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

9 Months Ended

Feb. 28, 2018

Funds Held for Clients and Corporate Investments [Abstract]

Funds Held for Clients and Corporate Investments

Note E: Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments are as follows:



	February 28, 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	$	673.9	$	—	$	—	$	673.9
Available-for-sale securities:
Corporate bonds		305.8		0.1		(6.5)		299.4
General obligation municipal bonds		1,303.8		2.6		(10.6)		1,295.8
Pre-refunded municipal bonds(1)		64.7		0.6		(0.1)		65.2
Revenue municipal bonds		851.3		1.7		(7.9)		845.1
U.S. government agency securities		410.2		—		(14.8)		395.4
Variable rate demand notes		854.7		—		—		854.7
Total available-for-sale securities		3,790.5		5.0		(39.9)		3,755.6
Other		15.8		2.1		—		17.9
Total funds held for clients and corporate investments	$	4,480.2	$	7.1	$	(39.9)	$	4,447.4



	May 31, 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	$	264.8	$	—	$	—	$	264.8
Available-for-sale securities:
Corporate bonds		208.6		2.7		(0.5)		210.8
General obligation municipal bonds		1,422.0		21.2		(0.9)		1,442.3
Pre-refunded municipal bonds(1)		54.6		0.9		—		55.5
Revenue municipal bonds		929.2		12.5		(0.8)		940.9
U.S. government agency securities		328.9		0.5		(3.6)		325.8
Variable rate demand notes		1,637.9		—		—		1,637.9
Total available-for-sale securities		4,581.2		37.8		(5.8)		4,613.2
Other		14.8		1.9		—		16.7
Total funds held for clients and corporate investments	$	4,860.8	$	39.7	$	(5.8)	$	4,894.7

(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, 2018 were bank demand deposit accounts, time deposits, commercial paper, and money market funds. Included in money market securities and other cash equivalents as of May 31, 2017 were bank demand deposit accounts and money market funds.

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



	February 28,		May 31,
In millions	2018		2017
Funds held for clients	$	3,944.7	$	4,301.9
Corporate investments		97.3		138.8
Long-term corporate investments		405.4		454.0
Total funds held for clients and corporate investments	$	4,447.4	$	4,894.7

The Company’s available-for-sale securities reflected a net unrealized loss of $34.9 million as of February 28, 2018 compared with a net unrealized gain of $32.0 million as of May 31, 2017. Included in the net unrealized loss as of February 28, 2018 were 859 available-for-sale securities in an unrealized loss position. Included in the net unrealized gain as of May 31, 2017 were 216 available-for-sale securities in an unrealized loss position. The available-for-sale securities in an unrealized loss position were as follows:



	February 28, 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	$	(5.2)	$	252.1	$	(1.3)	$	34.7	$	(6.5)	$	286.8
General obligation municipal bonds		(8.0)		735.5		(2.6)		71.4		(10.6)		806.9
Pre-refunded municipal bonds		(0.1)		7.2		—		0.5		(0.1)		7.7
Revenue municipal bonds		(6.1)		435.7		(1.8)		51.6		(7.9)		487.3
U.S. government agency securities		(6.8)		219.3		(8.0)		176.1		(14.8)		395.4
Total	$	(26.2)	$	1,649.8	$	(13.7)	$	334.3	$	(39.9)	$	1,984.1



	May 31, 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	$	(0.5)	$	43.6	$	—	$	—	$	(0.5)	$	43.6
General obligation municipal bonds		(0.9)		188.8		—		—		(0.9)		188.8
Pre-refunded municipal bonds		—		9.2		—		—		—		9.2
Revenue municipal bonds		(0.8)		154.8		—		1.0		(0.8)		155.8
U.S. government agency securities		(3.6)		210.0		—		—		(3.6)		210.0
Total	$	(5.8)	$	606.4	$	—	$	1.0	$	(5.8)	$	607.4

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, 2018 that had gross unrealized losses of $39.9 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, 2018 and May 31, 2017 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, 2018 and February 28, 2017.

The amortized cost and fair value of available-for-sale securities that had stated maturities as of February 28, 2018 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, 2018

	Amortized		Fair
In millions	cost		value
Maturity date:
Due in one year or less	$	317.9	$	317.9
Due after one year through three years		820.5		819.9
Due after three years through five years		998.1		990.7
Due after five years		1,654.0		1,627.1
Total	$	3,790.5	$	3,755.6

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.