ROCHESTER, N.Y.--(BUSINESS WIRE)--Paychex, Inc. (NASDAQ:PAYX) today announced its results of operations for the three months ended May 31, 2016 (the “fourth quarter”), as well as the full year ended May 31, 2016 (“fiscal 2016” or the “fiscal year”). Total service revenue increased 9% to $741.6 million for the fourth quarter and 8% to $2.9 billion for the fiscal year, compared to the respective periods last year. Net income and diluted earnings per share each increased 11% to $178.1 million and $0.49 per share, respectively, for the fourth quarter. For the fiscal year, net income increased 12% to $756.8 million and diluted earnings per share increased 13% to $2.09 per share. During the three months ended August 31, 2015 (the “first quarter”), a net tax benefit was recorded for income derived in prior tax years that increased full year diluted earnings per share by approximately $0.05. Excluding this tax benefit, net income and diluted earnings per share would have increased 9% and 10%, respectively, for fiscal 2016.

Martin Mucci, President and Chief Executive Officer, commented, “We are pleased with our strong finish to fiscal 2016, closing the year with nearly $3 billion in total revenues, a new milestone for Paychex. We experienced solid sales execution and strong client satisfaction and retention results, bringing our payroll client base to approximately 605,000 as of May 31, 2016. Our comprehensive offering of human resource outsourcing services continues to benefit from strong demand as reflected in double-digit growth in client worksite employees served.”

“During fiscal 2016, we continued to invest in our proprietary Paychex FlexSM platform, our cloud-based human capital management, or HCM, solution. We believe the strength of this technology, coupled with our personalized, flexible service model, positively impacted results, particularly in the mid-market space as our sales execution in this division was especially strong for fiscal 2016. We are also proud of the recognition that Paychex Flex continues to receive. Most recently we were the recipient of the 2016 TekTonic Award from HRO Today for best-in-class mobile and cloud-based technology suite for comprehensive, integrated HCM services.”

Payroll service revenue increased 5% to $430.4 million for the fourth quarter and 4% to $1.7 billion for the fiscal year, compared to the respective periods last year. These increases were driven by growth in client base and revenue per check. Revenue per check improved as a result of price increases, net of discounts. As of May 31, 2016, we served approximately 605,000 payroll clients. For fiscal 2016, client retention was in excess of 82% of our beginning client base for the fiscal year, consistent with record high retention levels. The acquisition of Advance Partners in December 2015 contributed approximately 1% to the growth in payroll service revenue for the fourth quarter and approximately 0.5% to the growth for the fiscal year.

Human Resource Services (“HRS”) revenue increased 14% to $311.2 million for the fourth quarter and 13% to $1.2 billion for the fiscal year, compared to the respective periods last year. HRS revenue growth was primarily driven by increases in client base across all major HCM services, including: comprehensive outsourcing services; retirement services; time and attendance; and human resource administration. Our largest HRS revenue stream is Paychex HR Services, which includes our administrative services organization and our professional employer organization (“PEO”). Strong demand for these services resulted in double-digit growth in the number of client worksite employees. Insurance services revenue benefited from continued growth of our full-service Affordable Care Act product and growth in health and benefit applicants, together with higher average premiums and clients in our workers' compensation insurance product. Advance Partners contributed approximately 2% to the growth in HRS revenue for the fourth quarter and approximately 1% to the fiscal year growth.

Total expenses increased 8% to $477.6 million for the fourth quarter and 7% to $1.8 billion for the fiscal year, compared to the respective periods last year. Compensation-related expenses were the largest driver of these increases, reflecting growth of 6% for both the fourth quarter and fiscal year. This was primarily attributable to higher wages and performance-based compensation costs. Strong growth in our PEO also contributed to the growth in total expenses. Advance Partners contributed approximately 1% to the growth in total expenses for the fourth quarter and less than 1% for the fiscal year.

Our effective income tax rate was 35.5% for the fourth quarter and 34.3% for the fiscal year, compared to 36.4% and 36.3% for the respective prior year periods. The decrease in the effective income tax rate for the fiscal year was primarily a result of the net tax benefit recognized in the first quarter for income derived in prior tax years related to customer-facing software we produced.

Our financial position as of May 31, 2016 remained strong with cash and total corporate investments of $793.2 million and no debt. Our primary source of cash is generated from our ongoing operations. Historically, we have funded our operations, capital purchases, business acquisitions, share repurchases, and dividend payments from our operating activities. Our positive cash flows have allowed us to support our business and to pay substantial dividends to our stockholders. It is anticipated that cash and total corporate investments as of May 31, 2016, along with projected operating cash flows, will support our normal business operations, capital purchases, business acquisitions, share repurchases, and dividend payments for the foreseeable future.

Cash flows from operations were $1.0 billion for fiscal 2016, an increase of 14% over the prior year. This increase was the result of higher net income adjusted for non-cash items, partially offset by the impact of fluctuations in working capital. Working capital fluctuations contributed $26.5 million of cash inflows for fiscal 2016, compared with $8.9 million of cash inflows in the prior year. This increase was largely related to the timing of collections from clients and payments for compensation, PEO payroll, and income taxes.

In May 2014, our Board of Directors approved a stock repurchase program to purchase up to $350 million of Paychex common stock, with authorization for this program expiring in May 2017. No shares were repurchased during the fourth quarter. A total of $107.9 million of common stock, or 2.2 million shares, have been repurchased under this program for fiscal 2016.

Outlook

Our outlook for the fiscal year ending 2017 (“fiscal 2017”) is based upon current market, economic, and interest rate conditions continuing with no significant changes. Our expected full year fiscal 2017 payroll revenue growth rate is based upon anticipated client base growth and increases in revenue per check. Our guidance for fiscal 2017 is as follows:

• Payroll service revenue is anticipated to increase approximately 4%;
• HRS revenue is anticipated to increase in the range of 12% to 14%;
• Total service revenue is expected to increase in the range of 7% to 8%;
• Interest on funds held for clients is expected to reflect mid-single-digit growth;
• Net income is expected to increase approximately 8%;
• Operating income, net of certain items, as a percent of total service revenue is expected to approximate 38%; and
• The effective income tax rate for fiscal 2017 is expected to be in the range of 35.5% to 36.0%.

Note 1: In addition to reporting operating income, a United States (“U.S.”) generally accepted accounting principle (“GAAP”) measure, we present operating income, net of certain items, which is a non-GAAP measure. We believe operating income, net of certain items, is an appropriate additional measure, as it is an indicator of our core business operations performance period over period. It is also the basis of the measure used internally for establishing the following year’s targets and measuring management’s performance in connection with certain performance-based compensation payments and awards. Operating income, net of certain items, excludes interest on funds held for clients. Interest on funds held for clients is an adjustment to operating income due to the volatility of interest rates, which are not within the control of management. Operating income, net of certain items, is not calculated through the application of GAAP and is not the required form of disclosure by the SEC. As such, it should not be considered as a substitute for the GAAP measure of operating income and, therefore, should not be used in isolation, but in conjunction with, the GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

Annual Report on Form 10-K

We anticipate filing our Form 10-K before the end of July 2016, and this will be available on our website. This press release should be read in conjunction with the Form 10-K and the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in that Form 10-K.

About Paychex

Paychex, Inc. (NASDAQ:PAYX) is a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by 45 years of industry expertise, Paychex serves approximately 605,000 payroll clients as of May 31, 2016 across more than 100 locations and pays one out of every 12 American private sector employees. Learn more about Paychex by visiting www.paychex.com and stay connected on Twitter and LinkedIn.