Paychex, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Funds Held for Clients and Corporate Investments

Funds Held for Clients and Corporate Investments

3 Months Ended

Aug. 31, 2013

Funds Held for Clients and Corporate Investments [Abstract]

Funds held for clients and corporate investments

Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments consisted of the following:



	August 31, 2013
In millions	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Type of issue:
Funds held for clients money market securities and other cash equivalents	$	1,404.8	$	—	$	—		$	1,404.8
Available-for-sale securities:
General obligation municipal bonds	1,603.7		18.8		(22.1		)	1,600.4
Pre-refunded municipal bonds⁽¹⁾	129.3		2.1		—			131.4
Revenue municipal bonds	837.8		5.9		(12.9		)	830.8
Variable rate demand notes	745.9		—		—			745.9
Total available-for-sale securities	3,316.7		26.8		(35.0		)	3,308.5
Other	10.5		1.2		(0.1		)	11.6
Total funds held for clients and corporate investments	$	4,732.0	$	28.0	$	(35.1	)	$	4,724.9

	May 31, 2013
In millions	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Type of issue:
Funds held for clients money market securities and other cash equivalents	$	1,137.7	$	—	$	—		$	1,137.7
Available-for-sale securities:
General obligation municipal bonds	1,432.9		27.4		(3.5		)	1,456.8
Pre-refunded municipal bonds⁽¹⁾	201.0		2.9		—			203.9
Revenue municipal bonds	746.1		10.1		(2.2		)	754.0
Variable rate demand notes	1,276.7		—		—			1,276.7
Total available-for-sale securities	3,656.7		40.4		(5.7		)	3,691.4
Other	9.5		1.2		—			10.7
Total funds held for clients and corporate investments	$	4,803.9	$	41.6	$	(5.7	)	$	4,839.8


⁽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 August 31, 2013 were short-term municipal bonds with a maturity of less than 90 days, commercial paper, money market funds, and bank demand deposit accounts. Included in money market securities and other cash equivalents as of May 31, 2013 were money market funds and bank demand deposit accounts. Within bank demand deposit accounts for funds held for clients, the Company maintained $22.2 million as of August 31, 2013 and $23.4 million as of May 31, 2013 in a separately designated account for tax obligations of a partner's clients.

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



In millions	August 31, 2013		May 31, 2013
Funds held for clients	$	3,911.7	$	4,072.5
Corporate investments	447.6		398.2
Long-term corporate investments	365.6		369.1
Total funds held for clients and corporate investments	$	4,724.9	$	4,839.8

The Company’s available-for-sale securities reflected a net unrealized loss of $8.2 million as of August 31, 2013 compared with a net unrealized gain of $34.7 million as of May 31, 2013. The change to an unrealized loss position was driven by recent increases in market rates of interest. Included in the net unrealized loss as of August 31, 2013 and the net unrealized gain as of May 31, 2013, there were 335 and 147 available-for-sale securities in an unrealized loss position, respectively. The securities in an unrealized loss position were as follows:



	August 31, 2013
	Less than twelve months					More than twelve months				Total
In millions	Gross unrealized losses			Fair value		Gross unrealized losses		Fair Value		Gross unrealized losses			Fair Value
Type of issue:
General obligation municipal bonds	$	(22.1	)	$	775.9	$	—	$	2.0	$	(22.1	)	$	777.9
Pre-refunded municipal bonds	—			11.4		—		—		—			11.4
Revenue municipal bonds	(12.9		)	512.3		—		2.1		(12.9		)	514.4
Total	$	(35.0	)	$	1,299.6	$	—	$	4.1	$	(35.0	)	$	1,303.7



	May 31, 2013
	Less than twelve months					More than twelve months				Total
In millions	Gross unrealized losses			Fair value		Gross unrealized losses		Fair Value		Gross unrealized losses			Fair Value
Type of issue:
General obligation municipal bonds	$	(3.5	)	$	349.2	$	—	$	—	$	(3.5	)	$	349.2
Pre-refunded municipal bonds	—			3.1		—		—		—			3.1
Revenue municipal bonds	(2.2		)	225.3		—		2.1		(2.2		)	227.4
Total	$	(5.7	)	$	577.6	$	—	$	2.1	$	(5.7	)	$	579.7

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 it held as of August 31, 2013, that had unrealized losses totaling $35.0 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 the 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 substantial portion of the securities in an unrealized loss position as of August 31, 2013 and May 31, 2013 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. For both the three months ended August 31, 2013 and 2012, realized gains were $0.2 million. There were no realized losses recognized in any of the respective periods.

The amortized cost and fair value of available-for-sale securities that had stated maturities as of August 31, 2013 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.



	August 31, 2013
In millions	Amortized cost		Fair value
Maturity date:
Due in one year or less	$	339.6	$	343.0
Due after one year through three years	711.8		727.0
Due after three years through five years	704.1		705.8
Due after five years	1,561.2		1,532.7
Total	$	3,316.7	$	3,308.5

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.