PAYCHEX INC - Quarter Report: 2019 November (Form 10-Q)

payx-20191130x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 30, 2019

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________to __________

Commission file number 0-11330

_________________________________________

PAYCHEX, INC.

911 Panorama Trail South

Rochester, NY 14625-2396

(585) 385-6666

A Delaware Corporation

IRS Employer Identification Number: 16-1124166

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange of which registered
Common Stock, $0.01 par value	PAYX	NASDAQ

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x

Accelerated Filer 

Non-Accelerated Filer 

Smaller Reporting Company 

Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 30, 2019, 358,386,480 shares of the registrant’s common stock, $.01 par value, were outstanding.

PAYCHEX, INC.

Table of Contents


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Statements of Income and Comprehensive Income	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Stockholders’ Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	39
Item 4.	Controls and Procedures	39
PART II. OTHER INFORMATION		40
Item 6.	Exhibits	40
Signatures		41

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

In millions, except per share amounts



	For the three months ended				For the six months ended
	November 30,				November 30,
	2019		2018		2019		2018
Revenue:
Management Solutions	$	726.7	$	685.4	$	1,451.2	$	1,373.1
PEO and Insurance Services		244.1		155.2		491.1		313.2
Total service revenue		970.8		840.6		1,942.3		1,686.3
Interest on funds held for clients		19.9		18.3		40.4		35.4
Total revenue		990.7		858.9		1,982.7		1,721.7
Expenses:
Operating expenses		323.4		264.9		648.8		530.4
Selling, general and administrative expenses		325.6		286.8		643.1		563.8
Total expenses		649.0		551.7		1,291.9		1,094.2
Operating income		341.7		307.2		690.8		627.5
Other (expense)/income, net		(4.7)		2.1		(9.5)		4.4
Income before income taxes		337.0		309.3		681.3		631.9
Income taxes		78.3		73.5		158.4		152.5
Net income	$	258.7	$	235.8	$	522.9	$	479.4

Other comprehensive (loss)/income, net of tax		(14.9)		(11.6)		11.5		(11.2)
Comprehensive income	$	243.8	$	224.2	$	534.4	$	468.2

Basic earnings per share	$	0.72	$	0.66	$	1.46	$	1.34
Diluted earnings per share	$	0.72	$	0.65	$	1.45	$	1.33
Weighted-average common shares outstanding		358.1		359.1		358.4		359.1
Weighted-average common shares outstanding, ‎ assuming dilution		360.6		361.5		361.1		361.5

See Notes to Consolidated Financial Statements.

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PAYCHEX, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In millions, except per share amounts




	November 30,		May 31,
	2019		2019
Assets
Cash and cash equivalents	$	600.6	$	673.6
Restricted cash		53.0		50.6
Corporate investments		34.4		39.0
Interest receivable		29.0		27.4
Accounts receivable, net of allowance for doubtful accounts		464.9		420.5
PEO unbilled receivables, net of advance collections		411.7		406.3
Prepaid income taxes		58.6		22.6
Prepaid expenses and other current assets		240.9		233.9
Current assets before funds held for clients		1,893.1		1,873.9
Funds held for clients		3,734.8		3,803.8
Total current assets		5,627.9		5,677.7
Long-term restricted cash		9.7		6.5
Long-term corporate investments		10.1		10.2
Property and equipment, net of accumulated depreciation		401.7		408.7
Operating lease right-of-use assets, net of accumulated amortization		119.2		—
Intangible assets, net of accumulated amortization		359.7		399.1
Goodwill		1,785.8		1,782.6
Long-term deferred costs		359.7		366.3
Other long-term assets		27.9		24.9
Total assets	$	8,701.7	$	8,676.0
Liabilities
Accounts payable	$	76.3	$	75.9
Accrued corporate compensation and related items		121.5		146.4
Accrued worksite employee compensation and related items		568.3		578.6
Short-term borrowings		51.3		—
Deferred revenue		42.2		40.3
Other current liabilities		268.0		219.5
Current liabilities before client fund obligations		1,127.6		1,060.7
Client fund obligations		3,696.3		3,784.3
Total current liabilities		4,823.9		4,845.0
Accrued income taxes		30.6		27.3
Deferred income taxes		226.8		223.1
Long-term borrowings, net of debt issuance costs		796.6		796.4
Operating lease liabilities		100.1		13.0
Other long-term liabilities		154.3		151.7
Total liabilities		6,132.3		6,056.5
Commitments and contingencies — Note N
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares; ‎ Issued and outstanding: 358.4 shares as of November 30, 2019 ‎ and 359.3 shares as of May 31, 2019		3.6		3.6
Additional paid-in capital		1,252.8		1,206.3
Retained earnings		1,301.4		1,409.5
Accumulated other comprehensive income		11.6		0.1
Total stockholders’ equity		2,569.4		2,619.5
Total liabilities and stockholders’ equity	$	8,701.7	$	8,676.0

See Notes to Consolidated Financial Statements.

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PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

In millions, except per share amounts


	For the six months ended November 30, 2019
								Accumulated
				Additional				other
	Common stock			paid-in		Retained		comprehensive
	Shares	Amount		capital		earnings		income/(loss)		Total
Balance as of May 31, 2019	359.3	$	3.6	$	1,206.3	$	1,409.5	$	0.1	$	2,619.5
Net income	—		—		—		522.9		—		522.9
Unrealized gains on securities, net of reclassification adjustment and tax	—		—		—		—		14.3		14.3
Cash dividends declared ($1.24 per share)	—		—		—		(444.3)		—		(444.3)
Repurchases of common shares	(2.0)		—		(3.7)		(168.2)		—		(171.9)
Stock-based compensation costs	—		—		23.8		—		—		23.8
Foreign currency translation adjustment	—		—		—		—		(2.8)		(2.8)
Activity related to equity-based plans	1.1		—		26.4		(18.5)		—		7.9
Balance as of November 30, 2019	358.4	$	3.6	$	1,252.8	$	1,301.4	$	11.6	$	2,569.4


	For the three months ended November 30, 2019
Balance as of August 31, 2019	357.9	$	3.6	$	1,224.0	$	1,265.2	$	26.5	$	2,519.3
Net income	—		—		—		258.7		—		258.7
Unrealized losses on securities, net of reclassification adjustment and tax	—		—		—		—		(11.1)		(11.1)
Cash dividends declared ($0.62 per share)	—		—		—		(222.3)		—		(222.3)
Stock-based compensation costs	—		—		13.3		—		—		13.3
Foreign currency translation adjustment	—		—		—		—		(3.8)		(3.8)
Activity related to equity-based plans	0.5		—		15.5		(0.2)		—		15.3
Balance as of November 30, 2019	358.4	$	3.6	$	1,252.8	$	1,301.4	$	11.6	$	2,569.4


	For the six months ended November 30, 2018
Balance as of May 31, 2018	359.0	$	3.6	$	1,126.8	$	1,262.6	$	(36.2)	$	2,356.8
Net income	—		—		—		479.4		—		479.4
Unrealized losses on securities, net of reclassification adjustment and tax	—		—		—		—		(5.2)		(5.2)
Cash dividends declared ($1.12 per share)	—		—		—		(402.7)		—		(402.7)
Repurchases of common shares	(0.5)		—		(0.8)		(32.0)		—		(32.8)
Stock-based compensation costs	—		—		22.8		—		—		22.8
Foreign currency translation adjustment	—		—		—		—		(6.0)		(6.0)
Activity related to equity-based plans	0.6		—		16.9		(4.7)		—		12.2
Balance as of November 30, 2018	359.1	$	3.6	$	1,165.7	$	1,302.6	$	(47.4)	$	2,424.5


	For the three months ended November 30, 2018
Balance as of August 31, 2018	359.0	$	3.6	$	1,151.1	$	1,268.1	$	(35.8)	$	2,387.0
Net income	—		—		—		235.8		—		235.8
Unrealized losses on securities, net of reclassification adjustment and tax	—		—		—		—		(7.2)		(7.2)
Cash dividends declared ($0.56 per share)	—		—		—		(201.3)		—		(201.3)
Stock-based compensation costs	—		—		11.9		—		—		11.9
Foreign currency translation adjustment	—		—		—		—		(4.4)		(4.4)
Activity related to equity-based plans	0.1		—		2.7		—		—		2.7
Balance as of November 30, 2018	359.1	$	3.6	$	1,165.7	$	1,302.6	$	(47.4)	$	2,424.5

See Notes to Consolidated Financial Statements.

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PAYCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In millions



	For the six months ended
	November 30,
	2019		2018 ⁽¹⁾
Operating activities
Net income	$	522.9	$	479.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on property and equipment and intangible assets		107.9		72.7
Amortization of premiums and discounts on available-for-sale securities, net		20.4		27.7
Amortization of deferred costs		92.4		89.5
Stock-based compensation costs		23.8		22.8
(Benefit)/provision for deferred income taxes		(2.7)		10.9
Provision for allowance for doubtful accounts		3.4		1.5
Net realized (gains)/losses on sales of available-for-sale securities		(1.8)		0.2
Changes in operating assets and liabilities:
Interest receivable		(1.6)		3.6
Accounts receivable and PEO unbilled receivables, net		(53.2)		(71.6)
Prepaid expenses and other current assets		(44.5)		(26.7)
Accounts payable and other current liabilities		(14.5)		(30.2)
Deferred costs		(85.3)		(82.2)
Net change in other long-term assets and liabilities		(2.7)		(0.4)
Net change in operating lease right-of-use assets and liabilities		0.1		—
Net cash provided by operating activities		564.6		497.2
Investing activities
Purchases of available-for-sale securities		(13,537.8)		(21,248.8)
Proceeds from sales and maturities of available-for-sale securities		14,167.1		21,364.3
Purchases of property and equipment		(59.9)		(60.8)
Purchases of other assets		(4.2)		(1.0)
Net cash provided by investing activities		565.2		53.7
Financing activities
Net change in client fund obligations		(88.0)		(1,017.6)
Net proceeds from short-term borrowings		51.3		57.3
Dividends paid		(444.3)		(402.7)
Repurchases of common shares		(171.9)		(32.8)
Activity related to equity-based plans		7.9		12.2
Net cash used in financing activities		(645.0)		(1,383.6)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents		484.8		(832.7)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		935.2		2,300.5
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	1,420.0	$	1,467.8

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
to the Consolidated Balance Sheets:
Cash and cash equivalents	$	600.6	$	510.6
Restricted cash		62.7		—
Restricted cash and restricted cash equivalents included in funds held for clients		756.7		957.2
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	1,420.0	$	1,467.8

(1)Amounts have been adjusted to reflect adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”

See Notes to Consolidated Financial Statements.

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PAYCHEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

November 30, 2019

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 human resource (“HR”), payroll, benefits, and insurance services for small- to medium-sized businesses in the United States (“U.S.”). The Company also has operations in Europe.

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 Europe, which represented approximately one percent of the Company’s total revenue for both the three and six months ended November 30, 2019 and November 30, 2018. Long-lived assets in Europe were approximately five percent of total long-lived assets of the Company as of both November 30, 2019 and May 31, 2019.

Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q (“Form 10-Q”) and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation. The consolidated financial statements include the consolidated accounts of the Company with all intercompany transactions eliminated. Certain disclosures are reported as zero balances due to rounding. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature), which are necessary for a fair presentation of the results for the interim period. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related Notes to Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended May 31, 2019 (“fiscal 2019”). Operating results and cash flows for the six months ended November 30, 2019 are not necessarily indicative of the results that may be expected for other interim periods or for the fiscal year ending May 31, 2020 (“fiscal 2020”).

Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation and had no effect on reported consolidated earnings.

Revision of previously reported financial information: During the three months ended February 28, 2019, the Company determined it should have presented cash equivalents and money market securities included in funds held for clients within cash, cash equivalents, restricted cash, and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on its Consolidated Statements of Cash Flows in accordance with ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This immaterial correction resulted in a decrease of $985.1 million in net cash provided by investing activities for the six months ended November 30, 2018. In addition, it resulted in increases in cash, cash equivalents, restricted cash, and restricted cash equivalents balances as reported on the Consolidated Statement of Cash Flows of $1.9 billion and $1.0 billion as of May 31, 2018 and November 30, 2018, respectively. The Consolidated Statement of Cash Flows for the six months ended November 30, 2018 has been revised to reflect the classification of cash equivalents and money market securities included in funds held for clients as restricted cash and restricted cash equivalents.

Restricted cash and restricted cash equivalents: Restricted cash and restricted cash equivalents are recorded at fair value, and consist of cash and cash equivalents, primarily money market securities, included in funds held for clients and cash that is restricted in use to secure certain workers’ compensation policies.

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 $10.8 million and $7.5 million as of November 30, 2019 and May 31, 2019, respectively. These balances include: trade receivables for services provided to clients and purchased receivables related to payroll funding arrangements with clients in the temporary staffing industry. Trade receivables were $90.1 million and $94.5 million as of November 30, 2019 and May 31, 2019, respectively. Purchased receivables were $385.6 million and $333.5 million as of November 30, 2019 and May 31, 2019, respectively. 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.

Professional Employer Organization (“PEO”) unbilled receivables, net of advance collections: The Company recognizes a liability for worksite employee gross wages and related payroll tax liabilities at the end of the period in which the worksite employee performs work, and where it assumes, under state regulations, the obligation for the payment of payroll and payroll tax

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liabilities. The estimated payroll and payroll tax liabilities are recorded in accrued worksite employee compensation and related items on the Company’s Consolidated Balance Sheets. The associated unbilled receivables, including estimated revenues, offset by advance collections from clients, are recorded as PEO unbilled receivables, net of advance collections on the Company’s Consolidated Balance Sheets. As of November 30, 2019 and May 31, 2019, advance collections included in PEO unbilled receivables, net of advance collections were $3.6 million and $4.2 million, respectively.

PEO insurance reserves: As part of the PEO service, the Company offers workers’ compensation insurance and health insurance for the benefit of client employees. Workers’ compensation insurance is provided under fully insured high deductible workers’ compensation insurance policies. 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 under its PEO workers’ compensation insurance policies is $1.0 million for the annual fiscal period ending May 31, 2020. For the annual fiscal period ended May 31, 2019, the Company’s maximum individual claims liability ranged from $0.5 million to $1.0 million under its PEO workers’ compensation insurance policies.

The Company offers minimum premium insurance plan arrangements for certain of its PEO clients for various medical, dental, and vision benefits. In connection with these minimum premium insurance plan offerings, the Company establishes insurance reserves to provide for the payment of claims in accordance with its service contract with the carriers. The Company’s maximum individual claims liability was $0.3 million under its minimum medical premium plan policies during both the annual fiscal periods ending May 31, 2020 and ended May 31, 2019.

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.

Leases: On June 1, 2019, the Company adopted the requirements of ASU No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). As a result of this adoption, the following accounting policies were implemented or changed.

At contract inception, the Company determines if the new contractual arrangement is a lease or contains a leasing arrangement. If a contract contains a lease, the Company evaluates whether it should be classified as an operating or a finance lease. Currently, all of the Company’s leases have been classified as operating leases. Upon modification of the contract, the Company will reassess to determine if a contract is or contains a leasing arrangement.

The Company records lease liabilities based on the future estimated cash payments discounted over the lease term, defined as the non-cancellable time period of the lease, together with all the following:

periods covered by an option to extend the lease if the Company is reasonably certain to exercise the extension option; and

periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option.

Leases may also include options to terminate the arrangement or options to purchase the underlying lease property. The Company does not separate lease and non-lease components of contracts. Lease components provide the Company with the right to use an identified asset, which consist of the Company’s real estate properties and office equipment. Non-lease components consist primarily of maintenance services.

As an implicit discount rate is not readily determinable in the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The incremental borrowing rate is determined using a portfolio approach utilizing publicly available information related to our unsecured borrowing rates. For certain leases with original terms of 12 months or less, the Company recognizes lease expense as incurred and does not recognize any lease liabilities. Short-term and long-term portions of operating lease liabilities are classified as other current liabilities and operating lease liabilities, respectively, in the Company’s Consolidated Balance Sheets.

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A right-of-use (“ROU”) asset is measured as the amount of the lease liability with adjustments, if applicable, for lease incentives, initial direct costs incurred by the Company, and lease prepayments made prior to or at lease commencement. ROU assets are classified as operating lease right-of-use assets, net of accumulated amortization, on the Company’s Consolidated Balance Sheets. The Company evaluates the carrying value of ROU assets if there are indicators of potential impairment, and performs the analysis concurrent with the review of the recoverability of the related asset group. If the carrying value of the asset group is determined to not be fully recoverable and is in excess of its estimated fair value, the Company will record an impairment loss in its Consolidated Statements of Income and Comprehensive Income. The Company did not recognize an impairment loss during the six months ended November 30, 2019.

Fixed lease expense payments are recognized on a straight-line basis over the lease term. Variable lease payments vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time, and are often due to changes in an external market rate or the value of an index (e.g. Consumer Price Index). Variable lease payments are expensed as incurred in the Company’s Consolidated Statements of Income and Comprehensive Income.

As part of the adoption of ASU No. 2016-02, the Company elected the following practical expedients: 1) lease vs. non-lease components relating to the real estate asset class; 2) the short-term lease exemption; and 3) the package of practical expedients, which permits the Company to not reassess prior conclusions about lease identification, lease classification, and initial direct costs under the new standard. In addition, the Company elected not to adopt the practical expedient related to hindsight.

Stock-based compensation costs: The Company has issued stock-based awards to employees and directors consisting of stock options, restricted stock awards, restricted stock units, performance shares, performance-based restricted stock, performance-based restricted stock units, and performance-based stock options. The Company accounts for all stock-based awards to employees and directors as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized over the requisite service period. Stock-based compensation costs recognized were $13.3 million and $23.8 million for the three and six months ended November 30, 2019, respectively, as compared with $11.9 million and $22.8 million for the three and six months ended November 30, 2018, respectively. The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company’s fiscal 2019 Form 10-K.

Recently adopted accounting pronouncements: In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02. This guidance, as amended by subsequent ASUs on the topic, 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. The Company adopted the requirements of ASU No. 2016-02 on June 1, 2019, utilizing the alternative transition method provided by the FASB in ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” and did not restate comparative periods as permitted under the standard.

The adoption of ASU No. 2016-02 increased ROU lease-related assets and liabilities by $116.4 million and resulted in ROU asset and lease liability balances of $116.4 million and $135.3 million, respectively, on the Company’s Consolidated Balance Sheets as of June 1, 2019. The difference between the ROU assets and lease liabilities relates to $18.9 million of unamortized landlord allowances and lease incentives. The Company has updated its control framework for new internal controls and made changes to existing internal controls related to the new standard. The adoption of this standard did not have an impact on the financial covenants set forth in the Company’s credit facilities and long-term borrowing agreement. Refer to Note H for additional information on the new standard.

In June 2019, the Company also adopted the following ASUs, none of which had a material impact on its consolidated financial statements:

ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting;”

ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income;” and

ASU No. 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.”

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Recently issued accounting pronouncements: In November 2019, the FASB issued ASU No. 2019-08 “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer.” ASU No. 2019-08 amends and clarifies ASU No. 2018-07, which was adopted by the Company on June 1, 2019, to require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have already adopted the amendments in ASU No. 2018-07, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” ASU No. 2019-04 was issued as part of the FASB’s ongoing project to improve upon its Accounting Standards Codification (“ASC”), and to clarify and improve areas of guidance related to recently issued standards on credit losses, hedging, and recognition and measurement. This guidance contains several effective dates, but is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.” ASU No. 2018-18 was issued to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. This guidance is effective for public entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for public entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is a