Paychex 2012 Annual Report Download - page 33

Non-GAAP Financial Measure
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 and the expense charge in fiscal 2010 to increase the litigation reserve. 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. The expense charge to increase the litigation reserve is also an adjustment to
operating income due to its unusual and infrequent nature. It is outside the normal course of our operations and
obscures the comparability of performance period over period. Operating income, net of certain items, is not
calculated through the application of GAAP and is not the required form of disclosure by the Securities and
Exchange Commission. 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.
Business Outlook
Our client base totaled approximately 567,000 clients as of May 31, 2012, compared to approximately
564,000 clients as of May 31, 2011, and approximately 536,000 clients as of May 31, 2010. Our client base
increased 0.5% for fiscal 2012, compared to an increase of 5.2% for fiscal 2011 and a decline of 3.2% for fiscal
2010. Our organic client base growth was essentially flat for fiscal 2012 and declined 0.9% for fiscal 2011.
For fiscal 2012, payroll services client retention was approximately 80% of our beginning client base, a
return to historical levels. This is a slight increase over fiscal 2011. Through our focus on providing high-quality
service to our customers to maximize client retention, we received the highest client satisfaction results in our
history.
Our ancillary services provide services to employers and employees beyond payroll, but effectively leverage
payroll processing data and, therefore, are beneficial to our operating margin. The following statistics
demonstrate the growth in our Human Resource Services ancillary service offerings:
As of
May 31,
2012
Organic growth for fiscal year(1)
2012 2011 2010
Paychex HR Solutions client employees served(2) .......... 615,000 8% 12% 11%
Paychex HR Solutions clients(2) ........................ 23,000 8% 8% 9%
Insurance services clients(3) ........................... 107,000 6% 8% 7%
Health and benefits services applicants .................. 121,000 23% 23% 38%
Retirement services clients ............................ 59,000 3% 5% 3%
(1) Growth rates exclude impact of acquisition of ePlan.
(2) Includes Paychex HR Essentials as of May 31, 2012 and 2011.
(3) Includes workers’ compensation insurance services clients and health and benefits services clients.
Continued investment in our business is critical to our success. We continued to expand our product
portfolio, through internal development and acquisitions, to add value for our clients. In the second half of fiscal
2011, we acquired SurePayroll and ePlan. These acquisitions have created excellent opportunities in their
markets, and allow Paychex to offer a full range of payroll and 401(k) outsourcing alternatives. During fiscal
2012, we continued to integrate these acquired companies. In December 2011, we purchased Icon Time Systems,
Inc., a provider of time and attendance solutions for small and medium-sized businesses, with whom we
previously had a successful business relationship through one of our time and attendance offerings. Additionally,
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