Paychex 2014 Annual Report Download - page 34

throughout this discussion, had no impact on operating income. Refer to the Results of Operations section of this
Item 7 and Note O to the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for
further details on the impact to service revenue, total revenue, and operating expenses. In evaluating HRS
revenue, we historically have considered the PEO revenue net of these direct costs.
Highlights of our financial results for fiscal 2014, compared to fiscal 2013, are as follows:
• Total service revenue increased 8% to $2.5 billion (6% growth excluding the PEO direct cost adjustment).
— Payroll service revenue increased 4% to $1.6 billion.
— HRS revenue increased 18% to $878.9 million (12% excluding the PEO direct cost adjustment).
• Interest on funds held for clients decreased 1% to $40.7 million.
• Total revenue increased 8% to $2.5 billion (6% excluding the PEO direct costs adjustment).
• Operating income increased 9% to $982.7 million, and operating income, net of certain items, increased
9% to $942.0 million. Refer to the “Non-GAAP Financial Measure” discussion below for further
information on operating income, net of certain items.
• Net income and diluted earnings per share increased 10% to $627.5 million and $1.71 per share,
respectively. The growth rate for net income and diluted earnings per share was positively impacted by
comparison to the prior year, which reflected settlement of a state income tax matter. This settlement
reduced diluted earnings per share by approximately $0.04 per share for fiscal 2013.
• Dividends of $510.6 million were paid to stockholders, representing 81% of net income.
Non-GAAP Financial Measure
In addition to reporting operating income, a United States (“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.
Business Outlook
Our client base totaled approximately 580,000 clients as of May 31, 2014, compared to approximately
570,000 clients as of May 31, 2013, and approximately 567,000 clients as of May 31, 2012. Our client base
increased approximately 2% for fiscal 2014, compared to approximately 1% for both fiscal 2013 and fiscal 2012.
For fiscal 2014, payroll services client retention was at a record level of approximately 82% of our
beginning of the year client base. Our client satisfaction results remained high, which we believe is a result of our
focus on providing innovative technology solutions and outstanding personal service to our clients to maximize
client retention.
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