Paychex (PAYX) 10-Q 23 Sep 09 2010 Q1 Quarterly report Financial data

Document and Company Informatio

Document and Company Information (USD $)
	3 Months Ended Aug. 31, 2009	Nov. 30, 2008
Document And Company Information [Abstract]
Entity Registrant Name	PAYCHEX, INC.
Entity Central Index Key	0000723531
Document Type	10-Q
Document Period End Date	2009-08-31
Amendment Flag	false
Current Fiscal Year End Date	--05-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float		$9,090,512,779
Entity Common Stock, Shares Outstanding	361,381,805

Consolidated Statements of Inco

Consolidated Statements of Income (USD $)
In Thousands, except Per Share data	3 Months Ended Aug. 31, 2009	3 Months Ended Aug. 31, 2008
Revenue:
Service revenue	$486,491	$509,867
Interest on funds held for clients	13,723	24,218
Total revenue	500,214	534,085
Expenses:
Operating expenses	163,346	168,468
Selling, general and administrative expenses	147,001	144,032
Total expenses	310,347	312,500
Operating income	189,867	221,585
Investment income, net	905	3,051
Income before income taxes	190,772	224,636
Income taxes	67,152	75,927
Net income	$123,620	$148,709
Basic earnings per share	0.34	0.41
Diluted earnings per share	0.34	0.41
Weighted-average common shares outstanding	361,208	360,629
Weighted-average common shares outstanding, assuming dilution	361,362	361,040
Cash dividends per common share	0.31	0.31

Consolidated Balance Sheets

Consolidated Balance Sheets (USD $)
In Thousands	Aug. 31, 2009	May. 31, 2009
ASSETS
Cash and cash equivalents	$315,323	$472,769
Corporate investments	13,853	19,710
Interest receivable	23,189	27,722
Accounts receivable, net of allowance for doubtful accounts	201,330	177,958
Deferred income taxes	4,099	10,180
Prepaid income taxes	0	2,198
Prepaid expenses and other current assets	28,564	27,913
Current assets before funds held for clients	586,358	738,450
Funds held for clients	3,017,511	3,501,376
Total current assets	3,603,869	4,239,826
Long-term corporate investments	304,874	82,234
Property and equipment, net of accumulated depreciation	268,317	274,530
Intangible assets, net of accumulated amortization	75,510	76,641
Goodwill	433,316	433,316
Deferred income taxes	17,706	16,487
Other long-term assets	4,151	4,381
Total assets	4,707,743	5,127,415
LIABILITIES
Accounts payable	33,301	37,334
Accrued compensation and related items	125,102	135,064
Deferred revenue	9,596	9,542
Accrued income taxes	58,223	0
Deferred income taxes	17,794	17,159
Litigation reserve	20,378	20,411
Other current liabilities	43,020	44,704
Current liabilities before client fund obligations	307,414	264,214
Client fund obligations	2,952,240	3,437,679
Total current liabilities	3,259,654	3,701,893
Accrued income taxes	26,155	25,730
Deferred income taxes	13,041	12,773
Other long-term liabilities	44,031	45,541
Total liabilities	3,342,881	3,785,937
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; Authorized: 600,000 shares; Issued and outstanding: 361,382 shares as of August 31, 2009 and 360,976 shares as of May 31, 2009, respectively	3,614	3,610
Additional paid-in capital	478,681	466,427
Retained earnings	839,366	829,501
Accumulated other comprehensive income	43,201	41,940
Total stockholders' equity	1,364,862	1,341,478
Total liabilities and stockholders' equity	$4,707,743	$5,127,415

Consolidated Balance Sheets (Pa

Consolidated Balance Sheets (Parenthetical) (USD $)
Share data in Thousands	Aug. 31, 2009	May. 31, 2009
Common stock, par value	0.01	0.01
Common stock, shares authorized	600,000	600,000
Common stock, shares issued	361,382	360,976
Common stock, shares outstanding	361,382	360,976

Consolidated Statements of Cash

Consolidated Statements of Cash Flows (USD $)
In Thousands	3 Months Ended Aug. 31, 2009	3 Months Ended Aug. 31, 2008
OPERATING ACTIVITIES
Net income	$123,620	$148,709
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets	21,627	20,687
Amortization of premiums and discounts on available-for-sale securities	7,974	6,537
Stock-based compensation costs	6,725	6,922
Provision for deferred income taxes	4,222	6,422
Provision for allowance for doubtful accounts	945	464
Net realized gains on sales of available-for-sale securities	(285)	(300)
Changes in operating assets and liabilities:
Interest receivable	4,533	4,906
Accounts receivable	(24,317)	(12,906)
Prepaid expenses and other current assets	1,547	10,782
Accounts payable and other current liabilities	41,324	23,275
Net change in other assets and liabilities	(1,297)	(947)
Net cash provided by operating activities	186,618	214,551
INVESTING ACTIVITIES
Purchases of available-for-sale securities	(336,555)	(13,140,530)
Proceeds from sales and maturities of available-for-sale securities	175,244	12,508,552
Net change in funds held for clients' money market securities and other cash equivalents	423,092	599,586
Purchases of property and equipment	(10,139)	(16,207)
Purchases of other assets	(4,118)	(1,274)
Net cash provided by/(used in) investing activities	247,524	(49,873)
FINANCING ACTIVITIES
Net change in client fund obligations	(485,439)	(160,536)
Dividends paid	(112,112)	(111,904)
Proceeds from and excess tax benefit related to exercise of stock options	5,963	5,107
Net cash used in financing activities	(591,588)	(267,333)
Decrease in cash and cash equivalents	(157,446)	(102,655)
Cash and cash equivalents, beginning of period	472,769	164,237
Cash and cash equivalents, end of period	$315,323	$61,582

Description of Business and Sig

Description of Business and Significant Accounting Policies
	3 Months Ended Aug. 31, 2009 USD / shares
Description of Business and Significant Accounting Policies [Abstract]
Description of Business and Significant Accounting Policies	Note A: Description of Business and Significant Accounting Policies Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the Company or Paychex) is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses in the United States (U.S.). The Company also has a subsidiary in Germany. Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the Companys revenue is generated within the U.S. The Company also generates revenue within Germany, which was less than one percent of its total revenue for the three months ended August31, 2009 and 2008. Long-lived assets in Germany are insignificant in relation to total long-lived assets of the Company as of August31, 2009 and May31, 2009. 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 Article10 of RegulationS-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 significant 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 presentation of the results for the interim period. These financial statements should be read in conjunction with the Companys Consolidated Financial Statements and related Notes to Consolidated Financial Statements presented in the Companys Annual Report on Form 10-K as of and for the year ended May 31, 2009 (fiscal 2009). Operating results and cash flows for the three months ended August31, 2009 are not necessarily indicative of the results that may be expected for other interim periods or the full fiscal year ending May31, 2010 (fiscal 2010). The Company has evaluated subsequent events for potential recognition and/or disclosure through September23, 2009, the date of issuance of these financial statements. PEO revenue recognition: Professional Employer Organization (PEO) revenue is included in service revenue and is reported net of direct costs billed and incurred which include wages, taxes, benefit premiums, and claims of PEO worksite employees. Direct costs billed and incurred were $708.4 million and $635.7million for the three months ended August31, 2009 and 2008, respectively. PEO workers compensation insurance: Workers compensation insurance for PEO worksite employees is provided under a deductible workers compensation policy with a national insurance company. Claims are paid as incurred and the Companys maximum individual claims liability is $1.0million under both its fiscal 2010 and fiscal 2009 policies. The Company has recorded the following amounts on its Consolidated Balance Sheets for workers compensation claims as of: August 31, May 31, In

Basic and Diluted Earnings Per

Basic and Diluted Earnings Per Share
	3 Months Ended Aug. 31, 2009 USD / shares
Basic and Diluted Earnings Per Share [Abstract]
Basic and Diluted Earnings Per Share	Note B: Basic and Diluted Earnings Per Share Basic and diluted earnings per share were calculated as follows: For the three months ended August 31, In thousands, except per share amounts 2009 2008 Basic earnings per share: Net income $ 123,620 $ 148,709 Weighted-average common shares outstanding 361,208 360,629 Basic earnings per share $ 0.34 $ 0.41 Diluted earnings per share: Net income $ 123,620 $ 148,709 Weighted-average common shares outstanding 361,208 360,629 Dilutive effect of common share equivalents at average market price 154 411 Weighted-average common shares outstanding, assuming dilution 361,362 361,040 Diluted earnings per share $ 0.34 $ 0.41 Weighted-average anti-dilutive common share equivalents 14,572 11,387 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 August31, 2009, 0.5million shares of the Companys common stock were issued for stock option exercises and vesting of restricted stock and RSUs compared with 0.3 million shares for the three months ended August31, 2008.

Funds Held for Clients and Corp

Funds Held for Clients and Corporate Investments
	3 Months Ended Aug. 31, 2009 USD / shares
Funds Held for Clients and Corporate Investments [Abstract]
Funds Held for Clients and Corporate Investments	Note C: Funds Held for Clients and Corporate Investments Funds held for clients and corporate investments consisted of the following: August 31, 2009 Gross Gross Amortized unrealized unrealized Fair In thousands cost gains losses value Type of issue: Money market securities and other cash equivalents $ 1,393,187 $ $ $ 1,393,187 Available-for-sale securities: General obligation municipal bonds 964,079 34,848 (319 ) 998,608 Pre-refunded municipal bonds(1) 565,008 20,825 (158 ) 585,675 Revenue municipal bonds 338,667 13,472 (80 ) 352,059 Other equity securities 20 48 68 Total available-for-sale securities $ 1,867,774 69,193 (557 ) 1,936,410 Other 7,309 33 (701 ) 6,641 Total funds held for clients and corporate investments $ 3,268,270 $ 69,226 $ (1,258 ) $ 3,336,238 May 31, 2009 Gross Gross Amortized unrealized unrealized Fair In thousands cost gains losses value Type of issue: Money market securities and other cash equivalents $ 1,816,278 $ $ $ 1,816,278 Available-for-sale securities: General obligation municipal bonds 849,594 32,698 (136 ) 882,156 Pre-refunded municipal bonds(1) 527,864 21,334 (24 ) 549,174 Revenue municipal bonds 336,675 12,818 (32 ) 349,461 Other equity securities 20 42 62 Total available-for-sale securities 1,714,153 66,892 (192 ) 1,780,853 Other 7,477 (1,288 ) 6,189 Total funds held for clients and corporate investments $ 3,537,908 $ 66,892 $ (1,480 ) $ 3,603,320 (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 August31, 2009 and May31, 2009 are U.S. agency discount notes, government money market funds, and bank demand deposit accounts. Classification of investments on the Consolidated Balance Sheets is as follows: August 31, May 31, In thousands 2009 2009 Funds held for clients $ 3,017,511 $ 3,501,376 Corporate investments 13,853 19,710 Long-term corporate investments 304,874 82,234 Total funds held for clients and corporate investments $ 3,336,238 $ 3,603,320 The Company is exposed to credit risk in connection with these investments through the possible inability of borrowers to meet the terms of their bonds. In addition, the Company is exposed to interest rate risk, as rate volatility will cause fluctuations in the fair value of held investments and in the earnings potential of future investments. The Company

Fair Value Measurements

Fair Value Measurements
	3 Months Ended Aug. 31, 2009 USD / shares
Fair Value Measurements [Abstract]
Fair Value Measurements	Note D: Fair Value Measurements The carrying values of cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts, and trade accounts payable 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. 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 has the ability to access. Level 2 valuations are based on quoted prices for similar, but not identical, instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or other than quoted prices observable inputs. Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement. The following table presents information on the Companys financial assets and liabilities measured at fair value on a recurring basis as of August31, 2009: Quoted Significant prices in other Significant Carrying active observable unobservable value markets inputs inputs In thousands (Fair value) (Level 1) (Level 2) (Level 3) Assets: Available-for-sale securities: General obligation municipal bonds $ 998,608 $ $ 998,608 $ Pre-refunded municipal bonds 585,675 585,675 Revenue municipal bonds 352,059 352,059 Other equity securities 68 68 Total available-for-sale securities $ 1,936,410 $ 68 $ 1,936,342 $ Other securities $ 6,641 $ 6,641 $ $ Liabilities: Other long-term liabilities $ 6,641 $ 6,641 $ $ In determining the fair value of its assets and liabilities, the Company uses various valuation approaches, predominately the market and income approaches. In determining the fair value of its available-for-sale securities, the Company utilizes the Interactive Data Pricing service, a market approach. Other securities are comprised of mutual fund investments, which are valued based on quoted market prices. Other long-term liabilities include the liability for the Companys non-qualified and unfunded deferred compensation plans, and are valued based on the quoted market prices for various mutual fund investment choices. 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,

Property and Equipment, Net of

Property and Equipment, Net of Accumulated Depreciation
	3 Months Ended Aug. 31, 2009 USD / shares
Property and Equipment, Net of Accumulated Depreciation [Abstract]
Property and Equipment, Net of Accumulated Depreciation	Note E: Property and Equipment, Net of Accumulated Depreciation The components of property and equipment, at cost, consisted of the following: August 31, May 31, In thousands 2009 2009 Land and improvements $ 4,033 $ 4,033 Buildings and improvements 83,404 83,386 Data processing equipment 183,085 180,448 Software 168,690 165,959 Furniture, fixtures, and equipment 144,606 143,638 Leasehold improvements 88,904 88,509 Construction in progress 5,893 4,034 Total property and equipment, gross 678,615 670,007 Less: Accumulated depreciation and amortization 410,298 395,477 Property and equipment, net of accumulated depreciation $ 268,317 $ 274,530 Depreciation expense was $16.4million and $15.9million for the three months ended August31, 2009 and 2008, respectively. Within construction in progress, there are costs for software being developed for internal use of $5.1million and $3.4million as of August31, 2009 and May31, 2009, respectively. Capitalization of costs ceases when the software is ready for its intended use, at which time the Company begins amortization of the costs.

Goodwill and Intangible Assets,

Goodwill and Intangible Assets, Net of Accumulated Amortization
	3 Months Ended Aug. 31, 2009 USD / shares
Goodwill and Intangible Assets, Net of Accumulated Amortization [Abstract]
Goodwill and Intangible Assets, Net of Accumulated Amortization	Note F: Goodwill and Intangible Assets, Net of Accumulated Amortization The Company had goodwill balances on its Consolidated Balance Sheets of $433.3million as of both August31, 2009 and May31, 2009. The Company has certain intangible assets with finite lives. The components of intangible assets, at cost, consisted of the following: August 31, May 31, In thousands 2009 2009 Client lists and associate office license agreements $ 198,995 $ 194,887 Other intangible assets 5,685 5,675 Total intangible assets, gross 204,680 200,562 Less: Accumulated amortization 129,170 123,921 Intangible assets, net of accumulated amortization $ 75,510 $ 76,641 Amortization expense relating to intangible assets was $5.2million and $4.8million for the three months ended August31, 2009 and 2008, respectively. As of August31, 2009, the estimated amortization expense relating to intangible asset balances for the full fiscal year 2010 and the following four fiscal years is as follows: Estimated In thousands amortization Year ending May 31, expense 2010 $ 21,736 2011 $ 18,920 2012 $ 16,064 2013 $ 10,090 2014 $ 6,150

Business Acquisition Reserves

Business Acquisition Reserves
	3 Months Ended Aug. 31, 2009 USD / shares
Business Acquisition Reserves [Abstract]
Business Acquisition Reserves	Note G: Business Acquisition Reserves The Company had recorded reserves related to acquisitions in the amounts of $10.2million for severance and $6.2million for redundant lease costs. Activity for the three months ended August 31, 2009 for these reserves is summarized as follows: Balance as of Balance as of May 31, Utilization of August 31, In thousands 2009 reserve 2009 Severance costs $ 149 $ $ 149 Redundant lease costs $ 475 $ (63 ) $ 412 The remaining severance payments are expected to be completed during fiscal 2010. Redundant lease payments are expected to be completed during the fiscal year ending May31, 2016. Payments of $0.2 million extend beyond one year and are included in other long-term liabilities on the Consolidated Balance Sheets as of August31, 2009.

Comprehensive Income

Comprehensive Income
	3 Months Ended Aug. 31, 2009 USD / shares
Comprehensive Income [Abstract]
Comprehensive Income	Note H: Comprehensive Income Comprehensive income is comprised of two components: net income and other comprehensive income. Comprehensive income includes all changes in equity during a period except those resulting from transactions with owners of the Company. The change in unrealized gains and losses, net of applicable taxes, related to available-for-sale securities is the primary component reported in accumulated other comprehensive income in the Consolidated Balance Sheets. Comprehensive income, net of related tax effects, is as follows: For the three months ended August 31, In thousands 2009 2008 Net income $ 123,620 $ 148,709 Other comprehensive income: Unrealized gains on available-for-sale securities, net of taxes 1,441 6,450 Reclassification adjustment for the net gain on sale of available-for-sale securities realized in net income, net of tax (180 ) (194 ) Total other comprehensive income 1,261 6,256 Total comprehensive income $ 124,881 $ 154,965 As of August31, 2009, accumulated other comprehensive income was $43.2million, which was net of taxes of $25.4million. As of May31, 2009, accumulated other comprehensive income was $41.9 million, which was net of taxes of $24.7million.

Commitments and Contingencies

Commitments and Contingencies
	3 Months Ended Aug. 31, 2009 USD / shares
Commitments and Contingencies [Abstract]
Commitments and Contingencies	Note I: Commitments and Contingencies Lines of credit: As of August31, 2009, the Company had unused borrowing capacity available under four uncommitted, secured, short-term lines of credit at market rates of interest with financial institutions as follows: Financial institution Amount available Expiration date JP Morgan Chase Bank, N.A. $350 million February 2010 Bank of America, N.A. $250 million February 2010 PNC Bank, National Association $150 million February 2010 Wells Fargo Bank, National Association $150 million February 2010 The primary uses of the lines of credit would be to meet short-term funding requirements related to deposit account overdrafts and client fund obligations arising from electronic payment transactions on behalf of clients in the ordinary course of business, if necessary. No amounts were outstanding against these lines of credit as of, or during the three months ended, August31, 2009. JP Morgan Chase Bank, N.A. and Bank of America, N.A. are also parties to our credit facility and irrevocable standby letters of credit, which arrangements are discussed below. Credit facility: The Company had a committed, secured, one-year revolving credit facility, which expired on September20, 2009. Paychex of New York LLC (the Borrower), a subsidiary of the Company, entered into the credit facility with JPMorgan Chase Bank, N.A. and Bank of America, N.A. (the Lenders). The credit facility was available to extend the duration of the Companys long-term investment portfolio. No amounts were outstanding against this credit facility as of, or during the three months ended, August31, 2009. The Company did not renew the credit facility when it expired on September20, 2009. Certain Lenders under the credit facility, and their respective affiliates, have performed, and may in the future perform for the Company and its subsidiaries, various commercial banking, investment banking, underwriting, and other financial advisory services, for which they have received, and will receive, customary fees and expenses. Letters of credit: The Company had irrevocable standby letters of credit available totaling $65.8 million as of both August31, 2009 and May31, 2009, required to secure commitments for certain insurance policies and bonding requirements. The letters of credit expire at various dates between December2009 and December2012 and are collateralized by securities held in the Companys investment portfolios. No amounts were outstanding on these letters of credit as of, or during the three months ended, August31, 2009. Other commitments: The Company enters into various purchase commitments with vendors in the ordinary course of business. As of August31, 2009, the Company had outstanding commitments to purchase approximately $6.4million of capital assets. The Company guarantees performance of service on annual maintenance contracts for clients who financed their service contracts through a third party. In the normal course of business, the Company makes representations and warranties that guarantee the performance of its services under service arrangements

Supplemental Cash Flow Informat

Supplemental Cash Flow Information
	3 Months Ended Aug. 31, 2009 USD / shares
Supplemental Cash Flow Information [Abstract]
Supplemental Cash Flow Information	Note J: Supplemental Cash Flow Information Income taxes paid were $1.5million and $0.5million for the three months ended August31, 2009 and 2008, respectively.

Related Party Transactions

Related Party Transactions
	3 Months Ended Aug. 31, 2009 USD / shares
Related Party Transactions [Abstract]
Related Party Transactions	Note K: Related Party Transactions During the three months ended August31, 2009 and 2008, the Company purchased approximately $1.5 million and $0.3million, respectively, of data processing equipment and software from EMC Corporation. The Chairman, President, and Chief Executive Officer (CEO) of EMC Corporation is a member of the Companys Board. During the three months ended August31, 2009 and 2008, respectively, the Company purchased $0.4million and $0.5million of services from Dun Bradstreet Corporation. Jonathan J. Judge, the Companys President and CEO, is a member of the Board of Directors of Dun Bradstreet Corporation.