Industry Research

Report
Junhan Tang Credit
Department
Index
Abstract 2

Construction 3

Broadcasting and cable 4

Real Estate 5

Trucking 6

Commercial Printing 7

Hotel 8

Paper and forest products 9

Dairy Farm 10

Office supplies 11

Insurance 12

Conclusion 13

Contacts:
Junhan Tang
Credit Risk
Representative
jtang@paychex.com
(585)3
36-7600 ext: 65384

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INDUSTRY REPORTS NOVEMBER 18, 2009
Abstract

Fiscal 2009 was not a normal year for Paychex – but then again, 2009 wasn’t a normal
year for any company. Like the rest of the world, our company found itself in
unprecedented times. The issues having the greatest effect on us – the ones that prevented
us from having what we call a “traditional Paychex year” --came about at the advent of
the poor economy.

2009 has been a tough year, -- our nation’s economy was the worst it has been since the
Great Depression. And as we know, our business model is highly positively correlated to
the overall economic situation considering the fact that most of our clients are small- to
medium-sized businesses covering various industries. To be more specific, worsening
economic situation has induced high unemployment, which led to fewer paychecks for us
to process. According to our statistics, the number of companies going out of business, or
losing their ability to pay for our services, accounted for a 17% increase in client losses in
the past fiscal year. At the same time, the credit crisis also kept fewer new businesses
from forming.

It is such a critical moment for us and thus, we think it is highly important for Paychex,
Inc. to study the trend of the macro economic situation and keep track of different
industries so that we can better protect the company in the future by minimizing the
operating loss associated with worsening situations in certain industries within certain
geographic areas.

We did research on 30+ industries and finally narrowed down the base to 10 industries
that we think are in serious trouble and at the same time have significant impact on
Paychex, Inc’s business. The way we adopted to decide the impact of certain industries
on us was finding out how many clients we had in its related industry. And we assign
higher scores to the industries with more clients and vice versa. Then we broke the
industries down by geography if possible to be more specific. Besides, we also take into
consideration of Paychex, Inc’s nature and we think more-deconsolidated industries have
greater impact on us, so we assign higher weight to these industries. Finally, we
calculated scores for each of the 10 industries on our list by combining the two factors
and in our opinion, the ones with the highest scores require highest attention and vice
versa.

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INDUSTRY REPORTS NOVEMBER 18, 2009
Construction
Geographic: California, Detroit and NYC
Facts:
• Construction of retail and office buildings has nearly ground to a halt in
today's struggling economy.
• From 07/ 2008-07/2009, employment in the sector declined by 99,800
jobs, or 12.1 percent, to 727,800 positions

Figure 1
Reasons:
• Collapse of the housing market and strict credit standards sharply reduces
the demand for construction.
Forecast:
• For the near and mid term, national government investments in
transportation infrastructure such as highways, education facilities,
government offices and health care facilities will offer opportunities to
commercial construction firms. A large portion of national government
“stimulus” construction spending will be funneled to state and local
projects.
How it affects Paychex:
• In combination of our client base as of 08/2009, we can see 6115 clients in
Construction related industry, 1086 of them in CA. (Table 1)
14 of them in Detroit (Table 2)
54 of them in NYC (Table 3)

Broadcasting and cable Industry

Facts:

3
INDUSTRY REPORTS NOVEMBER 18, 2009
 • Many companies have undergone dramatic structural and ownership
changes to address issues mostly stemming from high debt loads.
• The unemployment rate climbed to 9.5% in June 2009, the highest since
1983.
• 11 out of 16 major players had negative ROE.
Reasons:

issued for M&A

Declining advertising market
Large Nofor
amounts of bonds issued more
M&Acheap & easy financing

Substantially lower revenue

Decrease in Cash Flow

More difficult to make interest payment

Trouble in the Broadcasting and Cable

Industry
Forecast:
• In 2010, political revenues will ramp up, but with no Presidential election,
advertising will likely remain well below 2008 levels.
• In 2010 and beyond, there might be further consolidation in the
broadcasting industry, as better capitalized companies seek to acquire
assets from their struggling competitors.
How it affects Paychex:
• In combination of our client base as of 08/2009, we can see 1996 clients in
broadcasting and cable related industry. (Table 4, 5, 6)

Real Estate
Geographic: NYC, Washington, California, Detroit, Miami, and Las Vegas
Facts:

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INDUSTRY REPORTS NOVEMBER 18, 2009
 • For February, 2009, the Case Shiller Index of home prices in the U.S.
showed that prices in 20 of America’s largest metropolitan areas had
declined an average of 30.7% from their 2006 peak.
• An office rental rate has fallen 23% in New York and 11% in Washington
from their 2008 highs.
• Las Vegas and Miami are among the hardest hit, with housing price drops
of 29.4% and 26.8% respectively in 2008.
Reasons:
Homeowners/builders Interest
Subprime
Poor-credit
have Poor
payment
loan
credit,
buyers
difficultysoon
setlow-income
Aggressive
Declining
up
balloons
have
sellingasproperties;
Adjustable
nohome
much
incentive
people
higher,
interest
purchase
and to keep
theysoare
rate
buyers
the can’t
unable to meet com
ARMs afford
mortgage
house
home Mortgage
value
Un
Un

Forecast:
• Housing markets in the U.S. will eventually hit bottom and achieve either
growth or some sort of stability.
➢ The positive side is low mortgage interest rates, significantly lower
new and existing home prices.
➢ The negative side is high unemployment rates and job insecurity.
How it affects Paychex:
• In combination of our client base as of 08/2009, We can see 1316 clients
in real estate related industry, 41 in NYC (Table 7)
8 in Washington DC(Table 8)
1 in CA (Table 9)
1 in Detroit(Table 10)
Trucking (aka construction equipment, heavy trucks, and farm machinery)
Facts:
• The trucking industry has been in a slump since 2006, and those problems
accelerated in 2008.
• 5% of the commercial trucking fleet is not being used because of
weakened demand.

5
INDUSTRY REPORTS NOVEMBER 18, 2009
 • According to the U.S. Department of Labor, nearly 37,000 workers in the
heavy-duty truck manufacturing industry lost their jobs in 2008, up from
31,000 in 2007;
Reasons:
Decreasing demand
Decreasing
Decreasing
Worse
in consumer
Supply demand
demand
performance
in
spending,
inautomotive
home
in trucking
manufacturing
industryand in 2008-
shipping production
construction 2009
overhang from the overbuying
that
occurred in 2006

Forecast:
A more stringentBoost Athe
set of rebound
USdemand inand
emissionUS sales
economic
for is
standards 2009
growth
and in to take effect in
scheduled
2010. 2010. 2009

How it affects Paychex:

• In combination of our client base as of 08/2009, we can see 1102 clients in
truck related industry. (Table 11)
Commercial Printing
Facts:
• The S&P Commercial Printing Index fell 61.5% in 2008, versus a 38.2%
decrease for the S&P 1500.
• Industry Employment Growth - Bureau of Labor Statistics

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INDUSTRY REPORTS NOVEMBER 18, 2009
 Reasons:

Falling subscription
Competition
ofGlobal
newspapers,
fromeconomic
Internet
catalogs
and new
and other commercial
prints media crisis

Forecast:
• In the short term, we are concerned that excess industry capacity is likely
to cause price competition and shrink operating margins.
• For the long run, we expect continued consolidation in the highly
fragmented commercial print industry aimed at achieving economies of
scale.
How it affects Paychex:
• In combination of our client base as of 08/2009, we can see 744 clients in
commercial printing related industry.(Table 12)

Hotel
Geographic: West coast, California especially. New York
Facts:
• Luxury Hotel Chains Dropping Ratings to Conserve Cash.
• 1000 plus non-casino hotels have defaulted on $16.8 billion in loans
around the country.
• Smaller California towns that rely heavily on tourism also have seen
established hotels failure.

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INDUSTRY REPORTS NOVEMBER 18, 2009
 • Average price for a Manhattan hotel room now is about $200 a night,
down almost one-third since last year.

Reasons:
New hotels that companies
Decline
Increase
Decline
2008’s planned
in room
Slowing
high in
in supply
room
and built
gasoline
economy of
priceswhile times looked
good occupancy
rooms
demand

Forecast:
• We believe the ease on gas price and economy may increase the needs for
both leisure and business travelling, however, the industry fundamentals
on a global basis should remain weak by historical standards for at least
one year or two.
How it affects Paychex:
• In combination of our client base as of 08/2009, We can see 463 clients in
hotel related industry, 52 in CA (Table 13)
17 in NYC (Table 14)

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INDUSTRY REPORTS NOVEMBER 18, 2009
Paper and forest products Industry
Facts:
• Employment levels have been in a steady downward trend since 2000
because of contraction in the paper and paper products segment.
• In newsprint, demand in North America has been declining steadily for
several years.
• As Smurfit-Stone Container Corp. filed for Chapter 11 bankruptcy
protection, it became the largest bankruptcy filing in the history of the
North American paper and forest products industry.
Reasons:
• Electronic substitution, such as email, online bill paying, internet
advertising and electronic readers appear to be having a negative impact
on demand for several types of paper.
• The severe contraction in the housing market is having a major impact on
demand and pricing in the wood products sector.
Forecast:
• In the short term, pricing levels in many grades will continue to trend
down after a long upward move due to expected declines in economic
activity and employment levels. However, we expect manufacturers to
continue to exhibit supply discipline with temporary, or possibly
permanent, production cutbacks.
• In the long term, the promising future in bio-fuels could boost demand for
forest products.
How it affects Paychex:
• In combination of our client base as of 08/2009, we can see 457 clients in
commercial printing related industry, 71 in wood product(Table 15)
386 in paper product(Table 16)

Dairy Farm
Geographic: Western States, Wisconsin

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INDUSTRY REPORTS NOVEMBER 18, 2009
 Facts: Since January 2008 milk prices have fallen by nearly half, from $20.50 per
hundredweight (45kg) to $11.40 this June

Reasons:

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INDUSTRY REPORTS NOVEMBER 18, 2009
 Global demand has plummeted;
Cost
Worsening
of production
milkHistorically
profit
intended
remains
in dairy
forlow
export
relatively
has spilled back onto the domestic
market high.
farms price

Forecast:
• Dairy farms are expected to recover some in 2010 as the economy
recovers, but it will depend on the general economy recovering, in
combination of a reduction in supply and lower petroleum prices.

How it affects Paychex:

• In combination of our client base as of 08/2009, we can see 147 clients in
Dairy related industry (Table 14), 4 of them in WI (Table 17).
19 of them in CA(Table 18).
Office supplies
Facts:
• Major office supply retailers struggle and 7 out of 8 major suppliers had
negative ROE for last fiscal year.

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INDUSTRY REPORTS NOVEMBER 18, 2009
 Description Market
ROE % Div. Yield %
Cap
Sector: Consumer Goods 2138.1B 16.89 2.47
Industry: Office Supplies
1.9B 0.00 4.65
(More Info)
ACCO Brands Corporation
305.5M -249.83 NA
(ABD)
Acme United Corp. (ACU) 29.2M 13.79 2.30
AT Cross Co. (ATX) 71.3M -2.87 0.00
Ennis Inc. (EBF) 352.8M -11.38 4.50
Franklin Covey Co. (FC) 93.9M -4.48 NA

OfficeMax Inc. (OMX) 862.8M -96.18 5.20

Standard Register Co. (SR) 124.6M -5.94 4.50
Tufco Technologies Inc.
13.9M -1.70 NA
(TFCO)

Reasons:
• Slowdown in spending by consumers and small businesses amid the
struggling economic situation significantly reduces the demand for
renewing office supplys.
Forecast:
• In the short term, we expect gradual improvement in demand in 2010 with
the economy getting better. Besides, with the increasing equipment
replacement needs and stabilizing business activities, the demand for
office supplies will also pick up.
• For Longer term, we look for demand to come from improving global
economies and new products focused on cost efficiencies, but we also see
aggressive competition and price erosion.
How it affects Paychex:
• In combination of our client base as of 08/2009, we can see 31 clients in
office supply related industry (Table 19)

Insurance Industry (especially life insurance companies)

Facts:
• The year 2008 has proven to be one of the most difficult in recent memory
for the life insurance industry.
• 11 out of 14 insurance companies S&P covers reported 4th quarter earnings
below its already sharply downward-revised expect.

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INDUSTRY REPORTS NOVEMBER 18, 2009
 • S&P Life & Health Insurance index has declined nearly 50% in 2008 and
45% year-to-date through March 31, 2009.
Reasons:
• Investment loss :
➢ Holding significant percentage of long maturity financial assets
such as Mortgage-based securities, the subprime crisis and stock
market meltdown had a significant effect on profits and assets at
life insurance companies in particular.
➢ Insurance companies also hold immense investments in real estate,
hedge funds, private equity, venture capital funds and other types
of investments. The global financial meltdown hurt all of these
asset classes and thus hit the capital base of the insurance industry
in a hard way.
• Operation loss:
➢ Business bankruptcies, unemployment and cost-cutting by both
businesses and consumers hurt insurance sales.
Forecast:
• For the near term, the operating environment is still difficult
➢ Equity market’s decline year to date and the possibility of lower-
than-anticipated returns from alternative investments should
continue to put pressure on fee income from selling equity-linked
products as well as on the investment income in 2009.
➢ Furthermore, the low interest rate environment as well as high
cash and liquidity positions will curtail investment income,
weighing on top-line growth.
• For the long term, consolidation in the life insurance industry will
continue to be driven by the need to offset slowing revenue growth,
compete in a converging financial services marketplace, cut costs, and
achieve economies of scale.
How it affects Paychex:
• In combination of our client base as of 08/2009, we can see 31 clients in
insurance related industry, 13 in life insurance (Table 20)
18 in health insurance (Table 21)

Conclusion:
As we can see, among all the industries on the list, Construction industry affects
Paychex, Inc. the most in terms of the number of clients in the related industry while
Insurance industry has the least impact on Paychex, Inc.

However, considering the nature of Paychex, Inc’s business, 98% of our clients fall into
the small- and medium-sized business category, so we may want to focus more on the

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INDUSTRY REPORTS NOVEMBER 18, 2009
highly deconsolidated industry, in which the industry is less dominated by conglomerated
players so that smaller players have more impact in the industry. So among all the 10
industries on the list, Trucking, Commercial Printing, Paper and forest products as well as
Dairy farm fit this deconsolidated industry profile while Broadcasting and cable, Hotel,
Insurance industries are more consolidated. This indicates that our clients in these
consolidated industries may deviate from the core business and are more related to the
side business relating to the industries.

So combing the general industry analysis and Paychex, Inc.’s business model, we assign
different scores and weights to each industry. For the industry with most clients, aka the
Construction industry, we assign a score of 10. And for the industry with least clients, aka
the Insurance industry, we assign a score of 1. Besides, for the more deconsolidated
industries, we will multiple the assigned score with a multiplier of 1.5. And for the most
consolidated industries, we will multiple the assigned score with a multiplier of 0.5 and
the industries left will remain the score unchanged. So the industry with the biggest final
score will be of our most concern and vice versa.

Scor Multipli
Industry e er Final Score Rank
Construction 10 1.0 10.0 2
Broadcasting and cable 9 0.5 4.5 6
Real Estate 8 1.0 8.0 4
Trucking 7 1.5 10.5 1
Commercial Printing 6 1.5 9.0 3
Hotel 5 0.5 2.5 8
Paper and forest products 4 1.5 6.0 5
Dairy Farm 3 1.5 4.5 6
Office supplies 2 1.0 2.0 9
Insurance 1 0.5 0.5 10
In conclusion, we think the Trucking, Construction and Commercial Printing industries
are the top 3 industries among the 10 that Paychex, Inc. should keep an eye on for the
next year or two.

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INDUSTRY REPORTS NOVEMBER 18, 2009