UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended November 30, 2023

OR

 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

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Paychex, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	16-1124166 (I.R.S. Employer Identification No.)
911 Panorama Trail South Rochester**,** NY (Address of principal executive offices)	14625-2396 (Zip Code)

Registrant's telephone number, including area code: (585) 385-6666

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	PAYX	Nasdaq Global Select Market

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  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  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		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 

As of November 30, 2023, 359,821,826 shares of the registrant’s common stock, $.01 par value, were outstanding.

PAYCHEX, INC.

Ta****ble of Contents

		Page
PART I. FINANCIAL INFORMATION		1
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	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II. OTHER INFORMATION		30
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Repurchase of Equity Securities	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		32

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PART I. FINANCIAL INFORMATION

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,
		2023					2022					2023					2022
Revenue:
Management Solutions		$		930.7			$		895.3			$		1,886.2			$		1,800.8
PEO and Insurance Solutions				295.7					273.3					593.5					556.1
Total service revenue				1,226.4					1,168.6					2,479.7					2,356.9
Interest on funds held for clients				31.5					21.7					64.2					39.6
Total revenue				1,257.9					1,190.3					2,543.9					2,396.5
Expenses:
Cost of service revenue				364.1					359.3					724.3					710.3
Selling, general and administrative expenses				387.6					358.7					777.1					718.3
Total expenses				751.7					718.0					1,501.4					1,428.6
Operating income				506.2					472.3					1,042.5					967.9
Other income/(expense), net				11.7					2.9					24.5					(0.7	)
Income before income taxes				517.9					475.2					1,067.0					967.2
Income taxes				125.2					114.9					255.1					227.7
Net income		$		392.7			$		360.3			$		811.9			$		739.5
Other comprehensive income/(loss), net of tax				15.9					(26.9	)				(7.3	)				(64.4	)
Comprehensive income		$		408.6			$		333.4			$		804.6			$		675.1
Basic earnings per share		$		1.09			$		1.00			$		2.25			$		2.05
Diluted earnings per share		$		1.08			$		0.99			$		2.24			$		2.04
Weighted-average common shares outstanding				360.5					360.5					360.6					360.2
Weighted-average common shares outstanding, assuming dilution				362.1					362.3					362.4					362.3

See Notes to Consolidated Financial Statements.

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PA****YCHEX, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In millions, except per share amounts

		November 30,					May 31,
		2023					2023
Assets
Cash and cash equivalents		$		1,363.1			$		1,222.0
Restricted cash				47.9					49.8
Corporate investments				34.4					373.4
Interest receivable				23.7					24.4
Accounts receivable, net of allowance for credit losses				1,082.7					873.3
PEO unbilled receivables, net of advance collections				544.4					528.5
Prepaid income taxes				83.5					48.1
Prepaid expenses and other current assets				304.3					289.8
Current assets before funds held for clients				3,484.0					3,409.3
Funds held for clients				5,439.7					4,118.8
Total current assets				8,923.7					7,528.1
Long-term corporate investments				1.6					3.8
Property and equipment, net of accumulated depreciation				417.6					396.3
Operating lease right-of-use assets, net of accumulated amortization				59.4					61.5
Intangible assets, net of accumulated amortization				201.0					187.4
Goodwill				1,882.3					1,834.0
Long-term deferred costs				474.6					470.1
Other long-term assets				91.9					65.2
Total assets		$		12,052.1			$		10,546.4
Liabilities
Accounts payable		$		92.3			$		84.7
Accrued corporate compensation and related items				164.1					209.9
Accrued worksite employee compensation and related items				806.2					763.9
Short-term borrowings				13.6					10.2
Deferred revenue				55.1					47.3
Other current liabilities				496.3					395.4
Current liabilities before client fund obligations				1,627.6					1,511.4
Client fund obligations				5,626.8					4,294.0
Total current liabilities				7,254.4					5,805.4
Accrued income taxes				93.2					83.0
Deferred income taxes				103.0					112.1
Long-term borrowings, net of debt issuance costs				798.4					798.2
Operating lease liabilities				53.5					57.3
Other long-term liabilities				225.2					197.2
Total liabilities				8,527.7					7,053.2
Commitments and contingencies — Note I
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares; Issued and outstanding: 359.8 shares as of November 30, 2023 and 360.5 shares as of May 31, 2023				3.6					3.6
Additional paid-in capital				1,678.6					1,626.4
Retained earnings				2,009.4					2,023.1
Accumulated other comprehensive loss				(167.2	)				(159.9	)
Total stockholders’ equity				3,524.4					3,493.2
Total liabilities and stockholders’ equity		$		12,052.1			$		10,546.4

See Notes to Consolidated Financial Statements.

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P****AYCHEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

In millions, except per share amounts

		For the six months ended November 30, 2023

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Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc. and its wholly owned subsidiaries (“Paychex,” the “Company,” “we,” “our,” or “us”) for the three months ended November 30, 2023 (the “second quarter”), the six months ended November 30, 2023 (the “six months”), the respective prior year periods ended November 30, 2022 (the “prior year periods”), and our financial condition as of November 30, 2023. The focus of this review is on the underlying business reasons for material changes and trends affecting our revenue, expenses, net income, and financial condition. This review should be read in conjunction with the November 30, 2023 consolidated financial statements and the related Notes to Consolidated Financial Statements (Unaudited) contained in this Quarterly Report on Form 10-Q (“Form 10-Q”). This review should also be read in conjunction with our Annual Report on Form 10-K (“Form 10-K”) for the year ended May 31, 2023 (“fiscal 2023”). Forward-looking statements in this Form 10-Q are qualified by the cautionary statement included under the next sub-heading, “Cautionary Note Regarding Forward-Looking Statements.”

Cautionary Note Regarding Forward-Looking Statements

Certain written and oral statements made by us may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States (“U.S.”) Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as “expect,” “estimate,” “intend,” “outlook,” “will,” “would,” “project,” “projections,” “strategy,” “anticipate,” “believe,” “could,” “may,” “potential,” “purpose,” and other similar words or phrases. Examples of forward-looking statements include, among others, statements we make regarding operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, or similar projections.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, many of which are outside our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance upon any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

our ability to keep pace with changes in technology or provide timely enhancements to our solutions and support;

software defects, undetected errors, and development delays for our solutions;

the possibility of cyberattacks, security vulnerabilities or Internet disruptions, including data security and privacy leaks and data loss and business interruptions;

the possibility of failure of our business continuity plan during a catastrophic event;

the failure of third-party service providers to perform their functions;

the possibility that we may be exposed to additional risks related to our co-employment relationship with our professional employer organization (“PEO”) business;

changes in health insurance and workers’ compensation insurance rates and underlying claim trends;

risks related to acquisitions and the integration of the businesses we acquire;

our clients’ failure to reimburse us for payments made by us on their behalf;

the effect of changes in government regulations mandating the amount of tax withheld or the timing of remittances;

our failure to comply with covenants in our debt agreements;

changes in governmental regulations and policies;

our ability to comply with U.S. and foreign laws and regulations;

our compliance with data privacy laws and regulations;

our failure to protect our intellectual property rights;

potential outcomes related to pending or future litigation matters;

the impact of macroeconomic factors on the U.S. and global economy, and in particular on our small- and medium-sized business clients;

volatility in the political and economic environment, including inflation and interest rate changes;

changes in the availability and retention of qualified people; and

the possible effects of negative publicity on our reputation and the value of our brand.

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Any of these factors, as well as other factors discussed in our Form 10-K for fiscal 2023 or in our other periodic filings with the Securities and Exchange Commission (“SEC”), could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-Q is based upon the facts and circumstances known as of the date of this report, and any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of filing this Form 10-Q with the SEC to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.

Our investor presentation regarding the financial results for the second quarter is available and accessible on our Paychex Investor Relations portal at https://investor.paychex.com. Information available on our website is not a part of, and is not incorporated into, this Form 10-Q. We intend to make future investor presentations available exclusively on our Paychex Investor Relations portal.

Overview

We are a leading provider of integrated human capital management (“HCM”) solutions for human resources (“HR”), payroll, benefits, and insurance for small- to medium-sized businesses and their employees across the United States (“U.S.”) and parts of Europe. We offer a comprehensive portfolio of HCM technology and HR advisory solutions that help our clients navigate the challenges of HR.

Paychex Flex® is our proprietary HCM software-as-a-service (“SaaS”) platform that provides seamless workforce management throughout the employee life cycle from recruiting and hiring to retirement through an integrated suite of solutions and digital support capabilities. It utilizes a single cloud-based platform, with single client and employee records that allows a client to customize their set of solutions and modify it as their needs change. In addition, we provide comprehensive HR advisory solutions to help our clients plan, manage, and comply with all aspects of HR.

Our portfolio of technology, HR advisory, and employee benefits-related solutions is disaggregated into two categories, (1) Management Solutions and (2) PEO and Insurance Solutions, as discussed under the heading “Description of Solutions” in Part I, Item 1 of our Form 10-K for fiscal 2023.

Our strategy focuses on providing industry-leading, integrated technology; delivering superior customer experiences; expanding our leadership in HR; growing our client bases; and engaging in strategic acquisitions. We believe that successfully executing this strategy will lead to strong, long-term financial performance.

We maintain industry-leading margins by managing our personnel costs and expenses while continuing to invest in our business, particularly in sales and marketing and leading-edge technology. We believe these investments are critical to our success. Looking to the future, we believe that investing in our solutions, people, and digital capabilities will position us to capitalize on opportunities for long-term growth.

We closely monitor the evolving challenges and needs of small- and mid-sized businesses, and proactively aid our clients in navigating these challenges. Through our unique blend of innovative technology solutions, backed by our extensive compliance and HR expertise, we help clients more effectively hire, engage, train, and retain top talent in this challenging workforce environment. As businesses operate in a tight labor market, having an online portal for employee self-service that is intuitive and easy-to-use helps increase employee retention and efficiency for our clients. We continue to invest in our technology, enhancing our solutions to continuously improve the customer and employee experiences from hiring and onboarding through employee retention.

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Second Quarter and Year to Date Business Highlights

Highlights compared to the prior year periods are as follows:

		For the three months ended																	For the six months ended
		November 30,																	November 30,
In millions, except per share amounts		2023						2022						Change**(2)**					2023						2022						Change**(2)**
Total service revenue		$		1,226.4				$		1,168.6					5		%		$		2,479.7				$		2,356.9					5		%
Total revenue		$		1,257.9				$		1,190.3					6		%		$		2,543.9				$		2,396.5					6		%
Operating income		$		506.2				$		472.3					7		%		$		1,042.5				$		967.9					8		%
Net income		$		392.7				$		360.3					9		%		$		811.9				$		739.5					10		%
Adjusted net income(1)		$		391.6				$		359.4					9		%		$		806.7				$		731.3					10		%
Diluted earnings per share		$		1.08				$		0.99					9		%		$		2.24				$		2.04					10		%
Adjusted diluted earnings per share(1)		$		1.08				$		0.99					9		%		$		2.23				$		2.02					10		%
Dividends paid to stockholders		$		320.2				$		284.7					12		%		$		642.1				$		569.3					13		%

(1)

Adjusted net income and adjusted diluted earnings per share are not U.S. generally accepted accounting principle (“GAAP”) measures. Refer to the “Non-GAAP Financial Measures” section of this Item 2 for a discussion of non-GAAP measures and a reconciliation to the U.S. GAAP measures of net income and diluted earnings per share.

(2)

Percentage changes are calculated based on unrounded numbers.

For further analysis of our results of operations for the second quarter and six months, the prior year periods, and our financial position as of November 30, 2023, refer to the tables and analysis in the “Results of Operations” and “Liquidity and Capital Resources” sections of this Item 2.

RESULTS OF OPERATIONS

Summary of Results of Operations:

		For the three months ended																	For the six months ended
		November 30,																	November 30,
In millions, except per share amounts		2023						2022						Change**(1)**					2023						2022						Change**(1)**
Revenue:
Management Solutions		$		930.7				$		895.3					4		%		$		1,886.2				$		1,800.8					5		%
PEO and Insurance Solutions				295.7						273.3					8		%				593.5						556.1					7		%
Total service revenue				1,226.4						1,168.6					5		%				2,479.7						2,356.9					5		%
Interest on funds held for clients				31.5						21.7					44		%				64.2						39.6					62		%
Total revenue				1,257.9						1,190.3					6		%				2,543.9						2,396.5					6		%
Total expenses				751.7						718.0					5		%				1,501.4						1,428.6					5		%
Operating income				506.2						472.3					7		%				1,042.5						967.9					8		%
Other income/(expense), net				11.7						2.9				n/m							24.5						(0.7	)			n/m
Income before income taxes				517.9						475.2					9		%				1,067.0						967.2					10		%
Income taxes				125.2						114.9					9		%				255.1						227.7					12		%
Effective income tax rate				24.2		%				24.2		%									23.9		%				23.5		%
Net income		$		392.7				$		360.3					9		%		$		811.9				$		739.5					10		%
Diluted earnings per share		$		1.08				$		0.99					9		%		$		2.24				$		2.04					10		%

(1) Percentage changes are calculated based on unrounded numbers.

n/m – not meaningful

The changes in revenue as compared to the prior year periods were primarily driven by the following factors:

Management Solutions revenue: $930.7 million for the second quarter and $1.9 billion for the six months, reflecting increases of 4% and 5%, respectively:

o

Growth in the number of clients served across our suite of HCM solutions;

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o

Higher revenue per client from price realization and product penetration, including HR Solutions and retirement; and

o

Growth in ancillary services.

PEO and Insurance Solutions revenue: $295.7 million for the second quarter and $593.5 million for the six months, reflecting increases of 8% and 7%, respectively:

o

Growth in the number of average PEO worksite employees;

o

Increase in PEO insurance revenues; and

o

Higher revenue from ancillary services.

Interest on funds held for clients: $31.5 million for the second quarter and $64.2 million for the six months, reflecting increases of 44% and 62%, respectively, due to higher average interest rates.

We invest in highly liquid, investment-grade fixed income securities and do not utilize derivative instruments to manage interest rate risk.

Details regarding our combined funds held for clients and corporate cash equivalents and investment portfolios were as follows:

		For the three months ended																	For the six months ended
		November 30,																	November 30,
$ in millions		2023						2022						Change**(1)**					2023						2022						Change**(1)**
Average investment balances:
Funds held for clients		$		4,036.3				$		4,012.7					1		%		$		4,096.6				$		4,065.4					1		%
Corporate cash equivalents and investments				1,540.3						1,349.3					14		%				1,623.5						1,363.0					19		%
Total		$		5,576.6				$		5,362.0					4		%		$		5,720.1				$		5,428.4					5		%
Average interest rates earned (exclusive of net realized gains):
Funds held for clients				3.1		%				2.2		%									3.1		%				1.9		%
Corporate cash equivalents and investments				5.3		%				3.0		%									5.1		%				2.3		%
Combined funds held for clients and corporate cash equivalents and investments				3.7		%				2.4		%									3.7		%				2.0		%
Total net realized gains/(losses)		$		0.0				$		(0.0	)								$		(0.0	)			$		0.1

(1) Percentage changes are calculated based on unrounded numbers.

		November 30,						May 31,
$ in millions		2023						2023
Net unrealized losses on available for sale (“AFS”) securities (1)		$		(187.2	)			$		(175.3	)
Federal Funds rate (2)				5.50		%				5.25		%
Total fair value of AFS securities		$		3,292.6				$		3,604.6
Weighted-average duration of AFS securities in years (3)				3.0						3.3
Weighted-average yield-to-maturity of AFS securities (3)				3.0		%				2.9		%

(1) The net unrealized loss on our investment portfolio was approximately $148.3 million as of December 19, 2023. Refer to Note F in the Notes to Consolidated Financial Statements contained in this Form 10-Q for more information regarding AFS securities held in an unrealized loss position.

(2) The Federal Funds rate was in the range of 5.25% to 5.50% as of November 30, 2023 and in the range of 5.00% to 5.25% as of May 31, 2023.

(3) These items exclude the impact of variable rate demand notes (“VRDNs”) as they are tied to short-term interest rates.

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Total expenses: The following table summarizes the total combined cost of service revenue and selling, general and administrative expenses for the periods below:

		For the three months ended															For the six months ended
		November 30,															November 30,
In millions		2023					2022					Change**(1)**					2023					2022					Change**(1)**
Compensation-related expenses		$		452.6			$		442.8				2		%		$		907.9			$		869.4				4		%
PEO direct insurance costs				111.5					102.9				8		%				221.7					207.4				7		%
Depreciation and amortization				44.9					44.3				1		%				86.1					88.3				(3	)	%
Other expenses				142.7					128.0				12		%				285.7					263.5				9		%
Total expenses		$		751.7			$		718.0				5		%		$		1,501.4			$		1,428.6				5		%

(1) Percentage changes are calculated based on unrounded numbers.

Total expenses were $751.7 million for the second quarter and $1.5 billion for the six months, reflecting increases of 5% compared to the prior year periods. Total expenses increased as a result of the following:

Compensation-related expenses: $452.6 million for the second quarter and $907.9 million for the six months, reflecting an increase of 2% for the second quarter and 4% for the six months, driven by increases in average wage rates.

PEO direct insurance costs: $111.5 million for the second quarter and $221.7 million for the six months, reflecting an increase of 8% for the second quarter and 7% for the six months, related to growth in average worksite employees and PEO insurance revenues.

Other expenses: $142.7 million for the second quarter and $285.7 million for the six months, reflecting an increase of 12% for the second quarter and 9% for the six months, primarily due to continued investment in technology, sales and marketing.

Operating income: Operating income increased 7% to $506.2 million for the second quarter and 8% to $1.0 billion for the six months, as a result of revenue growth which outpaced expense increases as previously discussed.

Operating margin (operating income as a percentage of total revenue) was as follows:

		For the three months ended											For the six months ended
		November 30,											November 30,
		2023					2022						2023					2022
Operating margin			40.2		%				39.7		%			41.0		%				40.4		%

Other income/(expense), net: Other income/(expense), net increased $8.8 million to $11.7 million for the second quarter and $25.2 million to income of $24.5 million for the six months, primarily as a result of higher average interest rates earned on our corporate investments as well as higher average investment balances.

Income taxes: Our effective income tax rate was 24.2% for the second quarter and 23.9% for the six months, compared to 24.2% and 23.5%, for the prior year periods, respectively. All periods were impacted by the recognition of excess tax benefits related to employee stock-based compensation payments.

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Non-GAAP Financial Measures: Adjusted net income, adjusted diluted earnings per share, and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) are summarized as follows:

		For the three months ended															For the six months ended
		November 30,															November 30,
$ in millions		2023					2022					Change					2023					2022					Change
Net income		$		392.7			$		360.3				9		%		$		811.9			$		739.5				10		%
Non-GAAP adjustments:
Excess tax benefits related to employee stock-based compensation payments(1)				(1.1	)				(0.9	)									(5.2	)				(8.2	)
Adjusted net income		$		391.6			$		359.4				9		%		$		806.7			$		731.3				10		%
Diluted earnings per share(2)		$		1.08			$		0.99				9		%		$		2.24			$		2.04				10		%
Non-GAAP adjustments:
Excess tax benefits related to employee stock-based compensation payments(1)				—					—										(0.01	)				(0.02	)
Adjusted diluted earnings per share		$		1.08			$		0.99				9		%		$		2.23			$		2.02				10		%
Net income		$		392.7			$		360.3				9		%		$		811.9			$		739.5				10		%
Non-GAAP adjustments:
Interest (income)/expense, net				(11.8	)				(0.9	)									(23.9	)				2.8
Income taxes				125.2					114.9										255.1					227.7
Depreciation and amortization expense				44.9					44.3										86.1					88.3
Total non-GAAP adjustments				158.3					158.3										317.3					318.8
EBITDA		$		551.0			$		518.6				6		%		$		1,129.2			$		1,058.3				7		%

(1) Excess tax benefits related to employee stock-based compensation payments recognized in income taxes. This item is subject to volatility and will vary based on employee decisions on exercising employee stock options and fluctuations in our stock price, neither of which is within the control of management.

(2) The calculation of the impact of non-GAAP adjustments on diluted earnings per share is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.

In addition to reporting net income and diluted earnings per share, which are U.S. GAAP measures, we present adjusted net income, adjusted diluted earnings per share, and EBITDA, which are non-GAAP measures. We believe these additional measures are indicators of our core business operations’ performance period over period. Adjusted net income, adjusted diluted earnings per share, and EBITDA are not calculated through the application of U.S. GAAP and are not required forms of disclosure by the SEC. As such, they should not be considered a substitute for the U.S. GAAP measures of net income and diluted earnings per share, and, therefore, they should not be used in isolation, but in conjunction with the U.S. GAAP measures. The use of any non-GAAP measure may produce results that vary from the U.S. GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

LIQUIDITY AND CAPITAL RESOURCES

As of November 30, 2023, our financial position remained strong with cash, restricted cash, and total corporate investments of $1.4 billion. Total short-term and long-term borrowings, net of debt issuance costs, were $812.0 million as of November 30, 2023. Our primary source of cash is our ongoing operations. Cash flow from operations was $1.0 billion for the six months. Our positive cash flows have allowed us to support our business, pay dividends, and repurchase shares of our common stock. We currently anticipate that cash, restricted cash, and total corporate investments as of November 30, 2023, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, share repurchases, and dividend payments for the foreseeable future.

We believe that our investments in an unrealized loss position as of November 30, 2023 were not impaired due to increased credit risk or other valuation concerns, nor has any event occurred subsequent to that date to indicate any change in our assessment.

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Financing

Short-term financing: We maintain committed and unsecured credit facilities and irrevocable letters of credit as part of our normal and recurring business operations. The purpose of these credit facilities is to meet short-term funding requirements, finance working capital needs, and for general corporate purposes. We typically borrow on an overnight or short-term basis under our credit facilities. Refer to Note L of the Notes to Consolidated Financial Statements contained in Item 8 of our Form 10-K for fiscal 2023 for further discussion of our credit facilities.

Details of our credit facilities as of November 30, 2023 were as follows:

					Maximum					November 30, 2023
					Amount					Outstanding					Available
$ in millions		Expiration Date			Available					Amount					Amount
Credit facilities:
JP Morgan Chase Bank, N.A. (“JPM”)		July 31, 2024		$		1,000.0			$		-			$		1,000.0
JPM		September 17, 2026		$		750.0					-					750.0
PNC Bank, National Association (“PNC”)		February 6, 2026		$		250.0					13.6					236.4
Total Lines of Credit Outstanding and Available									$		13.6			$		1,986.4

Amounts outstanding under the PNC credit facility as of November 30, 2023 remain outstanding as of the date of this report.

Details of borrowings under each credit facility during the second quarter and the prior year period were as follows:

			For the three months ended November 30, 2023
			Credit Facility
			$1 Billion						$750 Million						$250 Million
$ in millions			JPM						JPM						PNC
Number of days borrowed				—						—						91
Maximum amount borrowed		$		—				$		—				$		97.7
Weighted-average amount borrowed		$		—				$		—				$		14.5
Weighted-average interest rate				—		%				—		%				6.40		%

			For the three months ended November 30, 2022
			Credit Facility
			$1 Billion						$750 Million						$250 Million
$ in millions			JPM						JPM						PNC
Number of days borrowed				—						—						91
Maximum amount borrowed		$		—				$		—				$		10.4
Weighted-average amount borrowed		$		—				$		—				$		10.0
Weighted-average interest rate				—		%				—		%				4.61		%

Short-term borrowings are primarily used for the settlement of client fund obligations, rather than liquidating previously collected client funds that have been invested in AFS securities allocated to our long-term investment portfolio.

Subsequent to November 30, 2023, there were no additional overnight borrowings under our JPM or PNC credit facilities.

We expect to have access to the amounts available under our current credit facilities to meet our ongoing financial needs. However, if we experience reductions in our operating cash flows due to any of the risk factors outlined in, but not limited to, Item 1A in our Form 10-K for fiscal 2023 and other SEC filings, we may need to adjust our capital, operating and other discretionary spending to realign our working capital requirements with the capital resources available to us. Furthermore, if we determine the need for additional short-term liquidity, there is no assurance that such financing, if pursued and obtained, would be adequate or on terms acceptable to us.

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Letters of credit: As of November 30, 2023, we had irrevocable standby letters of credit available totaling $141.3 million, required to secure commitments for certain insurance policies. The letters of credit expire at various dates between December 05, 2023 and October 09, 2025. No amounts were outstanding on these letters of credit during the second quarter or as of November 30, 2023.

Long-term financing: We have borrowed $800.0 million through the issuance of long-term private placement debt (“Senior Notes”). Certain information related to our Senior Notes are as follows:

		Senior Notes		Senior Notes
		Series A		Series B
Stated interest rate		4.07%		4.25%
Effective interest rate		4.14%		4.31%
Interest rate type		Fixed		Fixed
Interest payment dates		Semi-annual, in arrears		Semi-annual, in arrears
Principal payment dates		March 13, 2026		March 13, 2029
Note type		Unsecured		Unsecured

Refer to Note M of the Notes to Consolidated Financial Statements contained in Item 8 of our Form 10-K for fiscal 2023 for further discussion on our long-term financing.

Other commitments: We had outstanding commitments under existing workers’ compensation insurance agreements and legally binding contractual arrangements. We also entered into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase approximately $3.9 million of capital assets as of November 30, 2023. In addition, we are involved in three limited partnership agreements to contribute a maximum of $30.0 million to venture capital funds in the financial technology sector. As of November 30, 2023, we have contributed approximately $22.6 million of the total funding commitment.

In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees. We have also entered into indemnification agreements with our officers and directors, which require us to defend and, if necessary, indemnify these individuals for certain pending or future claims as they relate to their services provided to us.

We currently self-insure the deductible portion of various insured exposures under certain corporate employee and PEO employee health and medical benefit plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on our Consolidated Balance Sheets. Historically, the amounts accrued have not been material and were not material as of November 30, 2023. We also maintain insurance coverage in addition to our purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and self-insured retentions through our captive insurance company.

Operating, Investing, and Financing Cash Flow Activities

		For the six months ended
		November 30,
In millions		2023					2022						Change
Net cash provided by operating activities		$		1,004.3			$		719.7			$		284.6
Net cash (used in)/provided by investing activities				(109.7	)				1,027.8					(1,137.5	)
Net cash provided by/(used in) financing activities				532.3					(1,051.1	)				1,583.4
Net change in cash, restricted cash, and equivalents		$		1,426.9			$		696.4			$		730.5
Cash dividends per common share		$		1.78			$		1.58

The changes in our cash flow for the six months compared to the prior year period were primarily the result of the following key drivers:

Operating Cash Flow Activities

Higher net income attributable to the reasons discussed in the “Results of Operations” section of this Item 2;

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Net changes in PEO assets and liabilities as a result of the timing of cash collected and the settlement of payroll taxes;

A net increase in refunds owed to our PEO clients related to tax benefits allowed under the Coronavirus Aid, Relief, and Economic Security Act; and

Various changes in other assets and liabilities in the normal course of business.

Investing Cash Flow Activities

Lower net sales of AFS securities related to investments in VRDNs, the proceeds from which were reinvested into cash, money market securities or cash equivalents earning more favorable interest rates;

Cash used for the acquisition of Alterna Capital Solutions, LLC and settlement of its outstanding debt at closing. Refer to Note D of the Notes to Consolidated Financial Statements for additional discussion of this transaction; and

Increase in net purchases of short-term accounts receivable was primarily due to an increase in our client base, funding to existing client base, and the timing of cash collections on outstanding receivables and cash settlement of the related reserve.

Fluctuations in the net purchases and sales/maturities of AFS securities are also due to timing within the client funds portfolio and market conditions. Amounts will vary based upon the timing of collection from clients and the related remittance to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment services.

Discussion of interest rates and related risks is included in the “Market Risk Factors” section of this Item 2.

Financing Cash Flow Activities

The increase in net cash inflows from changes in client fund obligations is due to the timing of collections and remittances of client funds as November 30, 2023 fell on Thursday, which is a large cash inflow day for client funds. This cash inflow was offset by a higher than usual May 31, 2023 accrual balance due to the cash settlement of semi-weekly payroll taxes being paid a day later than the cycle due to the Memorial Day holiday. November 30, 2022 fell on a Wednesday, which is a cash outflow day for semi-weekly tax payments; offset by

Cash used to repurchase 1.5 million shares of our common stock at a weighted average price of $115.37 per share during the six months. There were no repurchases of our common shares during the fiscal 2023 period. All repurchased shares were retired upon acquisition; and

Dividends paid increased compared to the prior year period due to an increase in our cumulative dividend from $1.58 per share to $1.78 per share. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board of Directors (the "Board").

The client fund obligations liability will vary based on the timing of collecting client funds and the related required remittance of funds to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment services. Collections from clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days.

MARKET RISK FACTORS

Changes in interest rates and interest rate risk: Funds held for clients are primarily comprised of short-term funds and AFS securities. Corporate investments are primarily comprised of AFS securities. As a result of our investing activities, we are exposed to changes in interest rates that may materially affect our results of operations and financial position. Changes in interest rates will impact the earnings potential of future investments and will cause fluctuations in the fair value of our long-term AFS securities. We follow an investment strategy of protecting principal and optimizing liquidity. A substantial portion of our portfolios is invested in high credit quality securities with ratings of AA or higher, and A-1/P-1 ratings on short-term securities. We invest predominantly in corporate bonds; municipal bonds; U.S. government agency securities; and VRDNs when available in the market. We limit the amounts that can be invested in any single issuer and invest primarily in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes. We manage the AFS securities to a benchmark duration of two and one-half to three and three-quarters years.

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During the six months ended November 30, 2023, our primary short-term investment vehicles were U.S. government agency discount notes and bank demand deposit accounts. We have no exposure to high-risk or non-liquid investments. We have insignificant exposure to European investments. We have not and do not utilize derivative financial instruments to manage our interest rate risk.

During the six months ended November 30, 2023, the average interest rate earned on our combined funds held for clients and corporate cash equivalents and investment portfolios was 3.7% compared to 2.0% for the prior year period. When interest rates are rising, the full impact of higher interest rates will not immediately be reflected in net income due to the interaction of short- and long-term interest rate changes. During a rising interest rate environment, earnings will increase from our short-term investments, and over time, increase from our longer-term AFS securities. Earnings from AFS securities, which as of November 30, 2023 had an average duration of 3.0 years, would not reflect increases in interest rates until the investments are sold or mature and the proceeds are reinvested at higher rates.

The amortized cost and fair value of AFS securities that had stated maturities as of November 30, 2023 are shown below by expected maturity.

		November 30, 2023
		Amortized					Fair
In millions		cost					value
Maturity date:
Due in one year or less		$		165.8			$		163.7
Due after one year through three years				1,060.6					1,001.8
Due after three years through five years				1,880.3					1,766.7
Due after five years				373.1					360.4
Total		$		3,479.8			$		3,292.6

VRDNs, when held be us, 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.

As of November 30, 2023, the Federal Funds rate was in the range of 5.25% to 5.50%. There continues to be uncertainty in the changing market and economic conditions, including the possibility of additional measures that could be taken by the Federal Reserve and other government agencies, related to concerns over inflation risk and the failure of financial institutions. We will continue to monitor the market and economic conditions.

Calculating the future effects of changing interest rates involves many factors. These factors include, but are not limited to:

governmental action to address inflation and/or intervene to support financial markets;

daily interest rate changes;

seasonal variations in investment balances;

actual duration of short-term and AFS securities;

the proportion of taxable and tax-exempt investments;

changes in tax-exempt municipal rates versus taxable investment rates, which are not synchronized or simultaneous; and

financial market volatility and the resulting effect on benchmark and other indexing interest rates.

Subject to these factors and under normal financial market conditions, a 25-basis-point change in taxable interest rates generally affects our tax-exempt interest rates by approximately 17 basis points. Under normal financial market conditions, the impact to earnings from a 25-basis-point change in short-term interest rates would be approximately $4.0 million to $4.5 million, after taxes, for a twelve-month period. Such a basis point change may or may not be tied to changes in the Federal Funds rate.

Our total investment portfolio (funds held for clients and corporate cash equivalents and investments) is expected to average approximately $6.0 billion for the year ending May 31, 2024. Our anticipated allocation is approximately 40% invested in short-term securities and VRDNs with an average duration of less than 30 days and 60% invested in AFS securities, with an average duration of two and one-half to three and three-quarters years.

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The combined funds held for clients and corporate AFS securities reflected net unrealized losses of $187.2 million as of November 30, 2023 and $175.3 million as of May 31, 2023. During the six months ended November 30, 2023, the net unrealized loss on our investment portfolios ranged from a loss of $170.3 million to a loss of $259.6 million. These fluctuations were driven by changes in market rates of interest. The net unrealized loss on our investment portfolio was approximately $148.3 million as of December 19, 2023.

As of November 30, 2023 and May 31, 2023, we had $3.3 billion and $3.6 billion, respectively, invested in AFS securities at fair value. The weighted-average yield-to-maturity was 3.0% as of November 30, 2023 and 2.9 % as of May 31, 2023. The weighted-average yield-to-maturity excludes AFS securities tied to short-term interest rates, such as VRDNs, when held. Assuming a hypothetical increase in longer-term interest rates of 25 basis points, the resulting potential decrease in fair value for our portfolio of AFS securities as of November 30, 2023, would be approximately $25.0 million. Conversely, a corresponding decrease in interest rates would result in a comparable increase in fair value. This hypothetical increase or decrease in the fair value of the portfolio would be recorded as an adjustment to the portfolio’s recorded value, with an offsetting amount recorded in stockholders’ equity. These fluctuations in fair value would have no related or immediate impact on our results of operations unless any declines in fair value are due to credit related concerns and an impairment loss is recognized.

We are also exposed to interest rate risk through the use of our credit facilities as outlined in the Liquidity and Capital Resources section of this Form 10-Q. If interest rates were to increase, or we increase the frequency or amounts borrowed under these credit facilities, we could experience additional interest expense and a corresponding decrease in earnings.

Credit risk: We are exposed to credit risk in connection with our investments in AFS securities through the possible inability of the borrowers to meet the terms of their bonds. We regularly review our investment portfolios to determine if any investment is impaired due to increased credit risk or other valuation concerns and we believe that the investments we held as of November 30, 2023 were not impaired as a result of the previously discussed reasons. While $3.2 billion of our AFS securities had fair values that were below amortized cost, we believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the gross unrealized losses of $189.2 million were due to changes in interest rates and were not due to increased credit risk or other valuation concerns. A substantial portion of the AFS securities in an unrealized loss position as of November 30, 2023 and May 31, 2023 had an AA rating or better. We do not intend to sell these investments until the recovery of their amortized cost basis or maturity, and further believe that it is not more-likely-than-not that we will be required to sell these investments prior to that time. Our assessment that an investment is not impaired due to increased credit risk or other valuation concerns could change in the future due to new developments, including changes in our strategies or assumptions related to any particular investment.

We have some credit risk exposure relating to our purchase of client accounts receivable under non-recourse arrangements. There is also credit risk exposure relating to our trade accounts receivable. This credit risk exposure is diversified amongst multiple client arrangements and all such arrangements are regularly reviewed for potential write-off. No single client was material in respect to total accounts receivable, service revenue, or results of operations as of November 30, 2023.

Market risk: We have an ongoing monitoring system for financial institutions we conduct business with and maintain cash balances at large well-capitalized (as defined by their regulators) financial institutions. We continue to closely monitor this situation and take appropriate measures, when necessary, to minimize potential risk exposure to our client’s and our cash and investment balances.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in Item 7 of our Form 10-K for fiscal 2023, filed with the SEC on July 14, 2023. On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, those related to:

revenue recognition;

assets recognized from the costs to obtain and fulfill contracts;

PEO insurance reserves;

goodwill and other intangible assets;

impairment of long-lived assets;

stock-based compensation costs; and

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income taxes.

There have been no material changes in these aforementioned critical accounting policies.

NEW ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q for a discussion of recently adopted accounting pronouncements.

Recently issued accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q for a discussion of recently issued accounting pronouncements.

Ite****m 3. Quantitative and Qualitative Disclosures About Market Risk

The information called for by this item is provided under the caption “Market Risk Factors” under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.

Ite****m 4. Controls and Procedures

Disclosure Controls and Procedures: Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures: As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that as of November 30, 2023, the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting: The Company also carried out an evaluation of the internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended November 30, 2023. Based on such evaluation, there have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter ended November 30, 2023, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PAR****T II. OTHER INFORMATION

I****tem 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

The Company maintains a program to repurchase up to $400 million of the Company’s common stock with authorization expiring on January 31, 2024. The purpose of this program is to manage common stock dilution. Shares repurchased under this program during the second quarter were as follows:

In millions, except per share amounts		Total number of shares purchased					Average price paid per share					Total dollars					Approximate dollar value of shares that may yet be purchased under the programs
September 1, 2023 - September 30, 2023				—			$		—			$		—			$		327.1
October 1, 2023 - October 31, 2023				1.5			$		115.37			$		169.2			$		157.9
November 1, 2023 - November 30, 2023				—			$		—			$		—			$		157.9
Total for the period				1.5			$		115.37			$		169.2			$		157.9

On December 15, 2023, the Company and Efrain Rivera, its former Senior Vice President and Chief Financial Officer, agreed to extend the period for Mr. Rivera to serve as a senior advisor to the Company. Mr. Rivera will continue to serve as a senior advisor to the Company on a full-time basis until February 29, 2024 and on a part-time basis until August 1, 2024. Mr. Rivera has agreed to forfeit the equity awards granted to him in July 2023. Mr. Rivera’s base salary will be $10,000 per month effective March 1, 2024 to reflect his part-time status. There are no other changes to Mr. Rivera’s existing compensation.

During the three months ended November 30, 2023, none of our directors or officers (as defined by Rule 16a-1 under the Exchange Act), adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any “non-Rule 10b5-1 trading arrangement” (as defined by Item 408(c) of Regulation S-K).

Ite****m 6. Exhibits

INDEX TO EXHIBITS

	Exhibit number	Description
* #	10.1	Agreement between Paychex, Inc. and Efrain Rivera, dated as of December 15, 2023.
*	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	101.INS	Inline XBRL Instance Document– the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
*	101.SCH	Inline XBRL Taxonomy Extension Schema Document
*	101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
*	101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
*	101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
*	101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
*	104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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• Exhibit filed or furnished with this report

Management contract or compensatory plan

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SIGNA****TURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PAYCHEX, INC.

Date:	December 21, 2023	/s/ John B. Gibson
		John B. Gibson
		President, Chief Executive Officer and Director
		(Principal Executive Officer)
Date:	December 21, 2023	/s/ Robert L. Schrader
		Robert L. Schrader
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)
Date:	December 21, 2023	/s/ Christopher Simmons Christopher Simmons Vice President, Controller and Treasurer (Principal Accounting Officer)