Paychex 2010 Annual Report Download - page 37

Download and view the complete annual report

Please find page 37 of the 2010 Paychex annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

Refer to the previous discussion of operating income, net of certain items, in the “Non-GAAP Financial
Measure” section on page 14.
Investment income, net: Investment income, net, primarily represents earnings from our cash and cash
equivalents and investments in available-for-sale securities. Investment income does not include interest on funds
held for clients, which is included in total revenue. The decrease of 34% in investment income for fiscal 2010
compared to fiscal 2009 was the result of lower average interest rates earned offset somewhat by higher average
investment balances resulting from investment of cash generated from operations. The decrease of 74% in
investment income for fiscal 2009 compared with fiscal 2008 was primarily due to lower average interest rates
earned and lower average investment balances attributed to funding the stock repurchase program, which was
completed in December 2007.
Income taxes: Our effective income tax rate was 34.6% for fiscal 2010, compared with 34.3% for fiscal
2009, and 32.6% for fiscal 2008. The increase in our effective income tax rate for fiscal 2010 was primarily the
result of higher state income tax rates from state legislative changes. The increase in the effective income tax rate for
fiscal 2009 was primarily the result of lower levels of tax-exempt income derived from municipal debt securities in
the funds held for clients and corporate investment portfolios. Refer to Note H of the Notes to Consolidated
Financial Statements, contained in Item 8 of this Form 10-K, for additional disclosures on income taxes.
Net income and earnings per share: Net income decreased 11% for fiscal 2010 and 7% for fiscal 2009 to
$477.0 million and $533.5 million, respectively. Diluted earnings per share decreased 11% for fiscal 2010 and 5%
for fiscal 2009 to $1.32 per share and $1.48 per share, respectively. These fluctuations were attributable to the
factors previously discussed. In particular, the $18.7 million expense charge to increase the litigation reserve
reduced diluted earnings per share by $0.03 per share for fiscal 2010. Combined interest on funds held for clients
and corporate investment income for fiscal 2010 decreased 28% or $22.8 million, reducing diluted earnings per
share by $0.04 per share. For fiscal 2009, combined interest on funds held for clients and corporate investment
income decreased 48% or $76.0 million, reducing diluted earnings per share by $0.14 per share. For fiscal 2009,
diluted earnings per share decreased at a lower rate than net income due to a lower number of weighted-average
shares outstanding resulting from the stock repurchase program completed in December 2007.
Liquidity and Capital Resources
The volatility in the global financial markets that began in September 2008 curtailed available liquidity and
limited investment choices. Despite this macroeconomic environment, our financial position as of May 31, 2010
remained strong with cash and total corporate investments of $656.9 million and no debt. We also believe that our
investments as of May 31, 2010 were not other-than-temporarily impaired, nor has any event occurred subsequent to
that date that would indicate any other-than-temporary impairment. It is anticipated that cash and total corporate
investments as of May 31, 2010, along with projected operating cash flows, are expected to support our normal
business operations, capital purchases, and dividend payments for the foreseeable future.
Commitments and Contractual Obligations
Lines of credit: As of May 31, 2010, we had unused borrowing capacity available under four uncommitted,
secured, short-term lines of credit at market rates of interest with financial institutions as follows:
Financial institution Amount available Expiration date
JP Morgan Chase Bank, N.A. ........................... $350 million February 2011
Bank of America, N.A. ................................ $250 million February 2011
PNC Bank, National Association ......................... $150 million February 2011
Wells Fargo Bank, National Association ................... $150 million February 2011
Our credit facilities are evidenced by promissory notes and are secured by separate pledge security agreements
by and between Paychex, Inc. and each of the financial institutions (the “Lenders”), pursuant to which we have
granted each of the Lenders a security interest in certain of our investment securities accounts. The collateral is
maintained in a pooled custody account pursuant to the terms of a control agreement and is to be administered under
an intercreditor agreement among the Lenders. Under certain circumstances, individual Lenders may require that
21