Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

TABLE OF CONTENTS

DescriptionPage
Report on Management’s Assessment of Internal Control Over Financial Reporting30
Report of Independent Registered Public Accounting Firm31
Consolidated Statements of Income and Comprehensive Income for the Years Ended May 31, 2016, 2015, and 201432
Consolidated Balance Sheets as of May 31, 2016 and 201533
Consolidated Statements of Stockholders’ Equity for the Years Ended May 31, 2016, 2015, and 201434
Consolidated Statements of Cash Flows for the Years Ended May 31, 2016, 2015, and 201435
Notes to Consolidated Financial Statements36
Schedule II — Valuation and Qualifying Accounts for the Years Ended May 31, 2016, 2015, and 201458

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 Martin Mucci President and Chief Executive Officer/s/ Efrain Rivera Efrain Rivera Senior Vice President, Chief Financial Officer, and Treasurer

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 the effectiveness of internal control over financial reporting, included in the accompanying Report on 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

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

In millions, except per share amounts

Year ended May 31,201620152014
Revenue:
Service revenue$2,905.8$2,697.5$2,478.2
Interest on funds held for clients46.142.140.7
Total revenue2,951.92,739.62,518.9
Expenses:
Operating expenses857.1808.0732.5
Selling, general and administrative expenses948.2878.0803.7
Total expenses1,805.31,686.01,536.2
Operating income1,146.61,053.6982.7
Investment income, net4.56.45.4
Income before income taxes1,151.11,060.0988.1
Income taxes394.3385.1360.6
Net income$756.8$674.9$627.5
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on securities, net of tax21.7(14.0)(0.5)
Total other comprehensive income/(loss), net of tax21.7(14.0)(0.5)
Comprehensive income$778.5$660.9$627.0
Basic earnings per share$2.10$1.86$1.72
Diluted earnings per share$2.09$1.85$1.71
Weighted-average common shares outstanding360.7362.9364.5
Weighted-average common shares outstanding, assuming dilution362.5364.6366.1
Cash dividends per common share$1.68$1.52$1.40

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS

In millions, except per share amount

As of May 31,20162015
Assets
Cash and cash equivalents$131.5$170.0
Corporate investments220.6366.6
Interest receivable36.137.9
Accounts receivable, net of allowance for doubtful accounts408.6176.6
Prepaid income taxes10.512.9
Prepaid expenses and other current assets58.850.8
Current assets before funds held for clients866.1814.8
Funds held for clients3,997.54,273.4
Total current assets4,863.65,088.2
Long-term corporate investments441.1399.8
Property and equipment, net of accumulated depreciation353.0353.9
Intangible assets, net of accumulated amortization69.532.4
Goodwill657.1561.5
Prepaid income taxes24.9—
Other long-term assets31.631.7
Total assets$6,440.8$6,467.5
Liabilities
Accounts payable$56.7$51.7
Accrued compensation and related items247.8210.4
Deferred revenue26.311.2
Other current liabilities79.839.6
Current liabilities before client fund obligations410.6312.9
Client fund obligations3,955.34,260.1
Total current liabilities4,365.94,573.0
Accrued income taxes72.844.8
Deferred income taxes22.11.8
Other long-term liabilities68.362.4
Total liabilities4,529.14,682.0
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.3.63.6
Additional paid-in capital952.7880.1
Retained earnings926.2894.3
Accumulated other comprehensive income29.27.5
Total stockholders’ equity1,911.71,785.5
Total liabilities and stockholders’ equity$6,440.8$6,467.5

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

In millions

Accumulated
Additionalother
Common stockpaid-inRetainedcomprehensive
SharesAmountcapitalearningsincomeTotal
Balance as of May 31, 2013365.4$3.7$659.5$1,088.5$22.0$1,773.7
Net income627.5627.5
Unrealized losses on securities, net of tax(0.5)(0.5)
Cash dividends declared(510.6)(510.6)
Repurchases of common shares(6.2)(0.1)(11.2)(238.4)(249.7)
Stock-based compensation26.426.4
Stock-based award transactions3.8119.7(9.5)110.2
Balance as of May 31, 2014363.03.6794.4957.521.51,777.0
Net income674.9674.9
Unrealized losses on securities, net of tax(14.0)(14.0)
Cash dividends declared(551.8)(551.8)
Repurchases of common shares(3.9)(7.2)(175.2)(182.4)
Stock-based compensation31.531.5
Stock-based award transactions2.161.4(11.1)50.3
Balance as of May 31, 2015361.23.6880.1894.37.51,785.5
Net income756.8756.8
Unrealized gains on securities, net of tax21.721.7
Cash dividends declared(606.5)(606.5)
Repurchases of common shares(2.2)(4.1)(103.8)(107.9)
Stock-based compensation34.634.6
Stock-based award transactions1.442.1(14.6)27.5
Balance as of May 31, 2016360.4$3.6$952.7$926.2$29.2$1,911.7

See Notes to Consolidated Financial Statements.

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In millions

Year ended May 31,201620152014
Operating activities
Net income$756.8$674.9$627.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets115.1106.6105.0
Amortization of premiums and discounts on available-for-sale securities75.776.270.3
Stock-based compensation costs34.631.426.3
Provision/(benefit) for deferred income taxes7.1(4.1)(4.9)
Provision for allowance for doubtful accounts2.51.62.5
Net realized gains on sales of available-for-sale securities(0.1)(0.3)(0.6)
Changes in operating assets and liabilities:
Interest receivable1.8(1.6)(3.9)
Accounts receivable(37.5)(28.2)(18.2)
Prepaid expenses and other current assets(5.0)(8.5)22.5
Accounts payable and other current liabilities63.351.145.1
Net change in other long-term assets and liabilities3.9(3.9)9.3
Net cash provided by operating activities1,018.2895.2880.9
Investing activities
Purchases of available-for-sale securities(12,572.2)(34,020.4)(29,850.5)
Proceeds from sales and maturities of available-for-sale securities11,984.333,719.530,080.6
Net change in funds held for clients’ money market securities and other cash equivalents927.6149.1(441.5)
Purchases of property and equipment(97.7)(102.8)(84.1)
Acquisition of businesses, net of cash acquired(296.1)(27.1)(9.3)
Purchases of other assets(9.0)(3.3)(11.3)
Net cash used in investing activities(63.1)(285.0)(316.1)
Financing activities
Net change in client fund obligations(304.8)93.0127.4
Dividends paid(606.5)(551.8)(510.6)
Repurchases of common shares(107.9)(182.4)(249.7)
Equity activity related to stock-based awards25.648.5113.3
Net cash used in financing activities(993.6)(592.7)(519.6)
(Decrease)/increase in cash and cash equivalents(38.5)17.545.2
Cash and cash equivalents, beginning of fiscal year170.0152.5107.3
Cash and cash equivalents, end of fiscal year$131.5$170.0$152.5

See Notes to Consolidated Financial Statements.

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.

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:

CategoryDepreciable life
Buildings and improvementsTen to 35 years or the remaining life, whichever is shorter
Data processing equipmentThree to four years
Furniture, fixtures, and equipmentThree to seven years
Leasehold improvementsTen years or the life of the lease, whichever is shorter

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 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 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.

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: In May 2014, 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:

·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 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:

Year ended May 31,
In millions, except per share amounts201620152014
Basic earnings per share:
Net income$756.8$674.9$627.5
Weighted-average common shares outstanding360.7362.9364.5
Basic earnings per share$2.10$1.86$1.72
Diluted earnings per share:
Net income$756.8$674.9$627.5
Weighted-average common shares outstanding360.7362.9364.5
Dilutive effect of common share equivalents1.81.71.6
Weighted-average common shares outstanding, assuming dilution362.5364.6366.1
Diluted earnings per share$2.09$1.85$1.71
Weighted-average anti-dilutive common share equivalents0.50.30.7

Weighted-average common share equivalents that had an anti-dilutive impact are excluded from the computation of diluted earnings per share.

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:

Year ended May 31,
In millions201620152014
Interest income on corporate funds$8.4$7.8$6.9
Interest expense(1.1)(0.7)(1.1)
Net loss from equity-method investments(2.8)(0.7)(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.

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:

Year ended May 31,
2014201620152014
Performance stock optionsStock options
Risk-free interest rate1.5%1.9%2.1%2.0%
Dividend yield3.9%3.6%3.7%4.1%
Volatility factor0.200.180.210.22
Expected option life in years4.56.16.06.4
Weighted-average grant-date fair value of stock options 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:

Weighted-
Weighted-average
SharesaverageremainingAggregate
subjectexercise pricecontractualintrinsic
In millions, except per share amountsto optionsper shareterm (years)value(1)
Outstanding as of May 31, 20154.7$35.21
Granted0.8$47.42
Exercised(0.9)$34.77
Forfeited(0.1)$38.46
Expired—$35.89
Outstanding as of May 31, 20164.5$37.426.3$75.9
Exercisable as of May 31, 20162.6$33.844.9$53.1
(1)Market price of the underlying stock as of May 31, 2016 less the exercise price.

Other information pertaining to stock option grants is as follows:

Year ended May 31,
In millions, except per share amounts201620152014
Total intrinsic value of stock options exercised$14.5$17.6$18.9
Total grant-date fair value of stock options vested$4.0$3.6$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:

Weighted-
Weighted-average
SharesaverageremainingAggregate
subjectexercise pricecontractualintrinsic
In millions, except per share amountsto optionsper shareterm (years)value(1)
Outstanding as of May 31, 20152.7$31.31
Granted—$—
Exercised(0.1)$31.11
Forfeited(0.1)$29.85
Expired—$—
Outstanding as of May 31, 20162.5$31.365.4$57.9
Exercisable as of May 31, 20160.4$31.225.2$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.

The following table summarizes RSU activity for the year ended May 31, 2016:

Weighted-
Weighted-average
averageremaining
grant-datevestingAggregate
fair valueperiodintrinsic
In millions, except per share amountsRSUsper share(years)value(1)
Nonvested as of May 31, 20151.8$33.57
Granted0.7$42.60
Vested(0.5)$31.34
Forfeited(0.2)$35.97
Nonvested as of May 31, 20161.8$37.583.0$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:

Year ended May 31,
In millions, except per share amounts201620152014
Weighted-average grant-date fair value of RSUs granted$42.60$36.64$36.37
Total intrinsic value of RSUs vested$25.9$21.7$18.3
Total grant-date fair value of RSUs vested$17.3$14.8$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:

Weighted-
average
grant-date
Restrictedfair value
In millions, except per share amountssharesper share
Nonvested as of May 31, 20150.2$38.99
Granted—$47.46
Vested(0.1)$37.70
Forfeited—$40.54
Nonvested as of May 31, 20160.1$43.99

Other information pertaining to restricted stock follows:

Year ended May 31,
In millions, except per share amounts201620152014
Weighted-average grant-date fair value of restricted stock granted$47.46$41.70$38.53
Total grant-date fair value of restricted stock vested$3.0$3.5$3.3

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:

Weighted-
average
grant-date
Performancefair value
In millions, except per share amountssharesper share
Nonvested as of May 31, 20150.6$34.24
Granted (1)0.1$42.48
Vested(0.2)$29.10
Forfeited—$37.09
Nonvested as of May 31, 20160.5$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.

Note F — Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments are as follows:

May 31, 2016
GrossGross
AmortizedunrealizedunrealizedFair
In millionscostgainslossesvalue
Type of issue:
Funds held for clients money market securities and other cash equivalents$502.4$—$—$502.4
Available-for-sale securities:
Corporate bonds128.42.9(0.1)131.2
General obligation municipal bonds1,594.127.6(0.1)1,621.6
Pre-refunded municipal bonds(1)60.21.4—61.6
Revenue municipal bonds916.215.8(0.2)931.8
U.S. government agency securities160.80.6(0.3)161.1
Variable rate demand notes1,234.6——1,234.6
Total available-for-sale securities4,094.348.3(0.7)4,141.9
Other14.20.8(0.1)14.9
Total funds held for clients and corporate investments$4,610.9$49.1$(0.8)$4,659.2
May 31, 2015
GrossGross
AmortizedunrealizedunrealizedFair
In millionscostgainslossesvalue
Type of issue:
Funds held for clients money market securities and other cash equivalents$1,430.0$—$—$1,430.0
Available-for-sale securities:
General obligation municipal bonds1,694.014.0(4.3)1,703.7
Pre-refunded municipal bonds(1)101.71.0—102.7
Revenue municipal bonds960.76.1(3.2)963.6
Variable rate demand notes825.6——825.6
Total available-for-sale securities3,582.021.1(7.5)3,595.6
Other12.71.5—14.2
Total funds held for clients and corporate 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.

Classification of investments on the Consolidated Balance Sheets is as follows:

May 31,
In millions20162015
Funds held for clients$3,997.5$4,273.4
Corporate investments220.6366.6
Long-term corporate investments441.1399.8
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 monthsSecurities in an unrealized loss position for more than twelve monthsTotal
GrossGrossGross
unrealizedFairunrealizedFairunrealizedFair
In millionslossesvaluelossesvaluelossesvalue
Type of issue:
Corporate bonds(0.1)14.7——(0.1)14.7
General obligation municipal bonds$(0.1)$48.9$—$2.8$(0.1)$51.7
Pre-refunded municipal bonds—5.7———5.7
Revenue municipal bonds—20.7(0.2)11.7(0.2)32.4
U.S. government agency securities(0.3)51.1——(0.3)51.1
Total$(0.5)$141.1$(0.2)$14.5$(0.7)$155.6
May 31, 2015
Securities in an unrealized loss position for less than twelve monthsSecurities in an unrealized loss position for more than twelve monthsTotal
GrossGrossGross
unrealizedFairunrealizedFairunrealizedFair
In millionslossesvaluelossesvaluelossesvalue
Type of issue:
General obligation municipal bonds$(3.8)$535.1$(0.5)$26.3$(4.3)$561.4
Revenue municipal bonds(3.2)361.6——(3.2)361.6
Total$(7.0)$896.7$(0.5)$26.3$(7.5)$923.0

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 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:

Year ended May 31,
In millions201620152014
Gross realized gains$0.1$0.3$0.6
Gross realized losses———
Net realized gains$0.1$0.3$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.

May 31, 2016
AmortizedFair
In millionscostvalue
Maturity date:
Due in one year or less$359.6$360.7
Due after one year through three years742.7749.4
Due after three years through five years918.5935.7
Due after five years2,073.52,096.1
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:
oquoted prices for similar, but not identical, instruments in active markets;
oquoted prices for identical or similar instruments in markets that are not active;
oinputs other than quoted prices that are observable for the instrument; or
oinputs 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
QuotedSignificant
prices inotherSignificant
Carryingactiveobservableunobservable
valuemarketsinputsinputs
In millions(Fair value)(Level 1)(Level 2)(Level 3)
Assets:
Available-for-sale securities:
Corporate bonds$131.2$—$131.2$—
General obligation municipal bonds1,621.6—1,621.6—
Pre-refunded municipal bonds61.6—61.6—
Revenue municipal bonds931.8—931.8—
U.S. government agency securities161.1—161.1—
Variable rate demand notes1,234.6—1,234.6—
Total available-for-sale securities$4,141.9$—$4,141.9$—
Other$14.9$14.9$—$—
Liabilities:
Other long-term liabilities$14.9$14.9$—$—
May 31, 2015
QuotedSignificant
prices inotherSignificant
Carryingactiveobservableunobservable
valuemarketsinputsinputs
In millions(Fair value)(Level 1)(Level 2)(Level 3)
Assets:
Cash equivalents:
Commercial paper$15.0$—$15.0$—
General obligation municipal bonds55.1—55.1—
Pre-refunded municipal bonds20.5—20.5—
Revenue municipal bonds12.3—12.3—
Money market securities0.20.2——
Total cash equivalents$103.1$0.2$102.9$—
Available-for-sale securities:
General obligation municipal bonds$1,703.7$—$1,703.7$—
Pre-refunded municipal bonds102.7—102.7—
Revenue municipal bonds963.6—963.6—
Variable rate demand notes825.6—825.6—
Total available-for-sale securities$3,595.6$—$3,595.6$—
Other$14.2$14.2$—$—
Liabilities:
Other long-term liabilities$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.

Note H — Property and Equipment, Net of Accumulated Depreciation

The components of property and equipment, at cost, consisted of the following:

May 31,
In millions20162015
Land and improvements$8.3$8.3
Buildings and improvements103.0102.1
Data processing equipment196.1190.9
Software447.5391.8
Furniture, fixtures, and equipment125.0145.6
Leasehold improvements108.2106.2
Construction in progress24.128.5
Total property and equipment, gross1,012.2973.4
Less: Accumulated depreciation659.2619.5
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:

May 31,
In millions20162015
Client lists$289.2$244.6
Other intangible assets5.43.2
Total intangible assets, gross294.6247.8
Less: Accumulated amortization225.1215.4
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.

The estimated amortization expense for the next five fiscal years relating to intangible asset balances is as follows:

In millionsEstimated amortization
Year ending May 31,expense
2017$17.7
201814.1
201911.1
20208.5
20216.5

Note J — Income Taxes

The components of deferred tax assets and liabilities are as follows:

May 31,
In millions20162015
Deferred tax assets:
Compensation and employee benefit liabilities$21.4$20.9
Other current liabilities7.96.9
Tax credit carry forward40.040.1
Depreciation8.811.9
Stock-based compensation22.021.6
Tax benefit of uncertain tax positions18.615.7
Other7.19.2
Gross deferred tax assets125.8126.3
Deferred tax liabilities:
Capitalized software56.353.6
Depreciation2.53.8
Goodwill and intangible assets58.552.0
Revenue not subject to current taxes13.313.1
Unrealized gains on available-for-sale securities17.35.3
Other—0.3
Gross deferred tax liabilities147.9128.1
Net deferred tax liability$(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.

The components of the provision for income taxes are as follows:

Year ended May 31,
In millions201620152014
Current:
Federal$336.4$341.4$314.5
State50.847.851.0
Total current387.2389.2365.5
Deferred:
Federal5.5(5.1)(3.5)
State1.61.0(1.4)
Total deferred7.1(4.1)(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,
201620152014
Federal statutory tax rate35.0%35.0%35.0%
Increase/(decrease) resulting from:
State income taxes, net of federal tax benefit3.0%3.0%3.3%
Section 199 - Qualified production activities(2.4)%—%—%
Tax-exempt municipal bond interest(1.4)%(1.5)%(1.5)%
Other items0.1%(0.2)%(0.3)%
Effective income tax rate34.3%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.

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:

Year ended May 31,
In millions201620152014
Balance as of beginning of fiscal year$39.9$40.0$26.7
Additions for tax positions of the current year7.36.711.2
Additions for tax positions of prior years20.70.84.2
Reductions for tax positions of prior years(0.1)(0.4)(1.8)
Settlements with tax authorities(2.2)(1.2)—
Expiration of the statute of limitations(0.9)(6.0)(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.

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:

Year ended May 31,
In millions201620152014
Beginning balance$7.5$21.5$22.0
Other comprehensive income/(loss):
Unrealized holding gains/(losses)34.2(21.5)0.3
Income tax (expense)/benefit related to unrealized holding 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—0.10.2
Total other comprehensive income/(loss), net of tax21.7(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.

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 institutionAmount availableExpiration date
JP Morgan Chase Bank, N.A.$350 millionFebruary 27, 2017
Bank of America, N.A.$250 millionFebruary 28, 2017
PNC Bank, National Association$150 millionFebruary 27, 2017
Wells Fargo Bank, National Association$150 millionFebruary 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.

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 millions20162015
Number of days borrowed52
Maximum amount borrowed$450.0$150.0
Average amount borrowed$305.0$125.0
Weighted-average interest rate3.39%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.

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:

Minimum
In millionslease
Year ending May 31,payments
2017$35.7
201828.5
201920.0
202012.9
20217.4
Thereafter2.2

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:

Minimum
In millionspayment
Year ending May 31,obligation
2017$73.5
201820.5
20197.6
20204.4
20213.0
Thereafter0.6

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.

Note P — Quarterly Financial Data (Unaudited)

In millions, except per share amounts

Three Months Ended
Fiscal 2016August 31November 30February 29May 31Full Year
Service revenue$712.2$711.3$740.7$741.6$2,905.8
Interest on funds held for clients10.811.111.912.346.1
Total revenue$723.0$722.4$752.6$753.9$2,951.9
Operating income$296.1$294.2$280.0$276.3$1,146.6
Investment income/(loss), net1.41.61.7(0.2)4.5
Income before income taxes297.5295.8281.7276.11,151.1
Income taxes88.4106.6101.398.0394.3
Net income$209.1$189.2$180.4$178.1$756.8
Basic earnings per share(1)$0.58$0.52$0.50$0.49$2.10
Diluted earnings per share(1)$0.58$0.52$0.50$0.49$2.09
Weighted-average common shares outstanding361.1360.7360.5360.3360.7
Weighted-average common shares outstanding, assuming dilution362.8362.3362.2360.7362.5
Cash dividends per common share$0.42$0.42$0.42$0.42$1.68
Total net realized gains(2)$—$—$0.1$—$0.1
Three Months Ended
Fiscal 2015August 31November 30February 28May 31Full Year
Service revenue$656.6$665.9$693.6$681.4$2,697.5
Interest on funds held for clients10.210.410.710.842.1
Total revenue$666.8$676.3$704.3$692.2$2,739.6
Operating income$267.5$270.2$264.3$251.6$1,053.6
Investment income, net1.41.41.62.06.4
Income before income taxes268.9271.6265.9253.61,060.0
Income taxes97.698.696.592.4385.1
Net income$171.3$173.0$169.4$161.2$674.9
Basic earnings per share(1)$0.47$0.48$0.47$0.44$1.86
Diluted earnings per share(1)$0.47$0.47$0.46$0.44$1.85
Weighted-average common shares outstanding363.1363.0363.2362.3362.9
Weighted-average common shares outstanding, assuming dilution364.7364.6365.0364.5364.6
Cash dividends per common share$0.38$0.38$0.38$0.38$1.52
Total net realized gains(2)$0.1$0.1$—$0.1$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.

Schedule II — Valuation and Qualifying Accounts

PAYCHEX, INC.

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

FOR THE YEAR ENDED MAY 31,

(In millions)

Additions to/
Balance as ofAdditions(DeductionsBalance as
beginningcharged tofrom) otherCosts andof end
Descriptionof fiscal yearexpensesaccounts(1)deductions(2)of fiscal year
2016
Allowance for doubtful accounts$1.4$2.5$2.0$1.7$4.2
Reserve for client fund losses$1.8$2.4$—$2.2$2.0
2015
Allowance for doubtful accounts$1.5$1.6$0.1$1.8$1.4
Reserve for client fund losses$1.9$2.0$(0.2)$1.9$1.8
2014
Allowance for doubtful accounts$1.0$2.5$—$2.0$1.5
Reserve for client fund losses$2.4$2.2$—$2.7$1.9
(1)Amounts related to business acquisitions.
(2)Uncollectible amounts written off, net of recoveries.

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