Paychex 2015 Annual Report Download - page 41

Total expenses increased 10% for fiscal 2015 and 8% for fiscal 2014. Both fiscal 2015 and fiscal 2014 were
impacted by costs relating to the new minimum premium plan health insurance offering within our PEO, which
contributed three percentage points of the increase in total expenses for fiscal 2015 and two percentage points for
fiscal 2014.
The increases in total expenses were driven largely by growth in compensation-related expenses. For fiscal
2015, compensation-related expenses increased due to higher sales headcount and variable costs resulting from
strong sales execution, along with higher employee-benefit-related costs, primarily medical expenses. For fiscal
2014, compensation-related expenses increased due to higher wages and performance-based compensation costs.
The increase in wages was largely related to investments in product development and supporting technology, as
well as sales force investment initiatives that began in fiscal 2013. As of May 31, 2015, we had approximately
13,000 employees, compared with 12,700 employees as of May 31, 2014.
Depreciation expense is primarily related to buildings, furniture and fixtures, data processing equipment,
and software. Increases in depreciation expense were due to capital expenditures as we invested in technology
and continued to grow our business. The higher growth rate for fiscal 2014 was related to additional internally
developed software related to our leading-edge, cloud-based platform that was placed in service during the year.
Amortization of intangible assets is primarily related to client list acquisitions, which are amortized using either
straight-line or accelerated methods.
Other expenses include items such as non-capital equipment, delivery, forms and supplies, communications,
travel and entertainment, professional services, and other costs incurred to support our business. Other expenses
increased due to costs relating to the new minimum premium plan health care offering in the PEO. In addition,
continued investment in product development and supporting technology impacted other expense growth for both
fiscal 2015 and fiscal 2014.
Operating income: Operating income increased 7% for fiscal 2015 and 9% for fiscal 2014. The
fluctuations in operating income were attributable to the factors previously discussed.
Operating income, net of certain items, is as follows for fiscal years:
In millions 2015 Change 2014 Change 2013
Operating income .......................... $1,053.6 7% $982.7 9% $904.8
Excluding: Interest on funds held for clients ..... (42.1) 3% (40.7) (1)% (41.0)
Operating income, net of certain items (1) ....... $1,011.5 7% $942.0 9% $863.8
(1) Operating income, net of certain items is a non-GAAP measure. Refer to further discussion under “Non-
GAAP Financial Measure” discussion that follows.
Operating income, net of certain items, as a percentage of service revenue was approximately 38% for each of the
fiscal years 2015, 2014, and 2013. Operating income, net of certain items, for fiscal 2015 and fiscal 2014 was impacted
by the growth in the minimum premium plan within the PEO. This product offering is a lower-margin product.
Non-GAAP Financial Measure: In addition to reporting operating income, a 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 Securities and Exchange Commission (“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.
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