Paychex (PAYX) 10-Q 24 Mar 10 2010 Q3 Quarterly report Financial data

Document and Company Informatio

Document and Company Information (USD $)
	9 Months Ended Feb. 28, 2010	Nov. 30, 2008
Document and Entity Information [Abstract]
Entity Registrant Name	PAYCHEX INC
Entity Central Index Key	0000723531
Document Type	10-Q
Document Period End Date	2010-02-28
Amendment Flag	false
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q3
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	361,421,034

Consolidated Statements of Inco

Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data	3 Months Ended Feb. 28, 2010	3 Months Ended Feb. 28, 2009	9 Months Ended Feb. 28, 2010	9 Months Ended Feb. 28, 2009
Revenue:
Service revenue	$493,790	$512,196	$1,463,305	$1,526,446
Interest on funds held for clients	14,029	16,385	41,304	60,380
Total revenue	507,819	528,581	1,504,609	1,586,826
Expenses:
Operating expenses	164,508	174,503	490,502	513,646
Selling, general and administrative expenses	175,062	156,677	462,926	442,294
Total expenses	339,570	331,180	953,428	955,940
Operating income	168,249	197,401	551,181	630,886
Investment income, net	1,180	1,067	3,232	6,050
Income before income taxes	169,429	198,468	554,413	636,936
Income taxes	57,422	67,678	192,936	217,195
Net income	$112,007	$130,790	$361,477	$419,741
Basic earnings per share	0.31	0.36	$1	1.16
Diluted earnings per share	0.31	0.36	$1	1.16
Weighted-average common shares outstanding	361,417	360,821	361,328	360,743
Weighted-average common shares outstanding, assuming dilution	361,860	360,913	361,627	360,966
Cash dividends per common share	0.31	0.31	0.93	0.93

Consolidated Balance Sheets (Un

Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands	9 Months Ended Feb. 28, 2010	12 Months Ended May. 31, 2009
ASSETS
Cash and cash equivalents	$279,261	$472,769
Corporate investments	115,765	19,710
Interest receivable	22,591	27,722
Accounts receivable, net of allowance for doubtful accounts	159,131	177,958
Deferred income taxes	23,221	10,180
Prepaid income taxes	0	2,198
Prepaid expenses and other current assets	25,035	27,913
Current assets before funds held for clients	625,004	738,450
Funds held for clients	4,091,527	3,501,376
Total current assets	4,716,531	4,239,826
Long-term corporate investments	294,088	82,234
Property and equipment, net of accumulated depreciation	264,273	274,530
Intangible assets, net of accumulated amortization	68,085	76,641
Goodwill	421,559	433,316
Deferred income taxes	19,723	16,487
Other long-term assets	3,772	4,381
Total assets	5,788,031	5,127,415
LIABILITIES
Accounts payable	35,081	37,334
Accrued compensation and related items	128,745	135,064
Deferred revenue	3,792	9,542
Accrued income taxes	23,531	0
Deferred income taxes	19,463	17,159
Litigation reserve	39,096	20,411
Other current liabilities	41,314	44,704
Current liabilities before client fund obligations	291,022	264,214
Client fund obligations	4,021,401	3,437,679
Total current liabilities	4,312,423	3,701,893
Accrued income taxes	27,305	25,730
Deferred income taxes	5,786	12,773
Other long-term liabilities	45,397	45,541
Total liabilities	4,390,911	3,785,937
COMMITMENTS AND CONTINGENCIES - NOTE H
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; Authorized: 600,000 shares; Issued and outstanding: 361,421 shares as of February 28, 2010 and 360,976 shares as of May 31, 2009, respectively	3,614	3,610
Additional paid-in capital	492,008	466,427
Retained earnings	852,936	829,501
Accumulated other comprehensive income	48,562	41,940
Total stockholders' equity	1,397,120	1,341,478
Total liabilities and stockholders' equity	$5,788,031	$5,127,415

1_Consolidated Balance Sheets (

Consolidated Balance Sheets (Unaudited) (Parenthetical)
Share data in Thousands	Feb. 28, 2010	May. 31, 2009
STOCKHOLDERS' EQUITY
Common stock, par value	0.01	0.01
Common stock, shares authorized	600,000	600,000
Common stock, shares issued	361,421	360,976
Common stock, shares outstanding	361,421	360,976

Consolidated Statements of Cash

Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands	9 Months Ended Feb. 28, 2010	9 Months Ended Feb. 28, 2009
OPERATING ACTIVITIES
Net income	$361,477	$419,741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets	64,894	63,164
Amortization of premiums and discounts on available-for-sale securities	25,791	16,808
Stock-based compensation costs	19,121	19,310
Benefit for deferred income taxes	(24,862)	(7,389)
Provision for allowance for doubtful accounts	1,847	1,819
Provision for pending legal matters	18,700
Net realized gains on sales of available-for-sale securities	(2,289)	(878)
Changes in operating assets and liabilities:
Interest receivable	5,131	12,480
Accounts receivable	18,050	17,713
Prepaid expenses and other current assets	4,588	10,748
Accounts payable and other current liabilities	11,369	2,592
Net change in other assets and liabilities	(801)	7,215
Net cash provided by operating activities	503,016	563,323
INVESTING ACTIVITIES
Purchases of available-for-sale securities	(1,267,658)	(16,334,122)
Proceeds from sales and maturities of available-for-sale securities	416,348	17,616,942
Net change in funds held for clients' money market securities and other cash equivalents	(59,857)	(1,480,049)
Purchases of property and equipment	(41,444)	(53,281)
Acquisition of businesses, net of cash acquired		(6,466)
Proceeds from sale of business	13,050
Purchases of other assets	(11,295)	(18,097)
Net cash used in investing activities	(950,856)	(275,073)
FINANCING ACTIVITIES
Net change in client fund obligations	583,722	305,889
Dividends paid	(336,390)	(335,779)
Proceeds from and excess tax benefit related to exercise of stock options	7,000	5,810
Net cash provided by/(used in) financing activities	254,332	(24,080)
(Decrease)/increase in cash and cash equivalents	(193,508)	264,170
Cash and cash equivalents, beginning of period	472,769	164,237
Cash and cash equivalents, end of period	$279,261	$428,407

Description of Business and Sig

Description of Business and Significant Accounting Policies
	9 Months Ended Feb. 28, 2010
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 comprehensive payroll and integrated human resource and employee 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 nine months ended February28, 2010 and 2009. Long-lived assets in Germany are insignificant in relation to total long-lived assets of the Company as of February28, 2010 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 nine months ended February28, 2010 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 March24, 2010, 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 $841.6 million and $677.0million for the three months ended February28, 2010 and 2009, respectively, and $2.3billion and $1.9billion for the nine months ended February28, 2010 and 2009, 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. As of February28, 2010, the Company had r

Basic and Diluted Earnings Per

Basic and Diluted Earnings Per Share
	9 Months Ended Feb. 28, 2010
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 nine months ended February 28, February 28, In thousands, except per share amounts 2010 2009 2010 2009 Basic earnings per share: Net income $ 112,007 $ 130,790 $ 361,477 $ 419,741 Weighted-average common shares outstanding 361,417 360,821 361,328 360,743 Basic earnings per share $ 0.31 $ 0.36 $ 1.00 $ 1.16 Diluted earnings per share: Net income $ 112,007 $ 130,790 $ 361,477 $ 419,741 Weighted-average common shares outstanding 361,417 360,821 361,328 360,743 Dilutive effect of common share equivalents at average market price 443 92 299 223 Weighted-average common shares outstanding, assuming dilution 361,860 360,913 361,627 360,966 Diluted earnings per share $ 0.31 $ 0.36 $ 1.00 $ 1.16 Weighted-average anti-dilutive common share equivalents 12,488 14,379 13,506 13,267 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 February28, 2010 and 2009 were minimal. For the nine months ended February28, 2010 and 2009, shares of the Companys common stock issued for stock option exercises and vesting of restricted stock and RSUs were 0.4million and 0.3million, respectively.

Funds Held for Clients and Corp

Funds Held for Clients and Corporate Investments
	9 Months Ended Feb. 28, 2010
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: February 28, 2010 Gross Gross Amortized unrealized unrealized Fair In thousands cost gains losses value Type of issue: Money market securities and other cash equivalents $ 1,876,136 $ $ $ 1,876,136 Available-for-sale securities: General obligation municipal bonds 917,409 39,167 (8 ) 956,568 Pre-refunded municipal bonds(1) 556,213 22,268 (1 ) 578,480 Revenue municipal bonds 364,458 14,740 (71 ) 379,127 Variable rate demand notes(2) 703,860 703,860 Other equity securities 20 51 71 Total available-for-sale securities 2,541,960 76,226 (80 ) 2,618,106 Other 7,384 151 (397 ) 7,138 Total funds held for clients and corporate investments $ 4,425,480 $ 76,377 $ (477 ) $ 4,501,380 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) Beginning in November2009, the Company began to invest in variable rate demand notes (VRDNs) for the first time since September2008. Included in money market securities and other cash equivalents as of February28, 2010 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: February 28, May 31, In thousands 2010 2009 Funds held for clients $ 4,091,527 $ 3,501,376 Corporate investments 115,765 19,710 Long-term corporate investments 294,088 82,234 Total funds held for clients and corporate investments $ 4,501,380 $ 3,603,320 The Company is exposed to credit risk in connection with these investments through the

Fair Value Measurements

Fair Value Measurements
	9 Months Ended Feb. 28, 2010
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 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 February28, 2010: 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 $ 956,568 $ $ 956,568 $ Pre-refunded municipal bonds 578,480 578,480 Revenue municipal bonds 379,127 379,127 Variable rate demand notes 703,860 703,860 Other equity securities 71 71 Total available-for-sale securities $ 2,618,106 $ 71 $ 2,618,035 $ Other securities $ 7,138 $ 7,138 $ $ Liabilities: Other long-term liabilities $ 7,138 $ 7,138 $ $ 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, the

Property and Equipment, Net of

Property and Equipment, Net of Accumulated Depreciation
	9 Months Ended Feb. 28, 2010
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: February 28, May 31, In thousands 2010 2009 Land and improvements $ 4,200 $ 4,033 Buildings and improvements 83,780 83,386 Data processing equipment 183,874 180,448 Software 172,753 165,959 Furniture, fixtures, and equipment 146,034 143,638 Leasehold improvements 89,863 88,509 Construction in progress 14,279 4,034 Total property and equipment, gross 694,783 670,007 Less: Accumulated depreciation and amortization 430,510 395,477 Property and equipment, net of accumulated depreciation $ 264,273 $ 274,530 Depreciation expense was $16.1million and $48.5million for the three and nine months ended February28, 2010, respectively, as compared with $15.8million and $47.3million for the three and nine months ended February28, 2009, respectively. Within construction in progress, there were costs for software being developed for internal use of $4.2million and $3.4million as of February28, 2010 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
	9 Months Ended Feb. 28, 2010
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 as of February28, 2010, and $433.3million as of May31, 2009. The decrease in goodwill was due to divesting of Paychex Time and Attendance Inc. (Stromberg), 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: February 28, May 31, In thousands 2010 2009 Client lists and associate office license agreements $ 193,722 $ 194,887 Other intangible assets 4,935 5,675 Total intangible assets, gross 198,657 200,562 Less: Accumulated amortization 130,572 123,921 Intangible assets, net of accumulated amortization $ 68,085 $ 76,641 Amortization expense relating to intangible assets was $5.5million and $16.4million for the three and nine months ended February28, 2010, respectively, as compared with $5.7million and $15.9 million for the three and nine months ended February28, 2009, respectively. The estimated amortization expense relating to intangible asset balances for the full fiscal year 2010 and the following four fiscal years, as of February28, 2010, is as follows: Estimated In thousands amortization Fiscal year ending May 31, expense 2010 $ 21,872 2011 $ 19,157 2012 $ 16,095 2013 $ 11,223 2014 $ 7,077

Comprehensive Income

Comprehensive Income
	9 Months Ended Feb. 28, 2010
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 nine months ended February 28, February 28, In thousands 2010 2009 2010 2009 Net income $ 112,007 $ 130,790 $ 361,477 $ 419,741 Other comprehensive (loss)/income: Unrealized (losses)/gains on available-for-sale securities, net of taxes (257 ) 22,241 8,082 27,645 Reclassification adjustment for the net gain on sale of available-for-sale securities realized in net income, net of tax (820 ) (111 ) (1,460 ) (567 ) Total other comprehensive (loss)/income (1,077 ) 22,130 6,622 27,078 Total comprehensive income $ 110,930 $ 152,920 $ 368,099 $ 446,819 As of February28, 2010, accumulated other comprehensive income was $48.6million, which was net of taxes of $27.5million. 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
	9 Months Ended Feb. 28, 2010
Commitments and Contingencies [Abstract]
Commitments and Contingencies	Note H: Commitments and Contingencies Lines of credit: As of February28, 2010, 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 2011 Bank of America, N.A. $250 million February 2011 PNC Bank, National Association $150 million February 2011 Wells Fargo Bank, National Association $150 million February 2011 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 nine months ended, February28, 2010. 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 February28, 2010, the Company also had irrevocable standby letters of credit available totaling $65.3million 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 nine months ended, February28, 2010. 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 $9.0million and $4.5million of capital assets as of February28, 2010 and May31, 2009, respectively. During the nine months ended February28, 2010, 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. Historically, there have been no material losses related to such guarantees. 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. 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 primary insurance policies for gap cove

Related Party Transactions

Related Party Transactions
	9 Months Ended Feb. 28, 2010
Related Party Transactions [Abstract]
Related Party Transactions	Note I: Related Party Transactions During the three and nine months ended February28, 2010, the Company purchased approximately $0.2 million and $1.8million of data processing equipment and software from EMC Corporation, as compared with $1.4million and $4.0million in the respective prior year periods. The Chairman, President, and Chief Executive Officer of EMC Corporation is a member of the Companys Board. During the nine months ended February28, 2010 and 2009, the Company purchased $0.4million and $0.5million, respectively, of services from Dun Bradstreet Corporation. Purchases for the three months ended February28, 2010 and 2009 were minimal. Jonathan J. Judge, the Companys President and CEO, is a member of the Board of Directors of Dun Bradstreet Corporation.