Paychex 2011 Annual Report Download - page 32

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We invest primarily in high credit quality securities with AAA and AA ratings and short-term securities with
A-1/P-1 ratings. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term
instruments whose fair value is less sensitive to interest rate changes. We believe that our investments as of May 31, 2011
were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any
other-than-temporary impairment. All investments held as of May 31, 2011 were traded in active markets.
Our primary source of cash is our ongoing operations. Cash flow from operations was $715.3 million for fiscal
2011. Historically, we have funded our operations, capital purchases, business acquisitions, and dividend payments from
our operating activities. Our positive cash flows in fiscal 2011 allowed us to support our business growth and to pay
substantial dividends to our stockholders. During fiscal 2011, dividends paid to stockholders were 87% of net income. It
is anticipated that cash and total corporate investments as of May 31, 2011, along with projected operating cash flows,
will support our normal business operations, capital purchases, and dividend payments for the foreseeable future.
For further analysis of our results of operations for fiscal years 2011, 2010, and 2009, and our financial position
as of May 31, 2011, refer to the tables and analysis in the “Results of Operations” and “Liquidity and Capital
Resources” sections of this Item 7 and the discussion in the “Critical Accounting Policies” section of this Item 7.
Outlook
Our outlook for fiscal 2012 is based upon current economic and interest rate conditions continuing with no
significant changes. Consistent with our policy regarding guidance, our projections do not anticipate or speculate on
future changes to interest rates. Our fiscal 2012 guidance reflects anticipated results for SurePayroll and ePlan. The
anticipated service revenue impact is approximately 2% and the earnings dilution is expected to be approximately
$0.01 per share, mainly due to amortization of acquired intangible assets. Our fiscal 2012 guidance is as follows:
Low High
Payroll service revenue. ......................................... 5% — 7%
Human Resource Services revenue ................................. 12% — 15%
Total service revenue . . ......................................... 7% — 9%
Interest on funds held for clients ................................... (14)% — (12)%
Investment income, net. ......................................... — — 2%
Net income .................................................. 5% — 7%
Operating income, net of certain items, as a percentage of service revenue is expected to range from 35% to
36% for fiscal 2012. The effective income tax rate is expected to approximate 35% for fiscal 2012.
Interest on funds held for clients and investment income for fiscal 2012 are expected to be impacted by the
continuing low-interest-rate environment. The average rate of return on our combined funds held for clients and
corporate investment portfolios is expected to be 1.2% for fiscal 2012. As of May 31, 2011, the long-term
investment portfolio had an average yield-to-maturity of 2.6% and an average duration of 2.4 years. In the next
twelve months, slightly more than 20% of this portfolio will mature, and it is currently anticipated that these
proceeds will be reinvested at a lower average interest rate of approximately 1.0%. Investment income is expected to
benefit from ongoing investment of cash generated from operations, though at a lower growth rate as a result of cash
outlays in fiscal 2011 for business acquisitions.
Under normal financial market conditions, the impact to our earnings from a 25-basis-point increase or
decrease in short-term interest rates would be in the range of $3.5 million to $4.0 million, after taxes, for a twelve-
month period. Such a basis point change may or may not be tied to changes in the Federal Funds rate.
Purchases of property and equipment for fiscal 2012 are expected to be in the range of $90 million to
$95 million. This includes costs for internally developed software as we continue to invest in our product
development. Fiscal 2012 depreciation expense is projected to be in the range of $75 million to $80 million, and we
project amortization of intangible assets for fiscal 2012 to be in the range of $20 million to $25 million. Intangible
assets acquired from SurePayroll and ePlan are expected to increase amortization expense for fiscal 2012, partially
offset by the impact of fully amortized intangibles.
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