Paychex 2011 Annual Report Download - page 37

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Operating income: Operating income increased 8% for fiscal 2011 and declined 10% for fiscal 2010. 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 2011 Change 2010 Change 2009
Operating income ......................... $786.4 8% $724.8 (10)% $805.2
Excluding:
Interest on funds held for clients ............ (48.1) (13)% (55.0) (27)% (75.5)
Expense charge to increase the litigation
reserve ............................. — (100)% 18.7 100% —
Operating income, net of certain items .......... $738.3 7% $688.5 (6)% $729.7
Operating income, net of certain items, as a % of
total service revenue . .................... 36.3% 35.4% 36.4%
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 increase of 29% in investment income for fiscal 2011
compared to fiscal 2010 was the result of higher average invested balances and a slight increase in average interest
rates earned. The 1% increase in average investment balances for fiscal 2011 was the result of investment of cash
generated from operations, partially offset by cash utilized to fund the acquisitions of SurePayroll and ePlan during
the second half of fiscal 2011. The increase in average interest rates earned on corporate investments was primarily
driven by higher yields on funds invested into our longer-term investment portfolio compared to the prior year. 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.
Income taxes: Our effective income tax rate was 35.0% for fiscal 2011, compared to 34.6% for fiscal 2010,
and 34.3% for fiscal 2009. The increase in our effective tax rate for fiscal 2011 was primarily attributable to lower
tax-exempt income on available-for-sale securities during fiscal 2011 compared to fiscal 2010. 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. Refer to Note I 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 increased 8% to $515.3 million for fiscal 2011 and
decreased 11% to $477.0 million for fiscal 2010. Diluted earnings per share increased 8% to 1.42 per share for fiscal
2011 and decreased 11% to $1.32 per share for fiscal 2010. 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.
Liquidity and Capital Resources
The volatility in the global financial markets that began in September 2008 continues to curtail available
liquidity and limit investment choices. Despite this macroeconomic environment, our financial position as of
May 31, 2011 remained strong with cash and total corporate investments of $671.3 million and no debt. We also
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. We anticipate 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.
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