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

6 Months Ended

Nov. 30, 2019

Funds Held for Clients and Corporate Investments [Abstract]

Funds Held for Clients and Corporate Investments

Note F: Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments are as follows:



	November 30, 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	$	756.7	$	—	$	—	$	756.7
Available-for-sale securities:
Asset-backed securities		52.1		0.2		(0.1)		52.2
Corporate bonds		684.2		12.0		(0.3)		695.9
General obligation municipal bonds		734.7		10.6		—		745.3
Pre-refunded municipal bonds⁽¹⁾		23.2		0.2		—		23.4
Revenue municipal bonds		491.3		6.3		—		497.6
U.S. government agency and treasury securities		960.4		11.3		(1.5)		970.2
Variable rate demand notes		7.5		—		—		7.5
Total available-for-sale securities		2,953.4		40.6		(1.9)		2,992.1
Other		27.2		3.4		(0.1)		30.5
Total funds held for clients and corporate investments	$	3,737.3	$	44.0	$	(2.0)	$	3,779.3



	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

⁽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 November 30, 2019 and May 31, 2019 were bank demand deposit accounts, commercial paper, and money market funds. In addition, as of November 30, 2019, certain U.S. government agency securities with maturities of 90 days or less at acquisition were included in money market securities and other cash equivalents.

Classification of funds held for clients and investments on the Consolidated Balance Sheets is as follows:



	November 30,		May 31,
In millions	2019		2019
Funds held for clients	$	3,734.8	$	3,803.8
Corporate investments		34.4		39.0
Long-term corporate investments		10.1		10.2
Total funds held for clients and corporate investments	$	3,779.3	$	3,853.0

Funds held for clients’ money market securities and other cash equivalents is collected from 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 net unrealized gains of $38.7 million and $19.7 million as of November 30, 2019 and May 31, 2019, respectively. Included in the net unrealized gain totals as of November 30, 2019 and May 31, 2019 were 113 and 269 available-for-sale securities in an unrealized loss position, respectively. The available-for-sale securities in an unrealized loss position were as follows:



	November 30, 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:
Asset-backed securities	$	(0.1)	$	25.3	$	—	$	—	$	(0.1)	$	25.3
Corporate bonds		(0.2)		66.2		(0.1)		16.2		(0.3)		82.4
Revenue municipal bonds		—		5.2		—		—		—		5.2
U.S. government agency and treasury securities		(1.2)		232.5		(0.3)		75.9		(1.5)		308.4
Total	$	(1.5)	$	329.2	$	(0.4)	$	92.1	$	(1.9)	$	421.3



	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

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 November 30, 2019 that had gross unrealized losses of $1.9 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 November 30, 2019 and May 31, 2019 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 other (expense)/income, net. Realized gains were $0.9 million and $0.1 million for the three months ended November 30, 2019 and November 30, 2018, respectively, and $1.8 million and $0.2 million for the six months ended November 30, 2019 and November 30, 2018, respectively. There were no realized losses for the three and six months ended November 30, 2019 and $0.4 million of realized losses for both the three and six months ended November 30, 2018.

The amortized cost and fair value of available-for-sale securities that had stated maturities as of November 30, 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.



	November 30, 2019

	Amortized		Fair
In millions	cost		value
Maturity date:
Due in one year or less	$	336.9	$	337.8
Due after one year through three years		797.0		806.7
Due after three years through five years		937.0		953.0
Due after five years		882.5		894.6
Total	$	2,953.4	$	2,992.1

Variable rate demand notes (“VRDNs”) are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically 20 years 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.