Paychex 2012 Annual Report Download - page 39

Compensation-related costs for fiscal 2012 were impacted by increased headcount in areas supporting our
development of technology, and higher employee-related costs for health care and 401(k) employer match. In
addition, the increase in expenses for fiscal 2011 was primarily driven by personnel-related costs, in part due to
reinstatement of salary increases and 401(k) employer match during fiscal 2011, along with one-time costs
related to the separation agreement entered into with Jonathan J. Judge, our former President and Chief Executive
Officer. As of May 31, 2012 and 2011, we had approximately 12,400 employees compared with
approximately 12,200 employees as of May 31, 2010.
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. Amortization of intangible assets is primarily related to client list
acquisitions, which are amortized using either straight-line or accelerated methods. Depreciation and
amortization increased in fiscal 2012 and fiscal 2011 due to business acquisitions.
Other expenses include items such as delivery, forms and supplies, communications, travel and
entertainment, equipment costs, professional services, and other costs incurred to support our business. The
increase in other expenses for fiscal 2012 and fiscal 2011 was primarily attributable to the inclusion of our
acquisitions. In addition, higher equipment costs within information technology and higher professional services
supporting our technology development contributed to the increases in other expenses for fiscal 2012.
During fiscal 2010, we recorded an expense charge of $18.7 million to increase our Rapid Payroll litigation
reserve. Refer to Note M of the Notes to Consolidated Financial Statements, contained in Item 8 of this
Form 10-K, for additional information on legal matters.
Operating income: Operating income increased 9% for fiscal 2012 and 8% for fiscal 2011. 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 2012 Change 2011 Change 2010
Operating income ........................... $853.9 9% $786.4 8% $724.8
Excluding:
Interest on funds held for clients .............. (43.6) (9%) (48.1) (13%) (55.0)
Expense charge to increase the Rapid Payroll
litigation reserve ........................ — — — (100%) 18.7
Operating income, net of certain items ........... $810.3 10% $738.3 7% $688.5
Operating income, net of certain items, as a percent
of service revenue ......................... 37.1% 36.3% 35.4%
Refer to the previous discussion of operating income, net of certain items, in the “Non-GAAP Financial
Measure” section on page 15.
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 increases in investment income were primarily the result
of higher average invested balances. Average investment balances increased 4% for fiscal 2012 and 1% for fiscal
2011. The increases were the result of investment of cash generated from operations, partially offset by the
impact on balances of cash utilized to fund the acquisitions of SurePayroll and ePlan during the second half of
fiscal 2011. Fiscal 2011 benefited from a slight increase in average interest rates earned on corporate investments
that was primarily driven by higher yields on funds invested into our longer-term investment portfolio compared
to the prior year.
Income taxes: Our effective income tax rate was 36.3% for fiscal 2012 compared to 35.0% for fiscal 2011
and 34.6% for fiscal 2010. The increase in our effective tax rate for fiscal 2012 was primarily the result of
changes in state apportionment and lower levels of tax-exempt income derived from municipal debt securities in
the funds held for clients and corporate investment portfolios. The increase in our effective tax rate for fiscal
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