussion and Analysis is not a complete and
comprehensive Management's Discussion and Analysis as required by the
Securities and Exchange Commission for Annual Reports filed on Form 10-K or
Quarterly Reports on Form 10-Q. The Company expects to file its 2001 Form 10-K
with the Securities and Exchange Commission and mail the 2001 Annual Report to
Shareholders in August 2001. The 2001 Annual Report to Shareholders and Form
10-K will contain a complete set of audited Consolidated Financial Statements
and Notes to Consolidated Financial Statements and a complete Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the Years ended May 31, 2001, 2000 and 1999, and Financial Condition at May 31,
2001.
All information included in this Form 8-K is qualified by the cautionary
statement in Exhibit 99.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAYCHEX, INC.
Date: June 25, 2001 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: June 25, 2001 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
FOR IMMEDIATE RELEASE
John M. Morphy, Chief Financial Officer or Jan Shuler 716-383-3406
Access the Webcast of the Paychex, Inc. Year End and Fourth Quarter
Earnings Release Conference Call scheduled for June 25, 2001 at 11:00
a.m. Eastern Standard Time at
http://www.paychex.com/paychex/finance/finance.html.
Paychex, Inc. news releases, current financial information, related SEC
filings and Investor Relations presentation are accessible at the same
Web site.
PAYCHEX, INC. REPORTS RECORD YEAR-END AND FOURTH QUARTER RESULTS
ROCHESTER, NY, June 25, 2001 -- Paychex, Inc. (NASDAQ: PAYX) today announced
record net income of $254.9 million, or $.68 diluted earnings per share, for
the fiscal year ended May 31, 2001, a 34% increase over net income of $190.0
million, or $.51 diluted earnings per share, for the prior year. Total
revenues were $869.9 million, an increase of 19% over $728.1 million for the
prior year.
For the fourth quarter ended May 31, 2001, net income increased 31% to $67.8
million, or $.18 diluted earnings per share, as compared to $51.6 million, or
$.14 diluted earnings per share, for the same period last year. Total revenues
were $228.6 million, an increase of 16% over $197.2 million for the prior year
fourth quarter.
PAYROLL SEGMENT
For the year ended May 31, 2001, operating income for the Payroll segment
increased 21% to $366.5 million from $303.4 million for the prior fiscal year.
Total Payroll segment revenues were $772.0 million, an increase of 18% over
$653.2 million for the prior year.
For the fourth quarter ended May 31, 2001, operating income for the Payroll
segment increased 17% to $94.4 million from $80.9 million for the same period
last year. Total Payroll segment revenues were $201.8 million, an increase of
15% over $175.6 million for the prior year fourth quarter.
The increases in total Payroll segment revenues and operating income reflect
continued growth in the client base, increased utilization of ancillary
services, and leveraging of operating expenses. In addition, the Payroll
segment benefited from growth in the interest on funds held for clients due to
higher daily client balances and net realized gains. The full year period also
reflected higher comparable average rates of return.
As of May 31, 2001, 83% of Paychex clients utilized Taxpay (Registered
Trademark), the Company's tax filing and payment feature. The Company's
Employee Pay Services, which includes Direct Deposit, Readychex and Access Card
products, was utilized by 53% of its clients. Major Market Services revenue
increased 56% and 58% for the fourth quarter and the fiscal year to $13.5
million and $47.4 million, respectively.
HUMAN RESOURCE AND BENEFITS SEGMENT
For the year ended May 31, 2001, operating income for the Human Resource and
Benefits segment increased 62% from $23.4 million to $37.9 million. Human
Resource and Benefits service revenue was $97.9 million, an increase of 31%
over $74.9 million for the prior fiscal year. For the fourth quarter ended May
31, 2001, operating income for the Human Resource and Benefits segment
increased 73% from $6.3 million to $10.9 million. Human Resource and Benefits
service revenue was $26.8 million, an increase of 24% over $21.6 million for
the fourth quarter last year.
The increases in service revenue and operating income are primarily related to
increases in clients for 401(k) Recordkeeping, Workers' Compensation
Insurance, Section 125, PAS and PEO services. 401(k) Recordkeeping revenue
increased 26% and 36% for the fourth quarter and the full year period to $11.5
million and $43.0 million, respectively.
CORPORATE EXPENSES
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. For the year ended May 31, 2001, corporate expenses decreased
0.3% from $67.9 million to $67.7 million. For the quarter ended May 31, 2001,
corporate expenses increased 1.7% to $17.8 million from $17.5 million. The
relatively flat year-over-year comparisons reflect additional employees and
other expenditures to support the growth of the Company's service operations
and sales force offset by lower spending on national marketing efforts and
other areas in fiscal 2001.
INVESTMENT INCOME
Investment income for fiscal year 2001 increased 66% to $27.3 million from
$16.5 million in the prior year. Investment income for the quarter ended May
31, 2001 increased 74% to $8.5 million from $4.9 million for the fourth quarter
of fiscal 2000. The increases are due to higher balances of investments and
net realized gains on the sale of available-for-sale securities. The full year
period also benefited from higher comparable average rates of return.
INCOME TAXES
The income tax rates for the fourth quarter and the year ended May 31, 2001
were 29.5% and 30.0%, respectively, as compared to 31.0% for the same periods
last year.
B. Thomas Golisano, Chairman, President and Chief Executive Officer of Paychex,
said, "We are pleased with our financial results for the fourth quarter and
fiscal year. We have completed our eleventh straight year of record revenues
and net income and our tenth consecutive year of net income growth exceeding
30%. These results have been achieved by applying our growth strategy -
increasing our client base, increasing client utilization of ancillary
services, developing new services and leveraging our infrastructure. Looking
ahead to fiscal 2002, we recognize interest rate reductions will impact
year-over-year net income growth. However, we expect to continue to generate
record revenues and net income with total revenue growth in the range of 16% to
18%."
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For the three For the twelve
months ended months ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Payroll $179,154 $157,401 $688,650 $594,445
Human Resource and Benefits 26,801 21,580 97,871 74,874
-------- -------- -------- --------
Total service revenues 205,955 178,981 786,521 669,319
Interest on funds held
for clients 22,665 18,205 83,336 58,800
-------- -------- -------- --------
Total revenues 228,620 197,186 869,857 728,119
Operating costs 52,954 46,795 200,352 173,481
Selling, general and
administrative expenses 88,097 80,593 332,803 295,745
-------- -------- -------- --------
Operating income 87,569 69,798 336,702 258,893
Investment income 8,546 4,925 27,279 16,479
-------- -------- -------- --------
Income before income taxes 96,115 74,723 363,981 275,372
Income taxes 28,354 23,164 109,112 85,365
-------- -------- -------- --------
Net income $ 67,761 $ 51,559 $254,869 $190,007
======== ======== ======== ========
Basic earnings per share $ .18 $ .14 $ .68 $ .51
======== ======== ======== ========
Diluted earnings per share $ .18 $ .14 $ .68 $ .51
======== ======== ======== ========
Weighted-average common shares
outstanding 373,455 371,576 372,777 370,603
======== ======== ======== ========
Weighted-average shares assuming
dilution 377,397 376,407 377,510 375,081
======== ======== ======== ========
Cash dividends per common share $ .09 $ .06 $ .33 $ .22
======== ======== ======== ========
(A) Certain amounts for the three- and twelve-month periods ended May 31, 2000
have been reclassified to conform to the current year presentation.
(B) Further information on interest on funds held for clients and investment
income can be found in the Company's SEC filings under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and subheadings "Results of Operations" and "Market Risk
Factors." These SEC filings are accessible at the Company's Web site.
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
May 31, May 31,
2001 2000
---------- ----------
ASSETS
Cash and cash equivalents $ 45,784 $ 47,136
Corporate investments 568,217 412,357
Interest receivable 28,281 22,436
Accounts receivable 100,640 87,608
Deferred income taxes - 9,539
Prepaid expenses and other current assets 7,306 6,531
---------- ----------
Current assets before funds held for clients 750,228 585,607
Funds held for clients 2,041,045 1,776,968
---------- ----------
Total current assets 2,791,273 2,362,575
---------- ----------
Property and equipment - net 96,078 75,375
Goodwill and intangible assets - net 9,612 5,584
Deferred income taxes 1,361 2,494
Other assets 8,872 9,549
---------- ----------
Total assets $2,907,196 $2,455,577
========== ==========
LIABILITIES
Accounts payable $ 16,377 $ 17,086
Accrued compensation and related items 57,418 52,631
Deferred revenue 4,421 4,719
Accrued income taxes 9,783 2,969
Deferred income taxes 4,996 --
Other current liabilities 19,282 24,400
---------- ----------
Current liabilities before client funds deposits 112,277 101,805
Client funds deposits 2,031,565 1,785,140
---------- ----------
Total current liabilities 2,143,842 1,886,945
Long-term liabilities 5,512 5,200
---------- ----------
Total liabilities 2,149,354 1,892,145
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 600,000
authorized shares
Issued: 373,647/May 31, 2001 and
371,769/May 31, 2000 3,736 3,718
Additional paid-in capital 139,897 98,904
Retained earnings 601,142 469,385
Accumulated other comprehensive income/(loss) 13,067 (8,575)
---------- ----------
Total stockholders' equity 757,842 563,432
---------- ----------
Total liabilities and stockholders' equity $2,907,196 $2,455,577
========== ==========
PAYCHEX, INC.
BUSINESS SEGMENT INFORMATION
(In thousands)
The Company has two business segments: Payroll and Human Resource and Benefits.
The Payroll segment is engaged in the preparation of payroll checks, internal
accounting records, federal, state and local payroll tax returns, and
collection and remittance of payroll obligations for small- to medium-sized
businesses. The Human Resource and Benefits segment specializes in providing
small- to medium-sized businesses with cost-effective outsourcing solutions for
their employee benefits. Human Resource and Benefits products include 401(k)
Plan Recordkeeping, Workers' Compensation Insurance Administration, Section 125
Plan Administration, Group Benefits, State Unemployment Insurance, Employee
Handbooks and Management Services, Paychex Administrative Services (PAS) and
Professional Employer Organization (PEO) services. Corporate expenses are
primarily related to the Information Technology, Organizational Development,
Finance, Marketing and Senior Management functions of the Company.
For the three For the twelve
months ended months ended
May 31, May 31, May 31, May 31,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Payroll service revenue $179,154 $157,401 $688,650 $594,445
Interest on funds held for clients 22,665 18,205 83,336 58,800
-------- -------- -------- --------
Total Payroll segment revenues 201,819 175,606 771,986 653,245
Human Resource and Benefits
service revenue 26,801 21,580 97,871 74,874
-------- -------- -------- --------
Total revenues $228,620 $197,186 $869,857 $728,119
======== ======== ======== ========
Operating income:
Payroll $ 94,377 $ 80,926 $366,498 $303,360
Human Resource and Benefits 10,948 6,331 37,890 23,395
-------- -------- -------- --------
Segment operating income 105,325 87,257 404,388 326,755
Corporate expenses 17,756 17,459 67,686 67,862
-------- -------- -------- --------
Total operating income 87,569 69,798 336,702 258,893
Investment income 8,546 4,925 27,279 16,479
-------- -------- -------- --------
Income before income taxes $ 96,115 $ 74,723 $363,981 $275,372
======== ======== ======== ========
(A) Certain amounts for the three- and twelve-month periods ended May 31, 2000
have been reclassified to conform to the current year presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the Company's operating results for each of the three fiscal
years in the period ended May 31, 2001 (fiscal 2001, 2000, and 1999), and its
financial condition at May 31, 2001. This review provides additional analysis
and disclosure than that contained in the Company's June 25, 2001 press
release, which precedes this discussion.
This review is not a complete and comprehensive discussion and analysis as
required by the Securities and Exchange Commission for Annual Reports filed on
Form 10-K or Quarterly Reports on Form 10-Q. The Company expects to file its
2001 Form 10-K with the Securities and Exchange Commission and mail the 2001
Annual Report to Shareholders in August 2001. The 2001 Annual Report to
Shareholders will contain a complete set of audited Consolidated Financial
Statements and Notes to Consolidated Financial Statements and a complete
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Years ended May 31, 2001, 2000 and 1999, and Financial
Condition at May 31, 2001.
Forward-looking statements in this Management's Discussion and Analysis are
qualified by the cautionary statement in Exhibit 99, contained in this Form
8-K.
RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
In thousands, except per
share amounts 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Total revenues $869,857 19.5% $728,119 21.9% $597,296
Combined operating & SG&A
expenses $533,155 13.6% $469,226 14.5% $409,734
Operating income $336,702 30.1% $258,893 38.0% $187,562
Operating margin 38.7% 35.6% 31.4%
Income before income taxes $363,981 32.2% $275,372 37.6% $200,143
Net income $254,869 34.1% $190,007 36.6% $139,099
% of total revenues 29.3% 26.1% 23.3%
Basic earnings per share $ .68 33.3% $ .51 34.2% $ .38
Diluted earnings per share $ .68 33.3% $ .51 37.8% $ .37
===============================================================================
The financial results for Paychex, Inc. in fiscal 2001 reflect the eleventh
consecutive year of record service revenues and net income, and the tenth
consecutive year of net income growth of 30% or more. The Company's ability to
grow its client base, increase client utilization of ancillary services,
develop new services, implement price increases and decrease operating expenses
as a percent of total revenues has driven the increases in total revenues and
net income in fiscal 2001 and fiscal 2000.
The increases in combined operating and selling, general and administrative
(SG&A) expenses reflect increases in personnel, information technology and
facility costs necessary to support the growth of the Company. At the end of
fiscal 2001, the Company had 7,300 employees compared with 6,200 at the end of
fiscal 2000. In fiscal 2002, combined operating and SG&A costs are expected to
grow at a rate slightly below the growth rates experienced in fiscal 2001.
The increase in operating income and the improvement in operating margins
reflect the Company's ability to add profitable ancillary services and leverage
its infrastructure to grow profits faster than revenue growth.
In fiscal 2001, total revenues and net income benefited from higher comparable
average rates of interest earned and net realized gains on available-for-sale
securities related to the funds held for clients and corporate investments
portfolios. The recent trend of interest rate reductions is evidenced by the
Federal Funds rate moving from 6.50% at the beginning of January 2001 to 4.00%
at the end of May 2001. Looking ahead to fiscal 2002, the interest rate
reductions will impact year-over-year net income growth. The Company expects
to continue to generate record revenues and net income with total revenue
growth in the range of 16% to 18%.
In fiscal 2001, 2000 and 1999, the Company had two reportable business
segments: Payroll and Human Resource and Benefits.
Payroll segment
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Service revenue $688,650 15.8% $594,445 20.6% $492,914
Interest on funds held for clients $ 83,336 41.7% $ 58,800 12.4% $ 52,335
--------------------------------------------
Total payroll segment revenues $771,986 18.2% $653,245 19.8% $545,249
Operating income $366,498 20.8% $303,360 27.9% $237,236
Operating margin 47.5% 46.4% 43.5%
===============================================================================
Revenues: Total Payroll segment revenues include service fees and interest on
funds held for clients. Service fee revenue is earned primarily from Payroll,
Taxpay, Employee Pay Services and other ancillary services. The Employee Pay
Services includes the Direct Deposit, Readychex, and Access Card products. In
addition to service fees paid by clients, the Company earns interest on Taxpay
and Employee Pay Services funds that are collected before due dates and
invested (funds held for clients) until remittance to the applicable tax
authorities for Taxpay clients and employees of Employee Pay Services clients.
Interest on funds held for clients is included in total revenues on the
Consolidated Statements of Income as the collection, holding and remittance of
these funds is a critical component of providing these particular product
services. Interest on funds held for clients also includes net realized gains
and losses from the sale of available-for-sale securities.
The increases in Payroll service revenue are primarily related to the addition
of new clients, new services, price increases and increased utilization of
ancillary services, by both new and existing clients. At May 31, 2001, 83% of
Paychex clients utilized Taxpay, the Company's tax filing and payment feature,
compared with 81% at the end of 2000 and 79% at the end of 1999. Client
utilization of the Taxpay product is expected to mature within a range of 83%
to 87%. The Company's Employee Pay Services was utilized by 53% of clients at
May 31, 2001, versus 47% and 42% at May 31, 2000 and 1999, respectively.
During fiscal 2001 and 2000, the Company continued expansion of its Major
Market Services (MMS) payroll product offering. MMS is now available in
approximately one-half the markets served by the Company. MMS revenues totaled
$47.4 million, $30.0 million and $19.3 million in fiscal 2001, 2000 and 1999,
respectively. This represents year-over-year revenue growth of 58% for fiscal
2001 and 55% for fiscal 2000. Employee Pay Services and MMS are expected to
provide continuing revenue growth opportunities for fiscal 2002 and beyond. In
fiscal 2001, the Company introduced new payroll product enhancements including
Employee Garnishments and "After-The-Fact" payroll. Fiscal 2002's percentage
growth in Payroll service revenue is expected to be in the range of 16% to 18%.
In fiscal 2001 and 2000, interest on funds held for clients increased due to
growth in the utilization of Taxpay and Employee Pay Services by new and
existing clients and higher average daily balances. Average daily portfolio
balances for funds held for clients were approximately $1.7 billion, $1.4
billion, and $1.1 billion in fiscal 2001, 2000, and 1999, respectively. The
significantly higher percentage growth in interest on funds held for clients in
fiscal 2001 reflects the benefit of higher comparable average rates of return
and net realized gains on the sale of available-for-sale securities. In fiscal
2001, interest on funds held for clients included net realized gains of $5.7
million compared with net realized losses of $2.9 million and net realized
gains of $2.4 million in fiscal 2000 and 1999, respectively. During the third
and fourth quarters of fiscal 2001, market rates of interest declined
significantly with the Federal Funds rate decreasing 2.50 percentage points
during the period. Due to the decrease in interest rates, the Company expects
that interest on funds held for clients in fiscal 2002 will be lower than in
fiscal 2001. For further discussion of interest rates and related risks, refer
to the "Market Risk Factors" section of this review.
Operating income: Operating income for 2001 and 2000 increased as a result of
the increases in Payroll service revenue and interest on funds held for clients
and continued leveraging of the segment's operating expense base as evidenced
by the improvement in operating margins year-over-year.
Effective September 1, 1999, the Company increased its sales force compensation
package by approximately $6.0 million on an annualized basis to increase the
retention and quality of its payroll sales representatives. This compensation
increase resulted in additional expense of approximately $4.5 million in fiscal
2000 and $1.5 million in the first quarter of fiscal 2001 when compared to the
prior years.
Human Resource and Benefits
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Service revenue $97,871 30.7% $74,874 43.9% $52,047
Operating income $37,890 62.0% $23,395 111.3% $11,072
Operating margin 38.7% 31.2% 21.3%
===============================================================================
Revenues: The significant increases in service revenue for 2001 and 2000 are
primarily related to increasing 401(k) Recordkeeping, Workers' Compensation
Insurance Administration and Section 125 clients, and PAS and PEO client
employees serviced. At May 31, 2001, over 19,000 clients utilized the
Company's 401(k) Recordkeeping service, and over $1.7 billion of client
employee funds were managed externally. The growth in 401(k) clients reflects
the continuing interest of small- to medium-sized businesses in offerering
retirement savings benefits to their employees. 401(k) Recordkeeping revenues
were $43.0 million, $31.5 million and $19.7 million in fiscal 2001, 2000 and
1999, respectively. This represents year-over-year growth of 36% in fiscal
2001 and 60% in fiscal 2000. The Company continued to expand its Workers'
Compensation Insurance Administration product, which provides insurance for
qualified clients through leading insurance providers and a reporting method to
stabilize their cash flows throughout the year.
In fiscal 2000, the Company began a nationwide expansion of its Paychex
Administrative Services (PAS) product, a combined package of payroll, employer
compliance, employee benefit administration, and risk management outsourcing
services designed to make it easier for small businesses to manage their
payroll and related benefit costs. Expansion efforts continued throughout
fiscal 2001, and the PAS product is now available nationwide. The Company
operates a Professional Employer Organization (PEO) which provides the same
combined package of services as the PAS product, but as a co-employer of the
client's employees. The Company's PEO service is primarily focused in the
states of Florida and Georgia where PEO's are popular and operate under an
attractive regulatory environment. At the end of fiscal 2001, the PAS and PEO
products serviced over 60,000 client employees.
Operating income: For 2001 and 2000, the increases in operating income are
primarily related to the service revenue gains and the leveraging of operating
expenses.
Full-year fiscal 2002's Human Resource and Benefits service revenue is expected
to grow at a rate slightly higher than in fiscal 2001. Fiscal 2002's
quarter-over-quarter percentage comparisons in Human Resource and Benefits
revenue and operating income may vary significantly throughout the year, and
any one particular quarter's results may not be indicative of expected
full-year results.
Corporate expenses
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Corporate expenses $67,686 -.3% $67,862 11.7% $60,746
===============================================================================
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing, and Senior Management functions
of the Company. Corporate expenses have increased primarily due to additional
employees and other expenditures required to support the continued growth of
the Company's service operations and sales force. In fiscal 2001, these
increases were offset by lower spending on national marketing efforts and other
areas, resulting in a relatively flat growth year-over-year. Looking forward,
the Company expects the growth in corporate expenses to be in the range of 10%
to 13% in fiscal 2002.
Investment income
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Investment income $27,279 65.5% $16,479 31.0% $12,581
===============================================================================
Investment income primarily represents earnings from the Company's cash and
cash equivalents and investments in available-for-sale securities. Investment
income does not include interest on funds held for clients, which are recorded
within the Payroll segment and total revenue. The increases in investment
income in fiscal 2001 and 2000 are primarily due to the increase in average
daily invested balances generated from increases in overall cash flows.
Average daily balances invested were $.6 billion, $.4 billion and $.3 billion
for fiscal 2001, 2000 and 1999, respectively. Fiscal 2001 also benefited from
higher comparable average rates of return and net realized gains on
available-for-sale securities. In fiscal 2001, investment income included net
realized gains on available-for-sale securities of $1.7 million compared to net
realized losses of $0.8 million in fiscal 2000 and net realized gains of $0.5
million in fiscal 1999. During the third and fourth quarters of fiscal 2001,
market rates of interest declined significantly with the Federal Funds rate
decreasing 2.50 percentage points during the period. As a result of the
decrease in interest rates, investment income for fiscal 2002 is expected to
grow at a rate significantly lower than in fiscal 2001. Refer to the "Market
Risk Factors" section of this review for further discussion of interest rates
and the related risks.
Income taxes
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Income taxes $109,112 27.8% $85,365 39.8% $61,044
Effective income tax rate 30.0% 31.0% 30.5%
===============================================================================
The change in the effective income tax rate in 2001 is due to the growth in
tax-exempt income exceeding the growth in taxable income and other tax
reduction opportunities. Tax-exempt income is derived primarily from income
earned on municipal debt securities. Fiscal 2002's effective income tax rate
is expected to approximate 31.0%.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Operating cash flows $304,938 22.5% $249,028 43.0% $174,120
===============================================================================
The increases in operating cash flows resulted primarily from the achievement
of higher net income. Projected operating cash flows are expected to
adequately support normal business operations, forecasted growth, purchases of
property and equipment and dividend payments. At May 31, 2001, the Company had
$614 million in available cash and corporate investments. The Company also had
$140 million of available, uncommitted, unsecured lines of credit and $350
million available under an uncommitted, secured line of credit.
Investing activities
-------------------------------------------------------------------------------
In thousands 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Net funds held for clients
and corporate investment
activities $(144,270) -- $(144,322) 74.5% $ (82,724)
Purchases of property and
equipment (45,250) 32.5% (34,154) 54.4% (22,116)
Proceeds from the sale of
property and equipment 32 -- 1,266 -- 12
Purchases of other assets (8,290) 19.0% (6,964) 94.0% (3,590)
-----------------------------------------------
Net cash used in investing
activities $(197,778) 7.4% $(184,174) 69.9% $(108,418)
===============================================================================
Funds held for clients and corporate investments: Funds held for clients are
primarily comprised of short-term funds and available-for-sale debt securities,
and corporate investments are primarily comprised of available-for-sale debt
securities.
The reported amount of funds held for clients will vary significantly based
upon the timing of collecting client funds, and the related remittance of funds
to the applicable tax authorities for Taxpay clients and employees of clients
utilizing Employee Pay Services. Corporate investments have increased due to
the investment of growing cash balances provided by operating activities offset
by purchases of property and equipment and dividend payments. At May 31, 2001
the total available-for-sale portfolio included unrealized gains of $20.5
million, compared to a portfolio at May 31, 2000 that included unrealized
losses of $13.4 million. Additional discussion of interest rates and related
risks is included in the "Market Risk Factors" section of this review.
Purchases of property and equipment: To support the Company's client and
ancillary product growth, investments are regularly made in data processing
equipment and software, and for the expansion and upgrade of various branch
facilities. In fiscal 2001, the Company made purchases of property and
equipment of $45.3 million compared with $34.2 million of purchases in fiscal
2000. In May 2001, the Company purchased a 135,000 square foot office facility
in Rochester for approximately $5.0 million. This facility will house a
centralized information technology data center and various other support
functions. As a result of this purchase, the Company has delayed previously
announced plans to construct a new 300,000 square foot building at an estimated
cost of $40 million. During fiscal 2000, the Company sold an office facility
in California for $1.2 million and purchased a branch office facility in
Pennsylvania for $6.1 million. Purchases of property and equipment in fiscal
2002 are expected to be in the range of $35 million to $40 million. Fiscal 2002
depreciation expense is projected to be approximately $28 million.
Effective June 1, 1999, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires the capitalization of internal use computer
software costs if certain criteria are met, including all external direct costs
for materials and services and certain payroll and related fringe benefit
costs. Prior to fiscal 2000, the Company expensed as incurred certain payroll
and related fringe benefit costs to develop and enhance its internal computer
programs and software. The effect of adopting the SOP increased net income by
approximately $3.2 million and $2.4 million for the years ended May 31, 2001
and May 31, 2000, respectively.
Financing activities
-------------------------------------------------------------------------------
In thousands, except per
share amounts 2001 Change 2000 Change 1999
-------------------------------------------------------------------------------
Dividends paid $(123,112) 50.9% $(81,583) 50.9% $(54,055)
Proceeds from exercise of
stock options 14,600 29.9% 11,242 103.1% 5,535
Other -- -- (69) 13.1% (61)
-------------------------------------------------
Net cash used in financing
activities $(108,512) 54.1% $(70,410) 44.9% $(48,581)
-------------------------------------------------------------------------------
Cash dividends per common
share $ .33 50.0% $ .22 46.7% $ .15
===============================================================================
Dividends paid: On October 10, 2000 and October 7, 1999, the Company increased
its quarterly cash dividend rate per share by 50%. Future dividends are
dependent on the Company's future earnings and cash flow. The Company has
declared three-for-two stock splits effected in the form of 50% stock dividends
on outstanding shares in May of 2000 and 1999.
Proceeds from exercise of stock options: The increase in proceeds from the
exercise of stock options is primarily due to an increase in the number of
shares exercised and higher comparable exercise prices per share. The Company
has recognized a tax benefit from the exercise of stock options of $26.4
million, $19.4 million and $16.3 million for fiscal 2001, fiscal 2000 and
fiscal 1999, respectively. This tax benefit reduces the accrued income tax
liability and increases additional paid-in capital, with no impact on the
expense amount for income taxes.
MARKET RISK FACTORS
Interest rate risk: Funds held for clients are primarily comprised of
short-term funds and available-for-sale debt securities, and corporate
investments are primarily comprised of available-for-sale debt securities. The
Company's available-for-sale debt securities are exposed to interest rate risk
as interest rate volatility will cause fluctuations in the market value of held
investments and the earnings potential of future investments. Decreases in
interest rates normally increase the market value of the available-for-sale
securities, while increases in interest rates decrease the market value of the
available-for-sale securities. The Company's available-for-sale securities and
short-term funds are exposed to earnings risk from changes in interest rates,
as rate volatility will cause fluctuations in the earnings potential of future
investments. Decreases in interest rates quickly decrease earnings from
short-term funds, and over time decrease earnings from the available-for-sale
securities portfolio. Increases in interest rates have the opposite earnings
effect on the available-for-sale securities and short-term funds. Earnings
from the available-for-sale securities do not reflect changes in rates until
the investments are sold or mature, and the proceeds are reinvested at current
rates. The immediate impact of changing interest rates on earnings from
short-term funds may be temporarily offset by realized gains or losses from
transactions in the Company's available-for-sale portfolio. The Company
estimates that the earnings effect of a 25 basis point change in interest rates
(17 basis points for tax-exempt investments) at this point in time would equate
to approximately $3.0 million for fiscal 2002.
The Company directs investments towards high credit-quality, tax-exempt
securities to mitigate the risk that earnings from the portfolio could be
adversely impacted by changes in interest rates in the near term. The Company
invests in short- to intermediate-term, fixed-rate municipal and government
securities, which typically have lower interest rate volatility, and manages
the securities portfolio to a benchmark duration of 2.5 to 3.0 years. The
Company does not utilize derivative financial instruments to manage interest
rate risk.
The recent trend in interest rates has been toward interest rate reductions
versus interest rate increases during fiscal 2000. The following table
summarizes the changes in the Federal Funds rate over the last three years:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Federal Funds rate - beginning of fiscal year 6.50% 4.75% 5.50%
Rate increase/(decrease):
First quarter - .50 -
Second quarter - .25 (.75)
Third quarter (1.00) .25 -
Fourth quarter (1.50) .75 -
------ ----- -----
Federal Funds rate - end of fiscal year 4.00% 6.50% 4.75%
================================================================================
Three Year "AAA" Municipal Securities
Yields at May 31: 3.44% 4.96% 3.85%
================================================================================
Calculating the future effects of changing interest rates involves many
factors. These factors include, but are not limited to, daily interest rate
changes, seasonal variations in investment balances, actual duration of short
and intermediate-term investments, the proportionate mix of taxable and
tax-exempt investments, and changes in tax-exempt municipal rates versus
taxable investment rates - which are not synchronized or simultaneous. Subject
to these factors, a 25 basis point change generally affects the Company's
tax-exempt interest rates by approximately 17 basis points. Realized gains are
more prevalent in a decreasing rate environment and realized losses are more
prevalent in an increasing rate environment. During fiscal 2001, the Company's
total investment portfolio averaged approximately $2.3 billion compared with an
average of $1.8 billion for fiscal 2000. The total investment portfolio is
expected to average $2.6 billion in fiscal 2002. The Company's normal and
anticipated allocation is approximately 50% invested in short-term securities
with a duration of less than 30 days and 50% invested in intermediate-term
municipal securities with an average duration of three years.
As of May 31, 2001, the available-for-sale securities included unrealized gains
of $20.5 million, compared with a portfolio at May 31, 2000 that included
unrealized losses of $13.4 million. In fiscal 2000, the available-for-sale
portfolio had a market value less than its cost basis as a result of the upward
trend in interest rates throughout the year. The decreasing interest rate
environment in fiscal 2001 resulted in the improvement in the market value of
the available-for-sale portfolio. As of May 31, 2001 and May 31, 2000, the
Company had $1.3 billion and $1.0 billion invested in available-for-sale
securities at fair value, with weighted average yields to maturity of 4.3% and
4.5%, respectively. Assuming a hypothetical decrease in interest rates of 25
basis points given the May 31, 2001 securities portfolios, the resulting
potential increases in fair value would be in the range of $7.5 million to $8.5
million. Conversely, a corresponding increase in interest rates would result
in a comparable decrease in fair value. This hypothetical decrease or increase
in the fair value of the portfolio would be recorded as an adjustment to the
portfolio's recorded value, with an offsetting amount recorded in stockholders'
equity, with no related or immediate impact to the results of operations.
Credit risk: The Company is exposed to credit risk in connection with these
investments through the possible inability of the borrowers to meet the terms
of the bonds. The Company attempts to limit credit risk by investing primarily
in AAA and AA rated securities and A-1 rated short-term securities, and by
limiting amounts that can be invested in any single instrument. At May 31,
2001, approximately 98% of the available-for-sale securities held an AA rating
or better, and all short-term securities classified as cash equivalents held an
A-1 or equivalent rating.
OTHER
Recently issued accounting standards: In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements." This SAB formalizes the SEC's position
on application of revenue recognition rules. The Company adopted SAB No. 101
in the fourth quarter of fiscal 2001 with no material impact on the Company's
results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement was most recently amended
in June 2000 by Statement of Financial Accounting Standard No. 138 "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - An
Amendment to FASB Statement No. 133." These statements are collectively
referred to as SFAS 133. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities and is
effective for fiscal years beginning after June 15, 2000. The Company will
adopt the provisions of SFAS No. 133 in the first quarter of fiscal 2002. The
Company currently does not utilize derivative instruments and does not expect
that adoption of SFAS No. 133 will have a significant effect on its
consolidated results of operations or financial position.
Exhibit 99: "Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by Paychex, Inc., (the "Company")
management may constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are identified by such words and phrases as "we expect", "expected to",
"estimates", "we look forward to", "would equate to", "are projected at", "we
believe", "could be" and other similar phrases. Because they are
forward-looking, they should be evaluated in light of important risk factors.
These risk factors include, but are not limited to, general market and economic
conditions, including demand for the Company's products and services,
availability of internal and external resources, executing expansion plans,
competition, and price levels; changes in the laws regulating collection and
payment of payroll taxes, professional employer organizations, and employee
benefits, including 401(k) plans, workers' compensation, state unemployment,
and section 125 plans; delays in the development, timing of the introduction,
and marketing of new products and services; changes in technology including the
use of the Internet; the possibility of catastrophic events that could impact
the Company's operating facilities, computer technology and communication
systems; and changes in short- and long-term interest rates, changes in market
value of available-for-sale securities and the credit rating of cash, cash
equivalents, and securities held in the Company's investment portfolios, all of
which could cause actual results to differ materially from anticipated results.
The information provided in this document is based upon the facts and
circumstances known at this time. The Company assumes no obligation to update
this document for new information subsequent to its issuance.