Paychex, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Funds Held for Clients and Corporate Investments

Funds Held for Clients and Corporate Investments

12 Months Ended

May 31, 2019

Funds Held for Clients and Corporate Investments [Abstract]

Funds Held for Clients and Corporate Investments

Note G — Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments are as follows:



	May 31, 2019
			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	$	204.5	$	—	$	—	$	204.5
Available-for-sale securities:
Asset-backed securities		5.3		—		—		5.3
Corporate bonds		442.1		5.3		(0.9)		446.5
General obligation municipal bonds		840.6		7.5		(0.3)		847.8
Pre-refunded municipal bonds(1)		25.6		0.2		—		25.8
Revenue municipal bonds		545.4		4.7		(0.2)		549.9
U.S. government agency and treasury securities		612.5		4.7		(1.3)		615.9
Variable rate demand notes		1,129.6		—		—		1,129.6
Total available-for-sale securities		3,601.1		22.4		(2.7)		3,620.8
Other		26.3		1.7		(0.3)		27.7
Total funds held for clients and corporate investments	$	3,831.9	$	24.1	$	(3.0)	$	3,853.0



	May 31, 2018
			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	$	1,942.3	$	—	$	—	$	1,942.3
Available-for-sale securities:
Corporate bonds		328.6		0.1		(7.3)		321.4
General obligation municipal bonds		1,231.6		1.3		(11.2)		1,221.7
Pre-refunded municipal bonds(1)		50.9		0.1		(0.1)		50.9
Revenue municipal bonds		813.5		0.9		(8.0)		806.4
U.S. government agency and treasury securities		410.2		—		(14.1)		396.1
Variable rate demand notes		308.3		—		—		308.3
Total available-for-sale securities		3,143.1		2.4		(40.7)		3,104.8
Other		16.1		2.1		—		18.2
Total funds held for clients and corporate investments	$	5,101.5	$	4.5	$	(40.7)	$	5,065.3

(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 May 31, 2019 were bank demand deposit accounts, commercial paper, and money market funds. Included in money market securities and other cash equivalents as of May 31, 2018 were bank demand deposit accounts, time deposits, commercial paper, and money market funds.

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



	May 31,
In millions	2019		2018
Funds held for clients	$	3,803.8	$	4,703.8
Corporate investments		39.0		66.0
Long-term corporate investments		10.2		295.5
Total funds held for clients and corporate investments	$	3,853.0	$	5,065.3

Funds held for clients’ money market securities and other cash equivalents is collected from payroll clients before due dates for payroll tax administration services and employee payment services, and is invested until remitted to the applicable tax or regulatory agencies or client employees. Based upon the Company’s intent and its contractual obligation to the client, these funds are considered restricted until they are remitted to fund these client obligations.

The Company’s available-for-sale securities reflected a net unrealized gain of $19.7 million as of May 31, 2019, compared to a net unrealized loss of $38.3 million as of May 31, 2018. Included in the net unrealized gain as of May 31, 2019 were 269 available-for-sale securities in an unrealized loss position. Included in the net unrealized loss as of May 31, 2018 were 970 available-for-sale securities in an unrealized loss position. The available-for-sale securities in an unrealized loss position were as follows:



	May 31, 2019
	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	$	—	$	1.5	$	(0.9)	$	133.8	$	(0.9)	$	135.3
General obligation municipal bonds		—		3.0		(0.3)		168.3		(0.3)		171.3
Pre-refunded municipal bonds		—		0.1		—		1.6		—		1.7
Revenue municipal bonds		—		0.1		(0.2)		79.2		(0.2)		79.3
U.S. government agency and treasury securities		—		4.7		(1.3)		175.6		(1.3)		180.3
Total	$	—	$	9.4	$	(2.7)	$	558.5	$	(2.7)	$	567.9



	May 31, 2018
	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	$	(6.0)	$	271.5	$	(1.3)	$	34.6	$	(7.3)	$	306.1
General obligation municipal bonds		(8.7)		856.4		(2.5)		68.9		(11.2)		925.3
Pre-refunded municipal bonds		(0.1)		18.5		—		0.5		(0.1)		19.0
Revenue municipal bonds		(6.3)		540.9		(1.7)		50.9		(8.0)		591.8
U.S. government agency and treasury securities		(6.4)		219.7		(7.7)		176.4		(14.1)		396.1
Total	$	(27.5)	$	1,907.0	$	(13.2)	$	331.3	$	(40.7)	$	2,238.3

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 May 31, 2019 that had gross unrealized losses of $2.7 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 May 31, 2019 and May 31, 2018 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 from the sale of available-for-sale securities were as follows:



	Year ended May 31,
In millions	2019		2018		2017
Gross realized gains	$	0.6	$	0.3	$	0.1
Gross realized losses		(0.6)		(0.2)		—
Net realized gains	$	—	$	0.1	$	0.1

The amortized cost and fair value of available-for-sale securities that had stated maturities as of May 31, 2019 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.



	May 31, 2019
	Amortized		Fair
In millions	cost		value
Maturity date:
Due in one year or less	$	183.5	$	183.4
Due after one year through three years		898.9		903.1
Due after three years through five years		989.2		998.7
Due after five years		1,529.5		1,535.6
Total	$	3,601.1	$	3,620.8

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.