2016
h o w P a y c h e x
i e n t s m o r e
m a k e s c l
c o n n e c t e d t o t h e i r
t h e i r
e m p l o y e e s ,
b u s i n e s s e s
45
45th ANNIVERSARY 1971- 2016
m o r e
c o n n e c t e d
F o r t y - F i v e y e a r s
o F e m P o w e r i n g
B u s i n e s s e s
twitter.com/paychex
facebook.com/paychex
linkedin.com/company/paychex
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financial highlights
73%
S&P 500
102%
PAYCHEX
SToCk
PErformANCE
Returns to shareholders in the
last 5 years vs. S&P 500® average
(as of May 31, 2016)
DIVIDENDS
PAID
As a Percentage of
Net Income in FY 2016
80%
our purpose
We provide our clients the freedom to succeed.
our mission
We will be the leading provider of payroll, human resource,
and employee benefit services by being an essential partner
with America’s businesses.
our values
We act with uncompromising integrity.
We provide outstanding service
and build trusted relationships.
We drive innovation in products and services
and continually improve processes.
We work in partnership and support each other.
We are personally accountable and
deliver on commitments.
We treat each other with respect and dignity.
As of May 31, 2016
Cash and
Total Corporate
INVESTMENTS
$793
Million
DEBT
$0
40%
ROE
Return on
Equity
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financial highlights
OPERATING INCOME
Net of Certain Items*
( $ M i l l i o n s )
for the fiscal year ended May 31
$1,101
$1,012
$942
$864
$810
2012
2013
2014
* Refer to discussion of Non-GAAP Financial Measure included
in Item 7 of our Annual Report for further information.
2015
2016
TOTAL REVENUE
( $ B i l l i o n s )
for the fiscal year ended May 31
$2.7
$2.5
2016
2015
2014
2013
$2 . 3
2012
$2.2
$3.0
}
CAGR*
7%
*5-Year Cumulative
Annual Growth Rate
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P r e s i d e n t a n d C h i e f E x e c u t i v e O f f i c e r ,
M a r t i n M u c c i
,
w i t h a t e a m o f P a y c h e x e m p l o y e e s
2
I 2 0 1 6 a n n u a l r e p o r t
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Business owners today demand
easy-to-use, integrated human capital
management solutions – whether
they have five employees or 500.
They want to be connected. They want to be mobile. They want
personalized service. And, they want to have the same seamless user
experience, whether they are in their office or on the sidelines of their
child’s soccer game.
Paychex meets them where their business takes them.
We have been empowering businesses for 45 years. That foundation
drives our future. With our product momentum and technology-enabled
service, we are now taking more than 600,000 small- and mid-sized
businesses into the next decade. Our mobile-first design and single,
cloud-based platform make Paychex unique in the marketplace, fuel
our growth, and give our clients the opportunity to grow with us.
To our shareholders
In fiscal 2016, we delivered enhancements that supported
our clients from the recruitment of new employees to
their retirement. We provided clarity in navigating the
increasingly complex regulatory landscape. And, we
produced financial results that helped us close the year
with record revenue and profitability and solid returns for
our shareholders. These results position us well to execute
on our future performance.
2 0 1 6 a n n u a l r e p o r t I 3
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Innovative Growth
We understand the market and what
it wants. That’s why we built our
industry-leading Paychex Flex® human
capital management (HCM) platform
from the ground up.
We have the flexibility to deliver
integrating time and attendance
payroll, human resources, and benefits
functionality and employee benefits.
information in a way that creates a
We believe we now have the best-
streamlined, integrated approach to
in-market offerings for administrative
workforce management.
users and employee self-service, which
allow them access to our HCM suite
In fiscal 2016, we launched and fully
from a single application, no matter
integrated three HCM modules within
what device they’re using –
the Paychex Flex platform. Paychex
phone, tablet, or desktop. This
Flex Hiring gives employers access
simpler user interface is supported
to paperless recruiting, employee
by our personalized, flexible, industry-
screening, and onboarding through a
leading service model with options
seamless flow of information and data
ranging from 24/7 service to a
access. We followed that up with two
dedicated account manager. We see
more modules – Paychex Flex Time and
the advantage of that flexibility and
Paychex Flex Benefits Administration –
personalized service in our continued
high levels of client satisfaction
and retention.
We earned some valuable
recognition this past year for
Paychex Flex and the benefit our
technology brings to our clients.
4
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innovative growth
Global research firm Brandon Hall Group
honored Paychex Flex for best advance in
HR or workforce management technology
for small- and medium-sized businesses.
And, HRO Today awarded Paychex Flex a
TekTonic Award for best-in-class mobile and
cloud-based technology.
We earned some valuable
recognition this past year for
Paychex Flex and the benefit our
technology brings to our clients.
2 0 1 6 a n n u a l r e p o r t I 5
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Expansion, Enhancement, Acquisition
We invested in innovative solutions
across our offerings through product
expansion, enhancement, and
acquisition.
acquired Advance Partners, a company that
offers customizable solutions to temporary
staffing firms, including payroll funding and
outsourcing services. We are excited about
the opportunity this acquisition and its
leadership team provide and believe it’s
a great fit for Paychex and our future.
Last year, we introduced
reasons they rely on us. When
enhanced solutions for
our research identified that one
Financial Results
financial advisors to help them
in five business owners weren’t
Delivering great shareholder value is
meet new federal fiduciary
aware of the Department of
important to Paychex, and we know
rule requirements, a logical
Labor’s new overtime rule
continuing to make the right investments will
expansion for Paychex as a
and were concerned with the
drive the growth that produces outstanding
leader in retirement services.
limited time they have to meet
results. Our total shareholder return over the
And, we again earned
new standards, we spelled
last five years is 102 percent, surpassing the
number-one rankings in 401(k)
out solutions we offer that can
S&P 500 average.
recordkeeping from two leading
help businesses address the
industry publications.
requirements.
We completed filing
requirements for our Paychex
Employer Shared Responsibility
Services, our Affordable Care
Act solution we launched last
year to help our clients with
their monitoring and year-end
reporting requirements. We
were the first provider to offer a
stand-alone service, rather than
require employers to upgrade
to a benefits module. In fiscal
2016, we filed more than
2.2 million Forms 1095-C.
Because of the demand we
experienced for this service, we
have increased our investment
to enhance both the technology
and service of this product.
Due to ever-increasing
government regulations
and the need for a flexible
workforce, we believe the
temporary staffing business
will see significant future
growth. Industry data show
there are more than 3 million
temporary staffing employees
in the U.S. today, and about
Our ability to help our clients
10,000 small- and mid-sized
understand and manage the
staffing companies that support
constantly changing regulatory
that employee population.
environment is one of the
In December 2015, Paychex
6
I 2 0 1 6 a n n u a l r e p o r t
We saw sustained revenue growth in fiscal
2016 and maintained strong margins, while
continuing to invest in the technology our
clients use. Total revenue increased
8 percent to approximately $3 billion, up
nearly $900 million from five years ago.
Payroll service revenue rose 4 percent to
$1.7 billion. HRS revenue continued its
double-digit growth pattern, climbing
13 percent to $1.2 billion. Operating income
was a record $1.1 billion, an increase of
9 percent over 2015. Net income and earnings
per share were up 12 percent and 13 percent,
to $757 million and $2.09, respectively.
We increased our quarterly dividend by
11 percent last July, helping us maintain
our industry-leading dividend yield. We
continue to operate our stock repurchase
program, buying back 2 million shares
of Paychex stock for $108 million in
fiscal 2016. Paychex is able to take
shareholder-friendly actions such as
these because we have no debt and
a strong liquidity position, with cash
and total corporate investments of
$793 million.
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Investing for the Future
During fiscal 2016, I marked my fifth anniversary
are the backbone of our economy and clients
as president and chief executive officer of
Paychex serves every day. So, when you invest
Paychex. I value the strength, stability, and
in Paychex, you are really investing in something
strategic focus of the management team that has
bigger. You’re investing in a company that helps
joined me in charting the direction of Paychex.
support the growth of the U.S. economy. And
I am proud of what our company and our more
we are proud of that. Thank you for being an
than 13,000 employees have accomplished and
important part of our success.
the investments we have made during that time –
in our technology, products, and service to benefit
our clients.
Sincerely,
In the 45 years since Paychex was founded, our
focus has been on supporting small- and mid-
sized businesses, investing in their future. Today,
95 percent of all businesses in our country are
small businesses – the landscapers, dry cleaners,
Martin Mucci
restaurant owners, and service companies that
President and Chief Executive Officer
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The future of work is here
The future of work is here
The future of work is here
m o r e
c o n n e c t e d
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The Future of Work Is Here
Today’s workplace is far different than it was 10, even five years ago.
Technology has disrupted nearly every aspect of how business gets
done, and you’d be hard-pressed to find an industry it hasn’t touched –
even those you might not think of as being on the leading edge. It’s also
affecting where business gets done, with 3.7 million non-self-employed
workers in the U.S. now working from home at least half the time, up
103 percent since 2005.1
At the same time, companies of all sizes are facing new challenges.
Chief among them: attracting and retaining employees with the
right skills. Demand for top talent is outpacing supply, driving up
the cost of recruiting and hiring that talent.2 This has led to pressure
to derive more output from workers; as the cost of labor goes up,
businesses must find new ways to increase productivity and efficiency,
or risk hurting their bottom lines.
These two forces – new technology, new challenges – have led to the
rise of human capital management (HCM) solutions, as they’re called.
HCM solutions tie together all the stages of the employee journey –
from recruiting, screening, and onboarding, to payroll, HR, and benefits,
all the way on to retirement – giving employers new ways to connect
with their employees. Recruiters with candidates. Workers with the
resources they need to be more efficient. Owners with data that can
help them run a smarter business. Indeed, the connections that power
businesses are closer than ever.
The future of work is here
The future of work is here
The future of work is here
With the workplace changing so quickly, Paychex isn’t just keeping
pace – we’re leading the charge.
You see, we’ve been here before. We were the ones who pioneered
small-business outsourcing because we saw too many owners
spending their time on administrative tasks instead of on making
their business successful. We again were ahead of the market when
we introduced HR services to help clients manage their increasingly
complex employment law obligations. Last year, expecting that
a number of our clients would need help with new health care
reform requirements, we proactively launched our Employer Shared
Responsibility (ESR) Services, one of the first such solutions on the
market. For more than 45 years we’ve looked over the horizon and
prepared for change before it came.
And we’re doing it again. Today, we’re creating the future of work.
2 0 1 6 a n n u a l r e p o r t I 9
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That Future Is Mobile
It should be no surprise that nearly two-thirds
of Americans now own a smartphone of some
kind.3 What might surprise you is that over 40
percent of respondents in one study use their
personal mobile device weekly to access work-
related information or applications.4 The explosion
of mobile outside and inside the workplace is
why we take a mobile-first approach to product
development. We build new Paychex products,
including our industry-leading HCM solution,
Paychex Flex, to look great and work superbly on
your phone and tablet first, rather than adapting
desktop solutions for mobile as though it were
an afterthought.
The result is our clients and their employees
connecting in ways that used to be possible
only in the physical workplace. Remote and
seasonal workers are using a smartphone app to
punch in when their shift starts. Startup owners
are submitting payroll while waiting in line for
their morning espresso. Sales representatives
are submitting expense reports between
appointments – and their managers are approving
them on the walk from the office to the parking
lot. We’re empowering employees to connect with
employers, and employers to connect with their
businesses, on the devices they use most.
It’s in the Cloud
Ninety-five percent of respondents
to RightScale®’s 2016 State of the
Cloud Survey use cloud technology
at their company.5 And for good reason.
Cloud-based technology gives users access
to their data from any device with an internet
connection, at any time, from anywhere. It
also gives businesses the ability to receive new
features and enhancements without needing to
upgrade and configure software, and can reduce
the need to invest in IT staff, as software
is delivered over the internet, not from a
local server.
That’s why we built Paychex Flex in the
cloud. So restaurant owners can review
last month’s wages with their accountant
in real time. So construction workers can
allocate labor to jobs at the worksite. So
even the smallest retail shops can offer
their employees big-company perks such
as the ability to check their HR, payroll,
and benefits information from wherever
they are.
10
I 2 0 1 6 a n n u a l r e p o r t
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it’s in the cloud
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2 0 1 6 a n n u a l r e p o r t I 11
It’s Data-Driven
While the idea of big data used to apply to
only the largest companies, businesses of all
sizes are taking advantage of the information in
their company records – including those in their
human resource, payroll, and benefit systems –
to run a smarter operation and to gain an edge
on the competition.
It’s why we’re giving decision-makers actionable
insights into their business with a powerful set
of analytics and reports, as well as the ability to
create custom reports to meet the needs of even
the most unique businesses. It’s why Paychex
Flex’ applicant-tracking module helps HR teams
improve the quality of their candidate pool by
using algorithms to spot the most qualified
individuals. It’s why our expense management
platform helps large manufacturers control costs
by giving them new insights into their travel
spending. We believe that the more you know
about your business, the better you can run it.
12
I 2 0 1 6 a n n u a l r e p o r t
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exceptional service
It’s Flexible
It’s Here
By now you’ve heard about the millennial
generation. How they’re digital natives who
grew up with the internet, mobile devices, and
social media. How they believe technology can
help them be more effective at work. How many
prefer to communicate electronically rather than
face-to-face or by phone.6 With millennials climbing
the corporate ladder and starting businesses of
their own, we’re creating new product and service
offerings that fit the way they want to connect with
us. And more so than other generations, that’s
online. So while we continue to offer a dedicated
specialist for those who want high-touch service,
we’re creating options for others who prefer to
manage their HR, payroll, and benefits online, and
call, email, or IM a client service specialist in our
24/7 service center only when they need support.
However a client wants to connect with Paychex,
they can.
The connections that drive businesses have never been
stronger, and they’re getting stronger every day. But while we
helped move the HR, payroll, and benefits industry to where
it is today, our eyes are on the future. Innovation is at the very
core of our company, and we have the brightest, most visionary
minds in the industry creating new ways for businesses to be
more efficient. More flexible. More compliant. More connected.
1 GlobalWorkplaceanalytics.com. (2016, January). latest telecommuting Statistics.
http://globalworkplaceanalytics.com/telecommuting-statistics.
2 adapted from The 15 New Rules For Cracking The SMB Market, a February 2016 Forrester
report.
3 pew research Center. (2015, april). the Smartphone Difference.
http://www.pewinternet.org/2015/04/01/us-smartphone-use-in-2015/.
4 CtIa - the Wireless association®. (2013). Workplace technology. http://ctia.it/10Yb2tc.
5 rightScale 2016 State of the Cloud report. © 2016 rightScale, Inc. this work is licensed
under a Creative Commons attribution 4.0 International license. http://www.rightscale.com/
blog/cloud-industry-insights/cloud-computing-trends-2016-state-cloud-survey.
6 pricewaterhouseCoopers. (2011). Millennials at Work: reshaping the Workplace.
https://www.pwc.com/gx/en/managing-tomorrows-people/future-of-work/assets/reshaping-the-
workplace.pdf.
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2 0 1 6 a n n u a l r e p o r t I 1 3
B. Thomas Golisano
Mr. Golisano founded Paychex in 1971 and is
Chairman of the Board of the Company.
Board Committee: Executive Committee.
Joseph G. Doody
Mr. Doody is Vice Chairman of Staples, Inc.,
an office products company.
Board Committee: Audit Committee.
David J. S. Flaschen
Mr. Flaschen is an investor and advisor to a
number of private companies providing business,
marketing, and information services.
Board Committees: Audit (Chairman),
Investment, Corporate Development Advisory,
and Governance and Compensation Committees.
Phillip Horsley
Mr. Horsley founded in 1983 Horsley Bridge
Partners, a leading manager of private equity
investments for institutional clients, where he
served until his retirement in 2010.
Board Committees: Investment and Governance
and Compensation Committees.
Grant M. Inman
Mr. Inman is the founder and General Partner
of Inman Investment Management, a private
investment company.
Board Committees: Investment (Chairman),
Audit, and Governance and Compensation
Committees.
Pamela A. Joseph
Ms. Joseph is President and Chief Operating
Officer of Total System Services Inc. (“TSYS®”),
a provider of issuer services and merchant
payment acceptance for credit, debit, prepaid,
healthcare, and business solutions.
Board Committees: Audit, Corporate
Development Advisory, and Executive
Committees.
Martin Mucci
Mr. Mucci is President and Chief Executive
Officer of the Company.
Board Committees: Executive (Chairman) and
Corporate Development Advisory Committees.
Joseph M. Tucci
Mr. Tucci is the Chairman of the Board of
Directors of EMC Corporation, the world leader
in information infrastructure technology and
solutions.
Board Committees: Governance and
Compensation Committee (Chairman).
Joseph M. Velli
Mr. Velli is a retired financial services and
technology executive with over 22 years of
service at the Bank of New York, and currently
serves on the Board of Computershare Ltd.,
Scivantage, and several private equity advisory
boards.
Board Committees: Investment, Executive,
Corporate Development Advisory (Chairman),
and Governance and Compensation Committees.
Board of Directors
About Paychex
Paychex, Inc. (NASDAQ: PAYX) is a leading provider of integrated human capital
management solutions for payroll, HR, retirement, and insurance services. By
combining its innovative software-as-a-service technology and mobility platform with
dedicated, personal service, Paychex empowers small- and medium-sized business
owners to focus on the growth and management of their business. Backed by 45
years of industry expertise, Paychex serves approximately 605,000 payroll clients
across more than 100 locations and pays one out of every 12 American private sector
employees. Learn more about Paychex by visiting www.paychex.com, and stay
connected on Twitter and LinkedIn.
14
I 2 0 1 6 a n n u a l r e p o r t
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2016
Commission file number 0-11330
Paychex, Inc.
911 Panorama Trail South
Rochester, New York 14625-2396
(585) 385-6666
A Delaware Corporation
IRS Employer Identification Number: 16-1124166
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value
Name of exchange on which registered:
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act. Yes ‘ No Í
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes Í No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Í
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ‘ No Í
As of November 30, 2015 the last business day of the most recently completed second fiscal quarter, shares
held by non-affiliates of the registrant had an aggregate market value of $17,491,967,248 based on the closing
price reported for such date on the NASDAQ Global Select Market.
As of June 30, 2016, 360,532,001 shares of the registrant’s common stock, $.01 par value, were outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement to be issued in connection with its Annual Meeting of
Stockholders to be held on or about October 12, 2016, to the extent not set forth herein, are incorporated by
reference into Part III, Items 10 through 14, inclusive.
PAYCHEX, INC.
INDEX TO FORM 10-K
For the fiscal year ended May 31, 2016
Description
PART I
Cautionary Note Regarding Forward-Looking Statements Pursuant to the United States Private
Securities Litigation Reform Act of 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Item 3
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . .
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14
PART IV
Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS PURSUANT TO THE
UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by management of Paychex, Inc. and its wholly owned
subsidiaries (“we,” “our,” “us,” “Paychex,” or the “Company”) may constitute “forward-looking statements”
within the meaning of the safe harbor provisions of the United States (“U.S.”) Private Securities Litigation
Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as “we expect,”
“expected to,” “estimates,” “estimated,” “current outlook,” “we look forward to,” “would equate to,” “projects,”
“projections,” “projected to be,” “anticipates,” “anticipated,” “we believe,” “believe,” “could be,” and other
similar phrases. Examples of forward-looking statements include, among others, statements we make regarding
operating performance, events, or developments that we expect or anticipate will occur in the future, including
statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, or similar projections.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they
are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future
plans and strategies, projections, anticipated events and trends, the economy, and other future conditions.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and
changes in circumstances that are difficult to predict, many of which are outside our control. Our actual results
and financial conditions may differ materially from those indicated in the forward-looking statements. Therefore,
you should not place undue reliance upon any of these forward-looking statements. Important factors that could
cause our actual results and financial condition to differ materially from those indicated in the forward-looking
statements include, among others, the following:
• general market and economic conditions including, among others, changes in U.S. employment and wage
levels, changes to new hiring trends, legislative changes to stimulate the economy, changes in short- and
long-term interest rates, changes in the fair value and the credit rating of securities held by us, and
accessibility of financing;
• changes in demand for our services and products, ability to develop and market new services and products
effectively, pricing changes and the impact of competition;
• changes in the availability of skilled workers, in particular those supporting our technology and product
development;
• changes in the laws regulating collection and payment of payroll
organizations, and employee benefits,
insurance (including health care reform legislation), state unemployment, and section 125 plans;
taxes, professional employer
including retirement plans, workers’ compensation, health
• changes in health insurance and workers’ compensation rates and underlying claim trends;
• changes in technology that adversely affect our services and products and impact our ability to provide
timely enhancements to services and products;
• the possibility of a security breach that disrupts operations or exposes client confidential data;
• the possibility of failure of our operating facilities, computer systems, and communication systems during
a catastrophic event;
• the possibility of third-party service providers failing to perform their functions;
• the possibility of a failure of internal controls or our inability to implement business processing
improvements;
• the possibility that we may be subject to liability for violations of employment or discrimination laws by
our clients and acts or omissions of client employees who may be deemed to be our agents, even if we do
not participate in any such acts or violations; and
• potentially unfavorable outcomes related to pending or future (possible) legal matters.
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Any of these factors, as well as such other factors as discussed in Part I, Item 1A, “Risk Factors” and
throughout Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report on Form 10-K (“Form 10-K”), as well as in our periodic filings with the
Securities and Exchange Commission (“SEC” or “Commission”), could cause our actual results to differ
materially from our anticipated results. The information provided in this Form 10-K is based upon the facts and
circumstances known at this time, and any forward-looking statements made by us in this Form 10-K speak only
as of the date on which they are made. Except as required by law, we undertake no obligation to update these
forward-looking statements after the date of filing this Form 10-K with the SEC to reflect events or
circumstances after such date, or to reflect the occurrence of unanticipated events.
Item 1. Business
Incorporated in Delaware in 1979, we are a leading provider of integrated human capital management
(“HCM”) solutions for payroll, human resource, retirement, and insurance services for small- to medium-sized
businesses. As of May 31, 2016, we serviced approximately 605,000 payroll clients. We maintain our corporate
headquarters in Rochester, New York, and serve clients throughout the U.S. and Germany. We report our results
of operations and financial condition as one business segment. Our fiscal year ends May 31st.
Company Strategy
Our mission is to be the leading provider of payroll, human resource and employee benefit services for
small- to medium-sized businesses by being an essential partner with America’s businesses. We believe that
success in this mission will lead to strong, long-term financial performance. Our strategy focuses on the
following:
• flexible, convenient service;
• industry-leading, integrated technology;
• solid sales execution;
• comprehensive suite of value-added HCM services;
• continued service penetration; and
• strategic acquisitions.
Services and Products
We offer a comprehensive portfolio of HCM services and products that allow our clients to meet their
diverse payroll and human resource needs. Clients can select services on an á la carte basis or as part of various
product bundles. Our payroll-related ancillary services and Human Resource Service (“HRS”) offerings often
leverage the information gathered in the base payroll processing service, allowing us to provide comprehensive
outsourcing services covering the HCM spectrum. We also offer professional employer organization (“PEO”)
services and provide insurance offerings through the Paychex Insurance Agency, Inc. (“PIA”) that allow
employers to expand their employee benefit offerings at an affordable cost. We mainly earn our revenue through
recurring fees for services performed. Service revenue is primarily driven by the number of clients, checks or
transactions per client per pay period, and utilization of ancillary services.
Paychex FlexSM is our proprietary HCM software-as-a-service (“SaaS”) platform through which we provide
an integrated product suite that covers the employee life cycle from recruiting and hiring to retirement. Paychex
Flex streamlines workforce management through innovative technology and flexible choice of service. The
platform uses a single cloud-based platform, with single client and employee records, and single sign-on,
including self-service options and mobility applications. The HCM product suite integrates recruiting and
applicant tracking, employee onboarding, payroll, employee benefits and human resource administration, time
and attendance, and retirement services. Paychex Flex also provides technology-enabled service, with options
that include self-service, a 24/7 dedicated service center, individual payroll specialist, and integrated service via
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large clients can utilize a relationship manager for more
the multi-product service center. In addition,
personalized service. This flexible platform services our small-business clients, mid-market clients, and our PEO
business.
The integration of flexible service options and leading-edge technology allows us to meet our clients’
diverse needs by providing them with information and products when, where, and how they want it. Our Paychex
mobile applications add greater value and convenience for our clients and their employees by allowing them
instant access and increased productivity. Paychex Flex allows for device independence, providing a consistent
experience regardless of device. Our mobile apps are available for iOS® and AndroidTM tablets and smartphones,
and allow our clients and their employees to have full access to our products, offering diverse capabilities for
both the employer and employee.
Small-Business Clients
For our small-business clients, which we define as typically less than 50 employees, Paychex supports the
client in reducing the complexity and risk of running their own payroll, while ensuring greater accuracy with up-
to-date tax rates and regulatory information. We simplify their payroll with a combination of our dynamic
products and customer service for a quick and easy pay day. Small-business payroll is provided via our core
payroll, utilizing our robust Paychex Flex processing platform, or SurePayroll® products. Our core payroll clients
can opt for our full-service customer service model through our branch operations or use Paychex Online
Payroll®, our secure Internet portal. Paychex Online Payroll offers a suite of self-service and interactive services
twenty-four hours a day, seven days a week. Both service models offer payroll processing, employee access
online, general ledger service to provide payroll information to the client’s general ledger accounting software,
and access to our industry-leading, web-based report center and robust report writer. Our SurePayroll SaaS
solution offers “do-it-yourself,” self-service and mobile applications for small business.
Our small-business clients also benefit from our time and attendance products, which allow them to
accurately and efficiently manage the gathering and recording of employee hours worked. Our advanced suite of
time and attendance products, including web and mobile tools, can assist companies with the scheduling,
tracking, and reporting of time which can be beneficial to clients in complying with overtime regulations recently
enacted by the Department of Labor. Other Paychex solutions, such as our comprehensive human resource
outsourcing solutions are also available for our small-business clients.
Mid-Market Clients
Our mid-market clients are typically defined as more than 50 employees with more complex payroll and
employee benefit needs. These clients are serviced through our Paychex Flex Enterprise solution set, which
offers an integrated suite of HCM solutions on the Paychex Flex platform, or through our traditional mid-market
platform. Clients using Paychex Flex Enterprise are offered a SaaS solution that integrates payroll processing
with human resource management, employee benefits administration, time and labor management, applicant
tracking and onboarding solutions. Paychex Flex Enterprise allows our mid-market clients to choose the services
and software they need to meet the complexity of the business and have them integrated through one HCM
solution.
Mid-market clients also have the option to select from a number of á la carte payroll and human resource
ancillary services and can opt for our comprehensive human resource and payroll outsourcing solutions, Paychex
HR Services. This flexibility allows our clients to define the solution that best meets their particular needs.
Description of Services
Payroll processing: For both our small-business and mid-market clients, payroll processing is the
backbone of our portfolio of HCM services. Payroll processing services include the calculation, preparation, and
delivery of employee payroll checks; production of internal accounting records and management reports;
preparation of payroll tax returns; and collection and remittance of clients’ payroll obligations. Along with
payroll processing, clients can also select from the following payroll-related ancillary services:
• Payroll
tax administration services provide accurate
preparation and timely filing of quarterly and year-end tax returns, as well as the electronic transfer of
tax administration services: Our payroll
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funds to the applicable tax or regulatory agencies (federal, state, and local). In connection with these
services, we electronically collect payroll taxes from clients’ bank accounts, typically on payday, prepare
and file the applicable tax returns, and remit taxes to the applicable tax or regulatory agencies on the
respective due dates. These taxes are typically paid between one and 30 days after receipt of collections
from clients, with some items extending to 90 days. We handle regulatory correspondence, amendments,
and penalty and interest disputes.
• Employee payment services: Our employee payment services provide an employer with the option of
paying their employees by direct deposit, payroll debit card, a check drawn on a Paychex account
(Readychex®), or a check drawn on the employer’s account and electronically signed by us. For each of
the first three methods, we electronically collect net payroll from the clients’ bank accounts, typically one
business day before payday, and provide payment to the employees on payday. Our Readychex service
provides a cost-effective solution that offers the benefit of convenient, one-step payroll account
reconciliation for employers.
• Regulatory compliance services: We offer new-hire reporting services, which enable clients to comply
with federal and state requirements to report information on newly hired employees. This information aids
the government in enforcing child support orders and minimizes fraudulent unemployment and workers’
compensation insurance claims. Our garnishment processing service provides deductions from employees’
pay, forwards payments to third-party agencies, including those that require electronic payments, and
tracks the obligations to fulfillment. These services enable employers to comply with legal requirements
and reduce the risk of penalties.
Human Resource Services: We offer complementary services for outsourcing of various human resource
functions to our payroll clients. In addition, some of these services can be provided to clients who do not opt for
payroll processing. Our complementary services are categorized as follows:
• Paychex HR Services: We offer comprehensive human resource outsourcing solutions that provide
businesses a full-service approach to the outsourcing of employer and employee administrative needs. Our
Paychex HR Services offering is available through Paychex HR Solutions, an administrative services
organization (“ASO”), or Paychex PEO. Both options offer businesses a combined package of services
that includes payroll, employer compliance, human resource and employee benefits administration, risk
management outsourcing, and the on-site availability of a professionally trained human resource
representative. These comprehensive bundles of services are designed to make it easier for businesses to
manage their payroll and related benefit costs while providing a benefits package equal to that of larger
companies. Our PEO differs from the ASO in that we serve as a co-employer of the clients’ employees,
provide health care coverage to PEO employees, and assume the risks and rewards of workers’
compensation insurance and certain health insurance offerings. PEO services are sold through our
registered and licensed subsidiary, Paychex Business Solutions, LLC. We also offer Paychex HR
Essentials, which is an ASO product that provides support to our clients over the phone or online to help
manage employee-related topics. As of May 31, 2016, Paychex HR Services was utilized by
approximately 35,000 clients with approximately 944,000 client worksite employees.
• Retirement services administration: Our retirement services product line offers a variety of options to
clients, including 401(k) plans, 401(k) SIMPLE plans, SIMPLE IRAs, 401(k) plans with safe harbor
provisions, owner-only 401(k) plans, profit sharing plans, and money purchase plans. These services
provide plan implementation, ongoing compliance with government regulations, employee and employer
reporting, participant and employer online access, electronic funds transfer, and other administrative
services. Auto enrollment is an optional plan feature that allows employers to automatically enroll
employees in their company’s 401(k) plan and increase overall plan participation. Clients have the ability
to choose from a group of pre-defined fund selections or to customize their investment options within
their plan. We are the largest 401(k) recordkeeper for small businesses in the U.S. Our large-market
retirement services clients include relationships with financial advisors. As of May 31, 2016, retirement
services covered approximately 74,000 plans and the asset value of participants’ funds externally managed
totaled approximately $23.6 billion.
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• Insurance services: Our licensed insurance agency, PIA, provides insurance through a variety of
carriers. Insurance offerings include property and casualty coverage such as workers’ compensation,
business-owner policies, commercial auto, and health and benefits coverage, including health, dental,
vision, and life. Our insurance services simplify the insurance process to make it easy to find plans with
the features and affordability to meet the client’s needs. With access to numerous top national and
regional insurance carriers, our professional insurance agents have access to a wide selection of plans
from which they can best match the insurance needs of small businesses. Additionally, clients have the
option to integrate their insurance plans with Paychex payroll processing for easy, accurate plan
administration.
We also offer new comprehensive solutions to help employers and employees with certain mandates
under the Affordable Care Act (“ACA”), which sets forth specific coverage and reporting requirements
that employers must meet. Our Paychex Employer Shared Responsibility (“ESR”) Service is aimed at
helping clients: 1) determine if the ESR provision applies to them; 2) provide ongoing ESR analysis and
monitoring, along with automatic alerts, of their employees and hours worked; 3) evaluate if their health
care offering meets the minimum coverage requirement; and 4) prepare end-of-year reporting.
PIA has a website, www.paychexinsurance.com, with information and interactive tools to help educate
visitors on insurance and aid in making business insurance decisions. A section on this website is
designed to provide answers, information, and solutions that employers can use to prepare for and take
action to comply with health care reform.
• HR administration services: We offer cloud-based human resource administration software products for
employee benefits management and administration, time and attendance solutions, and recruiting. Paychex
HR Online offers powerful tools for managing employee benefits, personnel information, and human
resource compliance and reporting. Our BeneTrac service manages the employee-benefit enrollment
process. Our time and attendance products, including our Stratustime® software acquired in June 2014,
help minimize the time spent compiling time sheet information. These services allow the employer to
handle multiple payroll scenarios,
improving productivity, accuracy, and reliability in the payroll
process. Our expense reporting solution is a web-based solution that provides clients with tools to manage
and control
tracking suite provides technology that
streamlines, simplifies, and drives the applicant workflow and onboarding process for companies of all
sizes.
the expense reporting process. The applicant
• Other human resource services and products: We offer the outsourcing of plan administration under
section 125 of the Internal Revenue Code, allowing employees to use pre-tax dollars to pay for certain
health insurance benefits and health and dependent care expenses not covered by insurance. All required
implementation, administration, compliance, claims processing and reimbursement, and coverage tests are
provided with these services. We offer state unemployment insurance services, which provide clients with
prompt processing for all claims, appeals, determinations, change statements, and requests for separation
documents. Other HRS products include employee handbooks, management manuals, and personnel and
required regulatory forms. These products are designed to simplify clients’ office processes and enhance
their employee benefits programs.
Accounting and Financial Services: We offer various accounting and financial services to small- to
medium-sized businesses. These services offer additional value-added benefits for small-business owners
including: purchasing of accounts receivable as a means of providing funding to clients in the temporary staffing
industry; a cloud-based accounting service; payment processing services; payment distribution services; and a
small-business loan resource center.
Sales and Marketing
We market and sell our services primarily through our direct sales force based in the metropolitan markets
we serve. Our direct sales force includes sales representatives who have defined geographical territories and
specialize within our portfolio of services. Within payroll, we differentiate the markets we serve between small-
business and mid-market companies. Our sales representatives are also supported by marketing, advertising,
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public relations, trade shows, and telemarketing programs. We utilize a virtual sales force to service geographical
areas where we may not have a local presence or for products for which we do not have a local sales force. We
sell HRS products to both new clients and our existing client base.
In addition to our direct selling and marketing efforts, we utilize other indirect sales channels such as our
relationships with existing clients, certified public accountants (“CPAs”), and banks for new client referrals.
Approximately 50% of our new core payroll clients (excluding business acquisitions) come from these referral
sources. Our dedicated business development group drives sales through banking, national associations, and
franchise channels.
We have a long-standing partnership with the American Institute of Certified Public Accountants
(“AICPA”) as the preferred payroll provider for its AICPA Business SolutionsTM Program. More than half of the
CPA firms in the U.S. are enrolled and actively participating in the Paychex Partner Program from AICPA
Business Solutions. Our current partnership agreement with the AICPA is in place through September 2021. We
also partner with various state CPA society organizations.
Our website, which is available at www.paychex.com, includes online payroll sales presentations and
service and product information. It also serves as a cost-efficient tool that serves as a source of leads and new
sales, while complementing the efforts of our direct sales force. This online tool allows us to market to clients
and prospective clients in other geographical areas where we do not have a direct sales presence. In addition, our
insurance services website, which is available at www.paychexinsurance.com, provides information to help small
businesses navigate the insurance industry, and generates leads by allowing interested parties to get in contact
with one of our professional insurance agents.
Paychex also builds on its reputation as an expert in the HCM industry by providing education and
assistance to clients and other interested parties. We provide free webinars, white papers, and other information
on our website to aid existing and prospective clients with the impacts of regulatory change. We track current
the small business community and provide a monthly regulatory update.
regulatory issues that
Our Paychex Accountant Knowledge Center is a free online resource available through our website that brings
valuable information and time-saving online tools to accounting professionals. The BuildMyBiz® website, which
is available at www.BuildMyBiz.com, provides tools and resources for starting, growing, and managing a
business.
impact
Markets and Competition
We remain focused on servicing small- to medium-sized businesses based upon the growth potential that we
believe exists in the markets we serve. Our internal database source indicates that there are approximately 11
million addressable businesses in the geographic markets that we currently serve within the U.S. Of those
businesses, approximately 99% have fewer than 100 employees and comprise our primary customers and target
market. The average client size within our existing client base is approximately 16.7 employees. We believe that
there is opportunity for us in the HCM market as the demand is moving down-market to smaller businesses.
We serve a diverse base of small- to medium-sized clients operating in a broad range of industries located
throughout the U.S. and in Germany. Revenue from operations in Germany and long-lived assets in Germany are
not material. We also have a joint-venture arrangement to provide payroll and human resource services in Brazil.
We utilize service agreements and arrangements with clients that are generally terminable by the client at any
time or upon relatively short notice. For the fiscal year ended May 31, 2016 (“fiscal 2016”), client retention was
in excess of 82% of our beginning of the year client base, consistent with the prior year’s record high. No single
client has a material impact on total service revenue or results of operations.
The market for HCM services is highly competitive and fragmented. We have one primary national
competitor and we also compete with other national, regional, local, and online service providers, all of which we
believe have significantly fewer clients than us. In addition to traditional payroll processing and human resource
service providers, we compete with in-house payroll and human resource systems and departments. Payroll and
human resource systems and software are sold by many vendors. HRS products also compete with a variety of
providers of human resource services, such as retirement services companies, insurance companies, and human
resources and benefits consulting firms.
6
Competition in the payroll processing and human resource services industry is primarily based on service
responsiveness, product quality and reputation, including ease of use and accessibility of technology, breadth of
service and product offerings, and price. We believe we are competitive in each of these areas. We believe that
our excellent customer service,
leading-edge technology and mobility applications,
distinguishes us from our competitors.
together with our
Software Maintenance and Development
The ever-changing mandates of Federal, state, and local tax and regulatory agencies require us to regularly
update our proprietary software to provide payroll and human resource services to our clients. We are continually
engaged in developing enhancements to and the maintenance of our various software platforms to meet the
changing requirements of our clients and the marketplace. We continue to enhance our SaaS solutions and
mobility applications to offer our users an integrated and unified experience. Continued enhancement of the
client and client employee experience is important to our future success.
Employees
As of May 31, 2016, we employed approximately 13,500 people. None of our employees were covered by
collective bargaining agreements.
Intellectual Property
We own or license and use a number of trademarks, trade names, copyrights, service marks, trade secrets,
computer programs and software, and other intellectual property rights. Taken as a whole, our intellectual
property rights are material to the conduct of our business. Where it is determined to be appropriate, we take
measures to protect our intellectual property rights, including, but not limited to, confidentiality/non-disclosure
agreements or policies with employees, vendors, and others; license agreements with licensees and licensors of
intellectual property; and registration of certain trademarks. We believe that the “Paychex” name, trademark, and
logo are of material importance to us.
Seasonality
There is no significant seasonality to our business. However, during our third fiscal quarter, which ends in
February, the number of new payroll clients, new retirement services clients, and new Paychex HR Services
worksite employees tends to be higher than during the rest of the fiscal year, primarily because many new clients
prefer to start using our services at the beginning of a calendar year. In addition, calendar year-end transaction
processing and client funds activity are traditionally higher during our third fiscal quarter due to clients paying
year-end bonuses and requesting additional year-end services. Historically, as a result of these factors, our total
revenue has been slightly higher in our third fiscal quarter, with greater sales commission expenses also reported
in that quarter.
Available Information
We are subject to the informational and reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Therefore, we file periodic reports, proxy statements, and other information with
the SEC. Such reports may be read and copied at the SEC’s Public Reference Room at 100 F Street NE,
Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by
calling the SEC at (800) SEC-0330. The SEC also maintains a website (www.sec.gov) that includes our reports,
proxy statements, and other information.
Our corporate website, www.paychex.com, provides materials for investors and information about our
services. Our Form 10-Ks, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other SEC
filings, as well as any amendments to such reports and filings, are made available, free of charge, on our website
as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. Also, copies of
our Annual Report to Stockholders and Proxy Statement, to be issued in connection with our 2016 Annual
7
Meeting of Stockholders, will be made available, free of charge, upon written request submitted to Paychex, Inc.,
c/o Corporate Secretary, 911 Panorama Trail South, Rochester, New York 14625-2396.
Item 1A. Risk Factors
Our future results of operations are subject to a number of risks and uncertainties. These risks and
uncertainties could cause actual results to differ materially from historical and current results, and from our
projections. The risk factors described below represent our current view of some of the most important risks
facing our business and are important to understanding our business. The risks described below are not the only
risks we face. Additional factors not presently known to us or that we currently deem to be immaterial also may
adversely affect, possibly to a material extent, our business, cash flows, financial condition, or results of
operations in future periods. In addition, you should refer to the description of forward-looking statements at the
beginning of Part I of this Form 10-K.
Our services may be adversely impacted by changes in government regulations and policies: Many of
our services, particularly payroll tax administration services and employee benefit plan administration services,
are designed according to government regulations that continually change. Changes in regulations could affect
the extent and type of benefits employers are required, or may choose, to provide employees or the amount and
type of taxes employers and employees are required to pay. Such changes could reduce or eliminate the need for
some of our services and substantially decrease our revenue. Added requirements could also increase our cost of
doing business. Failure to educate and assist our clients regarding new or revised legislation that impacts them
could have an adverse impact on our reputation. Failure by us to modify our services in a timely fashion in
response to regulatory changes could have a material adverse effect on our business and results of operations.
Our clients and our business could be adversely impacted by health care reform: The ACA was enacted
in March 2010 and entails sweeping health care reforms with staggered effective dates from 2010 through 2018.
As a service provider, we have a responsibility to our clients to help them understand their increased obligations
under the federal and state regulations facing employers under the ACA. Failure to provide clients with
appropriate information or solutions to effectively manage their health care benefits and related costs could have
an adverse impact on our reputation and a negative impact on our client base. There is no guarantee that solutions
we have developed to help clients navigate health care legislation will continue to be readily accepted by clients,
which could have a material adverse impact on our insurance services business. Insurance services revenue is at
risk for lower commission revenue from underwriters if clients move away from traditional insurance policies
utilized in the past or as a result of pressure on commission rates, driven by restrictions on insurers as to use of
premiums. Refer to the discussion later in this section on changes in health insurance and workers’ compensation
insurance rates and underlying claim trends for a discussion of health care reform as it impacts our PEO.
We may not be able to keep pace with changes in technology or provide timely enhancements to our
products and services: To maintain our growth strategy, we must adapt and respond to technological advances
and technological requirements of our clients. Our future success will depend on our ability to enhance
capabilities and increase the performance of our internal systems, particularly our systems that meet our clients’
requirements. We continue to make significant investments related to the development of new technology. If our
systems become outdated, we may be at a disadvantage when competing in our industry. There can be no
assurance that our efforts to update and integrate systems will be successful. If we do not integrate and update
our systems in a timely manner, or if our investments in technology fail to provide the expected results, there
could be a material adverse effect to our business and results of operations.
Cyber-attacks and security vulnerabilities could lead to reduced revenues, increased costs, liability
claims, or harm to our competitive position: We rely upon information technology (“IT”) networks, cloud-
based platforms, and systems to process, transmit, and store electronic information, and to support a variety of
business processes. Cyber-attacks and security threats are a risk to our business and reputation. A privacy or IT
security breach could have a material adverse effect on our business.
Data Security and Privacy Leaks: We collect, use, and retain increasingly large amounts of personal
information about our clients, employees of our clients, and our employees, including: bank account numbers,
credit card numbers, social security numbers, tax return information, health care information, retirement account
8
information, payroll information, system and network passwords, and other sensitive personal and business
information. At the same time, the continued occurrence of high-profile data breaches provides evidence of an
external environment increasingly hostile to information security. Vulnerabilities, threats, and more sophisticated
and targeted computer crimes pose a risk to the security of our systems and networks, and the confidentiality,
availability, and integrity of our data.
Our service platforms enable our clients to store and process personal data on premise or, increasingly, in a
cloud-based environment that we host. The security of our IT infrastructure is an important consideration in our
customers purchasing decisions. As cyber threats continue to evolve, we are focused on ensuring that our
operating environments safeguard and protect personal and business information. While we have security
systems and IT infrastructure in place designed to detect and protect against unauthorized access to such
information, if our security measures are breached, our business could be substantially harmed and we could
incur significant liabilities. Any such breach or unauthorized access could negatively affect our ability to attract
new clients, cause existing clients to terminate their agreements with us, result in reputational damage and
subject us to lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect
our business and operating results. Third parties, including vendors that provide services for our operations,
could also be a source of security risk to us in the event of a failure of their own security systems and
infrastructure.
Data Loss and Business Interruption: If our systems are disrupted or fail for any reason, or if our systems are
infiltrated by unauthorized persons, both the Company and our clients could experience data loss, financial loss,
harm to reputation, or significant business interruption. We may be required to incur significant costs to protect
against damage caused by disruptions or security breaches in the future. Such events may expose us to
unexpected liability, litigation, regulatory investigation and penalties, loss of clients’ business, unfavorable
impact to business reputation, and there could be a material adverse effect on our business and results of
operations.
In the event of a catastrophe, our business continuity plan may fail, which could result in the loss of
client data and adversely interrupt operations: Our operations are dependent on our ability to protect our
infrastructure against damage from catastrophe or natural disaster, severe weather including events resulting from
climate change, unauthorized security breach, power loss, telecommunications failure, terrorist attack, or other
events that could have a significant disruptive effect on our operations. We have a business continuity plan in
place in the event of system failure due to any of these events. Our business continuity plan has been tested in the
past by circumstances of severe weather, including hurricanes, floods, and snowstorms, and has been successful.
However, these past successes are not an indicator of success in the future. If the business continuity plan is
unsuccessful in a disaster recovery scenario, we could potentially lose client data or experience material adverse
interruptions to our operations or delivery of services to our clients.
We may be adversely impacted by any failure of third-party service providers to perform their
functions: As part of providing services to clients, we rely on a number of third-party service providers. These
service providers include, but are not limited to, couriers used to deliver client payroll checks and banks used to
electronically transfer funds from clients to their employees. Failure by these service providers, for any reason, to
deliver their services in a timely manner could result in material interruptions to our operations, impact client
relations, and result in significant penalties or liabilities to us.
We may be exposed to additional risks related to our co-employment relationship within our PEO
business: Many federal and state laws that apply to the employer-employee relationship do not specifically
address the obligations and responsibilities of the “co-employment” relationship. As a result, there is a possibility
that we may be subject to liability for violations of employment or discrimination laws by our clients and acts or
omissions of client employees, who may be deemed to be our agents, even if we do not participate in any such
acts or violations. Although our agreements with clients provide that they will indemnify us for any liability
attributable to their own or their employees’ conduct, we may not be able to effectively enforce or collect such
contractual obligations. In addition, we could be subject to liabilities with respect to our employee benefit plans
if it were determined that we are not the “employer” under any applicable state or federal laws.
9
We may be adversely impacted by changes in health insurance and workers’ compensation rates and
underlying claims trends: Within our PEO business, we maintain health and workers’ compensation insurance
covering worksite employees. The insurance costs are impacted by claim experience and are a significant portion
of our PEO costs. If we experience a sudden or unexpected increase in claim activity, our costs could increase. In
in the event of expiration or cancellation of existing contracts, we may not be able to secure
addition,
replacement contracts on competitive terms. Also, as a co-employer in the PEO, we assume or share many of the
employer-related responsibilities associated with health care reform, which may result in increased costs.
Increases in costs not incorporated into service fees timely or fully could have a material adverse effect on our
results of operations. Incorporating cost increases into service fees could also impact our ability to attract and
retain clients.
Our interest earned on funds held for clients may be impacted by changes in government regulations
mandating the amount of tax withheld or timing of remittance: We receive interest income from investing
client funds collected but not yet remitted to applicable tax or regulatory agencies or to client employees. A
change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to
applicable tax or regulatory agencies could adversely impact interest income.
We may be adversely impacted by volatility in the financial and economic environment: During periods
of weak economic conditions, employment levels tend to decrease and interest rates may become more volatile.
These conditions may impact our business due to lower transaction volumes or an increase in the number of
clients going out of business. Current or potential clients may decide to reduce their spending on payroll and
other outsourcing services. In addition, new business formation may be affected by an inability to obtain credit.
The interest we earn on funds held for clients may decrease as a result of a decline in funds available to invest
and lower interest rates. In addition, during periods of volatility in the credit markets, certain types of
investments may not be available to us or may become too risky for us to invest in, further reducing the interest
we may earn on client funds.
Constriction in the credit markets may impact the availability of financing, even to borrowers with the
highest credit ratings. Historically, we have periodically borrowed against available credit arrangements to meet
short-term liquidity needs. However, should we require additional short-term liquidity during days of large
outflows of client funds, a credit constriction may limit our ability to access those funds or the flexibility to
obtain them at interest rates that would be acceptable to us. Growth in services for funding payrolls of our clients
in the temporary staffing industry may be constricted if access to financing becomes limited. If all of these
financial and economic circumstances were to remain in effect for an extended period of time, there could be a
material adverse effect on our results of operations and financial condition.
We may not be able to attract and retain qualified people, which could impact the quality of our services
and customer satisfaction. Our success, growth and financial results depend in part on our continuing ability to
attract, retain and motivate highly qualified people at all levels, including management, technical, compliance
and sales personnel. Competition for these individuals can be intense, and we may not be able to retain our key
people, or attract, assimilate or retain other highly-qualified individuals in the future, which could harm our
future success.
Quantitative and qualitative disclosures about market risk: Refer to Item 7A of this Form 10-K for a
discussion on Market Risk Factors, which could have a material adverse effect on our business and results of
operations.
Item 1B. Unresolved Staff Comments
None.
10
Item 2. Properties
We owned and leased the following properties as of May 31, 2016:
Square feet
Owned facilities:
Rochester, New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other U.S. locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
721,000
65,000
Total owned facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
786,000
Leased facilities:
Rochester, New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other U.S. locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231,000
1,889,000
35,000
Total leased facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,155,000
Our facilities in Rochester, New York house various distribution, processing, and technology functions,
certain ancillary functions, a telemarketing unit, and other back-office functions. Facilities outside of Rochester,
New York are at various locations throughout the U.S. and house our regional, branch, and sales offices and data
processing centers. These locations are concentrated in metropolitan areas. Our international locations are
primarily in Germany and house our German branch and sales locations. We believe that adequate, suitable lease
space will continue to be available to meet our needs.
Item 3. Legal Proceedings
We are subject to various claims and legal matters that arise in the normal course of our business. These
include disputes or potential disputes related to breach of contract, tort, breach of fiduciary duty, employment-
related claims, tax claims, and other matters.
Our management currently believes that resolution of outstanding legal matters will not have a material
adverse effect on our financial position or results of operations. However, legal matters are subject to inherent
uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material
adverse impact on the Company’s financial position and the results of operations in the period in which any such
effect is recorded.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock trades on the NASDAQ Global Select Market under the symbol “PAYX.” Dividends
have historically been paid on our common stock in August, November, February, and May. The level and
continuation of future dividends are dependent on our future earnings and cash flows, and are subject to the
discretion of our Board of Directors (the “Board.”)
As of June 30, 2016, there were 12,548 holders of record of our common stock, which includes registered
holders and participants in the Paychex, Inc. Dividend Reinvestment and Stock Purchase Plan. There were also
5,813 participants in the Paychex, Inc. Employee Stock Purchase Plan and 4,841 participants in the Paychex, Inc.
Employee Stock Ownership Plan.
11
The high and low sale prices for our common stock as reported on the NASDAQ Global Select Market and
dividends for fiscal 2016 and the fiscal year ended May 31, 2015 (“fiscal 2015”) are as follows:
Fiscal 2016
Fiscal 2015
Sales prices
High
Low
Cash
dividends
declared per
share
First quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter
. . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . .
$49.79
$54.54
$54.78
$54.58
$41.59
$43.19
$45.76
$51.06
$0.42
$0.42
$0.42
$0.42
Sales prices
High
Low
$42.66
$48.20
$50.19
$51.72
$40.10
$41.59
$44.52
$48.00
Cash
dividends
declared per
share
$0.38
$0.38
$0.38
$0.38
The closing price of our common stock as of May 31, 2016, as reported on the NASDAQ Global Select
Market, was $54.22 per share.
In May 2014, the Board approved a program to repurchase up to $350 million of our common stock with
authorization expiring on May 31, 2017. Shares repurchased under this program during fiscal 2016 and fiscal
2015 were as follows:
In millions
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016
Fiscal 2015
Total
number
of shares
purchased
1.3
—
0.9
—
2.2
Total
number
of shares
purchased
0.9
0.3
0.4
2.3
3.9
Total
dollars
$ 37.5
15.1
17.9
111.9
$182.4
Total
dollars
$ 62.9
—
45.0
—
$107.9
As of May 31, 2016, the approximate dollar value of shares that may yet be purchased under the program is
$59.7 million. Shares of stock repurchased during fiscal 2016 and fiscal 2015 were purchased pursuant to the
program and were retired.
12
The following graph shows a five-year comparison of the total cumulative returns of investing $100 on May
31, 2011 in Paychex common stock, the S&P 500 Index, and a Peer Group Index. All comparisons of stock price
performance shown assume reinvestment of dividends. We are a participant in the S&P 500 Index, a market
group of companies with a larger than average market capitalization. Our Peer Group is a group of companies
with comparable revenue and net income, who are in a comparable industry, or who are direct competitors of
Paychex (as detailed below).
STOCK PRICE PERFORMANCE GRAPH
$250
$200
$150
$100
$50
$-
2011
2012
2013
2014
2015
2016
Paychex, Inc.
S&P 500
Peer Group
May 31,
2011
2012
2013
2014
2015
2016
Paychex . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100.00
$100.00
$100.00
$96.81
$99.59
$94.61
$125.11
$126.75
$125.45
$142.92
$152.67
$155.83
$177.59
$170.69
$200.87
$201.67
$173.25
$208.71
There can be no assurance that our stock performance will continue into the future with the same or similar
trends depicted in the graph above. We will neither make nor endorse any predictions as to future stock
performance.
Our Peer Group for fiscal 2016 is comprised of the following companies:
Automatic Data Processing, Inc. (direct competitor) Broadridge Financial Solutions, Inc.
Fiserv, Inc.
The Western Union Company
Total Systems Services, Inc.
Global Payments Inc.
The Brink’s Company
DST System, Inc.
The Dun & Bradstreet Corporation
Robert Half International Inc.
Intuit Inc.
Iron Mountain Incorporated
Moody’s Corporation
H&R Block, Inc.
TD AMERITRADE Holding Corporation
13
Item 6. Selected Financial Data
In millions, except per share amounts
Year ended May 31,
2016 (1)
2015 (4)
2014 (2),(4)
2013 (3),(4)
2012 (4)
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . . . . . . . . . .
$2,905.8
46.1
$
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . .
Cash dividends per common share . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . .
Cash and total corporate investments . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .
Return on stockholders’ equity . . . . . . . . . . . . . . . . .
$2,951.9
$1,146.6
$ 756.8
2.10
$
2.09
$
$
1.68
97.7
$
$ 793.2
$6,440.8
$
$1,911.7
$2,697.5
42.1
$
$2,739.6
$1,053.6
$ 674.9
1.86
$
1.85
$
$
1.52
$ 102.8
$ 936.4
$6,467.5
$2,478.2
40.7
$
$2,518.9
$ 982.7
$ 627.5
1.72
$
1.71
$
$
1.40
84.1
$
$ 936.8
$6,321.0
$2,285.2
41.0
$
$2,326.2
$ 904.8
$ 569.0
1.56
$
1.56
$
$
1.31
98.7
$
$ 874.6
$6,127.3
$2,186.2
43.6
$
$2,229.8
$ 853.9
$ 548.0
1.51
$
1.51
$
$
1.27
89.6
$
$ 790.0
$6,448.8
—
$1,604.5
— $
— $
— $
— $
$1,785.5
$1,777.0
$1,773.7
40%
36%
35%
34%
34%
(1) In the first quarter of fiscal 2016, a net tax benefit was recorded for income derived in prior tax years from
customer-facing software we produced. This increased full-year diluted earnings per share by approximately
$0.05 per share.
(2) With the introduction of a new health care offering within the PEO during the fiscal year ended May 31,
2014, the Company began to recognize certain PEO direct costs as operating expenses rather than as a
reduction in service revenue. In the table above, this impacted service revenue and total revenue, but had no
impact on operating income.
(3) In the fourth quarter of the fiscal year ended May 31, 2013, the Company increased its tax provision related
to the settlement of a state income tax matter. This reduced diluted earnings per share by approximately
$0.04 per share.
(4) With the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2015-17
“Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes” during fiscal 2016, the
reclassification of prior year deferred tax amounts was made on the Consolidated Balance Sheets to conform
to the current period presentation. In the table above, a similar reclassification was made, which impacted
total assets. Refer to Note A of the Notes to Consolidated Financial Statements contained in Item 8 of this
Form 10-K for further details on this recently adopted accounting pronouncement.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the
operating results of Paychex, Inc. and its wholly owned subsidiaries (“Paychex,” “we,” “our,” or “us”) for each
of the three fiscal years ended May 31, 2016 (“fiscal 2016”), May 31, 2015 (“fiscal 2015”), and May 31, 2014
(“fiscal 2014”), and our financial condition as of May 31, 2016. This review should be read in conjunction with
the accompanying consolidated financial statements and the related notes to consolidated financial statements
contained in Item 8 of this Annual Report on Form 10-K (“Form 10-K”) and the “Risk Factors” discussed in
Item 1A of this Form 10-K. Forward-looking statements in this review are qualified by the cautionary statement
under the heading “Cautionary Note Regarding Forward-Looking Statements Pursuant to the United States
Private Securities Litigation Reform Act of 1995” contained at the beginning of Part I of this Form 10-K.
14
Overview
We are a leading provider of integrated human capital management (“HCM”) solutions for payroll, human
resource (‘HR”), retirement, and insurance services for small- to medium-sized businesses. We offer a
comprehensive portfolio of HCM services and products that allow our clients to meet their diverse payroll and
human resource needs. Our payroll processing services, the foundation of our service model, include:
• payroll processing;
• payroll tax administration services;
• employee payment services; and
• regulatory compliance services (new-hire reporting and garnishment processing).
We support small-business companies through our core payroll, utilizing our robust Paychex FlexSM
platform, and our software-as-a-service (“SaaS”) SurePayroll® products. Mid-market companies typically have
more sophisticated payroll and benefits needs, and are primarily serviced through our Paychex Flex Enterprise
solution set, which offers an integrated suite of HCM solutions through the Paychex Flex platform, or through
our traditional mid-market platform. Our SaaS solution through Paychex Flex Enterprise integrates payroll
processing with human resource management, employee benefits administration, time and labor management,
and applicant tracking and onboarding solutions.
We offer a suite of complementary Human Resource Services (“HRS”) products including:
• comprehensive human resource outsourcing through Paychex HR Services, under which we offer Paychex
HR Solutions, our administrative services organization (“ASO”), and Paychex PEO, our professional
employer organization (“PEO”);
• retirement services administration;
• insurance services;
• HR administration services, including time and attendance, benefit enrollment, recruiting, and onboarding;
and
• other human resource services and products.
We also offer certain accounting and financial services, which include: the purchase of accounts receivable
as a means of providing payroll funding to clients in the temporary staffing industry; a cloud-based accounting
service; payment processing services; payment distribution services; and a small-business loan resource center.
Our mission is to be the leading provider of payroll, HR, and employee benefits services for small- and mid-
sized companies by being an essential partner with America’s businesses. We believe success in this mission will
lead to strong long-term financial performance. Our strategy focuses on flexible, convenient service; industry-
leading, integrated technology; solid sales execution; providing a comprehensive suite of value-added HCM
services; continued service penetration; and engaging in strategic acquisitions.
We continue to focus on driving growth in the number of clients, revenue, and profits, while providing
industry-leading service and technology solutions to our clients and their employees. We are managing our
personnel costs and expenses while continuing to invest in our business, particularly in leading-edge technology.
We believe these investments are critical to our success. Looking to the future, we believe that investing in our
products, people, and service capabilities will position us to capitalize on opportunities for long-term growth.
Our financial results for fiscal 2016 reflected sustained growth in our business. Payroll service revenue
continued to experience steady growth of 4% for fiscal 2016 as compared with fiscal 2015, driven by growth in
client base and revenue per check. Our payroll client base grew 2% in fiscal 2016 to approximately 605,000
clients as of May 31, 2016, resulting from solid sales execution and client retention results in excess of 82% of
the beginning of the fiscal year client base, consistent with the prior year’s record high.
Our financial results continue to be impacted by the interest rate environment as interest rates available on
high-quality financial instruments remain low. Our combined funds held for clients and corporate investment
15
portfolios earned an average rate of return of 1.1% for fiscal 2016, compared to 1.0% for fiscal years 2015 and
2014. In December 2015, the United States (“U.S.”) Federal Reserve raised the Federal Funds rate by 25 basis
points. This was the first interest hike in nearly a decade. The Federal Funds rate was in the range of 0.25% to
0.50% as of May 31, 2016, and was in the range of zero to 0.25% as of May 31, 2015.
Highlights of our financial results for fiscal 2016, compared to fiscal 2015, are as follows:
• Total revenue increased 8% to $3.0 billion.
• Total service revenue increased 8% to $2.9 billion.
— Payroll service revenue increased 4% to $1.7 billion.
— HRS revenue increased 13% to $1.2 billion.
• Interest on funds held for clients increased 9% to $46.1 million.
• Operating income increased 9% to $1.1 billion.
• Net income increased 12% to $756.8 million and diluted earnings per share increased 13% to $2.09 per
share. During the first quarter of fiscal 2016 (the “first quarter”), a net tax benefit was recorded for income
derived in prior tax years that increased full-year diluted earnings per share by approximately $0.05.
Excluding this net tax benefit, net income and diluted earnings per share would have increased 9% and
10%, respectively, for fiscal 2016.
• Dividends of $606.5 million were paid to stockholders, representing 80% of net income.
Business Outlook
Our payroll client base totaled approximately 605,000 clients as of May 31, 2016, compared to
approximately 590,000 clients as of May 31, 2015, and approximately 580,000 clients as of May 31, 2014. Our
payroll client base increased approximately 2% for each of the fiscal years 2016, 2015 and 2014.
While HRS provides services to employers and employees beyond payroll, they effectively leverage payroll
processing data and, therefore, are beneficial to our operating margin. Our HR administration services are often
included as part of the SaaS solutions for mid-market clients. The following table illustrates the growth in
selected HRS service offerings:
Paychex HR Services client worksite employees . . . . . . . . . . . . .
Paychex HR Services clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health and benefits services applicants . . . . . . . . . . . . . . . . . . . .
Retirement services plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at
May 31,
2016
944,000
35,000
150,000
74,000
Growth rates for fiscal year
2014
2015
2016
10%
10%
6%
7%
12%
11%
6%
6%
14%
13%
3%
5%
In fiscal 2016, we made significant enhancements to our Paychex Flex platform, which is our cloud-based
HCM solution. In fiscal 2016, we completed the integration of key HCM modules with the release of Paychex
Flex Time, Paychex Flex Benefits Administration, and Paychex Flex Hiring. We believe this leading-edge
technology, along with our flexible service options, positively impacted our performance in the mid-market
space, as we experienced especially strong sales results for this division in fiscal 2016.
In December 2015, a wholly owned subsidiary of Paychex acquired substantially all of the net assets of
Advance Partners. Advance Partners is a leading provider of integrated financial, operational, and strategic
services to support independent staffing firms. Advance Partners offers customizable solutions to the temporary
staffing industry, including payroll funding and outsourcing services.
Our full-service Paychex Employer Shared Responsibility (“ESR”) services continued to show strong
market acceptance and growth in fiscal 2016. The Affordable Care Act (“ACA”) sets forth specific coverage and
reporting requirements that employers must meet. Paychex ESR services help clients navigate the complexities
of those requirements, avoid steep fines and penalties, and reduce ACA-related administrative work.
16
We continue to strengthen our position as an expert in our industry by serving as a source of education and
information to clients, small businesses, and other interested parties. We provide free webinars, white papers, and
other information on our website to aid existing and prospective clients with the impact of regulatory
changes. The Paychex Insurance Agency, Inc. website, www.paychexinsurance.com, helps small-business
owners navigate the area of insurance coverage. Both this website and www.paychex.com have sections
dedicated to the topic of health care reform.
Financial position and liquidity
Our financial position as of May 31, 2016 remained strong with cash and total corporate investments of
$793.2 million and no debt. Our investment strategy continues to focus on protecting principal and optimizing
liquidity. Yields on high quality financial instruments remain low, negatively impacting our income earned on
funds held for clients and corporate investments. We invest predominately in municipal bonds — including
general obligation bonds; pre-refunded bonds, which are secured by a U.S. government escrow; and essential
services revenue bonds — along with U.S. government agency securities and corporate bonds. During fiscal
2016, our primary short-term investment vehicles were bank demand deposit accounts, variable rate demand
notes (“VRDNs”), high-quality commercial paper, and government agency discount notes.
A substantial portion of our portfolio is invested in high credit quality securities with ratings of AA or
higher, and A-1/P-1 ratings on short-term securities. We limit the amounts that can be invested in any single
issuer and invest in short- to intermediate-term instruments whose fair value is less sensitive to interest rate
changes. We believe that our investments as of May 31, 2016 were not other-than-temporarily impaired, nor has
any event occurred subsequent to that date that would indicate any other-than-temporary impairment.
Our primary source of cash is our ongoing operations. Cash flow from operations exceeded $1.0 billion for
the first
time for fiscal 2016. Historically, we have funded our operations, capital purchases, business
acquisitions, share repurchases, and dividend payments from our operating activities. Our positive operating cash
flows for fiscal 2016 allowed us to support our business growth and to pay substantial dividends to our
stockholders. In July 2015, we announced an increase in our quarterly dividend of 11%, or $0.04 per share. In
July 2016, we subsequently announced an additional $0.04 per share, or 10%, increase in our quarterly
dividend. Dividends paid to stockholders were 80% of net income in fiscal 2016. It is anticipated that cash and
total corporate investments as of May 31, 2016, along with projected operating cash flows, will support our
normal business operations, capital purchases, share repurchases, dividend payments, and business acquisitions,
if any, for the foreseeable future.
For further analysis of our results of operations for fiscal years 2016, 2015, and 2014, and our financial
position as of May 31, 2016, refer to the tables and analysis in the “Results of Operations” and “Liquidity and
Capital Resources” sections of this Item 7 and the discussion in the “Critical Accounting Policies” section of this
Item 7.
Outlook
Our outlook for the fiscal year ending May 31, 2017 (“fiscal 2017”) is based upon current market,
economic, and interest rate conditions continuing with no significant changes. Our expected full-year fiscal 2017
payroll revenue growth rate is based upon anticipated client base growth and increases in revenue per check. Our
guidance for fiscal 2017 is as follows:
• Payroll service revenue is anticipated to increase approximately 4%;
• HRS Revenue is anticipated to increase in the range of 12% to 14%;
• total service revenue is expected to increase in the range of 7% to 8%;
• interest on funds held for clients is expected to reflect mid-single-digit growth;
• net income is expected to increase approximately 8%, excluding the net tax benefit recognized in fiscal
2016 related to income derived in prior tax years;
17
• operating income, net of certain items, as a percent of service revenue is expected to approximate 38%;
and
• the effective income tax rate for fiscal 2017 is expected to be in the range of 35.5% to 36%.
The average rate of return on our combined funds held for clients and corporate investment portfolios is
expected to be approximately 1.1% for fiscal 2017. As of May 31, 2016, the long-term investment portfolio had
an average yield-to-maturity of 1.7% and an average duration of 3.1 years.
Purchases of property and equipment for fiscal 2017 are expected to be in the range of $110 million to $120
million. This includes costs for internally developed software as we continue to invest in our service supporting
technology. Fiscal 2017 depreciation expense is projected to be in the range of $100 million to $110 million, and
we project amortization of intangible assets for fiscal 2017 to be in the range of $15 million to $20 million.
Results of Operations
Summary of Results of Operations for the Fiscal Years Ended May 31:
In millions, except per share amounts
2016
Change
2015
Change
2014
Revenue:
Payroll service revenue . . . . . . . . . . . . . . . .
HRS revenue . . . . . . . . . . . . . . . . . . . . . . . .
$1,729.9
1,175.9
4% $1,656.8
1,040.7
13%
4% $1,599.3
878.9
18%
Total service revenue . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . .
Combined operating and SG&A expenses . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Investment income, net
Income before income taxes . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,905.8
46.1
2,951.9
1,805.3
1,146.6
4.5
1,151.1
394.3
8%
9%
2,697.5
42.1
8% 2,739.6
1,686.0
7%
9% 1,053.6
6.4
(28)%
9% 1,060.0
385.1
2%
9%
3%
2,478.2
40.7
9% 2,518.9
1,536.2
10%
7%
17%
7%
7%
982.7
5.4
988.1
360.6
Effective income tax rate . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.3%
36.3%
36.5%
$ 756.8
12% $ 674.9
8% $ 627.5
Diluted earnings per share . . . . . . . . . . . . . .
$
2.09
13% $
1.85
8% $
1.71
We invest
in highly liquid,
investment-grade fixed income securities and do not utilize derivative
instruments to manage interest rate risk. As of May 31, 2016, we had no exposure to high-risk or illiquid
investments. Details regarding our combined funds held for clients and corporate investment portfolios are as
follows:
$ in millions
Average investment balances:
Year ended May 31,
2015
2014
2016
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,105.5
922.6
$4,080.0
1,011.5
$3,968.7
973.8
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,028.1
$5,091.5
$4,942.5
Average interest rates earned (exclusive of net realized gains):
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined funds held for clients and corporate investments . . . .
1.1%
0.9%
1.1%
1.0%
0.7%
1.0%
1.0%
0.7%
1.0%
Total net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.1
$
0.3
$
0.6
18
$ in millions
As of May 31,
Net unrealized gains on available-for-sale securities(1) . . . . . . . . . . .
Federal Funds rate(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of available-for-sale securities . . . . . . . . . . . . . . . . .
Weighted-average duration of available-for-sale securities in
2016
2015
2014
$
$
47.6
0.50%
$
13.6
0.25%
34.5
0.25%
$4,141.9
$3,595.6
$3,391.4
years(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1
3.2
3.0
Weighted-average yield-to-maturity of available-for-sale
securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.7%
1.6%
1.6%
(1) The net unrealized gain on our investment portfolios was approximately $63.5 million as of July 15, 2016.
(2) The Federal Funds rate was in the range of 0.25% to 0.50% as of May 31, 2016, and in the range of zero to
0.25% as of May 31, 2015.
(3) These items exclude the impact of VRDNs, as they are tied to short-term interest rates.
Payroll service revenue: Payroll service revenue was $1.7 billion for both fiscal 2016 and fiscal 2015,
reflecting growth of 4% for both fiscal 2016 and fiscal 2015 compared to fiscal 2014. Both fiscal 2016 and fiscal
2015 benefited from increases in client base and revenue per check. Revenue per check improved as a result of
price increases, net of discounts. Fiscal 2016 also benefited from two additional processing days during the year.
For fiscal 2016 and fiscal 2015, our total payroll client base growth was approximately 2%. Client retention
was in excess of 82% of the beginning of the year client base for fiscal 2016, consistent with fiscal 2015, which
reflected a record high.
Human Resource Services revenue: HRS revenue was $1.2 billion for fiscal 2016 and $1.0 billion for
fiscal 2015, reflecting growth of 13% and 18%, respectively, compared to each of the prior fiscal year periods.
For both fiscal 2016 and fiscal 2015, HRS revenue growth was primarily driven by increases in client base
across all major HCM services, including: comprehensive outsourcing services; retirement services; time and
attendance; and HR. HRS product key statistics are as follows:
$ in billions
As of May 31,
Paychex HR Services client worksite
employees . . . . . . . . . . . . . . . . . . . . . . . . .
Paychex HR Services clients . . . . . . . . . . . . .
Health and benefits services applicants . . . . .
Retirement services plans . . . . . . . . . . . . . . .
Asset value of retirement services
2016
Change
2015
Change
2014
944,000
35,000
150,000
74,000
10%
10%
6%
7%
858,000
31,000
142,000
70,000
12%
11%
6%
6%
766,000
28,000
134,000
66,000
participants’ funds . . . . . . . . . . . . . . . . . . .
$
23.6
—% $
23.5
7% $
21.9
We continue to experience strong demand for our Paychex HR Services, our largest HRS revenue stream, as
evidenced by the continued double-digit growth in client worksite employees. During both fiscal 2016 and fiscal
2015, the PEO, in particular, experienced strong demand.
Retirement services revenue growth was tempered in fiscal 2016 by a lower average asset value of
participants’ funds, offset somewhat by higher basis points earned from external fund managers. Retirement
services revenue for fiscal 2015 compared to fiscal 2014 benefited from pricing and higher average asset value of
participants’ funds.
Insurance services revenue growth for both fiscal 2016 and 2015 benefited from growth in our full-service
ACA product. In addition, higher average premiums and clients in our workers’ compensation product positively
impacted revenue in both years.
Our HR administration products, including time and attendance and HR management, contributed to growth
through strong sales of our SaaS solutions. Time and attendance solutions benefited from a small business
acquisition in fiscal 2015.
19
Total service revenue: Total service revenue increased 8% for fiscal 2016 and 9% for fiscal 2015,
attributable to the factors previously discussed.
Interest on funds held for clients:
Interest on funds held for clients increased 9% for fiscal 2016 and
increased 3% for fiscal 2015. For fiscal 2016, the increase was primarily due to higher average interest rates and
slightly higher average investment balances. For fiscal 2015, the increase was primarily due to an increase in
average investment balances, while average interest rates earned were flat.
Average investment balances for funds held for clients increased 1% for fiscal 2016 and 3% for fiscal
2015. The net increase in average investment balances for fiscal 2016 was mainly due to client base growth and
wage inflation, partially offset by lower state unemployment insurance rates. The increase in average investment
balances for fiscal 2015 was mainly driven by increases in client base and wage inflation.
Refer to the “Market Risk Factors” section contained in Item 7A of this Form 10-K for more information on
changing interest rates.
Combined operating and SG&A expenses: The following table summarizes total combined operating and
SG&A expenses for fiscal years:
In millions
2016
Change
2015
Change
2014
Compensation-related expenses . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . .
$1,148.2
115.1
542.0
6% $1,087.1
106.6
8%
492.3
10%
8% $1,003.9
105.0
2%
427.3
15%
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . .
$1,805.3
7% $1,686.0
10% $1,536.2
Total expenses increased 7% for fiscal 2016 and 10% for fiscal 2015. Fiscal 2015 was impacted by costs
relating to the new minimum premium plan health insurance offering within our PEO, introduced in January
2014, which contributed three percentage points of the increase in total expenses for fiscal 2015.
The increases in total expenses were driven largely by growth in compensation-related expenses. For fiscal 2016,
compensation-related expenses increased due to higher wages and performance-based compensation costs. For fiscal
2015, compensation-related expenses increased due to higher sales headcount and variable costs resulting from strong
sales execution, along with higher employee-benefit-related costs, primarily medical expenses. As of May 31, 2016,
we had approximately 13,500 employees, compared with 13,000 employees as of May 31, 2015.
Depreciation expense is primarily related to buildings, furniture and fixtures, data processing equipment,
and software. Amortization of intangible assets is primarily related to client list acquisitions, which are amortized
using either straight-line or accelerated methods. The higher growth rate for depreciation and amortization in
fiscal 2016 was primarily driven by higher depreciation related to an increase in internally developed software
that was placed in service.
Other expenses include items such as non-capital equipment, delivery, forms and supplies, communications,
travel and entertainment, professional services, and other costs incurred to support our business. Other expenses
increased due to growth within the PEO. In addition, continued investment
in product development and
supporting technology impacted other expense growth for both fiscal 2016 and fiscal 2015.
Operating income: Operating income increased 9% for fiscal 2016 and 7% for fiscal 2015. The
fluctuations in operating income were attributable to the factors previously discussed.
Operating income, net of certain items, is as follows for fiscal years:
In millions
2016
Change
2015
Change
2014
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Excluding: Interest on funds held for clients . . .
$1,146.6
(46.1)
Operating income, net of certain items (1)
. . . . . .
$1,100.5
9%
9%
9%
$1,053.6
(42.1)
$1,011.5
7%
3%
7%
$982.7
(40.7)
$942.0
(1) Operating income, net of certain items is a non-GAAP measure. Refer to the “Non-GAAP Financial
Measure” discussion that follows.
20
Operating income, net of certain items, as a percentage of service revenue was approximately 38% for each
of the fiscal years 2016, 2015 and 2014.
Non-GAAP Financial Measure:
In addition to reporting operating income, a U.S. generally accepted
accounting principle (“GAAP”) measure, we present operating income, net of certain items, which is a non-
GAAP measure. We believe operating income, net of certain items, is an appropriate additional measure, as it is
an indicator of our core business operations performance period over period. It is also the basis of the measure
used internally for establishing the following year’s targets and measuring management’s performance in
connection with certain performance-based compensation payments and awards. Operating income, net of certain
items, excludes interest on funds held for clients. Interest on funds held for clients is an adjustment to operating
income due to the volatility of interest rates, which are not within the control of management. Operating income,
net of certain items, is not calculated through the application of GAAP and is not the required form of disclosure
by the Securities and Exchange Commission (“SEC”). As such, it should not be considered as a substitute for the
GAAP measure of operating income and, therefore, should not be used in isolation, but in conjunction with the
GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and
may not be comparable to a similarly defined non-GAAP measure used by other companies.
Investment income, net:
Investment income, net, primarily represents earnings from our cash and cash
equivalents and investments in available-for-sale securities. Investment income does not include interest on funds
held for clients, which is included in total revenue. Investment income, net, decreased 28% for fiscal 2016 as the
result of immaterial losses on equity method investments and a decrease in average investment balances, partially
offset by higher average interest rates earned. The decrease in average investment balances for fiscal 2016 is the
result of cash consideration paid for the acquisition of Advance Partners in December 2015 and stock repurchase
activity. Investment income increased 17% for fiscal 2015 due to an increase in average investment balances
resulting from investment of cash generated from operations, while interest rates earned remained relatively flat.
Income taxes: Our effective income tax rate was 34.3% for fiscal 2016 compared to 36.3% for fiscal 2015
and 36.5% for fiscal 2014. The decrease in the effective income tax rate for fiscal 2016 is related primarily to a
net tax benefit that was recorded for income derived in prior tax years from customer-facing software we
produced. During the first quarter, we engaged tax specialists to assess the qualification of such software for the
Federal “Qualified Production Activities Deduction.” Based on this assessment, we concluded that certain of our
software offerings qualified for this tax deduction in prior tax years and, therefore, we recorded the tax benefits
and related tax reserves as a discrete item in the first quarter. Excluding this net tax benefit, the effective income
tax rate would have been approximately 35.8% for fiscal 2016. Refer to Note J of the Notes to Consolidated
Financial Statements contained in Item 8 of this Form 10-K for additional disclosures on income taxes.
Net income and earnings per share: Net income increased 12% to $756.8 million for fiscal 2016 and 8%
to $674.9 million for fiscal 2015. Diluted earnings per share increased 13% to $2.09 per share for fiscal 2016 and
8% to $1.85 per share for fiscal 2015. These fluctuations were attributable to the factors previously discussed.
Excluding the net tax benefit recognized in the first quarter, net income and diluted earnings per share for fiscal
2016 would have increased 9% and 10%, respectively.
Liquidity and Capital Resources
Our financial position as of May 31, 2016 remained strong with cash and total corporate investments of
$793.2 million and no debt. We believe that our investments as of May 31, 2016 were not other-than-temporarily
impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary
impairment. We anticipate that cash and total corporate investments as of May 31, 2016, along with projected
operating cash flows, will support our normal business operations, capital purchases, business acquisitions, share
repurchases, and dividend payments for the foreseeable future.
21
Commitments and Contractual Obligations
Lines of credit: As of May 31, 2016, we had unused borrowing capacity available under 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.
Bank of America, N.A.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PNC Bank, National Association . . . . . . . . . . . . . . . . . . . . . . . .
Wells Fargo Bank, National Association . . . . . . . . . . . . . . . . . .
$350 million
$250 million
$150 million
$150 million
February 27, 2017
February 28, 2017
February 27, 2017
February 27, 2017
Our credit facilities are evidenced by promissory notes and are secured by separate pledge security
agreements by and between Paychex, Inc. and each of the financial institutions (the “Lenders”), pursuant to
which we have granted each of the Lenders a security interest in certain of our investment securities accounts.
The collateral is maintained in a pooled custody account pursuant to the terms of a control agreement and is to be
administered under an intercreditor agreement among the Lenders. Under certain circumstances, individual
Lenders may require that collateral be transferred from the pooled account into segregated accounts for the
benefit of such individual Lenders.
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 our
clients in the ordinary course of business, if necessary. No amounts were outstanding against these lines of credit
during fiscal 2016 or as of May 31, 2016.
Certain of the financial institutions are also parties to our credit facility and irrevocable standby letters of
credit, which are discussed below.
Credit facilities: On August 5, 2015, the Company entered into a committed, unsecured, five-year
syndicated credit facility, expiring on August 5, 2020. Under the credit facility, Paychex of New York LLC (the
“Borrower”) may, subject
to certain restrictions, borrow up to $1 billion to meet short-term funding
requirements. The obligations under this facility have been guaranteed by the Company and certain of its
subsidiaries. The outstanding obligations under this credit facility will bear interest at competitive rates to be
elected by the Borrower. Upon expiration of the commitment in August 2020, any borrowings outstanding will
mature and be payable on such date. This agreement supersedes the $750 million credit facility agreement set to
expire on June 21, 2018, which was terminated as part of the new agreement.
There were no amounts outstanding under this credit facility as of May 31, 2016. During fiscal 2016, the
Company borrowed against this facility, and its predecessor facility, for one-day periods each, from one to two
times a quarter as follows:
$ in millions
Number of days borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average amount borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended May 31,
2016
2015
5
$450.0
$305.0
2
$150.0
$125.0
3.39%
3.25%
The Company subsequently borrowed $100 million for one day under this line in June 2016.
The credit facility contains various financial and operational covenants that are usual and customary for
such arrangements. The Borrower was in compliance with these covenants during fiscal 2016.
Certain lenders under this credit facility, and their respective affiliates, have performed, and may in the
future perform for us, various commercial banking, investment banking, underwriting, and other financial
advisory services, for which they have received, and will continue to receive in the future, customary fees and
expenses.
On March 17, 2016, the Company entered into a committed, unsecured, three-year credit facility with PNC
Bank, National Association, expiring on March 17, 2019. Under the credit facility, Paychex Advance LLC
22
(“Paychex Advance”) may, subject to certain restrictions, borrow up to $150 million to finance working capital
needs and for general corporate purposes. The obligations under this facility have been guaranteed by the
Company and certain of its subsidiaries. The outstanding obligations under this credit facility will bear interest at
competitive rates to be elected by Paychex Advance. Upon expiration of the commitment in March 2019, any
borrowings outstanding will mature and be payable on such date.
There were no amounts outstanding under this credit facility as of May 31, 2016. Subsequent to May 31,
2016, Paychex Advance borrowed approximately $56 million under this line, which remains outstanding as of
the date of this report.
Letters of credit: As of May 31, 2016, we had irrevocable standby letters of credit outstanding totaling
$43.0 million, required to secure commitments for certain insurance policies. The letters of credit expire at
various dates between July 2016 and April 2017, and are collateralized by securities held in our investment
portfolios. No amounts were outstanding on these letters of credit during fiscal 2016 or as of May 31, 2016.
Subsequent to May 31, 2016, the letter of credit expiring in July 2016 was renewed through July 2017.
Other commitments: We have entered into various operating leases and purchase obligations that, under
GAAP, are not reflected on the Consolidated Balance Sheets as of May 31, 2016. The table below summarizes
our estimated annual payment obligations under these commitments as of May 31, 2016:
In millions
Total
. . . . . . . . . . . . . . . . . . . . . .
Operating leases(1)
Purchase obligations(2) . . . . . . . . . . . . . . . . . . .
$106.7
109.7
Less than
1 year
$ 35.7
73.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$216.4
$109.3
1-3 years
4-5 years
More than
5 years
$48.5
28.1
$76.6
$20.3
7.4
$27.7
$2.2
0.6
$2.8
Payments due by period
(1) Operating leases are primarily for office space and equipment used in our branch operations.
(2) Purchase obligations include our estimate of the minimum outstanding commitments under purchase orders
to buy goods and services and legally binding contractual arrangements with future payment obligations.
Included in the total purchase obligations is $6.8 million of commitments to purchase capital assets.
Amounts actually paid under certain of these arrangements may be different due to variable components of
these agreements.
The liability for uncertain tax positions, including interest and net of federal benefits, was approximately
$54.2 million as of May 31, 2016. Refer to Note J of the Notes to Consolidated Financial Statements contained in
Item 8 of this Form 10-K for more information on income taxes. We are not able to reasonably estimate the
timing of future cash flows related to this liability and have excluded it from the table above.
Certain deferred compensation plan obligations and other long-term liabilities reported in our Consolidated
Balance Sheets amounting to $68.3 million are excluded from the table above because the timing of actual
payments cannot be specifically or reasonably determined due to the variability in assumptions required to
project the timing of future payments.
Advantage Payroll Services Inc. (“Advantage”) has license agreements with independently owned associate
offices (“Associates”), which are responsible for selling and marketing Advantage Payroll Services® and
performing certain operational functions, while Paychex and Advantage provide all centralized back-office
payroll processing and payroll tax administration services. Under these arrangements, Advantage pays the
Associates commissions based on processing activity for the related clients. When we acquired Advantage, there
were fifteen Associates. Over the past few years, arrangements with some Associates have been discontinued,
and there are currently fewer than ten Associates. Since the actual amounts of future payments are uncertain,
obligations under these arrangements are not included in the table above. Commission expense for the Associates
for fiscal years 2016, 2015, and 2014 was $16.1 million, $15.1 million, and $14.4 million, respectively.
In the normal course of business, we make representations and warranties that guarantee the performance of
services under service arrangements with clients. Historically, there have been no material losses related to such
23
guarantees. In addition, we have entered into indemnification agreements with our officers and directors, which
require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as
they relate to their services provided to us.
We currently self-insure the deductible portion of various insured exposures under certain employee benefit
plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on
our Consolidated Balance Sheets. Historically, the amounts accrued have not been material and are not material
as of the reporting date. We also maintain insurance coverage in addition to our purchased primary insurance
policies for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and
embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and self-insured retentions
through our captive insurance company.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions with unconsolidated entities which
would have been established for the purpose of facilitating off-balance sheet arrangements or other limited
purposes. We do maintain investments as a limited partner in low-income housing projects that are not
considered part of our ongoing operations. These investments are accounted for under the equity method of
accounting and are less than 1% of our total assets as of May 31, 2016.
Operating Cash Flow Activities
In millions
Year ended May 31,
2015
2016
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash adjustments to net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by changes in operating assets and liabilities . . . . . . . . .
$ 756.8
234.9
26.5
$674.9
211.4
8.9
$627.5
198.6
54.8
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
$1,018.2
$895.2
$880.9
The increase in our operating cash flows for fiscal 2016 compared to fiscal 2015 is primarily the result of
higher net income, adjusted for non-cash items, along with the positive impact from fluctuations in our operating
assets and liabilities. The increase for fiscal 2015 compared to fiscal 2014 is primarily the result of higher net
income, adjusted for non-cash items, offset by the decrease in cash provided by changes in our operating assets
and liabilities. Non-cash adjustments to net income increased for both fiscal 2016 and fiscal 2015, compared to
the respective prior year periods. The increase in non-cash adjustments for fiscal 2016 was largely due to higher
depreciation expense related to an increase in internally developed software placed in service, and an increase in
the deferred tax provision. The increase in non-cash adjustments for fiscal 2015 was largely due to higher
amortization of premiums on available-for-sale securities as the Company has increased its holdings of longer-
duration investments, and higher stock-based compensation costs. The fluctuations in our operating assets and
liabilities between all periods were primarily related to the timing of collections from clients and payments for
compensation, PEO payroll, income tax, and other liabilities.
Investing Cash Flow Activities
In millions
Year ended May 31,
2015
2014
2016
Net change in funds held for clients and corporate investment
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . .
Purchases of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 339.7
(97.7)
(296.1)
(9.0)
$(151.8)
(102.8)
(27.1)
(3.3)
$(211.4)
(84.1)
(9.3)
(11.3)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (63.1)
$(285.0)
$(316.1)
24
Funds held for clients and corporate investments: Funds held for clients consist of short-term funds and
available-for-sale securities. Corporate investments are primarily comprised of available-for-sale securities. The
portfolio of funds held for clients and corporate investments is detailed in Note F of the Notes to Consolidated
Financial Statements contained in Item 8 of this Form 10-K.
Fluctuations in the net change in funds held for clients and corporate investment activities are largely due to
timing within the client funds portfolio. For fiscal 2016 compared to fiscal 2015, there was a significant
fluctuation due to timing of the day of the week for fiscal year-end. There were larger cash outflows on Tuesday,
May 31, 2016 that required the liquidation of funds held in the funds held for clients portfolio. This resulted in
positive cash flow from investing activities for fiscal 2016. Our net cash inflow from funds held for clients and
corporate investment activities for fiscal 2016 was partially offset by the change in mix of investments with more
invested in VRDN securities and less in cash equivalents as of May 31, 2016. For fiscal 2015 compared to fiscal
2014, there was not a significant fluctuation due to timing of the day of the week for fiscal year-end. The net cash
outflow position for both fiscal 2015 and fiscal 2014 is related to more purchases of short-term and available-for-
sale securities resulting from higher average collections from clients. See further discussion of this timing in the
financing cash flows discussion of net change in client fund obligations.
In general, fluctuations in net funds held for clients and corporate investment activities primarily relate to
timing of purchases, sales, or maturities of investments. The amount of funds held for clients will vary based
upon the timing of collection of client funds, and the related remittance of funds to applicable tax or regulatory
agencies for payroll tax administration services and to employees of clients utilizing employee payment services.
Additional discussion of interest rates and related risks is included in the “Market Risk Factors” section
contained in Item 7A of this Form 10-K.
Other investing activities: To support our continued client and ancillary product growth, purchases of
property and equipment were made for data processing equipment and software, and for the expansion and
upgrade of various operating facilities. During fiscal years 2016, 2015, and 2014, we purchased approximately
$4.9 million, $6.9 million, and $4.7 million, respectively, of data processing equipment and software from EMC
Corporation. The Chairman, President, and Chief Executive Officer of EMC Corporation is a member of our
Board of Directors (the “Board”).
During fiscal 2016, we paid, net of cash acquired, $296.1 million for the acquisition of Advance
Partners. During fiscal years 2015 and 2014, we paid, net of cash acquired, $27.1 million and $9.3 million,
respectively, for immaterial business acquisitions.
Financing Cash Flow Activities
In millions, except per share amounts
Year ended May 31,
2015
2014
2016
Net change in client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity activity related to stock-based awards . . . . . . . . . . . . . . . . . . . .
$(304.8)
(606.5)
(107.9)
25.6
$ 93.0
(551.8)
(182.4)
48.5
$ 127.4
(510.6)
(249.7)
113.3
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(993.6)
$(592.7)
$(519.6)
Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.68
$ 1.52
$ 1.40
Net change in client fund obligations: The client fund obligations liability will vary based on the timing
of collecting client funds, and the related required remittance of funds to applicable tax or regulatory agencies for
payroll tax administration services and to employees of clients utilizing employee payment services. Collections
from clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days.
Fluctuations in net change in client fund obligations for the years presented are primarily the result of timing
of collections and remittances and overall trends in client fund balances. Timing for fiscal 2016 resulted in a net
25
cash outflow position. May 31, 2016 was a Tuesday, a larger cash outflow day due to clearing of Readychex and
tax payments. As May 31, 2015 was a Sunday, cash on hand would have been higher. As a result, there was a net
cash outflow over the period in fiscal 2016.
May 31, 2015 fell on a Sunday, while May 31, 2014 fell on a Saturday. Friday is a large cash outflow day
for direct deposit funds, partially offset by tax payment funds collected on that day. This impact was consistent
and did not impact the net cash flow position for client funds obligations reflected in fiscal 2015 or fiscal
2014. The net cash inflow position in those years is the result of growth in average client funds held. The slight
decrease in net cash inflows for fiscal 2015 was the result of lower cash collections for state unemployment
insurance with many states lowering their rates early in calendar 2015.
Dividends paid:
In July 2015, the Board increased our quarterly dividend to stockholders by 11% to $0.42
per share from $0.38 per share. In July 2014, the Board increased our quarterly dividend to stockholders by 9%
to $0.38 per share from $0.35 per share. The dividends paid as a percentage of net income totaled 80%, 82%, and
81% for fiscal years 2016, 2015, and 2014, respectively. The payment of future dividends is dependent on our
future earnings and cash flow, and is subject to the discretion of our Board.
Repurchases of common shares:
In May 2014, the Board approved a program to repurchase up to $350
million of Paychex common stock, with authorization expiring in May 2017. Under this share repurchase
program, we repurchased 2.2 million shares for a total of $107.9 million during fiscal 2016 and 3.9 million shares
for a total of $182.4 million during fiscal 2015. In fiscal 2014, we repurchased 6.2 million shares for a total of
$249.7 million under a previously authorized program to repurchase up to $350 million of Paychex common
stock, with authorization for that program expiring in May 2014.
Equity activity related to stock-based awards: The decrease in activity related to stock-based awards for
fiscal 2016 compared to fiscal 2015 and for fiscal 2015 compared to fiscal 2014 was largely driven by a decrease
in proceeds from the exercise of stock options. Shares of common stock acquired through the exercise of stock
options were 0.9 million shares, 1.6 million shares, and 3.4 million shares for fiscal years 2016, 2015, and 2014,
respectively. Refer to Note E of the Notes to Consolidated Financial Statements contained in Item 8 of this Form
10-K for additional disclosures on our stock-based compensation plans.
Other
Recently adopted accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial
recently adopted accounting
this Form 10-K for a discussion of
Statements contained in Item 8 of
pronouncements.
Recently issued accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial
Statements contained in Item 8 of this Form 10-K for a discussion of recently issued accounting pronouncements.
Critical Accounting Policies
Note A of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K discusses
the significant accounting policies of Paychex. Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have been prepared in accordance with
U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments, and
assumptions that affect reported amounts of assets, liabilities, revenue, and expenses. On an ongoing basis, we
evaluate the accounting policies and estimates used to prepare the consolidated financial statements. We base our
estimates on historical experience, future expectations, and assumptions believed to be reasonable under current
facts and circumstances. Actual amounts and results could differ from these estimates. Certain accounting
policies that are deemed critical to our results of operations or financial position are discussed below.
Revenue recognition: Service revenue is recognized in the period services are rendered and earned under
service arrangements with clients where service fees are fixed or determinable and collectability is reasonably
assured. Certain processing services are provided under annual service arrangements with revenue recognized
ratably over the service period. Our service revenue is largely attributable to processing services where the fee is
based on a fixed amount per processing period or a fixed amount per processing period plus a fee per employee
26
or transaction processed. Fees earned for funding of temporary staffing clients’ payrolls via purchase of accounts
receivable are based on a percentage of funding amounts as specified in the client contract. The revenue earned
from delivery service for the distribution of certain client payroll checks and reports is included in service
revenue, and the costs for delivery are included in operating expenses on the Consolidated Statements of Income
and Comprehensive Income.
For certain of our service offerings, we receive advance payments for set-up fees from our clients. We defer
revenue associated with these advance payments and the related costs, recognizing the revenue and related
expenses over the expected life of clients.
PEO revenue is included in service revenue and is reported net of certain direct pass-through costs billed
and incurred, which include wages, taxes, and certain benefit premiums. Direct costs related to certain benefit
plans where the Company retains risk are classified as operating expenses rather than as a reduction in service
revenue.
Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates
for payroll tax administration services and for employee payment services, and invested until remittance to the
applicable tax or regulatory agencies or client employees. These collections from clients are typically remitted
from one to 30 days after receipt, with some items extending to 90 days. The interest earned on these funds is
included in total revenue on the Consolidated Statements of Income and Comprehensive Income because the
collecting, holding, and remitting of these funds are critical components of providing these services. Interest on
funds held for clients also includes net realized gains and losses from the sales of available-for-sale securities.
PEO insurance reserves: As part of the PEO service, we offer workers’ compensation insurance and
health insurance to client companies for the benefit of client employees. Workers’ compensation insurance is
provided under a fully insured high deductible workers’ compensation policy with a national insurance carrier.
Workers’ compensation insurance reserves are established to provide for the estimated costs of paying claims up
to per occurrence liability limits. In establishing the PEO workers’ compensation insurance reserves, we use an
independent actuarial estimate of undiscounted future cash payments that would be made to settle the claims.
Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss
experience and actuarial loss projections, and is subject to change due to multiple factors, including economic
trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as
reported in the consolidated financial statements. Accordingly, workers’ compensation final claim settlements
may vary from the present estimates, particularly when those payments may not occur until well into the future.
With respect to our PEO health insurance, we offer various health insurance plans that take the form of
either fully insured fixed cost plans with various national insurance carriers or a fully insured minimum premium
insurance arrangement with coverage provided through a single national carrier. Under the minimum premium
arrangement, our health benefits insurance reserves are established to provide for the payment of claims liability
charges in accordance with our service contract with the carrier. The claims liability charges include estimates
for reported losses, plus amounts for those claims incurred but not reported, and estimates of certain expenses
associated with processing and settling the claims.
We regularly review the adequacy of our estimated insurance reserves. Adjustments to previously
established reserves are reflected in the results of operations for the period in which the adjustment is identified.
Such adjustments could possibly be significant, reflecting any combination of new and adverse or favorable
trends.
Goodwill and other intangible assets: Goodwill is not amortized, but instead is tested for impairment on
an annual basis and between annual tests if an event occurs or circumstances change in a way to indicate that
there has been a potential decline in the fair value of the reporting unit. We performed our annual impairment
testing in our fiscal fourth quarter. A quantitative analysis was performed for our German reporting unit. For all
other reporting units, we utilized a qualitative assessment to determine if it is more-likely-than-not that the fair
value of the reporting unit had declined below its carrying value. The assessment considered various financial,
macroeconomic, industry, and reporting unit specific qualitative factors. Based on the results of our testing, no
27
impairment loss was recognized in the results of operations for fiscal years 2016, 2015, or 2014. Subsequent to
this review, there have been no events or circumstances that indicate any potential impairment of our goodwill
balance.
We also test intangible assets for potential impairment when events or changes in circumstances indicate
that the carrying value may not be recoverable.
Stock-based compensation costs: All stock-based awards to employees, including grants of stock options,
are recognized as compensation costs in our consolidated financial statements based on their fair values
measured as of the date of grant. We estimate the fair value of stock option grants using a Black-Scholes option
pricing model. This model requires various assumptions as inputs including expected volatility of the Paychex
stock price and expected option life. We estimate volatility based on a combination of historical volatility using
stock prices over a period equal to the expected option life and implied market volatility. Expected option life is
estimated based on historical exercise behavior. We periodically reassess our assumptions as well as our choice
of valuation model, and will reconsider use of this model if additional information becomes available in the
future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of
future grants would warrant such a change.
We are required to estimate forfeitures and only record compensation costs for those awards that are
expected to vest. Our assumptions for forfeitures were determined based on type of award and historical
experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified, with any
adjustment recorded in the period of change, and the final adjustment at the end of the requisite service period to
equal actual forfeitures.
The assumptions of volatility, expected option life, and forfeitures all require significant judgment and are
subject to change in the future due to factors such as employee exercise behavior, stock price trends, and changes
to type or provisions of stock-based awards. Any change in one or more of these assumptions could have a
material impact on the estimated fair value of a future award.
Refer to Note E of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for
further discussion of our stock-based compensation plans.
Income taxes: We account for deferred taxes by recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the consolidated financial statements or
tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between
the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. We record a deferred tax asset related to the stock-based compensation
costs recognized for certain stock-based awards. At the time non-qualified stock options are exercised or stock
awards vest, we account for the resulting tax deduction by reducing our accrued income tax liability with an
offset to the deferred tax asset and any excess of the tax benefit over the deferred tax asset as an increase to
additional paid-in capital. We currently have a sufficient pool of excess tax benefits in additional paid-in capital
to absorb any deficiency in tax benefits that fall short of the related deferred tax asset related to stock-based
awards.
We maintain a reserve for uncertain tax positions. We evaluate tax positions taken or expected to be taken in
a tax return for recognition in our consolidated financial statements. Prior to recording the related tax benefit in
our consolidated financial statements, we must conclude that tax positions will be more-likely-than-not to be
sustained, assuming those positions will be examined by taxing authorities with full knowledge of all relevant
information. The benefit recognized in our consolidated financial statements is the amount we expect to realize
after examination by taxing authorities. If a tax position drops below the more-likely-than-not standard, the
benefit can no longer be recognized. Assumptions,
judgment, and the use of estimates are required in
determining if the more-likely-than-not standard has been met when developing the provision for income taxes
and in determining the expected benefit. A change in the assessment of the more-likely-than-not standard could
materially impact our results of operations or financial position. Refer to Note J of the Notes to Consolidated
Financial Statements contained in Item 8 of this Form 10-K for further discussion of our reserve for uncertain tax
positions.
28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Factors
Changes in interest rates and interest rate risk: Funds held for clients are primarily comprised of short-
term funds and available-for-sale securities. Corporate investments are primarily comprised of available-for-sale
securities. As a result of our investing activities, we are exposed to changes in interest rates that may materially
affect our results of operations and financial position. Changes in interest rates will impact the earnings potential
of future investments and will cause fluctuations in the fair value of our longer-term available-for-sale securities.
We follow an investment strategy of protecting principal and optimizing liquidity. A substantial portion of our
portfolios is invested in high credit quality securities with AAA and AA ratings and A-1/P-1 ratings on short-
term securities. We invest predominately in municipal bonds including general obligation bonds, pre-refunded
bonds that are secured by a U.S. government escrow, and essential services revenue bonds, along with U.S.
government agency securities and corporate bonds. We limit the amounts that can be invested in any single issuer
and invest primarily in short- to intermediate-term instruments whose fair value is less sensitive to interest rate
changes. We manage the available-for-sale securities to a benchmark duration of two and one-half to three and
three-quarters years.
During fiscal 2016, our primary short-term investment vehicles were bank demand deposit accounts,
VRDNs, high-quality commercial paper, and government agency discount notes. We have no exposure to high-
risk or illiquid investments. We have insignificant exposure to European investments. We have not and do not
utilize derivative financial instruments to manage our interest rate risk.
During fiscal 2016, the average interest rate earned on our combined funds held for clients and corporate
investment portfolios was 1.1%, compared to 1.0% for fiscal years 2015 and 2014. When interest rates are rising,
the full impact of higher interest rates will not immediately be reflected in net income due to the interaction of
short- and long-term interest rate changes. During a rising interest rate environment, earnings increase from our
short-term investments, and over time increase earnings from our longer-term available-for-sale securities.
Earnings from the available-for-sale securities, which as of May 31, 2016 had an average duration of 3.1 years,
would not reflect increases in interest rates until the investments are sold or mature and the proceeds are
reinvested at higher rates.
The amortized cost and fair value of available-for-sale securities that had stated maturities as of May 31,
2016 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.
In millions
Maturity date:
May 31, 2016
Amortized
cost
Fair
value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after three years through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 359.6
742.7
918.5
2,073.5
$ 360.7
749.4
935.7
2,096.1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,094.3
$4,141.9
VRDNs 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.
The Federal Funds rate was raised by 25 basis points in December 2015 and has been in the range of 0.25%
to 0.50% since then. Previously the Federal Funds rate had remained at a range of zero to 0.25% since December
2008.
29
Calculating the future effects of changing interest rates involves many factors. These factors include, but are
not limited to:
• daily interest rate changes;
• seasonal variations in investment balances;
• actual duration of short-term and available-for-sale securities;
• the proportion of taxable and tax-exempt investments;
• changes in tax-exempt municipal rates versus taxable investment rates, which are not synchronized or
simultaneous; and
• financial market volatility and the resulting effect on benchmark and other indexing interest rates.
Subject to these factors and under normal financial market conditions, a 25-basis-point change in taxable
interest rates generally affects our tax-exempt interest rates by approximately 17 basis points. Under normal
financial market conditions, the impact to earnings from a 25-basis-point change in short-term interest rates
would be approximately $3.5 million to $4.0 million, after taxes, for a twelve-month period. Such a basis point
change may or may not be tied to changes in the Federal Funds rate.
Our total investment portfolio (funds held for clients and corporate investments) averaged approximately
$5.0 billion for fiscal 2016. Our anticipated allocation is approximately 45% invested in short-term securities and
VRDNs with an average duration of less than 30 days, and 55% invested in available-for-sale securities with an
average duration of two and one-half to three and three-quarters years.
The combined funds held for clients and corporate available-for-sale securities reflected a net unrealized
gain of $47.6 million as of May 31, 2016, compared with an unrealized gain of $13.6 million as of May 31, 2015.
Refer to Note G of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for
additional disclosures on fair value measurements.
During fiscal 2016, the net unrealized gain on our investment portfolios ranged from $3.7 million to $72.2
million. During fiscal 2015, the net unrealized gain on our investment portfolios ranged from an unrealized gain
of $9.5 million to $55.9 million. The net unrealized gain on our investment portfolios was approximately $63.5
as of July 15, 2016.
As of May 31, 2016 and 2015, we had $4.1 billion and $3.6 billion, respectively, invested in available-for-
sale securities at fair value. The weighted-average yield-to-maturity was 1.7% and 1.6% as of May 31, 2016 and
2015, respectively. The weighted-average yield-to-maturity excludes available-for-sale securities tied to short-
term interest rates such as the VRDNs. Assuming a hypothetical increase in longer-term interest rates of 25 basis
points, the resulting potential decrease in fair value for our portfolio of available-for-sale securities as of May 31,
2016, would be in the range of $20.0 million to $25.0 million. Conversely, a corresponding decrease in interest
rates would result in a comparable increase in fair value. This hypothetical increase or decrease in the fair value
of the portfolio would be recorded as an adjustment to the portfolio’s recorded value, with an offsetting amount
recorded in stockholders’ equity. These fluctuations in fair value would have no related or immediate impact on
the results of operations, unless any declines in fair value were considered to be other-than-temporary and an
impairment loss recognized.
Credit risk: We are exposed to credit risk in connection with these investments through the possible
inability of the borrowers to meet the terms of their bonds. We regularly review our investment portfolios to
determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential
valuation concerns. We believe that the investments we held as of May 31, 2016 were not other-than-temporarily
impaired. While $155.6 million of our available-for-sale securities had fair values that were below amortized
cost, we believe that it is probable that the principal and interest will be collected in accordance with the
contractual terms, and that the unrealized losses of $0.7 million were due to changes in interest rates and were
not due to increased credit risk or other valuation concerns. A significant portion of these securities in an
unrealized loss position as of May 31, 2016 and 2015 held an AA rating or better. We do not intend to sell these
investments until the recovery of their amortized cost basis or maturity, and further believe that it is not more-
30
likely-than-not that we will be required to sell these investments prior to that time. Our assessment that an
investment is not other-than-temporarily impaired could change in the future due to new developments or
changes in our strategies or assumptions related to any particular investment.
We have some credit risk exposure in connection with our purchase of accounts receivable as a means of
providing funding to clients in the temporary staffing industry. This credit risk exposure is diversified amongst
multiple client arrangements and all such arrangements are regularly reviewed for potential write-off. No single
client is material in respect to total accounts receivable, service revenue, or results of operations.
Item 8. Financial Statements and Supplementary Data
Description
TABLE OF CONTENTS
Report on Management’s Assessment of Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income and Comprehensive Income for the Years Ended May 31, 2016, 2015,
and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of May 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the Years Ended May 31, 2016, 2015, and 2014 . . . .
Consolidated Statements of Cash Flows for the Years Ended May 31, 2016, 2015, and 2014 . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II — Valuation and Qualifying Accounts for the Years Ended May 31, 2016, 2015, and 2014 . . .
Page
32
33
34
35
36
37
38
64
31
REPORT ON MANAGEMENT’S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Paychex, Inc. (the “Company”) is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
the financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
May 31, 2016. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated Framework” (2013).
Based on our assessment, management determined that the Company maintained effective internal control over
financial reporting as of May 31, 2016.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, is appointed
by the Company’s Audit Committee. PricewaterhouseCoopers LLP has audited the Consolidated Financial
Statements included in this Annual Report on Form 10-K and the effectiveness of the Company’s internal control
over financial reporting as of May 31, 2016, and as a part of their integrated audit, has issued their report,
included herein, on the effectiveness of the Company’s internal control over financial reporting.
/s/ Martin Mucci
/s/ Efrain Rivera
Martin Mucci
President and Chief Executive Officer
Efrain Rivera
Senior Vice President, Chief Financial Officer,
and Treasurer
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of Paychex, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
income and comprehensive income, of stockholders’ equity, and of cash flows present fairly, in all material
respects, the financial position of Paychex, Inc. and its subsidiaries at May 31, 2016 and May 31, 2015, and the
results of their operations and their cash flows for each of the three years in the period ended May 31, 2016 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index appearing under Item 8 presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of May 31, 2016, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial reporting and for its assessment of
included in the accompanying Report on
the effectiveness of internal control over financial reporting,
Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the Company’s internal
control over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
July 22, 2016
33
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
In millions, except per share amounts
PAYCHEX, INC.
Year ended May 31,
Revenue:
2016
2015
2014
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,905.8
46.1
$2,697.5
42.1
$2,478.2
40.7
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,951.9
2,739.6
2,518.9
Expenses:
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . .
857.1
948.2
808.0
878.0
732.5
803.7
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,805.3
1,686.0
1,536.2
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,146.6
4.5
1,151.1
394.3
1,053.6
6.4
1,060.0
385.1
982.7
5.4
988.1
360.6
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 756.8
$ 674.9
$ 627.5
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on securities, net of tax . . . . . . . . . . . . . . . . . . .
Total other comprehensive income/(loss), net of tax . . . . . . . . . . . . . . . . . .
21.7
21.7
(14.0)
(14.0)
(0.5)
(0.5)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 778.5
$ 660.9
$ 627.0
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding, assuming dilution . . . . . .
Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2.10
2.09
360.7
362.5
1.68
$
$
$
1.86
1.85
362.9
364.6
1.52
$
$
$
1.72
1.71
364.5
366.1
1.40
See Notes to Consolidated Financial Statements.
34
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
In millions, except per share amount
As of May 31,
2016
2015
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets before funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net of accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net of accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 131.5
220.6
36.1
408.6
10.5
58.8
866.1
3,997.5
4,863.6
441.1
353.0
69.5
657.1
24.9
31.6
$ 170.0
366.6
37.9
176.6
12.9
50.8
814.8
4,273.4
5,088.2
399.8
353.9
32.4
561.5
—
31.7
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,440.8
$6,467.5
Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and related items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities before client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
56.7
247.8
26.3
79.8
410.6
3,955.3
4,365.9
72.8
22.1
68.3
$
51.7
210.4
11.2
39.6
312.9
4,260.1
4,573.0
44.8
1.8
62.4
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,529.1
4,682.0
Commitments and contingencies — Note N
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares;
Issued and outstanding: 360.4 shares as of May 31, 2016
and 361.2 shares as of May 31, 2015, respectively.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.6
952.7
926.2
29.2
3.6
880.1
894.3
7.5
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,911.7
1,785.5
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,440.8
$6,467.5
See Notes to Consolidated Financial Statements.
35
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
In millions
Common stock
Shares
Amount
Additional
paid-in
capital
Balance as of May 31, 2013 . . . . . . . . . . . . . . . 365.4
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on securities, net of tax . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . .
Stock-based award transactions . . . . . . . . . . . . .
3.8
(6.2)
Balance as of May 31, 2014 . . . . . . . . . . . . . . . 363.0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on securities, net of tax . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . .
Stock-based award transactions . . . . . . . . . . . . .
2.1
(3.9)
Balance as of May 31, 2015 . . . . . . . . . . . . . . . 361.2
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on securities, net of tax . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . .
Stock-based award transactions . . . . . . . . . . . . .
1.4
(2.2)
$ 3.7
$659.5
(0.1)
(11.2)
26.4
119.7
3.6
794.4
(7.2)
31.5
61.4
3.6
880.1
(4.1)
34.6
42.1
Retained
earnings
$1,088.5
627.5
Accumulated
other
comprehensive
income
$ 22.0
(0.5)
(510.6)
(238.4)
(9.5)
957.5
674.9
(551.8)
(175.2)
(11.1)
894.3
756.8
(606.5)
(103.8)
(14.6)
21.5
(14.0)
7.5
21.7
Total
$1,773.7
627.5
(0.5)
(510.6)
(249.7)
26.4
110.2
1,777.0
674.9
(14.0)
(551.8)
(182.4)
31.5
50.3
1,785.5
756.8
21.7
(606.5)
(107.9)
34.6
27.5
Balance as of May 31, 2016 . . . . . . . . . . . . . . . 360.4
$ 3.6
$952.7
$ 926.2
$ 29.2
$1,911.7
See Notes to Consolidated Financial Statements.
36
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
Year ended May 31,
2016
2015
2014
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization on property and equipment and
$
756.8
$
674.9
$
627.5
intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115.1
106.6
105.0
Amortization of premiums and discounts on available-for-sale
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision/(benefit) for deferred income taxes . . . . . . . . . . . . . . . . . . .
Provision for allowance for doubtful accounts . . . . . . . . . . . . . . . . . .
Net realized gains on sales of available-for-sale securities . . . . . . . . .
Changes in operating assets and liabilities:
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . .
Net change in other long-term assets and liabilities . . . . . . . . . . . . . .
75.7
34.6
7.1
2.5
(0.1)
1.8
(37.5)
(5.0)
63.3
3.9
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . .
1,018.2
76.2
31.4
(4.1)
1.6
(0.3)
(1.6)
(28.2)
(8.5)
51.1
(3.9)
895.2
70.3
26.3
(4.9)
2.5
(0.6)
(3.9)
(18.2)
22.5
45.1
9.3
880.9
Investing activities
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of available-for-sale securities . . . .
Net change in funds held for clients’ money market securities and
other cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . .
Purchases of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
Net change in client fund obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity activity related to stock-based awards . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease)/increase in cash and cash equivalents . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of fiscal year . . . . . . . . . . . . . . . .
(12,572.2)
11,984.3
(34,020.4)
33,719.5
(29,850.5)
30,080.6
927.6
(97.7)
(296.1)
(9.0)
(63.1)
(304.8)
(606.5)
(107.9)
25.6
(993.6)
(38.5)
170.0
149.1
(102.8)
(27.1)
(3.3)
(285.0)
93.0
(551.8)
(182.4)
48.5
(592.7)
17.5
152.5
(441.5)
(84.1)
(9.3)
(11.3)
(316.1)
127.4
(510.6)
(249.7)
113.3
(519.6)
45.2
107.3
Cash and cash equivalents, end of fiscal year . . . . . . . . . . . . . . . . . . .
$
131.5
$
170.0
$
152.5
See Notes to Consolidated Financial Statements.
37
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Description of Business, Basis of Presentation, and Significant Accounting Policies
Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively the “Company” or
“Paychex”) is a leading provider of integrated human capital management (“HCM”) solutions for payroll, human
resource, retirement, and insurance services for small- to medium-sized businesses in the United States (“U.S.”).
The Company also has operations in Germany.
Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the
Company’s revenue is generated within the U.S. The Company also generates revenue within Germany, which
represented less than one percent of the Company’s total revenue for each of the years ended May 31, 2016
(“fiscal 2016”), 2015 (“fiscal 2015”), and 2014 (“fiscal 2014”). Long-lived assets in Germany are insignificant in
relation to total long-lived assets of the Company as of May 31, 2016 and May 31, 2015. In addition, the
Company has equity method investments for a joint-venture in Brazil and a minority investment in a Canadian
entity, neither of which is significant.
Total revenue is comprised of service revenue and interest on funds held for clients. Service revenue is
comprised primarily of the fees earned on our portfolio of HCM services, which include payroll processing and
complementary human resource management and administration services. Payroll service revenue is earned
primarily from payroll processing, payroll tax administration services, employee payment services, and other
ancillary services. Payroll processing services include the calculation, preparation, and delivery of employee
payroll checks; production of internal accounting records and management reports; preparation of federal, state,
and local payroll tax returns; and collection and remittance of clients’ payroll obligations.
Our Human Resource Services (“HRS”) portfolio of services and products provide small- to medium-sized
businesses with retirement services administration, insurance services, HR administration services, and other
human resource services and products. Our comprehensive human resource outsourcing service is available
through Paychex HR Solutions, an administrative services organization (“ASO”), and Paychex PEO, a
professional employer organization (“PEO”). Both options offer businesses a combined package of services that
includes payroll, employer compliance, human resource and employee benefits administration, risk management
outsourcing, and the on-site availability of a professionally trained human resource services representative,
among other services. These comprehensive bundles of services are designed to make it easier for businesses to
manage their payroll and related benefits costs while providing a benefits package equal to that of larger
companies. The PEO differs from the ASO in that Paychex serves as a co-employer of the clients’ employees,
offers health care coverage to PEO client employees, and assumes the risks and rewards of workers’
compensation insurance and certain health insurance products. PEO services are sold through the Company’s
registered and licensed subsidiary, Paychex Business Solutions, Inc. Paychex HR Essentials is an ASO product
that provides support to the Company’s clients over the phone or online to help manage employee-related topics.
In connection with the automated payroll tax administration services, the Company electronically collects
payroll taxes from clients’ bank accounts, typically on payday, prepares and files the applicable tax returns, and
remits taxes to the applicable tax or regulatory agencies on the respective due dates. These taxes are typically
paid between one and 30 days after receipt of collections from clients, with some items extending to 90 days. The
Company handles regulatory correspondence, amendments, and penalty and interest disputes, and is subject to
cash penalties imposed by tax or regulatory agencies for late filings and late or under payment of taxes. With
employee payment services, employers are offered the option of paying their employees by direct deposit,
payroll debit card, a check drawn on a Paychex account (Readychex®), or a check drawn on the employer’s
account and electronically signed by Paychex. For the first three methods, Paychex electronically collects net
payroll from the clients’ bank accounts, typically one business day before payday, and provides payment to the
employees on payday.
The Company earns fees for funding of temporary staffing agencies payroll via purchasing of accounts
receivable invoices. The fees are deducted from the funding payment and revenue is recognized over an average
collection period of 45 to 60 days.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
In addition to service fees paid by clients, the Company earns interest on funds held for clients that are
collected before due dates and invested until remittance to the applicable tax or regulatory agencies or client
employees. The funds held for clients and related client fund obligations are included in the Consolidated
Balance Sheets as current assets and current liabilities, respectively. The amount of funds held for clients and
related client fund obligations varies significantly during the year.
Basis of presentation: The consolidated financial statements include the accounts of Paychex, Inc. and its
wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Subsequent Events: The Company has evaluated subsequent events for potential recognition and/or
disclosure through the date of issuance of these financial statements. On July 7, 2016, Paychex announced that
the Board of Directors (the “Board”) approved a $0.04 increase in the Company’s regular quarterly dividend, an
increase of 10%. The quarterly dividend will go from $0.42 per share to $0.46 per share and is payable on August
25, 2016 to shareholders of record on August 1, 2016.
Cash and cash equivalents: Cash and cash equivalents consist of available cash, money market securities,
and other investments with a maturity of 90 days or less at acquisition.
Accounts receivable, net of allowance for doubtful accounts: Accounts receivable balances are shown on
the Consolidated Balance Sheets net of the allowance for doubtful accounts of $4.2 million as of May 31, 2016
and $1.4 million as of May 31, 2015. Accounts receivable balances, net of allowance for doubtful accounts,
include: 1) trade receivables for services provided to clients of $221.6 million as of May 31, 2016 and $176.6
million as of May 31, 2015; and 2) purchased receivables related to funding arrangements with clients, resulting
from the acquisition of Advance Partners in December 2015, of $187.0 million as of May 31, 2016. Accounts
receivable are written off and charged against the allowance for doubtful accounts when the Company has
exhausted all collection efforts without success. No single client had a material impact on total accounts
receivable, service revenue, or results of operations.
Funds held for clients and corporate investments: 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 obtained from an independent pricing service. The funds held for clients portfolio also includes cash,
money market securities, and short-term investments. Unrealized gains and losses, net of applicable income
taxes, are reported as other comprehensive income in the Consolidated Statements of Income and Comprehensive
Income. Realized gains and losses on the sale of available-for-sale securities are determined by specific
identification of the cost basis of each security. On the Consolidated Statements of Income and Comprehensive
Income, realized gains and losses from the funds held for client portfolio and corporate investment portfolio are
included in interest on funds held for clients and investment income, net, respectively.
Concentrations: Substantially all of the Company’s deposited cash is maintained at large well-capitalized
(as defined by their regulators) financial institutions. These deposits may exceed the amount of any insurance
provided. All of the Company’s deliverable securities, primarily municipal bond securities, are held in custody
with certain of the aforementioned financial institutions, for which that institution bears the risk of custodial loss.
Non-deliverable securities, primarily time deposits and money market funds, are held by well-capitalized
financial institutions.
Property and equipment, net of accumulated depreciation: Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is based on the estimated useful lives of property and equipment using
the straight-line method. The estimated useful lives of depreciable assets are generally as follows:
Category
Depreciable life
Buildings and improvements
Data processing equipment
Furniture, fixtures, and equipment
Leasehold improvements
Ten to 35 years or the remaining life, whichever is shorter
Three to four years
Three to seven years
Ten years or the life of the lease, whichever is shorter
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Normal and recurring repairs and maintenance costs are charged to expense as incurred. The Company
reviews the carrying value of property and equipment for impairment when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable.
Software development and enhancements: Expenditures for software purchases and software developed
for internal use are capitalized and depreciated on a straight-line basis over the estimated useful lives, which are
generally three to five years. Software developed as part of the Company’s main processing platform is
depreciated over fifteen years. For software developed for internal use, certain costs are capitalized, including
external direct costs of materials and services associated with developing or obtaining the software, and payroll
and payroll-related costs for employees who are directly associated with internal-use software projects.
Capitalization of these costs ceases no later than the point at which the project is substantially complete and
ready for its intended use. Costs associated with preliminary project stage activities, training, maintenance, and
other post-implementation stage activities are expensed as incurred. The carrying value of software and
development costs is reviewed for impairment when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable.
Goodwill and other intangible assets, net of accumulated amortization: The Company has $657.1
million and $561.5 million of goodwill as of May 31, 2016 and 2015, respectively. Goodwill is not amortized,
but instead is tested for impairment on an annual basis and between annual tests if an event occurs or
circumstances change in a way to indicate that there has been a potential decline in the fair value of a reporting
unit. We performed our annual impairment testing in our fiscal fourth quarter. A quantitative analysis was
performed for our German reporting unit. For all other reporting units, we utilized a qualitative assessment to
determine if it more-likely-than-not that the fair value of the reporting unit had declined below its carrying value.
The assessment considered various financial, macroeconomic, industry, and reporting unit specific qualitative
factors. Based on the results of our testing, no impairment loss was recognized in the results of operations for
fiscal years 2016, 2015, or 2014. Subsequent to the latest review, there have been no events or circumstances that
indicate any potential impairment of the Company’s goodwill balance.
Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated
amortization on the Consolidated Balance Sheets. Intangible assets are amortized over periods generally ranging
from three to twelve years. Client lists use an accelerated method, while other intangible assets use the straight-
line method of amortization. The Company tests intangible assets for potential impairment when events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Revenue recognition: Revenues are primarily attributable to fees for providing services as well as
investment income earned on funds held for clients. Fees associated with services are recognized in the period
services are rendered and earned under service arrangements with clients where service fees are fixed or
determinable and collectability is reasonably assured. Certain processing services are provided under annual
service arrangements with revenue recognized ratably over the service period. The Company’s service revenue is
largely attributable to processing services where the fee is based on a fixed amount per processing period or a
fixed amount per processing period plus a fee per employee or transaction processed. Fees earned for funding of
payrolls for temporary staffing agency clients via the purchase of accounts receivable invoices are based on a
percentage of funding amounts as specified in the client contract. These fees are then recognized over the average
collection period of 45 to 60 days. The revenue earned from delivery service for the distribution of certain client
payroll checks and reports is included in service revenue, and the costs for the delivery are included in operating
expenses on the Consolidated Statements of Income and Comprehensive Income.
For certain of the Company’s service offerings, it receives advance payments for set-up fees from its clients.
The Company defers revenue associated with these advance payments, recognizing the revenue and related
expenses over the expected life of its clients.
PEO revenue is included in service revenue and is reported net of certain direct pass-through costs billed
and incurred, which primarily include payroll wages, payroll taxes, and certain benefit premiums. Direct costs
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
related to certain benefit plans where the Company retains risk are recognized as operating expenses rather than
as a reduction in service revenue. Direct pass-through costs billed and incurred that were a reduction in service
revenue were $5.1 billion, $4.2 billion, and $3.4 billion for fiscal years 2016, 2015, and 2014, respectively.
Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates
for payroll tax administration services and for employee payment services, and invested until remittance to the
applicable tax or regulatory agencies or client employees. The interest earned on these funds is included in total
revenue on the Consolidated Statements of Income and Comprehensive Income because the collecting, holding,
and remitting of these funds are components of providing these services. Interest on funds held for clients also
includes net realized gains and losses from the sales of available-for-sale securities.
PEO insurance reserves: As part of the PEO service, the Company offers workers’ compensation
insurance and health insurance to client companies for the benefit of client employees. Workers’ compensation
insurance is provided under a fully insured high deductible workers’ compensation policy with a national
insurance carrier. Workers’ compensation insurance reserves are established to provide for the estimated costs of
paying claims up to per occurrence liability limits. In establishing the PEO workers’ compensation insurance
reserves, the Company uses an independent actuarial estimate of undiscounted future cash payments that would
be made to settle the claims.
The Company’s maximum individual claims liability was $1.3 million and $1.0 million under its fiscal 2016
and fiscal 2015 workers’ compensation policies, respectively. As of May 31, 2016 and May 31, 2015, the
Company had recorded current liabilities of $13.8 million and $11.3 million, respectively, and long-term
liabilities of $18.4 million and $15.3 million, respectively, on its Consolidated Balance Sheets for workers’
compensation costs.
With respect to the PEO health insurance, the Company offers various health insurance plans that take the
form of either fully insured fixed cost plans with various national insurance carriers or a fully insured minimum
premium insurance arrangement with coverage provided through a single national carrier. Under the minimum
premium arrangement, the Company’s health benefits insurance reserves are established to provide for the
payment of claims liability charges in accordance with its service contract with the carrier. The claims liability
charges include estimates for reported losses, plus amounts for those claims incurred but not reported, and
estimates of certain expenses associated with processing and settling the claims. The Company’s maximum
individual claims liability is $0.3 million under both its calendar 2016 and 2015 minimum premium health
insurance plan policies. Amounts accrued related to the health insurance reserves are $9.5 million and $8.1
million as of May 31, 2016 and May 31, 2015, respectively. These amounts are included in current liabilities on
the Consolidated Balance Sheets.
Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss
experience and actuarial loss projections, and is subject to change due to multiple factors, including economic
trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as
reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present
estimates, particularly with workers’ compensation insurance where those payments may not occur until well
into the future. The Company regularly reviews the adequacy of its estimated insurance reserves. Adjustments to
previously established reserves are reflected in the results of operations for the period in which the adjustment is
identified. Such adjustments could be significant, reflecting any combination of new and adverse or favorable
trends.
Stock-based compensation costs: All stock-based awards to employees are recognized as compensation
costs in the consolidated financial statements based on their fair values measured as of the date of grant. The
Company estimates the fair value of stock option grants using a Black-Scholes option pricing model. This model
requires various assumptions as inputs including expected volatility of the Paychex stock price and expected
option life. Volatility is estimated based on a combination of historical volatility, using stock prices over a period
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
equal to the expected option life, and implied market volatility. Expected option life is estimated based on
historical exercise behavior. The Company periodically reassesses its assumptions as well as its choice of
valuation model. The Company will reconsider use of this model if additional information becomes available in
the future indicating that another model would provide a more accurate estimate of fair value, or if characteristics
of future grants would warrant such a change.
The fair value of stock awards is determined based on the stock price at the date of grant. For grants that do
not accrue dividends or dividend equivalents, the fair value is the stock price reduced by the present value of
estimated dividends over the vesting period or performance period.
The Company is required to estimate forfeitures and only record compensation costs for those awards that
are expected to vest. The assumptions for forfeitures were determined based on type of award and historical
experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified, with any
adjustment recorded in the period of change, and the final adjustment at the end of the requisite service period to
equal actual forfeitures.
The assumptions of volatility, expected option life, and forfeitures all require significant judgment and are
subject to change in the future due to factors such as employee exercise behavior, stock price trends, and changes
to type or provisions of stock-based awards. Any material change in one or more of these assumptions could have
an impact on the estimated fair value of a future award.
Refer to Note E for further discussion of the Company’s stock-based compensation plans.
Income taxes: The Company accounts for deferred taxes by recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect
for the year in which the differences are expected to reverse. The Company records a deferred tax asset related to
the stock-based compensation costs recognized for certain stock-based awards. At the time of the exercise of
non-qualified stock options or vesting of stock awards, the Company accounts for the resulting tax deduction by
reducing its accrued income tax liability with an offset to the deferred tax asset and any excess of the tax benefit
over the deferred tax asset as an increase to additional paid-in capital. The Company currently has a sufficient
pool of excess tax benefits in additional paid-in capital to absorb any deficiency in tax benefits that fall short of
the related deferred tax asset related to stock-based awards.
The Company also maintains a reserve for uncertain tax positions. The Company evaluates tax positions
taken or expected to be taken in a tax return for recognition in its consolidated financial statements. Prior to
recording the related tax benefit in the consolidated financial statements, the Company must conclude that tax
positions will be more-likely-than-not to be sustained, assuming those positions will be examined by taxing
authorities with full knowledge of all relevant information. The benefit recognized in the consolidated financial
statements is the amount the Company expects to realize after examination by taxing authorities. If a tax position
drops below the more-likely-than-not standard, the benefit can no longer be recognized. Assumptions, judgment,
and the use of estimates are required in determining if the more-likely-than-not standard has been met when
developing the provision for income taxes and in determining the expected benefit. A change in the assessment
of the more-likely-than-not standard could materially impact the Company’s results of operations or financial
position. The Company’s reserve for uncertain tax positions, including interest and net of federal benefits, was
$54.2 million as of May 31, 2016 and $29.1 million as of May 31, 2015. Refer to Note J for further discussion of
the Company’s reserve for uncertain tax positions.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates, judgments, and assumptions that affect
reported amounts of assets, liabilities, revenue, and expenses during the reporting period. Actual amounts and
results could differ from these estimates.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period
presentation and had no effect on reported consolidated earnings.
Recently adopted accounting pronouncements:
In March 2016, the Company adopted the Financial
Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-17 “Income Taxes
(Topic 740) — Balance Sheet Classification of Deferred Taxes.” This guidance requires deferred tax assets and
liabilities be classified as non-current in a classified statement of financial position. This guidance is effective for
public business entities for annual periods, including interim periods within those annual periods, beginning after
December 15, 2016, with early application permitted as of the beginning of an interim or annual reporting period.
With the adoption, the Company’s deferred tax assets and liabilities were classified as non-current on its
Consolidated Balance Sheet and prior period amounts have been reclassified to conform with current year
presentation. Adoption of this guidance did not materially impact its consolidated financial statements.
Recently issued accounting pronouncements:
the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606).” This guidance supersedes current guidance on revenue
recognition in Topic 605, “Revenue Recognition.” In addition, there are disclosure requirements related to the
nature, amount, timing, and uncertainty of revenue recognition. This guidance will be effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods. Early application of
the guidance is permitted for annual reporting periods beginning after December 31, 2016. Additional ASUs have
been issued to amend or clarify this ASU as follows:
In May 2014,
• ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients” was issued in May 2016. ASU No. 2016-12 amends the new revenue
recognition standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring
noncash consideration, and certain transition matters.
• ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing” was issued in April 2016. ASU No. 2016-10 addresses implementation issues
identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for
Revenue Recognition (TRG).
• ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606) — Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)” was issued in March 2016. ASU No. 2016-08
requires an entity to determine whether the nature of its promise to provide goods or services to a
customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner
based on its principal/agent designation.
This guidance in these ASUs for revenue recognition is applicable to the Company’s fiscal year beginning
June 1, 2018. The Company has substantially completed its initial analysis identifying the areas that will be
impacted by the new guidance and is currently analyzing the impact to its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments — Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 requires an organization to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for public business entities
for annual periods, including interim periods within those annual periods, beginning after December 15, 2019.
This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently
evaluating this guidance to determine the potential impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09 “Compensation — Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 simplifies several aspects of
the accounting for share-based payment award transactions, including income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. ASU No. 2016-09 is
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
effective for public business entities for annual periods, including interim periods within those annual periods,
beginning after December 15, 2016, with early application permitted. This guidance is applicable to the
Company’s fiscal year beginning June 1, 2017. The Company does not anticipate this to be material to its
consolidated financial statements, and anticipates adopting this standard for its fiscal year beginning June 1,
2016.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU No. 2016-02 improves
transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance
sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public
business entities for annual periods, including interim periods within those annual periods, beginning after
December 15, 2018, with early application permitted. This guidance is applicable to the Company’s fiscal year
beginning June 1, 2019. The Company is currently evaluating this guidance to determine the potential impact on
its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments — Overall (Subtopic 825-
10) — Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU No. 2016-01 provides
updated guidance for the recognition, measurement, presentation, and disclosure of certain financial assets and
liabilities. ASU No. 2016-01 is effective for public business entities for annual and interim periods beginning
after December 15, 2017, with early application permitted. This guidance is applicable to the Company’s fiscal
year beginning June 1, 2018. The Company is currently evaluating this guidance to determine the potential
impact on its consolidated financial statements.
Other recent authoritative guidance issued by the FASB (including technical corrections to the FASB
Accounting Standards Codification), the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission (“SEC”) did not, or are not expected to have a material effect on the Company’s
consolidated financial statements.
Note B — Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
In millions, except per share amounts
Basic earnings per share:
Year ended May 31,
2015
2014
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . .
$756.8
360.7
$674.9
362.9
$627.5
364.5
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.10
$ 1.86
$ 1.72
Diluted earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . .
Dilutive effect of common share equivalents . . . . . . . . . . . . . . . . . . . . .
$756.8
360.7
1.8
$674.9
362.9
1.7
$627.5
364.5
1.6
Weighted-average common shares outstanding, assuming dilution . . .
362.5
364.6
366.1
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.09
$ 1.85
$ 1.71
Weighted-average anti-dilutive common share equivalents . . . . . . . .
0.5
0.3
0.7
Weighted-average common share equivalents that had an anti-dilutive impact are excluded from the
computation of diluted earnings per share.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
In May 2014, the Board approved a program to repurchase up to $350.0 million of the Company’s common
stock with authorization expiring on May 31, 2017. During fiscal 2016, the Company repurchased 2.2 million
shares for $107.9 million and during fiscal 2015, the Company repurchased 3.9 million shares for $182.4 million
under this program. All shares repurchased were retired.
In July 2016, the Board approved a new program to repurchase up to $350.0 million of the Company’s
common stock with authorization expiring on May 31, 2019. The purpose of the program is to manage common
stock dilution. Shares purchased will be retired.
Note C — Business Combination
Effective December 22, 2015, substantially all of the net assets of Advance Partners, a leading provider of
integrated financial, operational, and strategic services to support independent staffing firms, were acquired by a
wholly owned subsidiary of the Company. Advance Partners offers customizable solutions to the temporary
staffing industry, including payroll funding and outsourcing services, which include payroll, invoicing, and tax
preparation. The acquisition consideration was comprised of a base purchase price of $190.5 million plus
immediate settlement of debt totaling $118.4 million, net of $12.8 million in cash acquired. Accounts receivable
balances acquired, net of allowance for doubtful accounts, and less amounts due to clients related to funding
arrangements, totaled $164.8 million. This acquisition allows the Company access to a growing industry serving
small- to medium-sized businesses. Goodwill in the amount of $95.6 million was recorded as a result of the
acquisition, which is tax-deductible.
The financial results of Advance Partners is included in the Company’s consolidated financial statements
from the date of acquisition. The Company concluded that the acquisition was not material to its results of
operations or financial position. Therefore, pro-forma financial information has been excluded.
Note D — Investment Income, Net
Investment income, net, consisted of the following items:
In millions
Year ended May 31,
2015
2014
2016
Interest income on corporate funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss from equity-method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8.4
(1.1)
(2.8)
$ 7.8
(0.7)
(0.7)
$ 6.9
(1.1)
(0.4)
Investment income, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.5
$ 6.4
$ 5.4
Note E — Stock-Based Compensation Plans
The Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated, effective on October 14, 2015 (the
“2002 Plan”), authorizes grants of up to 44.1 million shares of the Company’s common stock. As of May 31,
2016, there were 22.2 million shares available for future grants under the 2002 Plan.
All stock-based awards to employees are recognized as compensation costs in the consolidated financial
statements based on their fair values measured as of the date of grant. These costs are recognized as an expense
in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the requisite
service period and increase additional paid-in capital.
Stock-based compensation expense was $34.6 million, $31.4 million, and $26.3 million for fiscal years
2016, 2015, and 2014, respectively. Related income tax benefits recognized were $12.9 million, $11.7 million,
and $10.1 million for the respective fiscal years. Capitalized stock-based compensation costs related to the
development of internal use software for these same fiscal years were not significant.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
As of May 31, 2016, the total unrecognized compensation cost related to all unvested stock-based awards
was $60.8 million and is expected to be recognized over a weighted-average period of 2.9 years.
Black-Scholes fair value assumptions: The fair value of stock option grants and performance stock
options was estimated at
the date of grant using a Black-Scholes option pricing model. There were no
performance stock options granted in fiscal 2016. The weighted-average assumptions used for valuation under
the Black-Scholes model are as follows:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility factor
Expected option life in years . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant-date fair value of stock options
2014
Performance
stock options
1.5%
3.9%
0.20
4.5
Year ended May 31,
2016
2015
2014
Stock options
1.9%
3.6%
0.18
6.1
2.1%
3.7%
0.21
6.0
2.0%
4.1%
0.22
6.4
granted (per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3.85
$5.25
$5.68
$4.90
Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at the end of
the expected option life. The estimated volatility factor is based on a combination of historical volatility, using
stock prices over a period equal to the expected option life, and implied market volatility. The expected option
life is based on historical exercise behavior.
The Company has determined that the Black-Scholes option pricing model, as well as the underlying
assumptions used in its application, are appropriate in estimating the fair value of its stock option grants. The
Company periodically assesses its assumptions as well as its choice of valuation model, and will reconsider use
of this model if additional information becomes available in the future indicating that another model would
provide a more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.
Stock options: Stock options entitle the holder to purchase, at the end of the vesting term, a specified
number of shares of Paychex common stock at an exercise price per share set equal to the closing market price of
the common stock on the date of grant. All stock options have a contractual life of ten years from the date of the
grant and a vesting schedule as established by the Board. The Company issues new shares of common stock to
satisfy stock option exercises. Non-qualified stock option grants to officers and outside directors are typically
approved by the Board in July. Grants of non-qualified stock options to officers vest 25% per annum and grants
to members of the Board vest after one year.
The following table summarizes stock option activity for the year ended May 31, 2016:
In millions, except per share amounts
Outstanding as of May 31, 2015 . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of May 31, 2016 . . . . .
Exercisable as of May 31, 2016 . . . . . .
Shares subject
to options
Weighted-average
exercise price per
share
Weighted-average
remaining
contractual term
(years)
Aggregate
intrinsic value(1)
4.7
0.8
(0.9)
(0.1)
—
4.5
2.6
$35.21
$47.42
$34.77
$38.46
$35.89
$37.42
$33.84
6.3
4.9
$75.9
$53.1
(1) Market price of the underlying stock as of May 31, 2016 less the exercise price.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Other information pertaining to stock option grants is as follows:
In millions, except per share amounts
Year ended May 31,
2015
2014
2016
Total intrinsic value of stock options exercised . . . . . . . . . . . . . . . . . . . . . . . .
Total grant-date fair value of stock options vested . . . . . . . . . . . . . . . . . . . . .
$14.5
$ 4.0
$17.6
$ 3.6
$18.9
$ 3.0
Performance stock options:
In July 2011, the Board approved a special award of performance-based stock
options under a Long-Term Incentive Plan. Subsequent grants of this award have been made upon hire of new
officers. Under this award, stock options were granted to officers with vesting dependent on achievement against
long-term strategic and financial objectives. Total shares earned and vested are based on achievement against
pre-established targets for fiscal 2016. However, the terms of the award allowed for accelerated vesting of up to
50% of the award at target depending on achievement against pre-established targets for fiscal 2014. Based on
achievement against pre-established targets for fiscal 2016, a total of 63.0% of the award was earned. In July
2014, 23.5% of the awards accelerated and vested based on achievement against performance targets for fiscal
2014. The remaining 39.5% of the awards will vest in July 2016.
The following table summarizes performance stock option activity for the year ended May 31, 2016:
In millions, except per share amounts
Outstanding as of May 31, 2015 . . .
Granted . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of May 31, 2016 . . .
Exercisable as of May 31, 2016 . . . .
Shares subject
to options
Weighted-average
exercise price per
share
Weighted-average
remaining
contractual term
(years)
Aggregate intrinsic
value(1)
2.7
—
(0.1)
(0.1)
—
2.5
0.4
$31.31
$ —
$31.11
$29.85
$ —
$31.36
$31.22
5.4
5.2
$57.9
$ 9.6
(1) Market price of the underlying stock as of May 31, 2016 less the exercise price.
For fiscal 2016, the total intrinsic value of the performance stock options exercised was $1.0 million.
Restricted stock units: The Board grants restricted stock units (“RSUs”) to non-officer management. An
RSU is an agreement to issue shares at the time of vesting with no associated exercise cost. For each unit granted,
the holder will receive one share of stock at the time of vesting. RSUs do not have voting rights or earn dividend
equivalents during the vesting period. These awards vest 20% per annum over five years. The fair value of RSUs
is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the
present value of expected dividends over the vesting period.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The following table summarizes RSU activity for the year ended May 31, 2016:
In millions, except per share amounts
Nonvested as of May 31, 2015 . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
RSUs
1.8
0.7
(0.5)
(0.2)
Nonvested as of May 31, 2016 . . . . . . .
1.8
Weighted-average
grant-date
fair value per
share
Weighted-average
remaining vesting
period (years)
Aggregate
intrinsic value(1)
$33.57
$42.60
$31.34
$35.97
$37.58
3.0
$96.5
(1) Intrinsic value for RSUs is the market price of the underlying stock as of May 31, 2016.
Other information pertaining to RSUs is as follows:
In millions, except per share amounts
Year ended May 31,
2015
2014
2016
Weighted-average grant-date fair value of RSUs granted . . . . . . . . . . . . .
Total intrinsic value of RSUs vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total grant-date fair value of RSUs vested . . . . . . . . . . . . . . . . . . . . . . . .
$42.60
$ 25.9
$ 17.3
$36.64
$ 21.7
$ 14.8
$36.37
$ 18.3
$ 12.1
Restricted stock awards: The Board has approved grants of restricted stock awards to the Company’s
officers and outside directors. All shares underlying awards of restricted stock are restricted in that they are not
transferable until they vest. The recipients of the restricted stock have voting rights and earn dividends, which are
paid to the recipient at the time the awards vest. If the recipient leaves Paychex prior to the vesting date for any
reason, the shares of restricted stock and the dividends accrued on those shares will be forfeited and returned to
Paychex.
Time-vested restricted stock awards granted to officers vest one-third per annum. Restricted stock granted to
outside directors vest on the one-year anniversary of the grant date. The fair value of restricted stock awards is
equal to the closing market price of the underlying common stock as of the date of grant and is expensed over the
requisite service period on a straight-line basis.
The following table summarizes restricted stock activity for the year ended May 31, 2016:
In millions, except per share amounts
Restricted
shares
Weighted-average
grant-date
fair value
per share
Nonvested as of May 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested as of May 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
—
(0.1)
—
0.1
$38.99
$47.46
$37.70
$40.54
$43.99
Other information pertaining to restricted stock follows:
In millions, except per share amounts
Year ended May 31,
2015
2014
2016
Weighted-average grant-date fair value of restricted stock granted . . . . .
Total grant-date fair value of restricted stock vested . . . . . . . . . . . . . . . . .
$47.46
3.0
$
$41.70
3.5
$
$38.53
3.3
$
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Performance shares: Performance shares have a two-year performance period, after which the amount of
restricted shares earned will be determined based on achievement against established performance targets. The
restricted shares earned will then be subject to a one year service period. Performance shares do not have voting
rights or earn dividend equivalents during the performance period. The fair value of performance shares is equal
to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value
of expected dividends over the performance period.
The following table summarizes performance share activity for the year ended May 31, 2016:
In millions, except per share amounts
Performance
shares
Weighted-average
grant-date
fair value
per share
Nonvested as of May 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested as of May 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.6
0.1
(0.2)
—
0.5
$34.24
$42.48
$29.10
$37.09
$38.89
(1) Performance shares granted assuming achievement of performance goals at target. Actual amount of shares
to be earned may differ from this amount.
Non-compensatory employee benefit plan: Prior to January 1, 2016, the Company offered a non-qualified
Employee Stock Purchase Plan (“ESPP”) to all employees under which the Company’s common stock could be
purchased through a payroll deduction with no discount to the market price and no look-back provision. This
ESPP was discontinued as of December 31, 2015. Effective January 1, 2016, the Company began offering a
qualified ESPP to all employees. Under this new ESPP, the Company’s common stock can be purchased through
a payroll deduction at a discount to the market price. The Plan allows for a discount of up to 15% based on the
sole discretion of the committee established to administer the plan. For offering periods during fiscal 2016 the
discount was set at 5% of the market price. Transactions under the non-qualified ESPP occurred directly through
the Company’s transfer agent and no brokerage fees were charged to employees, except for when stock was sold.
Transactions under the qualified ESPP occur through the Company’s third party stock plan administrator. The
plans have been deemed non-compensatory and therefore, no stock-based compensation costs have been
recognized for fiscal years 2016, 2015, or 2014 related to either plan.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note F — Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments are as follows:
In millions
Type of issue:
Funds held for clients money market securities and
May 31, 2016
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
other cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
$ 502.4
$ —
$ —
$ 502.4
Available-for-sale securities:
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General obligation municipal bonds . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Pre-refunded municipal bonds(1)
Revenue municipal bonds . . . . . . . . . . . . . . . . . . . .
U.S. government agency securities . . . . . . . . . . . . .
Variable rate demand notes . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total funds held for clients and corporate
128.4
1,594.1
60.2
916.2
160.8
1,234.6
4,094.3
14.2
2.9
27.6
1.4
15.8
0.6
—
48.3
0.8
(0.1)
(0.1)
—
(0.2)
(0.3)
—
(0.7)
(0.1)
131.2
1,621.6
61.6
931.8
161.1
1,234.6
4,141.9
14.9
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,610.9
$49.1
$(0.8)
$4,659.2
In millions
Type of issue:
Funds held for clients money market securities and
May 31, 2015
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
other cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
$1,430.0
$ —
$ —
$1,430.0
Available-for-sale securities:
General obligation municipal bonds . . . . . . . . . . . .
Pre-refunded municipal bonds(1)
. . . . . . . . . . . . . . .
Revenue municipal bonds . . . . . . . . . . . . . . . . . . . .
Variable rate demand notes . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total funds held for clients and corporate
1,694.0
101.7
960.7
825.6
3,582.0
12.7
14.0
1.0
6.1
—
21.1
1.5
(4.3)
—
(3.2)
—
(7.5)
—
1,703.7
102.7
963.6
825.6
3,595.6
14.2
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,024.7
$22.6
$(7.5)
$5,039.8
(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 May 31, 2016 are money market funds
and bank demand deposit accounts. As of May 31, 2015 money market securities and other cash equivalents
included money market funds, bank demand deposit accounts, short-term municipal bonds and commercial
paper.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Classification of investments on the Consolidated Balance Sheets is as follows:
In millions
May 31,
2016
2015
Funds held for clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term corporate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,997.5
220.6
441.1
$4,273.4
366.6
399.8
Total funds held for clients and corporate investments . . . . . . . . . . . . . . . . .
$4,659.2
$5,039.8
The Company’s available-for-sale securities reflected a net unrealized gain of $47.6 million as of May 31,
2016 compared with a net unrealized gain of $13.6 million as of May 31, 2015. Included in the net unrealized
gain total as of May 31, 2016 and May 31, 2015, there were 63 and 280 available-for-sale securities in an
unrealized loss position, respectively. The available-for-sale securities in an unrealized loss position were as
follows:
May 31, 2016
Securities in an unrealized
loss position for less than
twelve months
Securities in an unrealized
loss position for more than
twelve months
Total
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
$(0.1)
$ 14.7
$ —
$ —
$(0.1) $ 14.7
(0.1)
—
—
(0.3)
48.9
5.7
20.7
51.1
—
—
(0.2)
—
2.8
(0.1)
51.7
—
11.7
—
(0.2)
5.7
32.4
—
(0.3)
51.1
In millions
Type of issue:
Corporate bonds . . . . . . . . . . . . .
General obligation municipal
bonds . . . . . . . . . . . . . . . . . . .
Pre-refunded municipal
bonds . . . . . . . . . . . . . . . . . . .
Revenue municipal bonds . . . . .
U.S. government agency
securities . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
$(0.5)
$141.1
$(0.2)
$14.5
$(0.7) $155.6
May 31, 2015
Securities in an unrealized
loss position for less than
twelve months
Securities in an unrealized
loss position for more than
twelve months
Total
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
$(3.8)
(3.2)
$(7.0)
$535.1
361.6
$896.7
$(0.5)
—
$(0.5)
$26.3
—
$26.3
$(4.3) $561.4
361.6
(3.2)
$(7.5) $923.0
In millions
Type of issue:
General obligation municipal
bonds . . . . . . . . . . . . . . . . . . .
Revenue municipal bonds . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
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 May 31, 2016 that had unrealized losses of $0.7 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
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
interest rates and were not due to increased credit risk or other valuation concerns. A significant portion of the
securities in an unrealized loss position as of May 31, 2016 and May 31, 2015 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 from the sale of available-for-sale securities were as follows:
In millions
Year ended May 31,
2015
2014
2016
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.1
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.1
$0.3
—
$0.3
$0.6
—
$0.6
The amortized cost and fair value of available-for-sale securities that had stated maturities as of May 31,
2016 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.
In millions
Maturity date:
May 31, 2016
Amortized
cost
Fair
value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after three years through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 359.6
742.7
918.5
2,073.5
$ 360.7
749.4
935.7
2,096.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,094.3
$4,141.9
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.
Note G — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants at the measurement date. 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
can access at the measurement date.
• Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for
the instrument, either directly or indirectly, for substantially the full term of the asset or liability including
the following:
— quoted prices for similar, but not identical, instruments in active markets;
— quoted prices for identical or similar instruments in markets that are not active;
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
— inputs other than quoted prices that are observable for the instrument; or
— inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
• Level 3 valuations are based on information that is unobservable and significant to the overall fair value
measurement.
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 Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
May 31, 2016
Quoted
prices in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Carrying
value
(Fair value)
In millions
Assets:
Available-for-sale securities:
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
General obligation municipal bonds . . . . . . . . . .
Pre-refunded municipal bonds . . . . . . . . . . . . . . .
Revenue municipal bonds . . . . . . . . . . . . . . . . . .
U.S. government agency securities . . . . . . . . . . .
Variable rate demand notes . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Other long-term liabilities . . . . . . . . . . . . . . . . . . . .
$ 131.2
1,621.6
61.6
931.8
161.1
1,234.6
$4,141.9
14.9
$
$ — $ 131.2
1,621.6
61.6
931.8
161.1
1,234.6
—
—
—
—
—
$ — $4,141.9
—
$14.9
$
$
14.9
$14.9
$
—
$—
—
—
—
—
—
$—
$—
$—
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
May 31, 2015
Quoted
prices in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Carrying
value
(Fair value)
In millions
Assets:
Cash equivalents:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . .
General obligation municipal bonds . . . . . . . . . .
Pre-refunded municipal bonds . . . . . . . . . . . . . . .
Revenue municipal bonds . . . . . . . . . . . . . . . . . .
Money market securities . . . . . . . . . . . . . . . . . . .
$
15.0
55.1
20.5
12.3
0.2
$ — $
—
—
—
0.2
15.0
55.1
20.5
12.3
—
Total cash equivalents . . . . . . . . . . . . . . . . . . . . .
$ 103.1
$ 0.2
$ 102.9
Available-for-sale securities:
General obligation municipal bonds . . . . . . . . . .
Pre-refunded municipal bonds . . . . . . . . . . . . . . .
Revenue municipal bonds . . . . . . . . . . . . . . . . . .
Variable rate demand notes . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Other long-term liabilities . . . . . . . . . . . . . . . . . . . .
$1,703.7
102.7
963.6
825.6
$3,595.6
14.2
$
$ — $1,703.7
102.7
963.6
825.6
—
—
—
$ — $3,595.6
—
$14.2
$
$
14.2
$14.2
$
—
$—
—
—
—
—
$—
$—
—
—
—
$—
$—
$—
In determining the fair value of its assets and liabilities, the Company predominately uses the market
approach. Money market securities, which are cash equivalents, are valued based on quoted market prices in
active markets. Time deposits are considered Level 1 investments as they are highly liquid and have a short
maturity period, usually no longer than overnight. Commercial paper is included in Level 2 because it may not
trade on a daily basis. Available-for-sale securities, including municipal bonds, corporate bonds, and U.S.
government agency securities, and short-term municipal bonds and short-term U.S. government agency securities
with a maturity of less than 90 days included in Level 2 are valued utilizing inputs obtained from an independent
pricing service. To determine the fair value of the Company’s Level 2 available-for-sale securities, a variety of
inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment
information. The Company has not adjusted the prices obtained from the independent pricing service because it
believes that they are appropriately valued.
Assets included as other are mutual fund investments, consisting of participants’ eligible deferral
contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related
liability is reported as other long-term liabilities. The mutual funds are valued based on quoted market prices in
active markets.
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 use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a different fair value
measurement at the reporting date.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note H — Property and Equipment, Net of Accumulated Depreciation
The components of property and equipment, at cost, consisted of the following:
In millions
May 31,
2016
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8.3
103.0
196.1
447.5
125.0
108.2
24.1
$
Total property and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,012.2
659.2
2015
8.3
102.1
190.9
391.8
145.6
106.2
28.5
973.4
619.5
Property and equipment, net of accumulated depreciation . . . . . . . . . . . . . . . .
$ 353.0
$353.9
Depreciation expense was $99.2 million, $92.1 million, and $89.1 million for fiscal years 2016, 2015, and
2014, respectively.
Note I — Goodwill and Intangible Assets, Net of Accumulated Amortization
The Company had goodwill balances on its Consolidated Balance Sheets of $657.1 million as of May 31,
2016, and $561.5 million as of May 31, 2015. The increase of $95.6 million in goodwill since May 31, 2015 was
the result of the acquisition of substantially all of the net assets of Advance Partners by a wholly owned
subsidiary of the Company in December 2015.
The Company has certain intangible assets with finite lives. The components of intangible assets, at cost,
consisted of the following:
In millions
May 31,
2016
2015
Client lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$289.2
5.4
Total intangible assets, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
294.6
225.1
$244.6
3.2
247.8
215.4
Intangible assets, net of accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . .
$ 69.5
$ 32.4
During fiscal 2016, the Company acquired intangible assets with weighted-average amortization periods as
follows: customer lists — 9.7 years; other intangible assets — 5.0 years; and total — 9.5 years. Amortization
expense relating to intangible assets was $15.9 million, $14.5 million, and $15.9 million for fiscal years 2016,
2015, and 2014, respectively.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The estimated amortization expense for the next five fiscal years relating to intangible asset balances is as
follows:
In millions
Year ending May 31,
Estimated amortization expense
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17.7
14.1
11.1
8.5
6.5
Note J — Income Taxes
The components of deferred tax assets and liabilities are as follows:
In millions
Deferred tax assets:
May 31,
2016
2015
Compensation and employee benefit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carry forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21.4
7.9
40.0
8.8
22.0
18.6
7.1
$ 20.9
6.9
40.1
11.9
21.6
15.7
9.2
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125.8
126.3
Deferred tax liabilities:
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue not subject to current taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56.3
2.5
58.5
13.3
17.3
—
53.6
3.8
52.0
13.1
5.3
0.3
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147.9
128.1
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (22.1)
$ (1.8)
The deferred tax asset related to tax credit carry forward consists of alternative minimum tax credits, which
may be carried forward indefinitely.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
The components of the provision for income taxes are as follows:
In millions
Year ended May 31,
2015
2014
2016
Current:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$336.4
50.8
$341.4
47.8
$314.5
51.0
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
387.2
389.2
365.5
Deferred:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.5
1.6
7.1
(5.1)
1.0
(4.1)
(3.5)
(1.4)
(4.9)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$394.3
$385.1
$360.6
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as
follows:
Year ended May 31,
2015
2014
2016
Federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase/(decrease) resulting from:
35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . .
Section 199 — Qualified production activities . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt municipal bond interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.0% 3.0% 3.3%
(2.4)% —% —%
(1.4)% (1.5)% (1.5)%
0.1% (0.2)% (0.3)%
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.3% 36.3% 36.5%
During fiscal 2016, the Company engaged tax specialists to assess the qualification of its customer-facing
computer software for the federal “Qualified Production Activities Deduction” under Internal Revenue Code
Section 199, and the regulations thereunder. Based on this assessment, the Company concluded that certain of its
software offerings qualified for this tax deduction for fiscal 2016 and prior tax years that remain open to IRS
examination. The Company submitted claims to recover these tax benefits for prior tax years and will claim the
fiscal 2016 tax benefits when it files its fiscal 2016 tax return. Accordingly, the Company recognized the tax
benefits, and related tax reserves, for its qualified customer-facing activities in these years in fiscal 2016.
Uncertain income tax positions: The Company is subject to U.S. federal income tax, numerous local and
state tax jurisdictions within the U.S., and income taxes in Germany. The Company maintains a reserve for
uncertain tax positions. As of May 31, 2016 and May 31, 2015, the total reserve for uncertain tax positions,
including interest and net of federal benefits, was $54.2 million and $29.1 million, respectively, and were
included in long-term liabilities on the Consolidated Balance Sheets.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
A reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax benefits,
not including interest or other potential offsetting effects, is as follows:
In millions
Year ended May 31,
2015
2014
2016
Balance as of beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of the current year . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39.9
7.3
20.7
(0.1)
(2.2)
(0.9)
$40.0
6.7
0.8
(0.4)
(1.2)
(6.0)
$26.7
11.2
4.2
(1.8)
—
(0.3)
Balance as of end of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$64.7
$39.9
$40.0
The reserve as of May 31, 2016 substantially relates to the Company’s uncertain tax positions for certain
federal and state income tax matters. The Company believes the reserve for uncertain tax positions, including
interest and net of federal benefits, of $54.2 million as of May 31, 2016 adequately covers open tax years and
uncertain tax positions up to and including fiscal 2016 for major taxing jurisdictions. As of May 31, 2016 and
May 31, 2015, the entire $54.2 million and $29.1 million, respectively, of unrecognized tax benefits, if
recognized, would impact the Company’s effective income tax rate.
The Company has concluded all U.S. federal income tax matters through the fiscal year ended May 31,
2011. Fiscal years 2012 through 2014 are currently under audit by the IRS and fiscal years 2015 and 2016 are
subject to potential audit. With limited exception, state income tax audits by taxing authorities are closed through
the fiscal year ended May 31, 2011, primarily due to expiration of the statute of limitations.
The Company continues to follow its policy of recognizing interest and penalties accrued on tax positions as
a component of income taxes on the Consolidated Statements of Income and Comprehensive Income. The
amount of accrued interest and penalties associated with the Company’s tax positions is immaterial to the
Consolidated Balance Sheets. The amount of interest and penalties recognized for fiscal years 2016, 2015, and
2014 was immaterial to the Company’s results of operations.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note K — Accumulated Other Comprehensive Income
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. The changes in accumulated other comprehensive income are as follows:
In millions
Year ended May 31,
2015
2016
2014
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income/(loss):
Unrealized holding gains/(losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense)/benefit related to unrealized holding
$ 7.5
$ 21.5
$22.0
34.2
(21.5)
0.3
gains/(losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12.4)
7.7
(0.4)
Reclassification adjustment for the net gain on sale of available-for-sale
securities realized in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.1)
(0.3)
(0.6)
Income tax expense on reclassification adjustment for the net gain on sale
of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
0.1
0.2
Total other comprehensive income/(loss), net of tax . . . . . . . . . . . . . . . . . .
21.7
(14.0)
(0.5)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29.2
$ 7.5
$21.5
Total tax expense/(benefit) included in other comprehensive income/
(loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 12.4
$ (7.8) $ 0.2
Reclassification adjustments out of accumulated other comprehensive income are for realized gains on the
sales of available-for-sale securities and impacted interest on funds held for clients on the Consolidated
Statements of Income and Comprehensive Income.
Note L — Supplemental Cash Flow Information
Income taxes paid were $369.9 million, $372.8 million, and $317.8 million for fiscal years 2016, 2015, and
2014, respectively.
Lease incentives received in the form of tenant allowances and free rent were $4.3 million, $8.5 million, and
$6.7 million for fiscal years 2016, 2015, and 2014, respectively.
Note M — Employee Benefit Plans
401(k) plan: The Company maintains a contributory savings plan that qualifies under section 401(k) of
the Internal Revenue Code. The Paychex, Inc. 401(k) Incentive Retirement Plan (the “Plan”) allows all
employees to immediately participate in the salary deferral portion of the Plan, contributing up to a maximum of
50% of their salary, subject to Internal Revenue Service limitations. Employees who have completed one year of
service and a minimum of 1,000 hours worked are eligible to receive a company matching contribution, when
such contribution is in effect. The Company provided matching contributions of 50% of up to 8% of eligible pay
that an employee contributed to the Plan, effective for pay dates on or after November 15, 2013 and 50% of up to
6% of eligible pay that an employee contributed to the Plan between February 2012 and November 2013.
Company contributions to the Plan for fiscal years 2016, 2015, and 2014 were $21.4 million, $19.6 million, and
$16.4 million, respectively.
The Plan is 100% participant directed. Plan participants can fully diversify their portfolios by choosing from any
or all investment fund choices in the Plan. Transfers in and out of investment funds, including the Paychex, Inc.
Employee Stock Ownership Plan (“ESOP”) Stock Fund, are not restricted, with the exception of certain restricted
trading periods for individuals designated as insiders as specified in the Company’s Insider Trading Policy. The
Company match contribution, when in effect, follows the same fund elections as the employee compensation deferrals.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Deferred compensation plans: The Company offers non-qualified and unfunded deferred compensation
plans to a select group of key employees, executive officers, and outside directors. Eligible employees are
provided with the opportunity to defer up to 50% of their annual base salary and bonus and outside directors may
defer 100% of their Board cash compensation. Gains and losses are credited based on the participant’s election of
a variety of investment choices. The Company does not match any participant deferral or guarantee its return.
Distributions are paid at one of the following dates selected by the participant: the participant’s termination date,
the date the participant retires from any active employment, or a designated specific date. The amounts accrued
under these plans were $14.9 million and $14.2 million as of May 31, 2016 and May 31, 2015, respectively, and
are reflected in other long-term liabilities on the accompanying Consolidated Balance Sheets.
Note N — Commitments and Contingencies
Lines of credit: As of May 31, 2016, the Company had unused borrowing capacity available under
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.
Bank of America, N.A.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PNC Bank, National Association . . . . . . . . . . . . . . . . . . . . . . . .
Wells Fargo Bank, National Association . . . . . . . . . . . . . . . . . .
$350 million
$250 million
$150 million
$150 million
February 27, 2017
February 28, 2017
February 27, 2017
February 27, 2017
The credit facilities are evidenced by promissory notes and are secured by separate pledge security
agreements by and between Paychex and each of the financial institutions (the “Lenders”), pursuant to which the
Company has granted each of the Lenders a security interest in certain investment securities accounts. The
collateral is maintained in a pooled custody account pursuant to the terms of a control agreement and is to be
administered under an intercreditor agreement among the Lenders. Under certain circumstances, individual
Lenders may require that collateral be transferred from the pooled account into segregated accounts for the
benefit of such individual Lenders.
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 during
fiscal 2016 or as of May 31, 2016.
Certain of the financial institutions are also parties to the Company’s credit facility and irrevocable standby
letters of credit, which are discussed below.
Credit facilities: On August 5, 2015, the Company entered into a committed, unsecured, five-year
syndicated credit facility, expiring on August 5, 2020. Under the credit facility, Paychex of New York LLC (the
“Borrower”) may, subject
to certain restrictions, borrow up to $1 billion to meet short-term funding
requirements. The obligations under this facility have been guaranteed by the Company and certain of its
subsidiaries. The outstanding obligations under this credit facility will bear interest at competitive rates to be
elected by the Borrower. Upon expiration of the commitment in August 2020, any borrowings outstanding will
mature and be payable on such date. This agreement supersedes the $750 million credit facility agreement set to
expire on June 21, 2018, which was terminated as part of the new agreement.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
There were no amounts outstanding under this credit facility as of May 31, 2016. During fiscal 2016, the
Company borrowed against this facility, and its predecessor facility, for one-day periods each, from one to two
times a quarter as follows:
$ in millions
Number of days borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average amount borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended May 31,
2016
2015
5
$450.0
$305.0
2
$150.0
$125.0
3.39%
3.25%
The Company subsequently borrowed $100 million for one day under this line in June 2016.
The credit facility contains various financial and operational covenants that are usual and customary for
such arrangements. The Borrower was in compliance with these covenants during fiscal 2016.
Certain lenders under this 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 continue to receive in
the future, customary fees and expenses.
In March 2016, the Company entered into a committed, unsecured, three-year credit facility with PNC
Bank, National Association, expiring on March 17, 2019. Under the credit facility, Paychex Advance LLC may,
subject to certain restrictions, borrow up to $150 million to finance working capital needs and general corporate
purposes. The obligations under this facility have been guaranteed by the Company and certain of its
subsidiaries. The outstanding obligations under this credit facility will bear interest at competitive rates to be
elected by the Borrower. Upon expiration of the commitment in March 2019, any borrowings outstanding will
mature and be payable on such date.
There were no amounts outstanding under this credit facility as of May 31, 2016. Paychex Advance
subsequently borrowed approximately $56 million under this line, which remains outstanding as of the date of
this report.
Letters of credit: The Company had irrevocable standby letters of credit outstanding totaling $43.0 million
both as of May 31, 2016 and May 31, 2015, required to secure commitments for certain insurance policies. The
letters of credit expire at various dates between July 2016 and April 2017, and are collateralized by securities
held in the Company’s investment portfolios. No amounts were outstanding on these letters of credit during fiscal
2016 or as of May 31, 2016. Subsequent to May 31, 2016, the letter of credit expiring in July 2016 was renewed
through July 2017.
Contingencies: The Company is subject to various claims and legal matters that arise in the normal course
of its business. These include disputes or potential disputes related to breach of contract, tort, breach of fiduciary
duty, employment-related claims, tax claims, and other matters.
The Company’s management currently believes that resolution of outstanding legal matters will not have a
material adverse effect on the Company’s financial position or results of operations. However, legal matters are
subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could
have a material adverse impact on the Company’s financial position and the results of operations in the period in
which any such effect is recorded.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Lease commitments: The Company leases office space and data processing equipment under terms of
various operating leases. Rent expense for fiscal years 2016, 2015, and 2014 was $39.8 million, $39.4 million,
and $39.1 million, respectively. As of May 31, 2016, future minimum lease payments under various non-
cancelable operating leases with terms of more than one year are as follows:
In millions
Year ending May 31,
Minimum lease payments
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35.7
28.5
20.0
12.9
7.4
2.2
Other commitments: As of May 31, 2016, the Company had outstanding commitments under purchase
orders and legally binding contractual arrangements with minimum future payment obligations of approximately
$109.6 million, including $6.8 million of commitments to purchase capital assets. These minimum future
payment obligations relate to the following fiscal years:
In millions
Year ending May 31,
Minimum payment obligation
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$73.5
20.5
7.6
4.4
3.0
0.6
In the normal course of business, the Company makes representations and warranties that guarantee the
performance of 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 the Company 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 Company’s 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
and are not material as of the reporting date. The Company also maintains insurance coverage in addition to its
purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions,
warranty liability, theft and embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and
self-insured retentions through its captive insurance company.
Note O — Related Parties
During fiscal years 2016, 2015, and 2014, the Company purchased approximately $4.9 million, $6.9 million,
and $4.7 million, respectively, of data processing equipment and software from EMC Corporation. The
Chairman, President, and Chief Executive Officer of EMC Corporation is a member of the Company’s Board.
During fiscal years 2016, 2015, and 2014, the Company purchased approximately $2.3 million, $1.7 million,
and $1.3 million, respectively, of office supplies from Staples, Inc. The Vice Chairman of Staples, Inc. is a
member of the Company’s Board.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYCHEX, INC.
Note P — Quarterly Financial Data (Unaudited)
In millions, except per share amounts
Fiscal 2016
August 31
November 30
February 29
May 31
Full Year
Three Months Ended
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . . . . . . . .
$712.2
10.8
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$723.0
Operating income . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income/(loss), net . . . . . . . . . . . . . . . .
$296.1
1.4
Income before income taxes . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
297.5
88.4
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$209.1
Basic earnings per share(1) . . . . . . . . . . . . . . . . . . .
Diluted earnings per share(1)
. . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . .
Weighted-average common shares outstanding,
assuming dilution . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per common share . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Total net realized gains(2)
$ 0.58
$ 0.58
361.1
362.8
$ 0.42
$ —
$711.3
11.1
$722.4
$294.2
1.6
295.8
106.6
$189.2
$ 0.52
$ 0.52
360.7
362.3
$ 0.42
$ —
$740.7
11.9
$752.6
$280.0
1.7
281.7
101.3
$741.6
12.3
$2,905.8
46.1
$753.9
$2,951.9
$276.3
(0.2)
$1,146.6
4.5
276.1
98.0
1,151.1
394.3
$180.4
$178.1
$ 756.8
$ 0.50
$ 0.50
360.5
362.2
$ 0.42
0.1
$
$ 0.49
$ 0.49
360.3
$
$
2.10
2.09
360.7
360.7
$ 0.42
$
$ — $
362.5
1.68
0.1
Fiscal 2015
August 31
November 30
February 28
May 31
Full Year
Three Months Ended
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on funds held for clients . . . . . . . . . . . . . .
$656.6
10.2
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$666.8
Operating income . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income, net . . . . . . . . . . . . . . . . . . . . .
$267.5
1.4
Income before income taxes . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
268.9
97.6
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$171.3
Basic earnings per share(1) . . . . . . . . . . . . . . . . . . .
Diluted earnings per share(1)
. . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . .
Weighted-average common shares outstanding,
assuming dilution . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per common share . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Total net realized gains(2)
$ 0.47
$ 0.47
363.1
364.7
$ 0.38
0.1
$
$665.9
10.4
$676.3
$270.2
1.4
271.6
98.6
$173.0
$ 0.48
$ 0.47
363.0
364.6
$ 0.38
0.1
$
$693.6
10.7
$704.3
$264.3
1.6
265.9
96.5
$681.4
10.8
$2,697.5
42.1
$692.2
$2,739.6
$251.6
2.0
253.6
92.4
$1,053.6
6.4
1,060.0
385.1
$169.4
$161.2
$ 674.9
$ 0.47
$ 0.46
363.2
365.0
$ 0.38
$ —
$ 0.44
$ 0.44
362.3
364.5
$ 0.38
0.1
$
$
$
$
$
1.86
1.85
362.9
364.6
1.52
0.3
(1) Each quarter is a discrete period and the sum of the four quarters’ basic and diluted earnings per share
amounts may not equal the full year amount.
(2) Total net realized gains on the combined funds held for clients and corporate investment portfolios.
63
Schedule II — Valuation and Qualifying Accounts
PAYCHEX, INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED MAY 31,
(In millions)
Description
2016
Allowance for doubtful accounts . . . .
Reserve for client fund losses . . . . . . .
2015
Allowance for doubtful accounts . . . .
Reserve for client fund losses . . . . . . .
2014
Allowance for doubtful accounts . . . .
Reserve for client fund losses . . . . . . .
Balance as of
beginning of
fiscal year
Additions
charged to
expenses
Additions to/
(Deductions from)
other accounts(1)
Costs and
deductions(2)
Balance as
of end
of fiscal year
$1.4
$1.8
$1.5
$1.9
$1.0
$2.4
$2.5
$2.4
$1.6
$2.0
$2.5
$2.2
$ 2.0
$ —
$ 0.1
$(0.2)
$ —
$ —
$1.7
$2.2
$1.8
$1.9
$2.0
$2.7
$4.2
$2.0
$1.4
$1.8
$1.5
$1.9
(1) Amounts related to business acquisitions.
(2) Uncollectible amounts written off, net of recoveries.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures: Disclosure controls and procedures are designed with the objective
of ensuring that information required to be disclosed in the Company’s reports filed under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), such as this report,
is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures are also designed with the objective of ensuring that such information is accumulated and
communicated to the Company’s management,
including the Company’s principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures: As of the end of the period
covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the
Company’s principal executive officer and principal financial officer, of the effectiveness of disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on such evaluation, the
Company’s principal executive officer and principal financial officer have concluded that as of May 31, 2016, the end
of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting: The Company also carried out an evaluation of the
internal control over financial reporting to determine whether any changes occurred during the quarter ended May 31,
2016. Based on such evaluation, there have been no changes in the Company’s internal control over financial reporting
that occurred during the Company’s most recently completed fiscal quarter ended May 31, 2016, that materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Internal Control Over Financial Reporting: The Report on Management’s Assessment of Internal
Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm are
incorporated herein by reference from Part II, Item 8 of this Form 10-K.
64
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The following table shows the executive officers of the Company as of May 31, 2016, and information
regarding their positions and business experience. Such executive officers hold principal policy-making powers
at the Company.
Name
Position and business experience
Age
Martin Mucci
. . . . . . . . . . . . .
Efrain Rivera . . . . . . . . . . . . . .
Mark A. Bottini . . . . . . . . . . . .
John B. Gibson . . . . . . . . . . . .
Michael E. Gioja . . . . . . . . . . .
56 Mr. Mucci has served as President and Chief Executive Officer of the
Company since September 2010. Mr. Mucci joined the Company in
2002 as Senior Vice President, Operations. Prior to joining Paychex, he
held senior level positions with Frontier Telephone of Rochester, a
telecommunications company, during his 20-year career. Mr. Mucci was
it was purchased by Birch
a director of Cbeyond,
Communications in July 2014. He is a member of the Upstate New York
Regional Advisory Board of the Federal Reserve Bank of New York and
is a Trustee Emeritus of St. John Fisher College. He also serves as a
director of the Company and is chairman of the Executive Committee.
Inc. until
59 Mr. Rivera joined Paychex in June 2011 as Senior Vice President, Chief
Financial Officer, and Treasurer. Prior to joining the Company, Mr.
Rivera served as Vice President of Finance and Administration for
Houghton College since 2009. He previously served for over twenty years
with Bausch & Lomb Incorporated, a world leader in the development,
manufacture, and marketing of eye health products, most recently as
Corporate Vice President and Chief Financial Officer from 2007 to 2009.
55 Mr. Bottini joined Paychex in October 2011 as Senior Vice President of
Sales. From 2008 to 2011, Mr. Bottini served as Vice President of Sales
for Ricoh, North America, a provider of advanced office technology and
innovative document
imaging products, services, and software. He
assumed his most recent position with Ricoh when Ricoh acquired IKON
Office Solutions, Inc. During his nearly 20 years with IKON, Mr. Bottini
served in a variety of sales leadership and field management roles.
50 Mr. Gibson joined Paychex in May 2013 as Senior Vice President of
Service. Prior to joining the Company, Mr. Gibson served as President and
Chief Executive Officer for AlphaStaff, a national provider of human
resource outsourcing services to small- and medium-sized businesses. Prior
to joining AlphaStaff in 2010, Mr. Gibson was President of the HR
leader in technology,
Management Division of Convergys, a global
outsourcing, and business services. From 2004 to 2007, he served as Senior
Vice President of Global Operations and Client Services of Convergys.
58 Mr. Gioja was named Senior Vice President of Information Technology,
Product Management, and Development in July 2011. Mr. Gioja has
been with the Company since November 2008 as Vice President of
Product Management,
and
information technology to his responsibilities. Previously, he was Chief
Information Officer and Executive Vice President of Products and
Services for Workstream, Inc., a provider of on-demand enterprise talent
management solutions and services.
subsequently
development
adding
65
Name
Age
Position and business experience
Stephanie L. Schaeffer . . . . . .
Jennifer Vossler
. . . . . . . . . . .
Laurie L. Zaucha . . . . . . . . . . .
46 Ms. Schaeffer was named Vice President and Chief Legal Officer in
January 2006. In 2011, she was appointed Corporate Secretary. She
joined Paychex in 2000 as Corporate Counsel and was promoted to
Director of Legal Affairs in 2004. In her current role, she is responsible
for overseeing all of the Company’s legal functions, including litigation,
corporate governance, and regulatory matters.
53 Ms. Vossler joined the Company in May 2009 as Vice President and
Controller. Prior to joining the Company, she served as Vice President
and Corporate Controller, and held various executive and senior
management positions during her eleven years at Bausch & Lomb
Incorporated. Previously in her career, she held leadership roles with a
facilities management outsourcing company and a public
global
accounting firm.
51 Ms. Zaucha joined the Company in March 2011 and was named Vice
President of Human Resources and Organizational Development. Prior
to joining the Company, she served as Senior Vice President of Human
Resources
1000
telecommunications company, from 2007 to 2011. From 2003 to 2007,
she held various executive positions at Bausch & Lomb Incorporated.
Paetec Holding
Fortune
Corp.,
for
a
The additional information required by this item is set forth in the Company’s Definitive Proxy Statement
for its 2016 Annual Meeting of Stockholders, anticipated to be held on or about October 12, 2016, in the sections
“PROPOSAL 1 — ELECTION OF DIRECTORS FOR A ONE-YEAR TERM,” “SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE,” “CORPORATE GOVERNANCE,” and “CODE OF BUSINESS
ETHICS AND CONDUCT” and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth in the Company’s Definitive Proxy Statement for its 2016
in the sections
Annual Meeting of Stockholders, anticipated to be held on or about October 12, 2016,
“COMPENSATION
OFFICER
COMPENSATION,” and “DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31,
2016,” and is incorporated herein by reference.
DISCUSSION
ANALYSIS,”
EXECUTIVE
“NAMED
AND
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is set forth in the Company’s Definitive Proxy Statement for its 2016
Annual Meeting of Stockholders, anticipated to be held on or about October 12, 2016, under the section
“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth in the Company’s Definitive Proxy Statement for its 2016
Annual Meeting of Stockholders, anticipated to be held on or about October 12, 2016, under the sub-headings
“Board Meetings and Committees” and “Policy on Transactions with Related Persons” within the section
“CORPORATE GOVERNANCE,” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is set forth in the Company’s Definitive Proxy Statement for its 2016
Annual Meeting of Stockholders, anticipated to be held on or about October 12, 2016, under the section
“PROPOSAL 3 — RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM,” and is incorporated herein by reference.
66
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)
1.
Financial Statements, Financial Statement Schedules, and Exhibits
Financial Statements
See Financial Statements and Supplementary Data Table of Contents at page 31.
2.
Financial Statement Schedules
Financial statement schedules required to be filed by Item 8 of this Form 10-K include Schedule II —
Valuation and Qualifying Accounts. See Financial Statements and Supplementary Data Table of Contents
at page 31. All other schedules are omitted as the required matter is not present, the amounts are not
significant, or the information is shown in the financial statements or the notes thereto.
3.
Exhibits
(3)(a)
(3)(b)
(10.1)
(10.2)
(10.3)
(10.4)
(10.5)
(10.6)
(10.7)
(10.8)
(10.9)
#
#
#
#
#
#
#
#
#
Restated Certificate of Incorporation, incorporated herein by reference from Exhibit 3(a) to the
Company’s Form 10-K filed with the Commission on July 20, 2004.
Bylaws, as amended, incorporated herein by reference from Exhibit 3(b) to the Company’s
Form 10-K filed with the Commission on July 21, 2006.
Paychex, Inc. Qualified Employee Stock Purchase Plan, incorporated herein by reference from
Exhibit 4.3 to the Company’s Registration Statement on Form S-8, No. 333-207594.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14, 2015),
incorporated herein by reference from Exhibit 4.3 to the Company’s Registration Statement on
Form S-8, No. 333-207592.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
Award Agreement for Non-Qualified Stock Options, incorporated herein by reference from
Exhibit 10.3 to the Company’s Form 8-K filed with the Commission on October 17, 2005.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
Form of Non-Qualified Stock Option Award Agreement, incorporated herein by reference from
Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on July 16, 2008.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
Form of Restricted Stock Unit Award Agreement, incorporated herein by reference from
Exhibit 10(n) to the Company’s Form 10-K filed with the Commission on July 18, 2008.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
Form of Non-Qualified Stock Option Agreement for Directors, incorporated herein by reference
from Exhibit 10(q) to the Company’s Form 10-K filed with the Commission on July 18, 2008.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
2009 Non-Qualified Stock Option Award Agreement (Special Grant), incorporated herein by
reference from Exhibit 10.17 to the Company’s Form 10-K filed with the Commission on
July 20, 2009.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
Form of Restricted Stock Award Agreement (Officer), incorporated herein by reference from
Exhibit 10.18 to the Company’s Form 10-K filed with the Commission on July 16, 2010.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)
Form of Non-Qualified Stock Option Award Agreement (Officer),
incorporated herein by
reference from Exhibit 10.19 to the Company’s Form 10-K filed with the Commission on July 16,
2010.
#
(10.10)
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Form
of Officer Performance Incentive Award Agreement (Long Term), incorporated herein by reference
from Exhibit 10.20 to the Company’s Form 10-K filed with the Commission on July 16, 2010.
67
#
(10.11)
#
#
(10.12)
(10.13)
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010)
Form of Non-Qualified Stock Option Award Agreement (Board),
incorporated herein by
reference from Exhibit 10.20 to the Company’s Form 10-K filed with the Commission on
July 15, 2011.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010) Form
of Restricted Stock Award Agreement (Board), incorporated herein by reference from Exhibit 10.21
to the Company’s Form 10-K filed with the Commission on July 15, 2011.
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010)
Form of Non-Qualified Stock Option Award Agreement (Officer) Long Term Incentive
Program (“LTIP”), incorporated herein by reference from Exhibit 10.23 to the Company’s Form
10-K filed with the Commission on July 15, 2011.
*#
(10.14)
Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 14, 2015)
Form of Non-Qualified Stock Option and Restricted Stock Award Agreement Long Term
Incentive Program (“LTIP”).
#
#
#
#
#
*
*
*
*
*
*
*
*
*
*
*
*
*
(10.15)
(10.16)
(10.17)
(10.18)
(10.19)
(21.1)
(23.1)
(24.1)
(31.1)
(31.2)
(32.1)
(32.2)
Paychex, Inc. Change In Control Plan, incorporated herein by reference from Exhibit 10.24 to
the Company’s Form 10-K filed with the Commission on July 15, 2011.
Paychex, Inc. Form of Performance Award Incentive Program, incorporated herein by reference
from Exhibit 10.25 to the Company’s Form 10-K filed with the Commission on July 15, 2011.
Form of Indemnity Agreement for Directors and Officers, incorporated herein by reference from
Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on March 28, 2012.
Paychex, Inc. Board Deferred Compensation Plan, incorporated herein by reference from
Exhibit 10.29 to the Company’s Form 10-K filed with the Commission on July 20, 2009.
Paychex, Inc. Employee Deferred Compensation Plan, incorporated herein by reference from
Exhibit 10.30 to the Company’s Form 10-K filed with the Commission on July 20, 2009.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.
Power of Attorney.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS XBRL instance document.
101.SCH XBRL taxonomy extension schema document.
101.CAL XBRL taxonomy extension calculation linkbase document.
101.LAB XBRL taxonomy label linkbase document.
101.PRE XBRL taxonomy extension presentation linkbase document.
101.DEF XBRL taxonomy extension definition linkbase document.
Exhibit filed with this report.
*
# Management contract or compensatory plan.
68
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on July 22,
2016.
SIGNATURES
PAYCHEX, INC.
By: /s/ Martin Mucci
Martin Mucci
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated on July 22, 2016.
/s/ Martin Mucci
Martin Mucci, President and
Chief Executive Officer, and Director
(Principal Executive Officer)
/s/ Efrain Rivera
Efrain Rivera, Senior Vice President, Chief Financial Officer, and Treasurer
(Principal Financial Officer)
B. Thomas Golisano*, Chairman of the Board
Joseph G. Doody*, Director
David J. S. Flaschen*, Director
Phillip Horsley*, Director
Grant M. Inman*, Director
Pamela A. Joseph*, Director
Joseph M. Tucci*, Director
Joseph Velli*, Director
*By: /s/ Martin Mucci
Martin Mucci, as Attorney-in-Fact
69
PAYCHEX, INC.
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
In millions, except per share amounts
Year ended May 31,
Results of operations
Revenue:
2016
2015
2014
2013
2012
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,905.8
$2,697.5
$2,478.2
$2,285.2
$2,186.2
Interest on funds held for clients . . . . . . . . . . . . . .
46.1
42.1
40.7
41.0
43.6
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,951.9
1,805.3
2,739.6
1,686.0
2,518.9
1,536.2
2,326.2
1,421.4
2,229.8
1,375.9
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,146.6
1,053.6
Investment income, net . . . . . . . . . . . . . . . . . . . . . . .
4.5
6.4
982.7
5.4
904.8
6.6
853.9
6.4
Income before income taxes . . . . . . . . . . . . . . . . . . .
$1,151.1
$1,060.0
$ 988.1
$ 911.4
$ 860.3
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 756.8
$ 674.9
$ 627.5
$ 569.0
$ 548.0
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . .
$
$
2.10
2.09
$
$
Weighted-average common shares outstanding . . . .
360.7
1.86
1.85
362.9
Weighted-average common shares outstanding,
assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . .
362.5
364.6
Cash dividends per common share . . . . . . . . . . . . . .
Selected financial data
$
1.68
$
1.52
Purchases of property and equipment . . . . . . . . . . . .
$
97.7
$ 102.8
$
$
$
$
1.72
1.71
364.5
366.1
1.40
84.1
$
$
$
$
1.56
1.56
363.8
364.7
1.31
98.7
$
$
$
$
1.51
1.51
362.4
363.0
1.27
89.6
Cash and total corporate investments . . . . . . . . . . . .
$ 793.2
$ 936.4
$ 936.8
$ 874.6
$ 790.0
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
— $
— $
— $
—
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .
$1,911.7
$1,785.5
$1,777.0
$1,773.7
$1,604.5
Return on stockholders’ equity . . . . . . . . . . . . . . . . .
40%
36%
35%
34%
34%
2011
2010
2009
2008
2007
2006
$2,036.2
$1,945.8
$2,007.3
$1,934.5
$1,752.9
$1,573.8
48.1
55.0
75.5
131.8
134.1
100.8
2,084.3
1,297.9
2,000.8
1,276.0
2,082.8
1,277.6
2,066.3
1,238.0
1,887.0
1,185.5
1,674.6
1,025.0
786.4
5.8
724.8
4.5
805.2
6.9
828.3
26.5
701.5
41.7
649.6
25.2
$ 792.2
$ 729.3
$ 812.1
$ 854.8
$ 743.2
$ 674.8
$ 515.3
$ 477.0
$ 533.5
$ 576.1
$ 515.4
$ 464.9
$
$
1.42
1.42
361.8
362.4
$
1.24
$ 100.5
$
$
$
$
1.32
1.32
361.4
361.7
1.24
61.3
$
$
$
$
1.48
1.48
360.8
361.0
1.24
64.7
$
$
$
$
1.56
1.56
368.4
369.5
1.20
82.3
$
$
$
$
1.35
1.35
381.1
382.8
0.79
79.0
$
$
$
$
1.23
1.22
379.5
381.4
0.61
81.1
$ 671.3
$ 656.9
$ 574.7
$ 434.8
$1,224.2
$ 962.0
$
— $
— $
— $
— $
— $
—
$1,496.2
$1,402.0
$1,341.4
$1,196.6
$1,952.2
$1,654.8
35%
34%
41%
39%
28%
30%
STOCKHOLDER INFORMATION
Annual Meeting
Direct Reinvestment and Stock Purchase Plan
The annual meeting of stockholders will be held
Wednesday, October 12, 2016 at 10:00 a.m. at The
Strong, One Manhattan Square, Rochester, NY
14607.
Stockholders can elect to have some or all of their
dividends
reinvested, and can make additional
investments in common stock through American
Stock Transfer & Trust Co.
Common Stock
Independent Auditors
The Company’s common stock trades on The
NASDAQ Global Select Market under the symbol
PAYX.
PricewaterhouseCoopers LLP
1100 Bausch & Lomb Place
Rochester, New York 14604
Dividends
Investor Relations
The Company has paid a cash dividend each quarter
since 1988. Dividends are normally paid in August,
November, February, and May. The level and
continuation of future dividends are dependent on the
Company’s future earnings and cash flow and are
subject to the discretion of the Board of Directors.
Members of the financial community and the media
should direct inquiries to Efrain Rivera, Senior Vice
President, Chief Financial Officer, and Treasurer.
For more information about Paychex Investor
Relations, please contact:
Transfer Agent and Registrar
Please send inquiries, certificates for transfer, address
changes,
and stock
and dividend reinvestment
purchase requests to:
Paychex Investor Relations
911 Panorama Trail South
Rochester, NY 14625-2396
or call 1-800-828-4411
American Stock Transfer & Trust Co.
6201 15th Avenue, 2nd Floor
Brooklyn, NY 11219
1-800-937-5449
Paychex, Inc. financial materials can be accessed at
http://investor.paychex.com.
Locations
Information about our locations throughout the U.S.
and Germany can be accessed at
http://locations.paychex.com
EXECUTIVE LEADERSHIP TEAM
• Martin Mucci
• Robert Morin
President and Chief Executive Officer
Vice President, Major Market Services Sales
• Efrain Rivera
Senior Vice President, Chief Financial Officer,
and Treasurer
• Lonny C. Ostrander
Vice President, Human Resource Services Sales
• Mark A. Bottini
Senior Vice President, Sales
• John B. Gibson
Senior Vice President, Service
• Neil F. Rohrer
Vice President, Core Payroll Sales, Eastern U.S.
• Stephanie L. Schaeffer
Vice President, Chief Legal Officer, and Secretary
• Michael E. Gioja
• Terry Sukalski
Senior Vice President, Information Technology,
Product Management and Development
Vice President, Core Payroll Sales, Central U.S.
• Andrew B. Childs
Vice President, Marketing
• Kevin N. Hill
Vice President, Insurance and Human Resource
Solutions Services
• Thomas P. Szwak
Vice President, Operations and Onboarding
• Jennifer R. Vossler
Vice President and Controller
• Bryan R. Hodge
Vice President, Service
• Theodore J. Jordan, Jr
Vice President, Operations
• Laurie A. Maffett
• Norman (Mick) Whittemore
Vice President, Information Technology Enterprise
Operations
• Lisa Williams-Garcia
Vice President, Core Payroll Sales,Western U.S.
• Laurie L. Zaucha
Vice President, Enterprise and Multi-Product
Services
Vice President, Human Resources and Organizational
Development
financial highlights
our purpose
We provide our clients the freedom to succeed.
our mission
We will be the leading provider of payroll, human resource,
and employee benefit services by being an essential partner
with America’s businesses.
our values
We act with uncompromising integrity.
We provide outstanding service
and build trusted relationships.
We drive innovation in products and services
and continually improve processes.
We work in partnership and support each other.
We are personally accountable and
deliver on commitments.
We treat each other with respect and dignity.
As of May 31, 2016
Cash and
Total Corporate
INVESTMENTS
$793
Million
DEBT
$0
40%
ROE
Return on
Equity
73%
S&P 500
102%
PAYCHEX
SToCk
PErformANCE
Returns to shareholders in the
last 5 years vs. S&P 500® average
(as of May 31, 2016)
DIVIDENDS
PAID
As a Percentage of
Net Income in FY 2016
80%
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45
45th ANNIVERSARY 1971- 2016
2016
h o w P a y c h e x
i e n t s m o r e
m a k e s c l
c o n n e c t e d t o t h e i r
t h e i r
e m p l o y e e s ,
b u s i n e s s e s
m o r e
c o n n e c t e d
F o r t y - F i v e y e a r s
o F e m P o w e r i n g
B u s i n e s s e s
twitter.com/paychex
facebook.com/paychex
linkedin.com/company/paychex
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