UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

_________________________________________



FORM 10Q

_________________________________________



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended February 28, 2017 



Commission file number 0-11330

_________________________________________



PAYCHEX, INC.

_________________________________________



911 Panorama Trail South

Rochester, New York 14625-2396

(585) 385-6666

A Delaware Corporation



IRS Employer Identification Number: 16-1124166

_________________________________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  



The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:





 

 

 

 

 



Common Stock, $0.01 Par Value

 

359,248,385 

  Shares

 



CLASS

 

OUTSTANDING AS OF 

February 28, 2017

 

 



 


 

PAYCHEX, INC.

Table of Contents





 

 



 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements



Consolidated Statements of Income and Comprehensive Income 



Consolidated Balance Sheets



Consolidated Statements of Cash Flows



Notes to Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15 

Item 3.

Quantitative and Qualitative Disclosures of Market Risk

29 

Item 4.

Controls and Procedures

29 

PART II. OTHER INFORMATION

30 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30 

Item 6.

Exhibits

30 

Signatures

31 

Index to Exhibits

32 



 



 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

In millions, except per share amounts







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

February 28,

 

February 29,

 

February 28,

 

February 29,



 

2017

 

2016

 

2017

 

2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Service revenue

 

$

782.6 

 

$

740.7 

 

$

2,316.1 

 

$

2,164.2 

Interest on funds held for clients

 

 

13.2 

 

 

11.9 

 

 

36.6 

 

 

33.8 

Total revenue

 

 

795.8 

 

 

752.6 

 

 

2,352.7 

 

 

2,198.0 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

236.8 

 

 

225.9 

 

 

688.2 

 

 

636.8 

Selling, general and administrative expenses

 

 

252.4 

 

 

246.7 

 

 

723.8 

 

 

690.9 

Total expenses

 

 

489.2 

 

 

472.6 

 

 

1,412.0 

 

 

1,327.7 

Operating income

 

 

306.6 

 

 

280.0 

 

 

940.7 

 

 

870.3 

Investment income, net

 

 

1.2 

 

 

1.7 

 

 

3.6 

 

 

4.7 

Income before income taxes

 

 

307.8 

 

 

281.7 

 

 

944.3 

 

 

875.0 

Income taxes

 

 

105.3 

 

 

101.3 

 

 

322.3 

 

 

296.3 

Net income

 

$

202.5 

 

$

180.4 

 

$

622.0 

 

$

578.7 



 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income/(loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) on securities, net of tax

 

 

21.4 

 

 

17.2 

 

 

(24.6)

 

 

30.0 

Total other comprehensive income/(loss), net of tax

 

 

21.4 

 

 

17.2 

 

 

(24.6)

 

 

30.0 

Comprehensive income

 

$

223.9 

 

$

197.6 

 

$

597.4 

 

$

608.7 



 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.56 

 

$

0.50 

 

$

1.73 

 

$

1.60 

Diluted earnings per share

 

$

0.56 

 

$

0.50 

 

$

1.71 

 

$

1.60 

Weighted-average common shares outstanding

 

 

359.0 

 

 

360.5 

 

 

360.0 

 

 

360.8 

Weighted-average common shares outstanding,
    assuming dilution

 

 

361.8 

 

 

362.2 

 

 

362.8 

 

 

362.4 

Cash dividends per common share

 

$

0.46 

 

$

0.42 

 

$

1.38 

 

$

1.26 



See Notes to Consolidated Financial Statements.

 

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PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In millions, except per share amount







 

 

 

 

 

 



 

 

 

 

 

 



 

February 28,

 

May 31,



 

2017

 

2016

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

189.9 

 

$

131.5 

Corporate investments

 

 

214.0 

 

 

220.6 

Interest receivable

 

 

32.0 

 

 

36.1 

Accounts receivable, net of allowance for doubtful accounts

 

 

429.9 

 

 

408.6 

Prepaid income taxes

 

 

33.4 

 

 

10.5 

Prepaid expenses and other current assets

 

 

68.0 

 

 

58.8 

Current assets before funds held for clients

 

 

967.2 

 

 

866.1 

Funds held for clients

 

 

4,784.6 

 

 

3,997.5 

Total current assets

 

 

5,751.8 

 

 

4,863.6 

Long-term corporate investments

 

 

440.2 

 

 

441.1 

Property and equipment, net of accumulated depreciation

 

 

341.6 

 

 

353.0 

Intangible assets, net of accumulated amortization

 

 

62.0 

 

 

69.5 

Goodwill

 

 

657.1 

 

 

657.1 

Prepaid income taxes

 

 

24.9 

 

 

24.9 

Other long-term assets

 

 

32.7 

 

 

31.6 

Total assets

 

$

7,310.3 

 

$

6,440.8 

Liabilities

 

 

 

 

 

 

Accounts payable

 

$

55.9 

 

$

56.7 

Accrued compensation and related items

 

 

278.1 

 

 

247.8 

Short-term borrowings

 

 

55.4 

 

 

 —

Deferred revenue

 

 

25.1 

 

 

26.3 

Other current liabilities

 

 

84.1 

 

 

79.8 

Current liabilities before client fund obligations

 

 

498.6 

 

 

410.6 

Client fund obligations

 

 

4,775.1 

 

 

3,955.3 

Total current liabilities

 

 

5,273.7 

 

 

4,365.9 

Accrued income taxes

 

 

48.0 

 

 

72.8 

Deferred income taxes

 

 

17.7 

 

 

22.1 

Other long-term liabilities

 

 

74.2 

 

 

68.3 

Total liabilities

 

 

5,413.6 

 

 

4,529.1 

Commitments and contingencies — Note J

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.01 par value; Authorized: 600.0 shares;
  Issued and outstanding: 359.2 shares as of February 28, 2017
   and 360.4 shares as of May 31, 2016, respectively.

 

 

3.6 

 

 

3.6 

Additional paid-in capital

 

 

1,016.6 

 

 

952.7 

Retained earnings

 

 

871.9 

 

 

926.2 

Accumulated other comprehensive income

 

 

4.6 

 

 

29.2 

Total stockholders’ equity

 

 

1,896.7 

 

 

1,911.7 

Total liabilities and stockholders’ equity

 

$

7,310.3 

 

$

6,440.8 



See Notes to Consolidated Financial Statements.

 

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PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In millions







 

 

 

 

 

 



 

 

 

 

 

 



 

For the nine months ended



 

February 28,

 

February 29,



 

2017

 

2016

Operating activities

 

 

 

 

 

 

Net income

 

$

622.0 

 

$

578.7 

Adjustments to reconcile net income to net cash provided by
   operating activities:

 

 

 

 

 

 

Depreciation and amortization on property and equipment and
   intangible assets

 

 

90.7 

 

 

85.1 

Amortization of premiums and discounts on available-for-sale securities

 

 

55.0 

 

 

57.2 

Stock-based compensation costs

 

 

26.5 

 

 

26.1 

Benefit from deferred income taxes

 

 

 —

 

 

(2.2)

Provision for allowance for doubtful accounts

 

 

3.4 

 

 

1.7 

Net realized gains on sales of available-for-sale securities

 

 

(0.1)

 

 

(0.1)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Interest receivable

 

 

4.1 

 

 

6.3 

Accounts receivable

 

 

(24.6)

 

 

18.6 

Prepaid expenses and other current assets

 

 

(32.1)

 

 

(8.6)

Accounts payable and other current liabilities

 

 

37.5 

 

 

28.4 

Net change in other long-term assets and liabilities

 

 

(13.1)

 

 

 —

Net cash provided by operating activities

 

 

769.3 

 

 

791.2 

Investing activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(36,029.5)

 

 

(2,700.9)

Proceeds from sales and maturities of available-for-sale securities

 

 

35,617.4 

 

 

3,303.6 

Net change in funds held for clients’ money market securities and other
   cash equivalents

 

 

(459.8)

 

 

(792.9)

Purchases of property and equipment

 

 

(66.8)

 

 

(70.0)

Acquisition of businesses, net of cash acquired

 

 

 —

 

 

(296.1)

Purchases of other assets

 

 

(8.4)

 

 

(7.3)

Net cash used in investing activities

 

 

(947.1)

 

 

(563.6)

Financing activities

 

 

 

 

 

 

Net change in client fund obligations

 

 

819.8 

 

 

403.8 

Net proceeds from short-term borrowings

 

 

55.4 

 

 

 —

Dividends paid

 

 

(496.9)

 

 

(455.0)

Repurchases of common shares

 

 

(166.2)

 

 

(107.9)

Activity related to equity-based plans

 

 

24.1 

 

 

14.6 

Net cash provided by/ (used in) financing activities

 

 

236.2 

 

 

(144.5)

Increase in cash and cash equivalents

 

 

58.4 

 

 

83.1 

Cash and cash equivalents, beginning of fiscal year

 

 

131.5 

 

 

170.0 

Cash and cash equivalents, end of period

 

$

189.9 

 

$

253.1 



See Notes to Consolidated Financial Statements.

 



 

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PAYCHEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

February 28, 2017 

 

Note A: Description of Business, Basis of Presentation, and Significant Accounting Policies



Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Paychex”) is a leading provider of integrated human capital management solutions for payroll, human resource, retirement, and insurance services for small- to medium-sized businesses in the United States (“U.S.”). The Company also has operations in Germany.



Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the Company’s revenue is generated within the U.S. The Company also generates revenue within Germany, which represented less than one percent of the Company's total revenue for each of the nine months ended February 28, 2017 and February 29, 2016. Long-lived assets in Germany are insignificant in relation to total long-lived assets of the Company as of February 28, 2017 and May 31, 2016.



Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation. The consolidated financial statements include the consolidated accounts of the Company with all intercompany transactions eliminated. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature), which are necessary for a fair statement of the results for the interim period. These financial statements should be read in conjunction with the Company’s consolidated financial statements and related Notes to Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K (“Form 10-K”) as of and for the year ended May 31, 2016 (“fiscal 2016”). Operating results and cash flows for the nine months ended February 28, 2017 are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year ending May 31, 2017 (“fiscal 2017”).



Accounts Receivable, net of allowance for doubtful accounts:  Accounts receivable balances are shown on the Consolidated Balance Sheets net of the allowance for doubtful accounts of $5.3 million as of February 28, 2017 and $4.2 million as of May 31, 2016.  Accounts receivable balances, net of allowance for doubtful accounts, include:  1) trade receivables for services provided to clients of $212.5 million as of February 28, 2017 and $221.6 million as of May 31, 2016; and 2) purchased receivables related to payroll funding arrangements with clients in the temporary staffing industry of $217.4 million as of February 28, 2017 and $187.0 million as of May 31, 2016.  



PEO insurance reserves: As part of the professional employer organization (“PEO”), the Company offers workers' compensation insurance and health insurance to client companies for the benefit of client employees. For workers' compensation insurance, reserves are established to provide for the estimated costs of paying claims underwritten by the Company. The Company’s maximum individual claims liability is $1.3 million under both its fiscal 2017 and fiscal 2016 policies.



Under the minimum premium plan health insurance offering within the PEO, the Company's health benefits insurance reserves are established to provide for the payment of claims liability charges in accordance with its service contract with the carrier. The Company's maximum individual claims liability is $0.3 million under both its calendar 2017 and calendar 2016 policies.



Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and actuarial loss projections, and is subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present estimates, particularly with workers' compensation insurance where those payments may not occur until well into the future. The Company regularly reviews the adequacy of its estimated insurance reserves. Adjustments to previously established reserves are reflected in the results of operations for the period in which such adjustments are identified. Such adjustments could be significant, reflecting any combination of new and adverse or favorable trends.



Stock-based compensation costs: The Company has issued stock-based awards to employees and directors consisting of stock options, restricted stock awards, restricted stock units, performance shares, and performance stock options. The Company accounts for all stock-based awards to employees and directors as compensation costs in the consolidated financial statements based on the fair value measured as of the date of grant. These costs are recognized over the requisite service period. Stock-based compensation costs recognized were $8.9 million and $26.5 million for the three and nine months ended February 28, 2017, respectively, as compared with $8.6 million and $26.1 million for the three and nine months ended February 29, 2016, respectively. The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company’s fiscal 2016 Form 10-K.



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Recently adopted accounting pronouncements: In June 2016, the Company early-adopted Accounting Standards Update (“ASU”) No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” issued by the Financial Accounting Standards Board (“FASB”).  ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. 



Amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in the recognition of $17.3 million of excess tax benefits within income taxes rather than additional paid in capital for the nine months ended February 28, 2017.  This increased diluted earnings per share by approximately $0.05 per share for the period. Excess tax benefits related to share-based payments are now included in operating cash flows rather than financing cash flows.  This change has been applied prospectively in accordance with ASU No. 2016-09 and prior periods have not been adjusted.  We have previously classified cash paid for tax withholding purposes as a financing activity in the statement of cash flows, therefore there is no change related to this requirement.  The amendments allow for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance.  The Company has elected to continue estimating forfeitures under the current guidance.



In June 2016, the Company also adopted the following ASUs, none of which had a material impact on its consolidated financial statements:



·

ASU No. 2015-09, “Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts.”



·

ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”



·

ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.”



·

ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” 



·

ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” 



Recently issued accounting pronouncements:  In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses From the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”  ASU No. 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it is deemed an “in substance non-financial asset.”  ASU No. 2017-05 is effective at the same time as the revenue standard in ASU No. 2014-09, “Revenue From Contracts With Customers (Topic 606)” goes into effect, which the Company anticipates to be its fiscal year beginning June 1, 2018. The Company is currently evaluating this guidance but does not anticipate it will have a material impact on its consolidated financial statements.



In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairments.”  ASU No. 2017-04 establishes a one-step process for testing goodwill for a decrease in value, requiring a goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value.  The guidance eliminates the second step of the current two-step process that requires the impairment to be measured as the difference between the implied value of a reporting unit’s goodwill with the goodwill’s carrying amount.   ASU No. 2017-04 is effective for public businesses that file periodic reports with the Securities and Exchange Commission (“SEC”) for annual or interim periods in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual impairment tests after January 1, 2017.  This guidance is applicable to the Company's fiscal year beginning June 1, 2020, and is not anticipated to have a material impact on the Company’s consolidated financial statements.



In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.”  ASU No. 2017-01 provides a more defined framework to use in determining when a set of assets and activities is a business. ASU No. 2017-01 also provides greater consistency in applying the guidance, making the definition of a business more operable.  ASU No. 2017-01 is effective for public companies for annual periods, including interim periods, beginning after December 15, 2017.  This guidance is applicable to the Company's fiscal year beginning June 1, 2018.  The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.



In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash: a Consensus of the FASB Emerging Issues Task Force.”  ASU No. 2016-18 will require a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. 

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Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period.  ASU No. 2016-18 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Company's fiscal year beginning June 1, 2018. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” ASU No. 2016-16 will require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold.  ASU No. 2016-16 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Company's fiscal year beginning June 1, 2018. The Company is currently evaluating this guidance to determine the potential impact on its consolidated financial statements.



In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU No. 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduce the current diversity in practice.  ASU No. 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Company's fiscal year beginning June 1, 2018. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early application permitted. This guidance is applicable to the Company's fiscal year beginning June 1, 2019. The Company is currently evaluating this guidance to determine the potential impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  This guidance, as amended by subsequent ASUs on the topic, outlines a single comprehensive model for determining revenue recognition for contracts with customers, and supersedes current guidance on revenue recognition in Topic 605, “Revenue Recognition.”  Entities have the option to apply the new guidance under a full retrospective approach to each prior reporting period presented or a modified retrospective approach with a cumulative effect of initially applying the new guidance recognized at the date of initial application within the consolidated financial statements.  This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods, with early adoption permitted effective for annual reporting periods beginning after December 15, 2016.  The Company expects to adopt the new standard in its fiscal year beginning June 1, 2018 and currently anticipates applying the guidance under the full retrospective approach.    The Company’s ability to adopt using the full retrospective method is dependent on system readiness and the completion of our analysis of information necessary to restate prior period consolidated financial statements.  While the evaluation of the impact of the new revenue recognition standard on its consolidated financial statements has not yet been fully determined, the Company anticipates the provisions to primarily impact the manner in which it treats certain costs to obtain contracts and costs to fulfill contracts.  Generally, in relation to these items, the new standard will result in the Company deferring additional costs on the Consolidated Balance Sheets and subsequently amortizing them to the Consolidated Statements of Income and Comprehensive Income over the estimated average life of the client.



Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification), the American Institute of Certified Public Accountants, and the SEC did not, or are not expected to, have a material effect on the Company’s consolidated financial statements.  

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Note B: Basic and Diluted Earnings Per Share



Basic and diluted earnings per share were calculated as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

February 28,

 

February 29,

 

February 28,

 

February 29,

In millions, except per share amounts

 

2017

 

2016

 

2017

 

2016

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

202.5 

 

$

180.4 

 

$

622.0 

 

$

578.7 

Weighted-average common shares outstanding

 

 

359.0 

 

 

360.5 

 

 

360.0 

 

 

360.8 

Basic earnings per share

 

$

0.56 

 

$

0.50 

 

$

1.73 

 

$

1.60 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

202.5 

 

$

180.4 

 

$

622.0 

 

$

578.7 

Weighted-average common shares outstanding

 

 

359.0 

 

 

360.5 

 

 

360.0 

 

 

360.8 

Dilutive effect of common share equivalents

 

 

2.8 

 

 

1.7 

 

 

2.8 

 

 

1.6 

Weighted-average common shares outstanding, assuming dilution

 

 

361.8 

 

 

362.2 

 

 

362.8 

 

 

362.4 

Diluted earnings per share

 

$

0.56 

 

$

0.50 

 

$

1.71 

 

$

1.60 

Weighted-average anti-dilutive common share equivalents

 

 

0.7 

 

 

0.7 

 

 

0.7 

 

 

0.7 



Weighted-average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.



For the three months ended February 28, 2017 and February 29, 2016,  0.4 million and 0.1 million shares, respectively, of the Company’s common stock were issued in connection with the exercise or vesting of stock-based awards.  For the nine months ended February 28, 2017 and February 29, 2016,  1.8 million and 1.2 million shares, respectively, of the Company’s common stock were issued in connection with the exercise or vesting of stock-based awards.



In July 2016, the Company announced that its Board of Directors approved a program to repurchase up to $350.0 million of the Company’s common stock, with authorization expiring in May 2019 (the “July 2016 Plan”).  No shares were repurchased during the three months ended February 28, 2017.  During the nine months ended February 28, 2017, the Company repurchased 2.9 million shares for $166.2 million.  Of the shares repurchased during the nine months ended February 28, 2017,  $106.5 million were repurchased under the July 2016 Plan and $59.7 million were repurchased under a previously authorized program to purchase up to $350.0 million of the Company’s common stock, with authorization expiring in May 2017 (the “May 2014 Plan”).  During the three and nine months ended February 29, 2016, the Company repurchased 0.9 million shares for $45.0 million and 2.2 million shares for $107.9 million, respectively, under the May 2014 Plan.  The purpose of both programs is to manage common stock dilution.  All shares repurchased were retired.  As of February 28, 2017, all amounts authorized under the May 2014 Plan have been used.

 



Note C: Investment Income, Net



Investment income, net, consisted of the following items:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended

 

For the nine months ended



 

February 28,

 

February 29,

 

February 28,

 

February 29,

In millions

 

2017

 

2016

 

2017

 

2016

Interest income on corporate funds

 

$

2.4 

 

$

2.1 

 

$

7.2 

 

$

6.1 

Interest expense

 

 

(0.6)

 

 

(0.2)

 

 

(1.9)

 

 

(0.7)

Net loss from equity-method investments

 

 

(0.6)

 

 

(0.2)

 

 

(1.7)

 

 

(0.7)

Investment income, net

 

$

1.2 

 

$

1.7 

 

$

3.6 

 

$

4.7 

 







7

 


 

Table of Contents

 

Note D: Funds Held for Clients and Corporate Investments



Funds held for clients and corporate investments are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

February 28, 2017



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

In millions

 

cost

 

gains

 

losses

 

value

Type of issue:

 

 

 

 

 

 

 

 

 

 

 

 

Funds held for clients money market securities and other
   cash equivalents

 

$

962.4 

 

$

 —

 

$

 —

 

$

962.4 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

189.3 

 

 

1.4 

 

 

(1.0)

 

 

189.7 

General obligation municipal bonds

 

 

1,456.0 

 

 

13.5 

 

 

(4.6)

 

 

1,464.9 

Pre-refunded municipal bonds(1)

 

 

62.7 

 

 

0.9 

 

 

 —

 

 

63.6 

Revenue municipal bonds

 

 

944.9 

 

 

8.2 

 

 

(4.1)

 

 

949.0 

U.S. government agency securities

 

 

295.9 

 

 

0.1 

 

 

(5.5)

 

 

290.5 

Variable rate demand notes

 

 

1,502.6 

 

 

 —

 

 

 —

 

 

1,502.6 

Total available-for-sale securities

 

 

4,451.4 

 

 

24.1 

 

 

(15.2)

 

 

4,460.3 

Other

 

 

14.6 

 

 

1.5 

 

 

 —

 

 

16.1 

Total funds held for clients and corporate investments

 

$

5,428.4 

 

$

25.6 

 

$

(15.2)

 

$

5,438.8 

  





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

May 31, 2016



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

In millions

 

cost

 

gains

 

losses

 

value

Type of issue:

 

 

 

 

 

 

 

 

 

 

 

 

Funds held for clients money market securities and other
   cash equivalents

 

$

502.4 

 

$

 —

 

$

 —

 

$

502.4 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

128.4 

 

 

2.9 

 

 

(0.1)

 

 

131.2 

General obligation municipal bonds

 

 

1,594.1 

 

 

27.6 

 

 

(0.1)

 

 

1,621.6 

Pre-refunded municipal bonds(1)

 

 

60.2 

 

 

1.4 

 

 

 —

 

 

61.6 

Revenue municipal bonds

 

 

916.2 

 

 

15.8 

 

 

(0.2)

 

 

931.8 

U.S. government agency securities

 

 

160.8 

 

 

0.6 

 

 

(0.3)

 

 

161.1 

Variable rate demand notes

 

 

1,234.6 

 

 

 —

 

 

 —

 

 

1,234.6 

Total available-for-sale securities

 

 

4,094.3 

 

 

48.3 

 

 

(0.7)

 

 

4,141.9 

Other

 

 

14.2 

 

 

0.8 

 

 

(0.1)

 

 

14.9 

Total funds held for clients and corporate investments

 

$

4,610.9 

 

$

49.1 

 

$

(0.8)

 

$

4,659.2 



(1)

Pre-refunded municipal bonds are secured by an escrow fund of U.S. government obligations.



Included in money market securities and other cash equivalents as of February 28, 2017 were bank demand deposit accounts, short-term municipal bonds, and government money market funds.  Included in money market securities and other cash equivalents as of May 31, 2016 were bank demand deposit accounts and government money market funds.



Classification of investments on the Consolidated Balance Sheets is as follows:







 

 

 

 

 

 



 

 

 

 

 

 



 

February 28,

 

May 31,

In millions

 

2017

 

2016

Funds held for clients

 

$

4,784.6 

 

$

3,997.5 

Corporate investments

 

 

214.0 

 

 

220.6 

Long-term corporate investments

 

 

440.2 

 

 

441.1 

Total funds held for clients and corporate investments

 

$

5,438.8 

 

$

4,659.2 



8

 


 

Table of Contents

 

The Company’s available-for-sale securities reflected a net unrealized gain of $8.9 million as of February 28, 2017 compared with a net unrealized gain of $47.6 million as of May 31, 2016. Included in the net unrealized gain totals as of February 28, 2017 and May 31, 2016, there were 280 and 63 available-for-sale securities in an unrealized loss position, respectively. The available-for-sale securities in an unrealized loss position were as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

February 28, 2017



 

Securities in an unrealized 
loss position for less than 
twelve months

 

Securities in an unrealized 
loss position for more than 
twelve months

 

Total



 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 



 

unrealized

 

Fair

 

unrealized

 

Fair

 

unrealized

 

Fair

In millions

 

losses

 

value

 

losses

 

value

 

losses

 

value

Type of issue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

(1.0)

 

$

57.4 

 

$

 —

 

$

 —

 

$

(1.0)

 

$

57.4 

General obligation municipal bonds

 

 

(4.6)

 

 

258.6 

 

 

 —

 

 

 —

 

 

(4.6)

 

 

258.6 

Pre-refunded municipal bonds

 

 

 

 

12.4 

 

 

 —

 

 

 —

 

 

 —

 

 

12.4 

Revenue municipal bonds

 

 

(4.1)

 

 

199.1 

 

 

 —

 

 

1.0 

 

 

(4.1)

 

 

200.1 

U.S. government agency securities

 

 

(5.5)

 

 

254.6 

 

 

 —

 

 

 —

 

 

(5.5)

 

 

254.6 

Total

 

$

(15.2)

 

$

782.1 

 

$

 —

 

$

1.0 

 

$

(15.2)

 

$

783.1 

  





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

May 31, 2016



 

Securities in an unrealized 
loss position for less than 
twelve months

 

Securities in an unrealized 
loss position for more than 
twelve months

 

Total



 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 



 

unrealized

 

Fair

 

unrealized

 

Fair

 

unrealized

 

Fair

In millions

 

losses

 

value

 

losses

 

value

 

losses

 

value

Type of issue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

(0.1)

 

$

14.7 

 

$

 —

 

$

 —

 

$

(0.1)

 

$

14.7 

General obligation municipal bonds

 

 

(0.1)

 

 

48.9 

 

 

 —

 

 

2.8 

 

 

(0.1)

 

 

51.7 

Pre-refunded municipal bonds

 

 

 —

 

 

5.7 

 

 

 —

 

 

 —

 

 

 —

 

 

5.7 

Revenue municipal bonds

 

 

 —

 

 

20.7 

 

 

(0.2)

 

 

11.7 

 

 

(0.2)

 

 

32.4 

U.S. government agency securities

 

 

(0.3)

 

 

51.1 

 

 

 —

 

 

 —

 

 

(0.3)

 

 

51.1 

Total

 

$

(0.5)

 

$

141.1 

 

$

(0.2)

 

$

14.5 

 

$

(0.7)

 

$

155.6 



The Company regularly reviews its investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The Company believes that the investments held as of February 28, 2017 that had unrealized losses of $15.2 million were not other-than-temporarily impaired. The Company believes that it is probable that the principal and interest will be collected in accordance with contractual terms, and that the unrealized losses on these securities were due to changes in interest rates and were not due to increased credit risk or other valuation concerns. A majority of the securities in an unrealized loss position as of February 28, 2017 and May 31, 2016 held an AA rating or better. The Company does not intend to sell these investments until the recovery of their amortized cost basis or maturity and further believes that it is not more-likely-than-not that it will be required to sell these investments prior to that time. The Company’s assessment that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in the Company’s strategies or assumptions related to any particular investment.



Realized gains and losses on the sales of securities are determined by specific identification of the amortized cost basis of each security. On the Consolidated Statements of Income and Comprehensive Income, realized gains and losses from funds held for clients are included in interest on funds held for clients and realized gains and losses from corporate investments are included in investment income, net. Realized gains and losses were insignificant for the three and nine months ended February 28, 2017 and February 29, 2016.  



9

 


 

Table of Contents

 

The amortized cost and fair value of available-for-sale securities that had stated maturities as of February 28, 2017 are shown below by contractual maturity. Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.







 

 

 

 

 

 



 

 

 

 

 

 



 

February 28, 2017



 

Amortized

 

Fair

In millions

 

cost

 

value

Maturity date:

 

 

 

 

 

 

Due in one year or less

 

$

319.7 

 

$

320.4 

Due after one year through three years

 

 

732.8 

 

 

737.6 

Due after three years through five years

 

 

991.8 

 

 

1,001.3 

Due after five years

 

 

2,407.1 

 

 

2,401.0 

Total

 

$

4,451.4 

 

$

4,460.3 



Variable rate demand notes are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.

 

Note E: Fair Value Measurements



Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price), in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:



·

Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company can access at the measurement date.



·

Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for the instrument, either directly or indirectly, for substantially the full term of the asset or liability including the following:



·

quoted prices for similar, but not identical, instruments in active markets;



·

quoted prices for identical or similar instruments in markets that are not active;



·

inputs other than quoted prices that are observable for the instrument; or



·

inputs that are derived principally from or corroborated by observable market data by correlation or other means.



·

Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.



The carrying values of cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts, accounts payable and short-term borrowings approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as available-for-sale and are recorded at fair value on a recurring basis.



10

 


 

Table of Contents

 

The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

February 28, 2017



 

 

 

 

Quoted

 

Significant

 

 

 



 

 

 

 

prices in

 

other

 

Significant



 

Carrying

 

active

 

observable

 

unobservable



 

value

 

markets

 

inputs

 

inputs

In millions

 

(Fair value)

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

General obligation municipal bonds

 

$

3.7 

 

$

 —

 

$

3.7 

 

$

 —

Revenue municipal bonds

 

 

15.0 

 

 

 —

 

 

15.0 

 

 

 —

Total cash equivalents

 

$

18.7 

 

$

 —

 

$

18.7 

 

$

 —

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

189.7 

 

$

 —

 

$

189.7 

 

$

 —

General obligation municipal bonds

 

 

1,464.9 

 

 

 —

 

 

1,464.9 

 

 

 —

Pre-refunded municipal bonds

 

 

63.6 

 

 

 —

 

 

63.6 

 

 

 —

Revenue municipal bonds

 

 

949.0 

 

 

 —

 

 

949.0 

 

 

 —

U.S. government agency securities

 

 

290.5 

 

 

 —

 

 

290.5 

 

 

 —

Variable rate demand notes

 

 

1,502.6 

 

 

 —

 

 

1,502.6 

 

 

 —

Total available-for-sale securities

 

$

4,460.3 

 

$

 —

 

$

4,460.3 

 

$

 —

Other

 

$

16.1 

 

$

16.1 

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

$

16.1 

 

$

16.1 

 

$

 —

 

$

 —

  



















 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

May 31, 2016



 

 

 

 

Quoted

 

Significant

 

 

 



 

 

 

 

prices in

 

other

 

Significant



 

Carrying

 

active

 

observable

 

unobservable



 

value

 

markets

 

inputs

 

inputs

In millions

 

(Fair value)

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

131.2 

 

$

 —

 

$

131.2 

 

$

 —

General obligation municipal bonds

 

 

1,621.6 

 

 

 —

 

 

1,621.6 

 

 

 —

Pre-refunded municipal bonds

 

 

61.6 

 

 

 —

 

 

61.6 

 

 

 —

Revenue municipal bonds

 

 

931.8 

 

 

 —

 

 

931.8 

 

 

 —

U.S. government agency securities

 

 

161.1 

 

 

 —

 

 

161.1 

 

 

 —

Variable rate demand notes

 

 

1,234.6 

 

 

 —

 

 

1,234.6 

 

 

 —

Total available-for-sale securities

 

$

4,141.9 

 

$

 —

 

$

4,141.9 

 

$

 —

Other

 

$

14.9 

 

$

14.9 

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

$

14.9 

 

$

14.9 

 

$

 —

 

$

 —



11

 


 

Table of Contents

 

In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. Money market securities, which are cash equivalents, are valued based on quoted market prices in active markets. Available-for-sale securities including municipal bonds, corporate bonds, U.S. government agency securities, and short-term municipal bonds with a maturity of less than 90 days included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company’s Level 2 available-for-sale securities, a variety of inputs are utilized including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company has not adjusted the prices obtained from the independent pricing service because it believes that they are appropriately valued.



Assets included as other are mutual fund investments, consisting of participants’ eligible deferral contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term liabilities. The mutual funds are valued based on quoted market prices in active markets.



The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

Note F: Property and Equipment, Net of Accumulated Depreciation



The components of property and equipment, at cost, consisted of the following:







 

 

 

 

 

 



 

 

 

 

 

 



 

February 28,

 

May 31,

In millions