Paychex 2014 Annual Report Download - page 43

Advantage Payroll Services Inc. (“Advantage”) has license agreements with independently owned associate
offices (“Associates”), which are responsible for selling and marketing Advantage payroll services and
performing certain operational functions, while Paychex and Advantage provide all centralized back-office
payroll processing and payroll tax administration services. Under these arrangements, Advantage pays the
Associates commissions based on processing activity for the related clients. When we acquired Advantage, there
were fifteen Associates. Over the past few years, arrangements with some Associates have been discontinued,
and there are currently fewer than ten Associates. Since the actual amounts of future payments are uncertain,
obligations under these arrangements are not included in the table above. Commission expense for the Associates
for fiscal years 2014, 2013, and 2012 was $14.4 million, $12.6 million, and $11.7 million, respectively.
In the normal course of business, we make representations and warranties that guarantee the performance of
services under service arrangements with clients. Historically, there have been no material losses related to such
guarantees. In addition, we have entered into indemnification agreements with our officers and directors, which
require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as
they relate to their services provided to us.
We currently self-insure the deductible portion of various insured exposures under certain employee benefit
plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on
our Consolidated Balance Sheets. Historically, the amounts accrued have not been material and are not material
as of the reporting date. We also maintain insurance coverage in addition to our purchased primary insurance
policies for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and
embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and self-insured retentions
through our captive insurance company.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions with unconsolidated entities which
would have been established for the purpose of facilitating off-balance sheet arrangements or other limited
purposes. We do maintain investments as a limited partner in low-income housing projects that are not
considered part of our ongoing operations. These investments are accounted for under the equity method of
accounting and are less than 1% of our total assets as of May 31, 2014.
Operating Cash Flow Activities
Year ended May 31,
In millions 2014 2013 2012
Net income ................................................. $627.5 $569.0 $548.0
Non-cash adjustments to net income ............................. 198.6 183.3 175.1
Cash provided by/(used in) changes in operating assets and liabilities . . . 54.8 (77.0) (16.5)
Net cash provided by operating activities ......................... $880.9 $675.3 $706.6
The increase in our operating cash flows for fiscal 2014 compared to fiscal 2013 is primarily the result of
higher net income, adjusted for non-cash items, and fluctuations in our operating assets and liabilities. The
decrease in our operating cash flows for fiscal 2013 compared to fiscal 2012 resulted mainly from fluctuations in
operating assets and liabilities, partially offset by higher net income adjusted for non-cash items. Non-cash
adjustments to net income increased for both years, driven largely by higher amortization of premiums on
available-for-sale securities as the Company has increased its holdings of longer-duration investments. The
fluctuations in our operating assets and liabilities between periods were primarily related to the timing of
collections from clients and payments for compensation, PEO payroll, income tax, and other liabilities. Income
taxes contributed significantly to these fluctuations as a result of a higher prepaid income tax position as of
May 31, 2013 that arose from the federal benefit on the settlement of a state tax matter during fiscal 2013.
25