filings.toolsItem 1. Financial Statements
90K characters. Original on sec.gov · Markdown
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 nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Management Solutions | $ | 1,100.7 | $ | 1,049.9 | $ | 3,025.3 | $ | 2,936.1 | ||||||||||||
| PEO and Insurance Solutions | 365.4 | 345.5 | 1,002.6 | 939.0 | ||||||||||||||||
| Total service revenue | 1,466.1 | 1,395.4 | 4,027.9 | 3,875.1 | ||||||||||||||||
| Interest on funds held for clients | 42.9 | 43.9 | 116.5 | 108.1 | ||||||||||||||||
| Total revenue | 1,509.0 | 1,439.3 | 4,144.4 | 3,983.2 | ||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Cost of service revenue | 387.4 | 379.8 | 1,146.5 | 1,104.1 | ||||||||||||||||
| Selling, general and administrative expenses | 429.8 | 409.7 | 1,221.3 | 1,186.8 | ||||||||||||||||
| Total expenses | 817.2 | 789.5 | 2,367.8 | 2,290.9 | ||||||||||||||||
| Operating income | 691.8 | 649.8 | 1,776.6 | 1,692.3 | ||||||||||||||||
| Other (expense)/income, net | (6.0 | ) | 9.4 | 10.0 | 33.9 | |||||||||||||||
| Income before income taxes | 685.8 | 659.2 | 1,786.6 | 1,726.2 | ||||||||||||||||
| Income taxes | 166.5 | 160.6 | 426.5 | 415.7 | ||||||||||||||||
| Net income | $ | 519.3 | $ | 498.6 | $ | 1,360.1 | $ | 1,310.5 | ||||||||||||
| Other comprehensive income, net of tax | 2.3 | 22.0 | 55.5 | 14.7 | ||||||||||||||||
| Comprehensive income | $ | 521.6 | $ | 520.6 | $ | 1,415.6 | $ | 1,325.2 | ||||||||||||
| Basic earnings per share | $ | 1.44 | $ | 1.39 | $ | 3.78 | $ | 3.64 | ||||||||||||
| Diluted earnings per share | $ | 1.43 | $ | 1.38 | $ | 3.76 | $ | 3.62 | ||||||||||||
| Weighted-average common shares outstanding | 360.1 | 359.9 | 360.1 | 360.4 | ||||||||||||||||
| Weighted-average common shares outstanding, assuming dilution | 362.0 | 361.7 | 361.9 | 362.2 |
See Notes to Consolidated Financial Statements.
PA****YCHEX, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In millions, except per share amounts
| February 28, | May 31, | |||||||||
| 2025 | 2024 | |||||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 1,563.8 | $ | 1,468.9 | ||||||
| Restricted cash | 49.1 | 47.8 | ||||||||
| Corporate investments | 37.2 | 33.9 | ||||||||
| Interest receivable | 22.6 | 23.3 | ||||||||
| Accounts receivable, net of allowance for credit losses | 1,244.8 | 1,059.6 | ||||||||
| PEO unbilled receivables, net of advance collections | 597.9 | 542.4 | ||||||||
| Prepaid income taxes | 18.3 | 47.5 | ||||||||
| Prepaid expenses and other current assets | 359.4 | 321.9 | ||||||||
| Current assets before funds held for clients | 3,893.1 | 3,545.3 | ||||||||
| Funds held for clients | 4,183.9 | 3,706.2 | ||||||||
| Total current assets | 8,077.0 | 7,251.5 | ||||||||
| Long-term corporate investments | — | 3.7 | ||||||||
| Property and equipment, net of accumulated depreciation | 451.2 | 411.7 | ||||||||
| Operating lease right-of-use assets, net of accumulated amortization | 48.2 | 46.9 | ||||||||
| Intangible assets, net of accumulated amortization | 175.6 | 194.5 | ||||||||
| Goodwill | 1,877.8 | 1,882.7 | ||||||||
| Long-term deferred costs | 472.3 | 477.1 | ||||||||
| Other long-term assets | 119.5 | 115.0 | ||||||||
| Total assets | $ | 11,221.6 | $ | 10,383.1 | ||||||
| Liabilities | ||||||||||
| Accounts payable | $ | 118.7 | $ | 104.3 | ||||||
| Accrued corporate compensation and related items | 157.8 | 135.0 | ||||||||
| Accrued worksite employee compensation and related items | 746.8 | 662.4 | ||||||||
| Short-term borrowings | 17.6 | 18.7 | ||||||||
| Deferred revenue | 51.7 | 50.2 | ||||||||
| Other current liabilities | 455.3 | 469.8 | ||||||||
| Current liabilities before client fund obligations | 1,547.9 | 1,440.4 | ||||||||
| Client fund obligations | 4,251.8 | 3,868.7 | ||||||||
| Total current liabilities | 5,799.7 | 5,309.1 | ||||||||
| Accrued income taxes | 118.2 | 102.6 | ||||||||
| Deferred income taxes | 93.0 | 86.0 | ||||||||
| Long-term borrowings, net of debt issuance costs | 799.0 | 798.6 | ||||||||
| Operating lease liabilities | 47.1 | 49.0 | ||||||||
| Other long-term liabilities | 248.0 | 236.8 | ||||||||
| Total liabilities | 7,105.0 | 6,582.1 | ||||||||
| Commitments and contingencies — Note I | ||||||||||
| Stockholders’ equity | ||||||||||
| Common stock, $0.01 par value; Authorized: 600.0 shares; Issued and outstanding: 360.2 shares as of February 28, 2025 and 360.1 shares May 31, 2024 | 3.6 | 3.6 | ||||||||
| Additional paid-in capital | 1,814.8 | 1,729.5 | ||||||||
| Retained earnings | 2,387.8 | 2,213.0 | ||||||||
| Accumulated other comprehensive loss | (89.6 | ) | (145.1 | ) | ||||||
| Total stockholders’ equity | 4,116.6 | 3,801.0 | ||||||||
| Total liabilities and stockholders’ equity | $ | 11,221.6 | $ | 10,383.1 |
See Notes to Consolidated Financial Statements.
P****AYCHEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
In millions, except per share amounts
| For the nine months ended February 28, 2025 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Net unrealized loss on AFS securities | Cash Flow Hedges | Foreign currency translation | Total accumulated comprehensive loss | Total | ||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2024 | 360.1 | $ | 3.6 | $ | 1,729.5 | $ | 2,213.0 | $ | **(**120.7 | ) | $ | — | $ | **(**24.4 | ) | $ | **(**145.1 | ) | $ | 3,801.0 | ||||||||||||||||||||||||
| Net income | — | — | — | 1,360.1 | — | — | — | — | 1,360.1 | |||||||||||||||||||||||||||||||||||
| Unrealized gains/(losses), net of $23.2 million in tax expense | — | — | — | — | 70.9 | (15.9 | ) | — | 55.0 | 55.0 | ||||||||||||||||||||||||||||||||||
| Reclassification adjustment to earnings, net of $0.1 million in tax benefit (1) | — | — | — | — | 0.3 | 7.3 | — | 7.6 | 7.6 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($2.94 per share) | — | — | — | (1,058.9 | ) | — | — | — | — | (1,058.9 | ) | |||||||||||||||||||||||||||||||||
| Repurchases of common shares, including excise taxes of $0.5 million (2) | (0.8 | ) | (0.0 | ) | (4.0 | ) | (100.5 | ) | — | — | — | — | (104.5 | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation costs | — | — | 50.5 | — | — | — | — | — | 50.5 | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | (7.1 | ) | (7.1 | ) | (7.1 | ) | ||||||||||||||||||||||||||||||||
| Activity related to equity-based plans | 0.9 | 0.0 | 38.8 | (25.9 | ) | — | — | — | — | 12.9 | ||||||||||||||||||||||||||||||||||
| Balance as of February 28, 2025 | 360.2 | $ | 3.6 | $ | 1,814.8 | $ | 2,387.8 | $ | **(**49.5 | ) | $ | **(**8.6 | ) | $ | **(**31.5 | ) | $ | **(**89.6 | ) | $ | 4,116.6 |
| For the three months ended February 28, 2025 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Net unrealized loss on AFS securities | Cash Flow Hedges | Foreign currency translation | Total accumulated comprehensive loss | Total | ||||||||||||||||||||||||||||||||||||
| Balance as of November 30, 2024 | 360.1 | $ | 3.6 | $ | 1,789.4 | $ | 2,224.6 | $ | **(**63.1 | ) | $ | — | $ | **(**28.8 | ) | $ | **(**91.9 | ) | $ | 3,925.7 | ||||||||||||||||||||||||
| Net income | — | — | — | 519.3 | — | — | — | — | 519.3 | |||||||||||||||||||||||||||||||||||
| Unrealized gains/(losses), net of $4.3 million in tax expense | — | — | — | — | 13.3 | (15.9 | ) | — | (2.6 | ) | (2.6 | ) | ||||||||||||||||||||||||||||||||
| Reclassification adjustment to earnings, net of $0.1 million in tax benefit (1) | — | — | — | — | 0.3 | 7.3 | — | 7.6 | 7.6 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.98 per share) | — | — | — | (353.2 | ) | — | — | — | — | (353.2 | ) | |||||||||||||||||||||||||||||||||
| Repurchases of common shares, including excise taxes of $0.0 million (2) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation costs | — | — | 17.6 | — | — | — | — | — | 17.6 | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | (2.7 | ) | (2.7 | ) | (2.7 | ) | ||||||||||||||||||||||||||||||||
| Activity related to equity-based plans | 0.1 | 0.0 | 7.8 | (2.9 | ) | — | — | — | — | 4.9 | ||||||||||||||||||||||||||||||||||
| Balance as of February 28, 2025 | 360.2 | $ | 3.6 | $ | 1,814.8 | $ | 2,387.8 | $ | **(**49.5 | ) | **(**8.6 | ) | $ | **(**31.5 | ) | $ | **(**89.6 | ) | $ | 4,116.6 |
(1)
Reclassification adjustments to earnings on the sale of available-for-sale ("AFS") securities are reflected in interest on funds held for clients and other (expense)/income, net on the Consolidated Statements of Income and Comprehensive Income. Reclassification adjustments to earnings for the cash flow hedges relate to amortization of the excluded component of the initial fair value and are reflected in interest expense and included in other (expense)/income, net on the Consolidated Statements of Income and Comprehensive Income.
(2)
The Company maintains a program to repurchase $400.0 million of its common stock, with authorization expiring May 31, 2027. The Company previously maintained a program to repurchase up to $400.0 million of its common stock, with an authorization that expired on January 31, 2024. The purpose of these programs is to manage common stock dilution.
| For the nine months ended February 29, 2024 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Net unrealized loss on AFS securities | Cash Flow Hedges | Foreign currency translation | Total accumulated comprehensive loss | Total | ||||||||||||||||||||||||||||||||||||
| Balance as of May 31, 2023 | 360.5 | $ | 3.6 | $ | 1,626.4 | $ | 2,023.1 | $ | **(**130.3 | ) | — | $ | **(**29.6 | ) | $ | **(**159.9 | ) | $ | 3,493.2 | |||||||||||||||||||||||||
| Net income | — | — | — | 1,310.5 | — | — | — | — | 1,310.5 | |||||||||||||||||||||||||||||||||||
| Unrealized gains on securities, net of $3.5 million in tax expense | — | — | — | — | 9.9 | — | — | 9.9 | 9.9 | |||||||||||||||||||||||||||||||||||
| Reclassification adjustment for realized losses on securities, net of $0.0 million in tax benefit (1) | — | — | — | — | 0.0 | — | — | 0.0 | 0.0 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($2.67 per share) | — | — | — | (962.3 | ) | — | — | — | — | (962.3 | ) | |||||||||||||||||||||||||||||||||
| Repurchases of common shares (2) | (1.5 | ) | (0.0 | ) | (6.2 | ) | (163.0 | ) | — | — | — | — | (169.2 | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation costs | — | — | 45.1 | — | — | — | — | — | 45.1 | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 4.8 | 4.8 | 4.8 | |||||||||||||||||||||||||||||||||||
| Activity related to equity-based plans | 1.0 | 0.0 | 37.2 | (22.1 | ) | — | — | — | — | 15.1 | ||||||||||||||||||||||||||||||||||
| Balance as of February 29, 2024 | 360.0 | $ | 3.6 | $ | 1,702.5 | $ | 2,186.2 | $ | **(**120.4 | ) | — | $ | **(**24.8 | ) | $ | **(**145.2 | ) | $ | 3,747.1 |
| For the three months ended February 29, 2024 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Net unrealized loss on AFS securities | Cash Flow Hedges | Foreign currency translation | Total accumulated comprehensive loss | Total | ||||||||||||||||||||||||||||||||||||
| Balance as of November 30, 2023 | 359.8 | $ | 3.6 | $ | 1,678.6 | $ | 2,009.4 | $ | **(**139.4 | ) | — | $ | **(**27.8 | ) | $ | **(**167.2 | ) | $ | 3,524.4 | |||||||||||||||||||||||||
| Net income | — | — | — | 498.6 | — | — | — | — | 498.6 | |||||||||||||||||||||||||||||||||||
| Unrealized gains on securities, net of $6.3 million in tax expense | — | — | — | — | 19.0 | — | — | 19.0 | 19.0 | |||||||||||||||||||||||||||||||||||
| Reclassification adjustment for realized gains on securities, net of $0.0 million in tax expense (1) | — | — | — | — | (0.0 | ) | — | — | (0.0 | ) | (0.0 | ) | ||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.89 per share) | — | — | — | (320.4 | ) | — | — | — | — | (320.4 | ) | |||||||||||||||||||||||||||||||||
| Repurchases of common shares (2) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation costs | — | — | 14.4 | — | — | — | — | — | 14.4 | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 3.0 | 3.0 | 3.0 | |||||||||||||||||||||||||||||||||||
| Activity related to equity-based plans | 0.2 | 0.0 | 9.5 | (1.4 | ) | — | — | — | — | 8.1 | ||||||||||||||||||||||||||||||||||
| Balance as of February 29, 2024 | 360.0 | $ | 3.6 | $ | 1,702.5 | $ | 2,186.2 | $ | **(**120.4 | ) | — | $ | **(**24.8 | ) | $ | **(**145.2 | ) | $ | 3,747.1 |
(1)
Reclassification adjustments to earnings on the sale of AFS securities are reflected in interest on funds held for clients and other (expense)/income, net on the Consolidated Statements of Income and Comprehensive Income. Reclassification adjustments to earnings for the cash flow hedges relate to amortization of the excluded component of the initial fair value and are reflected in interest expense and included in other (expense)/income, net on the Consolidated Statements of Income and Comprehensive Income.
(2)
The Company maintained a program to repurchase up to $400.0 million of its common stock, with an authorization that expired on January 31, 2024. On January 19, 2024, the Company's Board of Directors approved a new repurchase plan authorizing up to $400 million of repurchases of its common stock, with authorization expiring on May 31, 2027. The purpose of these programs are to manage common stock dilution.
See Notes to Consolidated Financial Statements.
P****AYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In millions
| For the nine months ended | ||||||||||
| February 28, | February 29, | |||||||||
| 2025 | 2024 | |||||||||
| Operating activities | ||||||||||
| Net income | $ | 1,360.1 | $ | 1,310.5 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 123.8 | 130.9 | ||||||||
| Amortization of premiums and discounts on AFS securities, cash flow hedges and long-term debt, net | 5.1 | (4.7 | ) | |||||||
| Amortization of deferred contract costs | 176.6 | 173.4 | ||||||||
| Stock-based compensation costs | 50.5 | 45.1 | ||||||||
| Benefit from deferred income taxes | (16.1 | ) | (20.9 | ) | ||||||
| Provision for credit losses | 17.6 | 14.9 | ||||||||
| Net realized losses on sales of AFS securities | 0.4 | 0.0 | ||||||||
| Premiums paid on cash flow hedges | (19.2 | ) | — | |||||||
| Changes in operating assets and liabilities: | ||||||||||
| Interest receivable | 0.7 | 1.6 | ||||||||
| Accounts receivable and PEO unbilled receivables, net | (99.9 | ) | (3.5 | ) | ||||||
| Prepaid expenses and other current assets | 2.3 | 9.2 | ||||||||
| Accounts payable and other current liabilities | 107.8 | 184.2 | ||||||||
| Deferred costs | (173.7 | ) | (184.3 | ) | ||||||
| Net change in other long-term assets and liabilities | 25.4 | 21.6 | ||||||||
| Net change in operating lease right-of-use assets and liabilities | (4.3 | ) | (2.0 | ) | ||||||
| Net cash provided by operating activities | 1,557.1 | 1,676.0 | ||||||||
| Investing activities | ||||||||||
| Purchases of AFS securities | (8,473.2 | ) | (6,007.4 | ) | ||||||
| Proceeds from sales and maturities of AFS securities | 8,500.4 | 6,345.6 | ||||||||
| Net purchases of short-term accounts receivable | (153.3 | ) | (101.8 | ) | ||||||
| Purchases of property and equipment | (131.3 | ) | (120.1 | ) | ||||||
| Acquisition of businesses, net of cash acquired | — | (208.3 | ) | |||||||
| Purchases of other assets, net | (24.3 | ) | (25.8 | ) | ||||||
| Net cash used in investing activities | **(**281.7 | ) | **(**117.8 | ) | ||||||
| Financing activities | ||||||||||
| Net change in client fund obligations | 383.1 | 1,947.4 | ||||||||
| Net change in short-term borrowings | — | 9.0 | ||||||||
| Dividends paid | (1,059.2 | ) | (962.5 | ) | ||||||
| Repurchases of common shares, including excise tax | (104.5 | ) | (169.2 | ) | ||||||
| Debt issuance fees | (11.4 | ) | — | |||||||
| Activity related to equity-based plans | 12.9 | 15.1 | ||||||||
| Net cash (used in)/provided by financing activities | **(**779.1 | ) | 839.8 | |||||||
| Net change in cash, restricted cash, and equivalents | 496.3 | 2,398.0 | ||||||||
| Cash, restricted cash, and equivalents, beginning of period | 1,897.0 | 2,134.9 | ||||||||
| Cash, restricted cash, and equivalents, end of period | $ | 2,393.3 | $ | 4,532.9 | ||||||
| Reconciliation of cash, restricted cash, and equivalents | ||||||||||
| Cash and cash equivalents | $ | 1,563.8 | $ | 1,693.6 | ||||||
| Restricted cash | 49.1 | 41.0 | ||||||||
| Restricted cash and restricted cash equivalents included in funds held for clients | 780.4 | 2,798.3 | ||||||||
| Total cash, restricted cash, and equivalents | $ | 2,393.3 | $ | 4,532.9 |
See Notes to Consolidated Financial Statements.
PAY****CHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
February 28, 2025
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 an industry-leading human capital management ("HCM") company delivering a full suite of technology and advisory services in human resources ("HR"), employee benefit solutions, insurance and payroll processing for small- to medium-sized businesses and their employees across the United States (“U.S.”) and parts of Europe. The Company also has operations in India. Paychex, a Delaware corporation formed in 1979, reports as one segment.
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 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) necessary for a fair statement 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, 2024 (“fiscal 2024”). Operating results and cash flows for the nine months ended February 28, 2025 are not necessarily indicative of the results that may be expected for other interim periods or for the fiscal year ending May 31, 2025 (“fiscal 2025”).
Reclassifications: Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated earnings.
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 commitments for certain workers’ compensation insurance policies.
Accounts receivable, net of allowance for credit losses: Accounts receivable balances are shown on the Consolidated Balance Sheets net of the allowance for credit losses of $23.8 million and $21.3 million as of February 28, 2025 and May 31, 2024, respectively. These balances include trade receivables for services provided to clients and receivables purchased from the Company's clients under non-recourse arrangements. Trade receivables were $170.5 million and $141.3 million as of February 28, 2025 and May 31, 2024, respectively. Purchased receivables, at gross, were $1.1 billion and $939.6 million as of February 28, 2025 and May 31, 2024, respectively.
The Company is exposed to credit losses through the sale of services, payment of client obligations, and collection of purchased receivables. To mitigate this credit risk, the Company has multiple programs in place to assess and continuously monitor each client’s ability to pay for these solutions and support. Credit monitoring programs include, but are not limited to, new client credit reviews, establishing appropriate credit limits, monitoring of credit distressed clients, and early electronic wire and collection procedures. The Company also considers contract terms and conditions, client business type or strategy and may require collateralized asset support or prepayment to mitigate credit risk.
Accounts receivable are written off and charged against the allowance for credit losses when the Company has exhausted all collection efforts without success. The Company estimates its credit losses based on historical loss activity adjusted for current economic conditions and reasonable and supportable forecast factors, when applicable. The provision for the allowance for credit losses and accounts written off were not material for the three and nine months ended February 28, 2025 and February 29, 2024. No single client had a material impact on total accounts receivable as of February 28, 2025 and May 31, 2024 or service revenue and results of operations for the three and nine months ended February 28, 2025 and February 29, 2024.
Professional Employer Organization (“PEO”) unbilled receivables, net of advance collections: PEO 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 February 28, 2025 and May 31, 2024, advance collections were $0.6 million and $0.7 million, respectively.
PEO insurance reserves: As part of its PEO solution, the Company offers workers’ compensation insurance and health insurance coverage to clients for the benefit of client employees. Workers’ compensation insurance is primarily 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. These reserves include estimates of certain expenses associated with processing and settling claims. For fiscal 2025 and 2024, the Company has an aggregate maximum liability of $1.0 million for claims exceeding $1.0 million, and once met, the maximum individual claims liability is $1.0 million.
With respect to PEO health insurance coverage, the Company offers various health insurance plans that take the form of either fully insured guaranteed cost plans or fully insured insurance arrangements where the Company retains risk. A reserve for insurance arrangements where the Company retains risk is established to provide for the payment of claims in accordance with the Company’s service contract with the carrier. The claims reserve includes 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 $0.5 million under its policies covering both fiscal 2025 and fiscal 2024.
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 claims. Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and accepted actuarial methods and assumptions. These reserves are 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: The Company has issued stock-based awards to employees and members of its Board of Directors (the “Board”) consisting of stock options, restricted stock units, and restricted stock awards. The Company accounts for all stock-based awards to employees and members of the Board 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 $17.6 million and $50.5 million for the three and nine months ended February 28, 2025, and $14.4 million and $45.1 million for the three and nine months ended February 29, 2024.
Derivative Instruments: Interest rate swaption contracts (“Swaption Contracts”), qualifying as cash flow hedges of interest payments, are used to hedge a portion of the Company's exposure to fluctuations in benchmark interest rates related to the anticipated issuances of long-term fixed rate debt. At inception, a derivative asset is recorded for the fair value of the premiums paid. Changes to the fair value of these cash flow hedges is temporarily reported in Accumulated other comprehensive loss on the Company’s Consolidated Balance Sheets and reclassifed to earnings as the hedged item affects earnings. Refer to Note H Supplemental Information for additional information on the Company's Swaption Contracts.
We formally assess, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure.
Recently adopted accounting pronouncements: There were no recently adopted accounting pronouncements during the nine months ended February 28, 2025 that had a material impact on the Company's consolidated financial statements or disclosures.
Recently issued accounting pronouncements: In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU expands public business entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. The requirements are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and are required to be applied retrospectively. This ASU is applicable to the Company’s Annual Report on Form 10-K for fiscal 2025, and subsequent interim periods, with early application permitted. The requirements of this ASU are disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its reportable segment disclosures.
In December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. This ASU is effective for annual periods
beginning after December 15, 2024, and is applicable to the Company’s fiscal year beginning June 1, 2025, with early application permitted. The transition method is prospective with the retrospective method permitted. The requirements of this ASU are disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its income tax disclosures.
In November 2024, the FASB issued ASU No. 2024-03 “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” ASU 2024-03 as amended by subsequent ASUs on the topic requires public business entities to disclose, for interim and annual reporting periods, additional information about certain income statement expense categories. The requirements are effective for annual reporting periods beginning after December 15, 2026, and for interim periods within annual reporting periods beginning after December 15, 2027. Entities are permitted to apply either the prospective or retrospective transition methods. This ASU is applicable to the Company’s Annual Report on Form 10-K for the fiscal year ending May 31, 2028, and subsequent interim periods, with early application permitted. The requirements of this ASU are disclosure-related and will not have an impact on the Company’s financial condition, results of operations, or cash flows. The Company is currently evaluating the impact of adopting this ASU on its disclosures.
Note B: Service Revenue
Service revenue is primarily attributable to fees for providing services to the Company’s clients and is recognized when control of the contracted services is transferred to its clients, in an amount that reflects the consideration it expects to receive in exchange for such services. Insurance Solutions revenue is commissions earned on premiums collected and remitted to insurance carriers. The Company’s contracts generally do not contain specified contract periods and may be terminated by either party with a 30-day notice of termination. Sales and other applicable non-payroll related taxes are excluded from service revenue.
Based upon similar operational and economic characteristics, the Company’s service revenue is disaggregated by Management Solutions and PEO and Insurance Solutions as reported in the Company’s Consolidated Statements of Income and Comprehensive Income. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
Management Solutions Revenue
Management Solutions revenue is primarily derived from the Company’s integrated HCM services and HR solutions. Clients can select services on an á la carte basis or as part of various product bundles. The Company’s offerings often leverage the information gathered in its base payroll processing service, allowing it to provide comprehensive services covering the HCM spectrum. Management Solutions revenue is generally recognized over time as services are performed and the client simultaneously receives and controls the benefits from these services.
Revenue earned from delivery service for the distribution of certain client payroll checks and reports is also included in Management Solutions revenue in the Company’s Consolidated Statements of Income and Comprehensive Income. Delivery service revenue is recognized at a point in time following the delivery of payroll checks, reports, quarter-end packages, and tax returns to the Company’s clients.
PEO and Insurance Solutions Revenue
PEO solutions are sold through the Company’s registered and licensed subsidiaries and offer businesses HCM and HR solutions. The Company serves as a co-employer of its clients’ employees, offers health insurance coverage to client employees, and assumes the risks and rewards of workers’ compensation insurance and certain health insurance offerings. PEO Solutions revenue is recognized over time as the services are performed and the client simultaneously receives and controls the benefits from these services. PEO Solutions revenue is reported net of certain pass-through costs billed and incurred, which include payroll wages, payroll taxes, including federal and state unemployment insurance, and health insurance premiums on guaranteed cost benefit plans. For workers’ compensation and health insurance plans where the Company retains risk, revenues and costs are recorded on a gross basis.
PEO pass-through costs netted within the PEO and Insurance Solutions revenue were as follows:
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Payroll wages and payroll taxes | $ | 7,783.0 | $ | 7,317.0 | $ | 21,836.6 | $ | 20,378.5 | ||||||||||||
| State unemployment insurance (included in payroll wages and payroll taxes) | $ | 81.5 | $ | 78.0 | $ | 127.9 | $ | 116.3 | ||||||||||||
| Guaranteed cost benefit plans | $ | 172.6 | $ | 165.6 | $ | 505.9 | $ | 499.4 |
Insurance solutions are sold through the Company’s licensed insurance agency, Paychex Insurance Agency, Inc., which provides insurance through a variety of carriers, allowing companies to expand their employee benefit offerings at an affordable cost. Insurance offerings include property and casualty coverage such as workers’ compensation, business-owner policies, commercial auto, cyber security, and health and benefits coverage, including health, dental, vision, life and disability. Insurance Solutions revenue reflects commissions earned on remitted insurance services premiums billed and is recognized over time as services are performed and the client simultaneously receives and controls the benefits from these services.
Contract Balances
The timing of revenue recognition for Management Solutions and PEO and Insurance Solutions is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.
Payments received for certain of the Company’s service offerings for set-up fees are considered a material right. Therefore, the Company defers revenue associated with these performance obligations, which exceed one year, and subsequently recognizes them as future services are provided, over approximately three to four years.
Changes in deferred revenue related to material rights that exceed one year were as follows:
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Balance, beginning of period | $ | 74.0 | $ | 69.8 | $ | 74.9 | $ | 62.0 | ||||||||||||
| Deferral of revenue | 11.5 | 12.4 | 29.1 | 36.3 | ||||||||||||||||
| Recognition of unearned revenue | (9.9 | ) | (8.9 | ) | (28.4 | ) | (25.0 | ) | ||||||||||||
| Balance, end of period | $ | 75.6 | $ | 73.3 | $ | 75.6 | $ | 73.3 |
Deferred revenue related to material rights is reported in the deferred revenue and other long-term liabilities line items on the Company’s Consolidated Balance Sheets. As of February 28, 2025, the Company expects to recognize deferred revenue related to these material rights for the remainder of fiscal 2025 and subsequent fiscal years as follows:
| In millions | Estimated | ||||
| Year ending May 31, | recognition of unearned revenue | ||||
| 2025 | $ | 9.4 | |||
| 2026 | 32.1 | ||||
| Thereafter | 34.1 | ||||
| Total recognition of unearned revenue | $ | 75.6 |
Assets Recognized from the Costs to Obtain and Fulfill Contracts
The Company recognizes an asset for the incremental costs of obtaining a contract with a client if it is expected that the economic benefit and amortization period will be longer than one year. The Company also recognizes an asset for the costs to fulfill a contract with a client if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered.
Deferred costs to obtain and fulfill contracts are reported in the prepaid expenses and other current assets and long-term deferred costs line items on the Company’s Consolidated Balance Sheets. Amortization expense related to costs to obtain and fulfill a contract are included in cost of service revenue and selling, general and administrative expenses in the Company’s Consolidated Statements of Income and Comprehensive Income and recognized over the expected economic benefit period.
The Company regularly reviews its deferred costs for potential impairment and did not recognize an impairment loss during the nine months ended February 28, 2025 or February 29, 2024.
Changes in deferred costs to obtain and fulfill contracts were as follows:
| Costs to obtain contracts: | ||||||||||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Balance, beginning of period | $ | 600.7 | $ | 605.0 | $ | 609.4 | $ | 597.5 | ||||||||||||
| Capitalization of costs | 59.0 | 53.7 | 154.2 | 163.1 | ||||||||||||||||
| Amortization | (52.6 | ) | (51.6 | ) | (156.5 | ) | (153.5 | ) | ||||||||||||
| Balance, end of period | $ | 607.1 | $ | 607.1 | $ | 607.1 | $ | 607.1 |
| Costs to fulfill contracts: | ||||||||||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Balance, beginning of period | $ | 75.8 | $ | 75.8 | $ | 76.6 | $ | 75.3 | ||||||||||||
| Capitalization of costs | 6.9 | 7.5 | 19.5 | 21.2 | ||||||||||||||||
| Amortization | (6.7 | ) | (6.7 | ) | (20.1 | ) | (19.9 | ) | ||||||||||||
| Balance, end of period | $ | 76.0 | $ | 76.6 | $ | 76.0 | $ | 76.6 |
Note C: Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions, except per share amounts | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||
| Net income | $ | 519.3 | $ | 498.6 | $ | 1,360.1 | $ | 1,310.5 | ||||||||||||
| Weighted-average common shares outstanding | 360.1 | 359.9 | 360.1 | 360.4 | ||||||||||||||||
| Basic earnings per share | $ | 1.44 | $ | 1.39 | $ | 3.78 | $ | 3.64 | ||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||
| Net income | $ | 519.3 | $ | 498.6 | $ | 1,360.1 | $ | 1,310.5 | ||||||||||||
| Weighted-average common shares outstanding | 360.1 | 359.9 | 360.1 | 360.4 | ||||||||||||||||
| Dilutive effect of common share equivalents | 1.9 | 1.8 | 1.8 | 1.8 | ||||||||||||||||
| Weighted-average common shares outstanding, assuming dilution | 362.0 | 361.7 | 361.9 | 362.2 | ||||||||||||||||
| Diluted earnings per share | $ | 1.43 | $ | 1.38 | $ | 3.76 | $ | 3.62 | ||||||||||||
| Weighted-average anti-dilutive common share equivalents | 0.0 | 0.6 | 0.3 | 0.6 |
Weighted-average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.
Note D: Business Combinations
Effective July 31, 2023, substantially all of the net assets of Alterna Capital Solutions LLC (“Alterna”), were acquired by a wholly owned subsidiary of the Company. Alterna purchases outstanding accounts receivable of their customers under non-recourse arrangements. This acquisition allows the Company to increase and diversify its portfolio of solutions and support serving small- to medium-sized businesses. The acquisition consideration was comprised of a base purchase price of $95.1 million plus immediate settlement of debt totaling $128.9 million, net of $15.7 million in cash and restricted cash acquired. Accounts receivable balances acquired, net of allowance for credit losses, and less amounts due to clients related to funding arrangements, totaled $146.1 million. Management determined that intangible assets related to the client list were $18.9 million to be amortized utilizing an accelerated method of amortization over a weighted average of 8 years. Goodwill in the amount of $46.7 million was recorded as a result of the acquisition, which is tax-deductible. The Company finalized the purchase price allocation for the acquisition of Alterna as of November 30, 2023. The financial results of Alterna are included in the Company’s consolidated financial statements from its respective date of acquisition. This acquisition was not material to the Company’s results of operations, financial position, or cash flows.
On January 7, 2025, the Company entered into a definitive agreement to acquire Paycor HCM, Inc. ("Paycor") in an all-cash transaction for $22.50 per eligible share, without interest (the "Acquisition"). The Company expects the Acquisition will enhance its capabilities up market, broaden its suite of AI-driven HR Technology capabilities, and provide new channels for sustained long-term growth. The waiting period with respect to the consummation of the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired on February 21, 2025. The expiration of the waiting period satisfies one of the major conditions to the closing of the Acquisition, which remains subject to other customary closing conditions. The Company currently has a bridge commitment letter ("Bridge Loan Commitment") in place and expects to have long-term fixed financing in place prior to closing. The Acquisition is expected to close in April 2025, subject to customary closing conditions.
Note E: Other (Expense)/Income, Net
Other (expense)/income, net, consisted of the following items:
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Interest income on corporate investments | $ | 16.6 | $ | 19.3 | $ | 52.3 | $ | 61.1 | ||||||||||||
| Interest expense | (22.6 | ) | (9.9 | ) | (41.7 | ) | (27.8 | ) | ||||||||||||
| Other | (0.0 | ) | (0.0 | ) | (0.6 | ) | 0.6 | |||||||||||||
| Other (expense)/income, net | $ | **(**6.0 | ) | $ | 9.4 | $ | 10.0 | $ | 33.9 |
During the three months ended February 28, 2025, the Company entered into a Bridge Loan Commitment and executed three Swaption Contracts in connection with its pending acquisition of Paycor. This resulted in an additional $13.2 million of expense related to the amortization of debt issuance costs on the Bridge Loan Commitment and the excluded component of the initial fair value of the Swaption Contracts. These amounts are included in interest expense in the above table and in other (expense)/income, net on the Consolidated Statements of Income and Comprehensive Income. Refer to Note G Fair Value Measurements and Note H Supplemental Information for further discussion of the Bridge Loan Commitment and Swaption Contracts.
Note F: Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments were as follows:
| February 28, 2025 | ||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||||||
| In millions | cost | gains | losses | value | ||||||||||||||||
| Type of issue: | ||||||||||||||||||||
| Funds held for clients' money market securities and other restricted cash equivalents | $ | 780.4 | $ | — | $ | — | $ | 780.4 | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | 166.9 | 1.1 | (0.1 | ) | 167.9 | |||||||||||||||
| Corporate bonds | 1,358.3 | 7.2 | (8.9 | ) | 1,356.6 | |||||||||||||||
| Municipal bonds | 1,043.1 | 0.5 | (50.7 | ) | 992.9 | |||||||||||||||
| U.S. government agency and treasury securities | 904.7 | 2.4 | (19.4 | ) | 887.7 | |||||||||||||||
| Total AFS securities | 3,473.0 | 11.2 | (79.1 | ) | 3,405.1 | |||||||||||||||
| Other | 33.0 | 3.7 | (1.1 | ) | 35.6 | |||||||||||||||
| Total funds held for clients and corporate investments | $ | 4,286.4 | $ | 14.9 | $ | **(**80.2 | ) | $ | 4,221.1 |
| May 31, 2024 | ||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||||||
| In millions | cost | gains | losses | value | ||||||||||||||||
| Type of issue: | ||||||||||||||||||||
| Funds held for clients' money market securities and other restricted cash equivalents | $ | 380.3 | $ | — | $ | — | $ | 380.3 | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | 135.7 | 0.1 | (1.1 | ) | 134.7 | |||||||||||||||
| Corporate bonds | 1,400.3 | 1.3 | (32.8 | ) | 1,368.8 | |||||||||||||||
| Municipal bonds | 1,060.1 | 0.2 | (86.9 | ) | 973.4 | |||||||||||||||
| U.S. government agency and treasury securities | 896.0 | 0.1 | (43.4 | ) | 852.7 | |||||||||||||||
| Total AFS securities | 3,492.1 | 1.7 | (164.2 | ) | 3,329.6 | |||||||||||||||
| Other | 32.3 | 3.2 | (1.6 | ) | 33.9 | |||||||||||||||
| Total funds held for clients and corporate investments | $ | 3,904.7 | $ | 4.9 | $ | **(**165.8 | ) | $ | 3,743.8 |
Included in funds held for clients' money market securities and other restricted cash equivalents as of February 28, 2025 were bank demand deposit accounts, money market funds, and U.S. government agency and treasury securities.
Included in asset-backed securities as of February 28, 2025 were investment-grade securities primarily collateralized by fixed-rate auto loans and credit card receivables and all have credit ratings of AAA. The primary risk associated with these securities is the collection of the underlying receivables. Collateral on these asset-backed securities has performed as expected through February 28, 2025.
Included in corporate bonds as of February 28, 2025 were investment-grade securities covering a wide range of issuers, industries, and sectors primarily carrying credit ratings of A or better and having maturities ranging from March 6, 2025 through July 23, 2030.
Included in municipal bonds as of February 28, 2025 were general obligation bonds and revenue bonds primarily carrying credit ratings of AA or better and have maturities ranging from March 1, 2025 through August 1, 2032.
A substantial portion of the Company's portfolios are invested in high credit quality securities with ratings of AA or higher, and A-1/P-1 ratings on short-term securities.
The classification of funds held for clients and corporate investments on the Consolidated Balance Sheets was as follows:
| February 28, | May 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Funds held for clients | $ | 4,183.9 | $ | 3,706.2 | ||||||
| Corporate investments | 37.2 | 33.9 | ||||||||
| Long-term corporate investments | — | 3.7 | ||||||||
| Total funds held for clients and corporate investments | $ | 4,221.1 | $ | 3,743.8 |
Funds held for clients’ money market securities and other restricted cash equivalents is collected from clients before due dates for payroll tax administration services and employee payment services and is invested until remitted to the applicable tax or regulatory agencies or client employees. Based upon the Company’s intent and its contractual obligation to clients, these funds are considered restricted until they are remitted to fund these client obligations.
The Company’s AFS securities reflected net unrealized losses of $67.9 million and $162.5 million as of February 28, 2025 and May 31, 2024, respectively. Included in net unrealized losses as of February 28, 2025 and May 31, 2024, were 658 and 957 AFS securities in an unrealized loss position, representing approximately 68% and 95% of the total securities held, respectively.
AFS securities in an unrealized loss position for which a credit loss has not been recognized were as follows:
| February 28, 2025 | ||||||||||||||||||||||||||||||
| Securities in an unrealized loss position for less than twelve months | Securities in an unrealized loss position for more than twelve months | Total | ||||||||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||||||||
| unrealized | Fair | unrealized | Fair | unrealized | Fair | |||||||||||||||||||||||||
| In millions | losses | value | losses | value | losses | value | ||||||||||||||||||||||||
| Type of issue: | ||||||||||||||||||||||||||||||
| Asset-backed securities | $ | (0.0 | ) | $ | 3.0 | $ | (0.1 | ) | $ | 6.0 | $ | (0.1 | ) | $ | 9.0 | |||||||||||||||
| Corporate bonds | (0.6 | ) | 249.2 | (8.3 | ) | 280.3 | (8.9 | ) | 529.5 | |||||||||||||||||||||
| Municipal bonds | (1.7 | ) | 29.5 | (49.0 | ) | 922.3 | (50.7 | ) | 951.8 | |||||||||||||||||||||
| U.S. government agency and treasury securities | (0.4 | ) | 78.4 | (19.0 | ) | 529.5 | (19.4 | ) | 607.9 | |||||||||||||||||||||
| Total | $ | **(**2.7 | ) | $ | 360.1 | $ | **(**76.4 | ) | $ | 1,738.1 | $ | **(**79.1 | ) | $ | 2,098.2 |
| May 31, 2024 | ||||||||||||||||||||||||||||||
| Securities in an unrealized loss position for less than twelve months | Securities in an unrealized loss position for more than twelve months | Total | ||||||||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||||||||
| unrealized | Fair | unrealized | Fair | unrealized | Fair | |||||||||||||||||||||||||
| In millions | losses | value | losses | value | losses | value | ||||||||||||||||||||||||
| Type of issue: | ||||||||||||||||||||||||||||||
| Asset-backed securities | $ | (0.4 | ) | $ | 77.4 | $ | (0.7 | ) | $ | 43.0 | $ | (1.1 | ) | $ | 120.4 | |||||||||||||||
| Corporate bonds | (8.4 | ) | 620.8 | (24.4 | ) | 647.8 | (32.8 | ) | 1,268.6 | |||||||||||||||||||||
| Municipal bonds | (8.0 | ) | 102.5 | (78.9 | ) | 864.7 | (86.9 | ) | 967.2 | |||||||||||||||||||||
| U.S. government agency and treasury securities | (6.2 | ) | 268.2 | (37.2 | ) | 547.2 | (43.4 | ) | 815.4 | |||||||||||||||||||||
| Total | $ | **(**23.0 | ) | $ | 1,068.9 | $ | **(**141.2 | ) | $ | 2,102.7 | $ | **(**164.2 | ) | $ | 3,171.6 |
The Company regularly reviews its investment portfolios to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. The Company believes the investments held as of February 28, 2025 that had gross unrealized losses of $79.1 million were not impaired due to credit risk or other valuation concerns, and the Company was not required to record a credit loss or an allowance for credit losses on its AFS securities. The Company believes 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 substantial portion of the securities in an unrealized loss position as of February 28, 2025 and as of May 31, 2024 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 impaired due to credit risk or other valuation concerns 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 on the sale of AFS 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 clients portfolio and corporate investments portfolio are included in interest on funds held for clients and other income, net, respectively.
Realized gains and losses from the sale of AFS securities were as follows:
| For the three months ended | For the nine months ended | |||||||||||||||||||
| February 28, | February 29, | February 28, | February 29, | |||||||||||||||||
| In millions | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||
| Gross realized gains | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | ||||||||||||
| Gross realized losses | (0.4 | ) | — | (0.4 | ) | (0.0 | ) | |||||||||||||
| Net realized (losses)/gains | $ | **(**0.4 | ) | $ | 0.0 | $ | **(**0.4 | ) | $ | **(**0.0 | ) |
The amortized cost and fair value of AFS securities that had stated maturities as of February 28, 2025 are shown below by expected maturity.
| February 28, 2025 | ||||||||||
| Amortized | Fair | |||||||||
| In millions | cost | value | ||||||||
| Maturity date: | ||||||||||
| Due in one year or less | $ | 460.1 | $ | 455.4 | ||||||
| Due after one year through three years | 1,921.7 | 1,868.4 | ||||||||
| Due after three years through five years | 879.5 | 867.9 | ||||||||
| Due after five years | 211.7 | 213.4 | ||||||||
| Total | $ | 3,473.0 | $ | 3,405.1 |
Variable rate demand notes (“VRDNs”), when held by the Company, 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:
o
quoted prices for similar, but not identical, instruments in active markets;
o
quoted prices for identical or similar instruments in markets that are not active;
o
inputs other than quoted prices that are observable for the instrument; or
o
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.
The carrying values of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, net of allowance for credit losses, PEO unbilled receivables, net of advance collections, accounts payable and short-term borrowings, when used by the Company, 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 AFS 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:
| February 28, 2025 | ||||||||||||||||||||
| Quoted | Significant | |||||||||||||||||||
| prices in | other | Significant | ||||||||||||||||||
| Carrying | active | observable | unobservable | |||||||||||||||||
| value | markets | inputs | inputs | |||||||||||||||||
| In millions | (Fair value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Restricted and unrestricted cash equivalents: | ||||||||||||||||||||
| Money market securities | $ | 58.1 | $ | 58.1 | $ | — | $ | — | ||||||||||||
| U.S. government agency and treasury securities | 888.6 | — | 888.6 | — | ||||||||||||||||
| Total restricted and unrestricted cash equivalents | $ | 946.7 | $ | 58.1 | $ | 888.6 | $ | — | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | $ | 167.9 | $ | — | $ | 167.9 | $ | — | ||||||||||||
| Corporate bonds | 1,356.6 | — | 1,356.6 | — | ||||||||||||||||
| Municipal bonds | 992.9 | — | 992.9 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 887.7 | — | 887.7 | — | ||||||||||||||||
| Total AFS securities | $ | 3,405.1 | $ | — | $ | 3,405.1 | $ | — | ||||||||||||
| Interest Rate Swaption Contracts | $ | 3.4 | $ | — | $ | 3.4 | $ | — | ||||||||||||
| Other | $ | 35.6 | $ | 35.6 | $ | — | $ | — | ||||||||||||
| Liabilities: | ||||||||||||||||||||
| Other long-term liabilities | $ | 35.6 | $ | 35.6 | $ | — | $ | — |
| May 31, 2024 | ||||||||||||||||||||
| Quoted | Significant | |||||||||||||||||||
| prices in | other | Significant | ||||||||||||||||||
| Carrying | active | observable | unobservable | |||||||||||||||||
| value | markets | inputs | inputs | |||||||||||||||||
| In millions | (Fair value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Restricted and unrestricted cash equivalents: | ||||||||||||||||||||
| Money market securities | $ | 31.4 | $ | 31.4 | $ | — | $ | — | ||||||||||||
| U.S. government agency and treasury securities | 386.4 | — | 386.4 | — | ||||||||||||||||
| Total restricted and unrestricted cash equivalents | $ | 417.8 | $ | 31.4 | $ | 386.4 | $ | — | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | $ | 134.7 | $ | — | $ | 134.7 | $ | — | ||||||||||||
| Corporate bonds | 1,368.8 | — | 1,368.8 | — | ||||||||||||||||
| Municipal bonds | 973.4 | — | 973.4 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 852.7 | — | 852.7 | — | ||||||||||||||||
| Total AFS securities | $ | 3,329.6 | $ | — | $ | 3,329.6 | $ | — | ||||||||||||
| Interest Rate Swaption Contracts | $ | — | — | — | — | |||||||||||||||
| Other | $ | 33.9 | $ | 33.9 | $ | — | $ | — | ||||||||||||
| Liabilities: | ||||||||||||||||||||
| Other long-term liabilities | $ | 33.9 | $ | 33.9 | $ | — | $ | — |
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 considered Level 1 investments as they are valued based on quoted market prices in active markets. Cash equivalents also include U.S. government agency and treasury securities with original maturities of 90 days or less which are considered Level 2 investments as they are valued based on similar, but not identical, instruments in active markets. AFS securities, including asset-backed securities, corporate bonds, municipal bonds, U.S. government agency securities, and VRDNs, when held by the Company, are included in Level 2 and are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company’s Level 2 AFS securities, the independent pricing service uses a variety of inputs, 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.
Swaption Contracts are considered a Level 2 asset as they are remeasured on a recurring basis using observable market inputs, such as forward curves, volatility levels, discount, and interest rates with gains and losses reported through other comprehensive income on the Consolidated Statements of Income and Comprehensive Income.
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 considered Level 1 investments as they are valued based on quoted market prices in active markets.
The Company’s long-term borrowings are accounted for on a historical cost basis. As of February 28, 2025 and May 31, 2024, the fair value of long-term borrowings, net of debt issuance costs was $398.2 million and $391.8 million for the Senior Notes, Series A, respectively, and $395.5 million and $386.0 million for the Senior Notes, Series B, respectively.
The Company’s long-term borrowings are not traded in active markets, and as a result, its fair values were estimated using a market approach employing Level 2 valuation inputs, including borrowing rates the Company believes are currently available based on loans with similar terms and maturities.
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: Supplemental Information
Property and equipment, net of accumulated depreciation: Depreciation expense was $30.3 million and $86.8 million for the three and nine months ended February 28, 2025, respectively, compared to $32.3 million and $94.7 million for the three and nine months ended February 29, 2024, respectively.
Goodwill and intangible assets, net of accumulated amortization: Amortization expense relating to intangible assets was $12.8 million and $37.0 million for the three and nine months ended February 28, 2025, respectively, compared to $12.5 million and $36.2 million for the three and nine months ended February 29, 2024, respectively. Goodwill and intangible assets were recorded during the nine months ended February 29, 2024 related to the acquisition of Alterna. The goodwill related to this acquisition is included in the Purchased Receivable reporting unit for goodwill impairment testing. Refer to Note D Business Combinations for additional information regarding this acquisition and the impact it had on goodwill and intangible assets. The Company did not recognize an impairment loss as it relates to its goodwill or intangible assets during the nine months ended February 28, 2025 or February 29, 2024.
Short-term financing: Outstanding borrowings on the Company’s credit facilities had a weighted-average interest rate of 4.11% and 6.14% as of February 28, 2025 and May 31, 2024, respectively. The unused amount available under these credit facilities as of February 28, 2025 was approximately $2.0 billion.
The credit facilities contain various financial and operational covenants that are usual and customary for such arrangements. The Company was in compliance with all of these covenants as of February 28, 2025.
Letters of credit: The Company had irrevocable standby letters of credit available totaling $168.7 million and $168.5 million as of February 28, 2025 and May 31, 2024, respectively, primarily to secure commitments for certain insurance policies. The letters of credit expire at various dates between March 03, 2025 and February 28, 2026. No amounts were outstanding on these letters of credit as of, or during the nine months ended February 28, 2025 and February 29, 2024, or as of May 31, 2024.
Long-term debt: There have been no material changes to the Company's long-term debt agreement or balances subsequent to May 31, 2024. The Company’s long-term debt agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants that are usual and customary for such arrangements. The Company was in compliance with all of these covenants as of February 28, 2025.
Bridge Loan Commitment: On January 7, 2025, the Company and a Company subsidiary, Paychex of New York, LLC, entered into a Bridge Loan Commitment with JPMorgan Chase Bank, N.A. (“JPM”), pursuant to which JPM committed to provide a 364-day senior unsecured credit facility of up to $3.5 billion for the acquisition of Paycor, including related fees and expenses. The Company incurred $11.4 million in debt financing fees, including structuring and commitment fees, which were capitalized as Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheets and are recognized as interest expense on a straight-line basis until the expected issuance date for permanent financing. There were no borrowings under the Bridge Loan Commitment as of February 28, 2025 or for the period from January 7, 2025 to February 28, 2025.
The Company and certain subsidiaries will guarantee any borrowings that are made under the Bridge Loan Commitment. The Bridge Loan Commitment contains various financial and operational covenants that would have been applicable to any borrowings under the Bridge Loan Commitment and that are usual and customary for such arrangements. If such covenants were in effect, the Company would have been in compliance with all of these covenants as of February 28, 2025.
Interest Rate Swaption Contracts: On January 31, 2025, the Company executed three Swaption Contracts with JPM. The Swaption Contracts qualify as cash flow hedges, have an aggregate notional amount of $3.0 billion, and are being utilized to manage exposure to fluctuations in benchmark interest rates associated with the anticipated issuance of long-term fixed rate debt to fund the planned acquisition of Paycor. At inception, the Company recorded Swaption Contract assets related to paid premiums of $19.2 million. The fair value of the Swaption Contract assets is classified as Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheets. Refer to Note G: Fair Value Measurements for additional information on the Company's Swaption Contracts.
Note I: Commitments and Contingencies
Other commitments: The Company had outstanding commitments under existing workers’ compensation insurance agreements and other legally binding contractual arrangements. The Company also enters into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase capital assets of approximately $6.1 million as of February 28, 2025 and $2.9 million as of May 31, 2024.
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. The Company has also entered into indemnification agreements with its officers, directors, and fiduciaries of certain of its retirement plans, 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.
The Company currently self-insures the deductible portion of various insured exposures under certain corporate employee and PEO employee health and medical 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 were not material as of February 28, 2025. The Company also maintains insurance, 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, as well as capacity for deductibles and self-insured retentions through its captive insurance company.
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, employment-related claims, tax claims, statutory, and other matters.
The Company’s management currently believes that resolution of any 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 results of operations in the period in which any such effects are recorded.
Note J: Income Taxes
The Company’s effective income tax rate was 24.3% and 23.9% for the three and nine months ended February 28, 2025, respectively, compared to 24.4% and 24.1% for the three and nine months ended February 29, 2024, respectively. All periods were impacted by the recognition of excess tax benefits related to employee stock-based compensation payments.
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