Paychex (PAYX) 10-Q 16 Dec 09 2010 Q2 Quarterly report Financial data

Document and Company Informatio

Document and Company Information (USD $)
	6 Months Ended Nov. 30, 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	2009-11-30
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	361,406,822

Consolidated Statements of Inco

Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data	3 Months Ended Nov. 30, 2009	3 Months Ended Nov. 30, 2008	6 Months Ended Nov. 30, 2009	6 Months Ended Nov. 30, 2008
Revenue:
Service revenue	$483,024	$504,383	$969,515	$1,014,250
Interest on funds held for clients	13,552	19,777	27,275	43,995
Total revenue	496,576	524,160	996,790	1,058,245
Expenses:
Operating expenses	162,648	170,675	325,994	339,143
Selling, general and administrative expenses	140,863	141,585	287,864	285,617
Total expenses	303,511	312,260	613,858	624,760
Operating income	193,065	211,900	382,932	433,485
Investment income, net	1,147	1,932	2,052	4,983
Income before income taxes	194,212	213,832	384,984	438,468
Income taxes	68,362	73,590	135,514	149,517
Net income	$125,850	$140,242	$249,470	$288,951
Basic earnings per share	0.35	0.39	0.69	0.8
Diluted earnings per share	0.35	0.39	0.69	0.8
Weighted-average common shares outstanding	361,392	360,812	361,288	360,710
Weighted-average common shares outstanding, assuming dilution	361,692	360,977	361,515	360,998
Cash dividends per common share	0.31	0.31	0.62	0.62

Consolidated Balance Sheets (Un

Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands	Nov. 30, 2009	May. 31, 2009
ASSETS
Cash and cash equivalents	$225,304	$472,769
Corporate investments	62,011	19,710
Interest receivable	29,107	27,722
Accounts receivable, net of allowance for doubtful accounts	221,711	177,958
Deferred income taxes	0	10,180
Prepaid income taxes	0	2,198
Prepaid expenses and other current assets	27,958	27,913
Current assets before funds held for clients	566,091	738,450
Funds held for clients	2,996,115	3,501,376
Total current assets	3,562,206	4,239,826
Long-term corporate investments	317,430	82,234
Property and equipment, net of accumulated depreciation	262,024	274,530
Intangible assets, net of accumulated amortization	71,478	76,641
Goodwill	421,559	433,316
Deferred income taxes	18,488	16,487
Other long-term assets	3,947	4,381
Total assets	4,657,132	5,127,415
LIABILITIES
Accounts payable	36,494	37,334
Accrued compensation and related items	136,777	135,064
Deferred revenue	2,516	9,542
Accrued income taxes	1,739	0
Deferred income taxes	23,683	17,159
Litigation reserve	20,396	20,411
Other current liabilities	42,138	44,704
Current liabilities before client fund obligations	263,743	264,214
Client fund obligations	2,922,986	3,437,679
Total current liabilities	3,186,729	3,701,893
Accrued income taxes	26,580	25,730
Deferred income taxes	7,743	12,773
Other long-term liabilities	43,890	45,541
Total liabilities	3,264,942	3,785,937
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; Authorized: 600,000 shares; Issued and outstanding: 361,407 shares as of November 30, 2009 and 360,976 shares as of May 31, 2009, respectively	3,614	3,610
Additional paid-in capital	485,853	466,427
Retained earnings	853,084	829,501
Accumulated other comprehensive income	49,639	41,940
Total stockholders' equity	1,392,190	1,341,478
Total liabilities and stockholders' equity	$4,657,132	$5,127,415

Consolidated Balance Sheets (Pa

Consolidated Balance Sheets (Parenthetical) (Unaudited) (USD $)
Share data in Thousands	Nov. 30, 2009	May. 31, 2009
Common stock, par value	0.01	0.01
Common stock, shares authorized	600,000	600,000
Common stock, shares issued	361,407	360,976
Common stock, shares outstanding	361,407	360,976

Consolidated Statements of Cash

Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands	6 Months Ended Nov. 30, 2009	6 Months Ended Nov. 30, 2008
OPERATING ACTIVITIES
Net income	$249,470	$288,951
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets	43,313	41,678
Amortization of premiums and discounts on available-for-sale securities	16,801	11,940
Stock-based compensation costs	13,310	13,942
Provision for deferred income taxes	4,263	13,089
Provision for allowance for doubtful accounts	1,958	1,084
Net realized gains on sales of available-for-sale securities	(1,014)	(705)
Changes in operating assets and liabilities:
Interest receivable	(1,385)	4,644
Accounts receivable	(44,641)	(35,836)
Prepaid expenses and other current assets	1,665	5,501
Accounts payable and other current liabilities	(1,422)	(18,712)
Net change in other assets and liabilities	(3,147)	2,809
Net cash provided by operating activities	279,171	328,385
INVESTING ACTIVITIES
Purchases of available-for-sale securities	(756,826)	(16,284,599)
Proceeds from sales and maturities of available-for-sale securities	284,071	17,493,183
Net change in funds held for clients' money market securities and other cash equivalents	697,664	(820,736)
Purchases of property and equipment	(23,091)	(39,207)
Proceeds from sale of business	13,050	0
Purchases of other assets	(9,168)	(13,445)
Net cash provided by investing activities	205,700	335,196
FINANCING ACTIVITIES
Net change in client fund obligations	(514,693)	(279,002)
Dividends paid	(224,234)	(223,840)
Proceeds from and excess tax benefit related to exercise of stock options	6,591	5,657
Net cash used in financing activities	(732,336)	(497,185)
(Decrease)/increase in cash and cash equivalents	(247,465)	166,396
Cash and cash equivalents, beginning of period	472,769	164,237
Cash and cash equivalents, end of period	$225,304	$330,633

Description of Business and Sig

Description of Business and Significant Accounting Policies
	6 Months Ended Nov. 30, 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 six months ended November30, 2009 and 2008. Long-lived assets in Germany are insignificant in relation to total long-lived assets of the Company as of November30, 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 six months ended November30, 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 December16, 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 $730.7 million and $637.4million for the three months ended November30, 2009 and 2008, respectively, and $1.4billion and $1.3billion for the six months ended November30, 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 Balanc

Basic and Diluted Earnings Per

Basic and Diluted Earnings Per Share
	6 Months Ended Nov. 30, 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 For the six months ended November 30, November 30, In thousands, except per share amounts 2009 2008 2009 2008 Basic earnings per share: Net income $ 125,850 $ 140,242 $ 249,470 $ 288,951 Weighted-average common shares outstanding 361,392 360,812 361,288 360,710 Basic earnings per share $ 0.35 $ 0.39 $ 0.69 $ 0.80 Diluted earnings per share: Net income $ 125,850 $ 140,242 $ 249,470 $ 288,951 Weighted-average common shares outstanding 361,392 360,812 361,288 360,710 Dilutive effect of common share equivalents at average market price 300 165 227 288 Weighted-average common shares outstanding, assuming dilution 361,692 360,977 361,515 360,998 Diluted earnings per share $ 0.35 $ 0.39 $ 0.69 $ 0.80 Weighted-average anti-dilutive common share equivalents 13,459 14,035 14,016 12,711 Weighted-average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share. Shares of the Companys common stock issued for the three months ended November30, 2009 and 2008 were minimal. For the six months ended November30, 2009 and 2008, shares of the Companys common stock issued for stock option exercises and vesting of restricted stock and RSUs were 0.5million and 0.3million, respectively.

Funds Held for Clients and Corp

Funds Held for Clients and Corporate Investments
	6 Months Ended Nov. 30, 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: November 30, 2009 Gross Gross Amortized unrealized unrealized Fair In thousands cost gains losses value Type of issue: Money market securities and other cash equivalents $ 1,118,614 $ $ $ 1,118,614 Available-for-sale securities: General obligation municipal bonds 943,218 40,277 (16 ) 983,479 Pre-refunded municipal bonds(1) 551,829 23,442 575,271 Revenue municipal bonds 347,439 15,129 (66 ) 362,502 Variable rate demand notes(2) 328,615 328,615 Other equity securities 20 54 74 Total available-for-sale securities 2,171,121 78,902 (82 ) 2,249,941 Other 7,441 69 (509 ) 7,001 Total funds held for clients and corporate investments $ 3,297,176 $ 78,971 $ (591 ) $ 3,375,556 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 Variable rate demand notes(2) 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. (2) For the first time since September2008, the Company began to invest in variable rate demand notes (VRDNs) beginning in November2009. Included in money market securities and other cash equivalents as of November30, 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: November 30, May 31, In thousands 2009 2009 Funds held for clients $2,996,115 $ 3,501,376 Corporate investments 62,011 19,710 Long-term corporate investments 317,430 82,234 Total funds held for clients and corporate investments $3,375,556 $ 3,603,320 The Company is exposed to credit risk in connection with these investments through the possible inability of borrow

Fair Value Measurements

Fair Value Measurements
	6 Months Ended Nov. 30, 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 November30, 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 $ 983,479 $ $ 983,479 $ Pre-refunded municipal bonds 575,271 575,271 Revenue municipal bonds 362,502 362,502 Variable rate demand notes 328,615 328,615 Other equity securities 74 74 Total available-for-sale securities $ 2,249,941 $ 74 $ 2,249,867 $ Other securities $ 7,001 $ 7,001 $ $ Liabilities: Other long-term liabilities $ 7,014 $ 7,014 $ $ In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. In determining the fair value of its available-for-sale securities, the Company utilizes the Interactive Data Pricing service. 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
	6 Months Ended Nov. 30, 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: November 30, May 31, In thousands 2009 2009 Land and improvements $ 4,033 $ 4,033 Buildings and improvements 83,456 83,386 Data processing equipment 184,853 180,448 Software 170,117 165,959 Furniture, fixtures, and equipment 145,520 143,638 Leasehold improvements 88,924 88,509 Construction in progress 5,060 4,034 Total property and equipment, gross 681,963 670,007 Less: Accumulated depreciation and amortization 419,939 395,477 Property and equipment, net of accumulated depreciation $ 262,024 $ 274,530 Depreciation expense was $16.0million and $32.4million for the three and six months ended November30, 2009, respectively, as compared with $15.6million and $31.5million for the three and six months ended November30, 2008, respectively. Within construction in progress, there were costs for software being developed for internal use of $3.0million and $3.4million as of November30, 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
	6 Months Ended Nov. 30, 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 $421.6million and $433.3 million as of November30, 2009 and May31, 2009, respectively. The decrease in goodwill was due to divesting of Stromberg time and attendance, an immaterial component of the Company. The Company has certain intangible assets with finite lives. The components of intangible assets, at cost, consisted of the following: November 30, May 31, In thousands 2009 2009 Client lists and associate office license agreements $ 191,595 $ 194,887 Other intangible assets 4,935 5,675 Total intangible assets, gross 196,530 200,562 Less: Accumulated amortization 125,052 123,921 Intangible assets, net of accumulated amortization $ 71,478 $ 76,641 Amortization expense relating to intangible assets was $5.7million and $10.9million for the three and six months ended November30, 2009, respectively, as compared with $5.4million and $10.2 million for the three and six months ended November30, 2008, respectively. The estimated amortization expense relating to intangible asset balances for the full fiscal year 2010 and the following four fiscal years, as of November30, 2009, is as follows: Estimated In thousands amortization Fiscal year ending May 31, expense 2010 $ 21,718 2011 $ 18,703 2012 $ 15,700 2013 $ 10,885 2014 $ 6,798

Comprehensive Income

Comprehensive Income
	6 Months Ended Nov. 30, 2009 USD / shares
Comprehensive Income [Abstract]
Comprehensive Income	Note G: 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 For the six months ended November 30, November 30, In thousands 2009 2008 2009 2008 Net income $ 125,850 $ 140,242 $ 249,470 $ 288,951 Other comprehensive income/(loss): Unrealized gains/(losses) on available-for-sale securities, net of taxes 6,898 (1,046 ) 8,339 5,404 Reclassification adjustment for the net gain on sale of available-for-sale securities realized in net income, net of tax (460 ) (262 ) (640 ) (456 ) Total other comprehensive income/(loss) 6,438 (1,308 ) 7,699 4,948 Total comprehensive income $ 132,288 $ 138,934 $ 257,169 $ 293,899 As of November30, 2009, accumulated other comprehensive income was $49.6million, which was net of taxes of $29.2million. 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
	6 Months Ended Nov. 30, 2009 USD / shares
Commitments and Contingencies [Abstract]
Commitments and Contingencies	Note H: Commitments and Contingencies Lines of credit: As of November30, 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 six months ended, November30, 2009. JP Morgan Chase Bank, N.A. and Bank of America, N.A. are also parties to the Companys irrevocable standby letters of credit, which are discussed below. Letters of credit: As of November30, 2009, and May31, 2009, the Company had irrevocable standby letters of credit available totaling $65.8million required to secure commitments for certain insurance policies and bonding requirements. The letters of credit expire at various dates between May2010 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 six months ended, November30, 2009. Other commitments: The Company enters into various purchase commitments with vendors in the ordinary course of business. The Company had outstanding commitments to purchase approximately $12.1million and $4.5million of capital assets as of November30, 2009 and May31, 2009, respectively. During the three months ended November30, 2009, the Company entered into a multi-year commitment with a vendor to purchase computer systems. 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 with clients. In addition, the Company has entered into indemnification agreements with its officers and directors, which require it to defend and, if necessary, indemnify these individuals for certain pending or future claims as they relate to their services provided to the Company. Historically, there have been no material losses related to such guarantees and indemnifications. Paychex currently self-insures the deductible portion of various insured exposures under certain employee benefit plans. The Companys estimated loss exposure under these insurance arrangements is recorded in other current liabilities on the Consolidated Balance Sheets. Historically, the amounts accrued have not been material. The Company also maintains insurance coverage in addition to its purchased pr

Related Party Transactions

Related Party Transactions
	6 Months Ended Nov. 30, 2009 USD / shares
Related Party Transactions [Abstract]
Related Party Transactions	Note I: Related Party Transactions During the three and six months ended November30, 2009, the Company purchased approximately $0.1 million and $1.6million of data processing equipment and software from EMC Corporation, as compared with $2.3million and $2.6million in the respective prior year periods. The Chairman, President, and Chief Executive Officer (CEO) of EMC Corporation is a member of the Companys Board. During the six months ended November30, 2009 and 2008, the Company purchased $0.4million and $0.5 million of services from Dun Bradstreet Corporation, respectively. Purchases for the three months ended November30, 2009 and 2008 were minimal. Jonathan J. Judge, the Companys President and CEO, is a member of the Board of Directors of Dun Bradstreet Corporation.