ROCHESTER, N.Y.--(BUSINESS WIRE)--Paychex, Inc. (the “Company,” “Paychex,” “we,” “our,” or “us”) (Nasdaq:PAYX) today announced service revenue was $968.9 million for the three months ended November 30, 2020 (the “second quarter”), consistent with the prior year period. Total revenue decreased 1% from the prior year period to $983.7 million for the second quarter. Net income increased 5% to $272.4 million and diluted earnings per share increased 4% to $0.75 per share for the second quarter, each compared to the prior year period. Adjusted net income⁽¹⁾ and adjusted diluted earnings per share, both non-GAAP measures, increased 4% from the prior year period to $264.8 million and $0.73 per share, respectively, for the second quarter.

Martin Mucci, President and Chief Executive Officer, commented, “Financial results for the second quarter showed continued recovery in our key business metrics. The effects of the COVID-19 pandemic impacted our results and year-over-year comparisons; however, client retention remains strong, and our sales performance has resulted in year-over-year growth in the number of clients sold and serviced. We remain focused on providing excellent customer service, human resource (“HR”) expertise, and product innovations to support our clients through the challenges of the pandemic. In addition, our margins have demonstrated sequential improvement as our cost-saving initiatives have proceeded as expected.”

Mucci added, “More than ever before, companies are turning to technology solutions to maintain operations, stay connected with employees, and keep their people productive. We recently introduced additional enhancements to our Paychex Flex^® platform to help our clients manage risk, stay compliant, better assess performance, and adapt to mobile and artificial intelligence-driven trends. Headlining these product releases are an Apple Watch^®/Google Assistant™ device integration allowing employees greater access to their information, a professional employer organization (“PEO”) Protection Plus Package to protect clients against unforeseen costs, and additional forward-looking solutions in our platform to help employers and their employees complete key tasks quickly, safely, and accurately in a paperless, mobile fashion. We believe our continuing investments in our service delivery platforms strongly position us to meet the demands of the current business environment and support employers no matter where they are in their HR journey.”

Results of operations for the second quarter improved but continued to be impacted by the COVID-19 pandemic. Total revenue and adjusted diluted earnings per share grew 6% and 16%, respectively, since the three months ended August 31, 2020 (the “first quarter”) and year-over-year second quarter results showed marked improvement from the first quarter.

Management Solutions revenue was $732.8 million for the second quarter, an increase of 1% compared to the prior year period. The growth was primarily driven by increases in our client base and increased penetration of our suite of solutions, particularly HR outsourcing, time and attendance, and retirement services, partially offset by a decline in check volumes.

PEO and Insurance Solutions revenue was $236.1 million for the second quarter, a decrease of 3% compared to the prior year period. The decrease was primarily driven by a decline in the number of our clients’ worksite employees. Insurance Solutions revenue declined as a result of lower workers’ compensation premiums driven by reduced wages due to fewer worksite employees for certain industries and related premium rates.

Interest on funds held for clients decreased 25% to $14.8 million for the second quarter, compared to the prior year period. The decrease resulted from lower average investment balances, average interest rates, and realized gains. Funds held for clients’ average investment balances were impacted by lower client fund collections and changes in client base mix, offset by timing of collections and remittances and wage inflation.

Average investment balances and interest rates are summarized below:

	For the three months ended								For the six months ended
	November 30,								November 30,
$ in millions	2020			2019			Change		2020			2019			Change
Average investment balances:
Funds held for clients	$	3,581.4		$	3,726.3		(4	)%	$	3,544.3		$	3,735.5		(5	)%
Corporate cash equivalents and investments	$	964.9		$	788.5		22	%	$	993.6		$	825.2		20	%

Average interest rates earned (exclusive of net realized gains/(losses)):
Funds held for clients		1.6	%		2.0	%				1.6	%		2.1	%
Corporate cash equivalents and investments		0.2	%		1.7	%				0.2	%		1.9	%

Total net realized gains	$	0.4		$	0.9				$	0.7		$	1.8

Total expenses decreased approximately 3% to $629.4 million for the second quarter compared to the prior year period. This decrease in total expenses was driven by lower discretionary spending, reduced facilities costs resulting from cost-saving initiatives, and amortization of intangible assets.

Operating income increased 4% to $354.3 million for the second quarter compared to the prior year period. Operating margin (operating income as a percentage of total revenue) was 36.0% for the second quarter, compared to 34.5% for the prior year period.

Our effective income tax rate was 22.1% for the second quarter compared to 23.2% for the prior year period. The effective income tax rates in both periods were impacted by the recognition of net discrete tax benefits related to employee stock-based compensation payments.

Year-To-Date Fiscal 2021 Key Points

The key points for the six months ended November 30, 2020 (the “six months”) are as follows:

Total revenue decreased 3% to $1.9 billion.
Operating income decreased 8% to $638.3 million. Adjusted operating income⁽¹⁾ decreased 3% to $670.5 million.
Diluted earnings per share decreased 8% to $1.34 per share. Adjusted diluted earnings per share⁽¹⁾decreased 4% to $1.36 per share.

Adjusted operating income and adjusted diluted earnings per share include adjustments for one-time costs of $32.2 million related to the acceleration of cost-saving initiatives, including the long-term strategy to reduce our geographic footprint and headcount optimization, and net tax windfall benefits related to employee stock-based compensation payments.

⁽¹⁾

Adjusted operating income and adjusted diluted earnings per share are not U.S. GAAP measures. Please refer to the “Non-GAAP Financial Measures” section on page 4 of this press release for a discussion of these non-GAAP measures and a reconciliation to the most comparable U.S. GAAP measures of operating income and diluted earnings per share.

Financial Position and Liquidity

As of November 30, 2020, our financial position remained strong with cash, restricted cash, and total corporate investments of $963.4 million. Total short-term and long-term borrowings, net of debt issuance costs, were $803.9 million as of November 30, 2020. Our positive cash flows have historically allowed us to support our business and to pay substantial dividends to our stockholders. We currently anticipate that cash, restricted cash, and total corporate investments as of November 30, 2020, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, share repurchases, and dividend payments for the foreseeable future. Our strong balance sheet and operational flexibility have allowed us to successfully manage through the ongoing impacts of the COVID-19 pandemic to date while protecting our cash flow and liquidity. We continue to evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and assess the potential impact on our business and financial position.

Cash flows from operations were $430.7 million for the six months, a decrease of 24% from the prior year period. The decrease in our operating cash flows was driven by lower net income and changes in our operating assets and liabilities. The changes in our operating assets and liabilities were primarily driven by an increase in accounts receivable balances due to growth in our business, offset by an increase in other long-term liabilities.

During the six months, we paid dividends of $446.7 million and repurchased 0.4 million shares of our common stock for a total of $28.8 million. In the respective prior year period, we paid dividends of $444.3 million and repurchased 2.0 million shares of our common stock for a total of $171.9 million.

Non-GAAP Financial Measures

	For the three months ended						For the six months ended
	November 30,						November 30,

$ in millions	2020		2019⁽¹⁾		Change		2020⁽¹⁾		2019		Change
Operating income	$	354.3	$	341.7	4	%	$	638.3	$	690.8	(8	)%
Non-GAAP adjustments:
Cost-saving initiatives⁽²⁾		1.0		—				32.2		—
Total non-GAAP adjustments		1.0		—				32.2		—
Adjusted operating income	$	355.3	$	341.7	4	%	$	670.5	$	690.8	(3	)%

Net income	$	272.4	$	258.7	5	%	$	484.0	$	522.9	(7	)%
Non-GAAP adjustments: