filings.toolsItem 1. Financial Statements
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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 | ||||||||||
| August 31, | August 31, | |||||||||
| 2025 | 2024 | |||||||||
| Revenue: | ||||||||||
| Management Solutions | $ | 1,163.3 | $ | 961.7 | ||||||
| PEO and Insurance Solutions | 329.1 | 319.3 | ||||||||
| Total service revenue | 1,492.4 | 1,281.0 | ||||||||
| Interest on funds held for clients | 47.6 | 37.5 | ||||||||
| Total revenue | 1,540.0 | 1,318.5 | ||||||||
| Expenses: | ||||||||||
| Cost of service revenue | 413.8 | 380.0 | ||||||||
| Selling, general and administrative expenses | 584.3 | 391.8 | ||||||||
| Total expenses | 998.1 | 771.8 | ||||||||
| Operating income | 541.9 | 546.7 | ||||||||
| Interest expense | (68.2 | ) | (9.6 | ) | ||||||
| Other income, net | 23.8 | 20.0 | ||||||||
| Income before income taxes | 497.5 | 557.1 | ||||||||
| Income taxes | 113.7 | 129.7 | ||||||||
| Net income | $ | 383.8 | $ | 427.4 | ||||||
| Other comprehensive income, net of tax | 28.7 | 64.8 | ||||||||
| Comprehensive income | $ | 412.5 | $ | 492.2 | ||||||
| Basic earnings per share | $ | 1.07 | $ | 1.19 | ||||||
| Diluted earnings per share | $ | 1.06 | $ | 1.18 | ||||||
| Weighted-average common shares outstanding | 360.1 | 360.1 | ||||||||
| Weighted-average common shares outstanding, assuming dilution | 361.9 | 361.9 |
See Notes to Consolidated Financial Statements.
PA****YCHEX, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In millions, except per share amounts
| August 31, | May 31, | |||||||||
| 2025 | 2025 | |||||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 809.0 | $ | 1,628.6 | ||||||
| Restricted cash | 50.4 | 47.9 | ||||||||
| Corporate investments | 861.9 | 34.5 | ||||||||
| Interest receivable | 34.0 | 27.9 | ||||||||
| Accounts receivable, net of allowance for credit losses | 1,359.3 | 1,330.5 | ||||||||
| PEO unbilled receivables, net of advance collections | 609.4 | 616.6 | ||||||||
| Prepaid income taxes | 9.2 | 38.9 | ||||||||
| Prepaid expenses and other current assets | 379.4 | 378.3 | ||||||||
| Current assets before funds held for clients | 4,112.6 | 4,103.2 | ||||||||
| Funds held for clients | 4,927.4 | 4,813.3 | ||||||||
| Total current assets | 9,040.0 | 8,916.5 | ||||||||
| Property and equipment, net of accumulated depreciation | 525.4 | 511.5 | ||||||||
| Operating lease right-of-use assets, net of accumulated amortization | 64.2 | 63.8 | ||||||||
| Intangible assets, net of accumulated amortization | 1,886.8 | 1,947.3 | ||||||||
| Goodwill | 4,523.6 | 4,514.1 | ||||||||
| Long-term deferred costs | 489.0 | 482.4 | ||||||||
| Other long-term assets | 134.0 | 128.5 | ||||||||
| Total assets | $ | 16,663.0 | $ | 16,564.1 | ||||||
| Liabilities | ||||||||||
| Accounts payable | $ | 120.6 | $ | 129.8 | ||||||
| Accrued corporate compensation and related items | 151.7 | 183.9 | ||||||||
| Accrued worksite employee compensation and related items | 779.7 | 735.8 | ||||||||
| Short-term borrowings | 18.5 | 18.6 | ||||||||
| Long-term debt, net, current portion | 399.9 | 399.8 | ||||||||
| Deferred revenue | 68.8 | 69.4 | ||||||||
| Other current liabilities | 641.1 | 552.0 | ||||||||
| Current liabilities before client fund obligations | 2,180.3 | 2,089.3 | ||||||||
| Client fund obligations | 4,948.4 | 4,867.0 | ||||||||
| Total current liabilities | 7,128.7 | 6,956.3 | ||||||||
| Accrued income taxes | 124.9 | 119.0 | ||||||||
| Deferred income taxes | 518.0 | 444.7 | ||||||||
| Long-term borrowings, net of debt issuance costs | 4,550.3 | 4,548.4 | ||||||||
| Operating lease liabilities | 52.9 | 55.5 | ||||||||
| Other long-term liabilities | 317.6 | 312.2 | ||||||||
| Total liabilities | 12,692.4 | 12,436.1 | ||||||||
| Commitments and contingencies — Note I | ||||||||||
| Stockholders’ equity | ||||||||||
| Common stock, $0.01 par value; Authorized: 600.0 shares; Issued and outstanding: 359.9 shares as of August 31, 2025 and 360.5 shares as of May 31, 2025 | 3.6 | 3.6 | ||||||||
| Additional paid-in capital | 1,921.8 | 1,901.1 | ||||||||
| Retained earnings | 2,070.2 | 2,277.0 | ||||||||
| Accumulated other comprehensive loss | (25.0 | ) | (53.7 | ) | ||||||
| Total stockholders’ equity | 3,970.6 | 4,128.0 | ||||||||
| Total liabilities and stockholders’ equity | $ | 16,663.0 | $ | 16,564.1 |
See Notes to Consolidated Financial Statements.
P****AYCHEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
In millions, except per share amounts
| For the three months ended August 31, 2025 | |||||||||||||||||||||||||||||||||||||||
| Common stock | Accumulated other comprehensive loss | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Net unrealized loss on AFS securities | Foreign currency translation | Total accumulated comprehensive loss | Total | ||||||||||||||||||||||||||||||||
| Balance as of May 31, 2025 | 360.5 | $ | 3.6 | $ | 1,901.1 | $ | 2,277.0 | $ | **(**38.5 | ) | $ | **(**15.2 | ) | $ | **(**53.7 | ) | $ | 4,128.0 | |||||||||||||||||||||
| Net income | — | — | — | 383.8 | — | — | — | 383.8 | |||||||||||||||||||||||||||||||
| Unrealized gains on securities, net of $8.4 million in tax expense | — | — | — | — | 24.3 | — | 24.3 | 24.3 | |||||||||||||||||||||||||||||||
| Reclassification adjustment for realized losses on securities to earnings, net of $0.0 million in tax benefit (1) | — | — | — | — | 0.0 | — | 0.0 | 0.0 | |||||||||||||||||||||||||||||||
| Cash dividends declared ($1.08 per share) | — | — | — | (389.0 | ) | — | — | — | (389.0 | ) | |||||||||||||||||||||||||||||
| Repurchases of common shares (2) | (1.1 | ) | (0.0 | ) | (5.3 | ) | (154.8 | ) | — | — | — | (160.1 | ) | ||||||||||||||||||||||||||
| Stock-based compensation costs | — | — | 26.8 | — | — | — | — | 26.8 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 4.4 | 4.4 | 4.4 | |||||||||||||||||||||||||||||||
| Activity related to equity-based plans | 0.5 | 0.0 | (0.8 | ) | (46.8 | ) | — | — | — | (47.6 | ) | ||||||||||||||||||||||||||||
| Balance as of August 31, 2025 | 359.9 | $ | 3.6 | $ | 1,921.8 | $ | 2,070.2 | $ | **(**14.2 | ) | $ | **(**10.8 | ) | $ | **(**25.0 | ) | $ | 3,970.6 |
| For the three months ended August 31, 2024 | |||||||||||||||||||||||||||||||||||||||
| Common stock | Accumulated other comprehensive loss | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional paid-in capital | Retained earnings | Net unrealized loss on AFS securities | 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 | — | — | — | 427.4 | — | — | — | 427.4 | |||||||||||||||||||||||||||||||
| Unrealized gains on securities, net of $20.2 million in tax expense | — | — | — | — | 61.8 | — | 61.8 | 61.8 | |||||||||||||||||||||||||||||||
| 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 ($0.98 per share) | — | — | — | (352.8 | ) | — | — | — | (352.8 | ) | |||||||||||||||||||||||||||||
| Repurchases of common shares (2) | (0.8 | ) | (0.0 | ) | (4.0 | ) | (100.0 | ) | — | — | — | (104.0 | ) | ||||||||||||||||||||||||||
| Stock-based compensation costs | — | — | 16.5 | — | — | — | — | 16.5 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 3.0 | 3.0 | 3.0 | |||||||||||||||||||||||||||||||
| Activity related to equity-based plans | 0.6 | 0.0 | 19.7 | (22.2 | ) | — | — | — | (2.5 | ) | |||||||||||||||||||||||||||||
| Balance as of August 31, 2024 | 359.9 | $ | 3.6 | $ | 1,761.7 | $ | 2,165.4 | $ | **(**58.9 | ) | $ | **(**21.4 | ) | $ | **(**80.3 | ) | $ | 3,850.4 |
(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 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 purpose of this program is to manage common stock dilution. All shares of common stock repurchased were retired.
See Notes to Consolidated Financial Statements.
P****AYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In millions
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| 2025 | 2024 | |||||||||
| Operating activities | ||||||||||
| Net income | $ | 383.8 | $ | 427.4 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 109.3 | 39.0 | ||||||||
| Amortization of premiums and discounts on AFS securities and long-term debt, net | (2.1 | ) | (2.8 | ) | ||||||
| Amortization of deferred contract costs | 60.4 | 58.5 | ||||||||
| Stock-based compensation costs | 26.8 | 16.5 | ||||||||
| Provision on/(benefit from) deferred income taxes | 66.0 | (11.0 | ) | |||||||
| Provision for credit losses | 7.7 | 7.5 | ||||||||
| Net realized losses/(gains) on sales of AFS securities | 0.0 | (0.0 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||
| Interest receivable | (6.1 | ) | 0.4 | |||||||
| Accounts receivable and PEO unbilled receivables, net | (18.9 | ) | (36.4 | ) | ||||||
| Prepaid expenses and other current assets | 29.5 | 26.3 | ||||||||
| Accounts payable and other current liabilities | 124.9 | 65.6 | ||||||||
| Deferred costs | (68.5 | ) | (51.6 | ) | ||||||
| Net change in other long-term assets and liabilities | 6.3 | 8.4 | ||||||||
| Net change in operating lease right-of-use assets and liabilities | (0.7 | ) | (1.7 | ) | ||||||
| Net cash provided by operating activities | 718.4 | 546.1 | ||||||||
| Investing activities | ||||||||||
| Purchases of AFS securities | (3,731.9 | ) | (1,029.7 | ) | ||||||
| Proceeds from sales and maturities of AFS securities | 2,547.3 | 1,013.0 | ||||||||
| Net purchases of short-term accounts receivable | (47.0 | ) | (45.1 | ) | ||||||
| Purchases of property and equipment | (55.9 | ) | (35.6 | ) | ||||||
| Acquisition of businesses, net of cash acquired | (0.2 | ) | — | |||||||
| Purchases of other assets, net | (15.0 | ) | (12.6 | ) | ||||||
| Net cash used in investing activities | **(**1,302.7 | ) | **(**110.0 | ) | ||||||
| Financing activities | ||||||||||
| Net change in client fund obligations | 81.4 | (25.1 | ) | |||||||
| Dividends paid | (389.1 | ) | (353.4 | ) | ||||||
| Repurchases of common shares | (160.1 | ) | (104.0 | ) | ||||||
| Activity related to equity-based plans | (47.6 | ) | (2.5 | ) | ||||||
| Net cash used in financing activities | **(**515.4 | ) | **(**485.0 | ) | ||||||
| Net change in cash, restricted cash, and equivalents | **(**1,099.7 | ) | **(**48.9 | ) | ||||||
| Cash, restricted cash, and equivalents, beginning of period | 2,734.3 | 1,897.0 | ||||||||
| Cash, restricted cash, and equivalents, end of period | $ | 1,634.6 | $ | 1,848.1 | ||||||
| Reconciliation of cash, restricted cash, and equivalents | ||||||||||
| Cash and cash equivalents | $ | 809.0 | $ | 1,459.6 | ||||||
| Restricted cash | 50.4 | 54.9 | ||||||||
| Restricted cash and restricted cash equivalents included in funds held for clients | 775.2 | 333.6 | ||||||||
| Total cash, restricted cash, and equivalents | $ | 1,634.6 | $ | 1,848.1 |
See Notes to Consolidated Financial Statements.
PAY****CHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 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 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. Refer to Note K Segment Reporting for additional information on the Company's segment results.
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, 2025 (“fiscal 2025”). Operating results and cash flows for the three months ended August 31, 2025 are not necessarily indicative of the results that may be expected for other interim periods or for the fiscal year ending May 31, 2026 (“fiscal 2026”).
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 as follows:
| August 31, | May 31, | |||||||||
| In millions | 2025 | 2025 | ||||||||
| Trade receivables | $ | 222.1 | $ | 205.4 | ||||||
| Purchased receivables | 1,161.6 | 1,151.1 | ||||||||
| Total accounts receivable, gross | 1,383.7 | 1,356.5 | ||||||||
| Less: Allowance for credit losses | 24.4 | 26.0 | ||||||||
| Accounts receivable, net of allowance for credit losses | $ | 1,359.3 | $ | 1,330.5 |
Trade receivables are for services provided to clients in the normal course of business and purchased receivables are acquired from the Company's clients under non-recourse arrangements.
The Company is exposed to credit losses through the sale of its solutions and support 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 services. 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 allowance for credit losses based on historical loss activity adjusted for current economic conditions and reasonable and supportable forecast factors, when applicable.
Allowance for credit losses activity related to accounts receivables are as follows:
| Three months ended August 31, | ||||||||||
| In millions | 2025 | 2024 | ||||||||
| Balance, beginning of period | $ | 26.0 | $ | 21.3 | ||||||
| Provision for credit losses | 7.7 | 7.5 | ||||||||
| Write-offs and recoveries | (9.3 | ) | (2.8 | ) | ||||||
| Balance, end of period | $ | 24.4 | $ | 26.0 |
No single client had a material impact on total accounts receivable as of August 31, 2025 and May 31, 2025 or service revenue and results of operations for the three months ended August 31, 2025 and August 31, 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 August 31, 2025 and May 31, 2025, advance collections were $2.8 million and $1.8 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 2026 and fiscal 2025, 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, 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 was $0.5 million under its policies during both fiscal 2026 and fiscal 2025.
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 $26.8 million for the three months ended August 31, 2025, compared with $16.5 million for the three months ended August 31, 2024.
Recently adopted accounting pronouncements: There were no recently adopted accounting pronouncements during the three months ended August 31, 2025 that had a material impact on the Company's consolidated financial statements or disclosures.
Recently issued accounting pronouncements: In December 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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 Annual Report on Form 10-K for fiscal 2026, 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 No. 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.
In July 2025, the FASB issued ASU No. 2025-05 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets,” which introduces a practical expedient for the application of the current expected credit loss model to current accounts receivable and contract assets. This ASU is effective for annual periods beginning after December 15, 2025, and interim periods within those annual reporting periods. This ASU is applicable to the Company’s fiscal year beginning June 1, 2026, with early application permitted. The transition method is prospective. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.
In September 2025, the FASB issued ASU No. 2025-06 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software.” This ASU updates the cost capitalization threshold for internal-use software development costs by removing all references to software project development stages and providing new guidance on how to evaluate whether the probable-to-complete recognition threshold has been met. This ASU is effective for annual periods beginning after December 15, 2027, and interim periods within those annual reporting periods. This ASU is applicable to the Company’s fiscal year beginning June 1, 2028, with early application permitted. The transition method may be prospective, modified, or retrospective. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and 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 and HR outsourcing 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 | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Payroll wages and payroll taxes | $ | 7,356.1 | $ | 6,881.6 | ||||||
| State unemployment insurance (included in payroll wages and payroll taxes) | $ | 23.7 | $ | 23.0 | ||||||
| Guaranteed cost benefit plans | $ | 175.5 | $ | 165.8 |
Insurance solutions are sold through the Company’s licensed insurance agency, Paychex Insurance Agency, Inc., which provides insurance through a variety of carriers, enabling clients 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 two to four years.
Changes in deferred revenue related to material rights that exceed one year were as follows:
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Balance, beginning of period | $ | 92.4 | $ | 74.9 | ||||||
| Deferral of revenue | 12.1 | 7.6 | ||||||||
| Recognition of unearned revenue | (14.5 | ) | (9.1 | ) | ||||||
| Balance, end of period | $ | 90.0 | $ | 73.4 |
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 August 31, 2025, the Company expects to recognize deferred revenue related to these material rights for the remainder of fiscal 2026 and subsequent fiscal years as follows:
| In millions | Estimated | ||||
| Year ending May 31, | recognition of unearned revenue | ||||
| 2026 | $ | 36.0 | |||
| 2027 | 32.9 | ||||
| Thereafter | 21.1 | ||||
| Total recognition of unearned revenue | $ | 90.0 |
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 three months ended August 31, 2025 or August 31, 2024.
Changes in deferred costs to obtain and fulfill contracts were as follows:
| Costs to obtain contracts: | ||||||||||
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Balance, beginning of period | $ | 609.0 | $ | 609.4 | ||||||
| Capitalization of costs | 48.9 | 45.3 | ||||||||
| Amortization | (52.8 | ) | (51.8 | ) | ||||||
| Balance, end of period | $ | 605.1 | $ | 602.9 |
| Costs to fulfill contracts: | ||||||||||
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Balance, beginning of period | $ | 87.0 | $ | 76.6 | ||||||
| Capitalization of costs | 19.6 | 6.3 | ||||||||
| Amortization | (7.6 | ) | (6.7 | ) | ||||||
| Balance, end of period | $ | 99.0 | $ | 76.2 |
Note C: Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| In millions, except per share amounts | 2025 | 2024 | ||||||||
| Basic earnings per share: | ||||||||||
| Net income | $ | 383.8 | $ | 427.4 | ||||||
| Weighted-average common shares outstanding | 360.1 | 360.1 | ||||||||
| Basic earnings per share | $ | 1.07 | $ | 1.19 | ||||||
| Diluted earnings per share: | ||||||||||
| Net income | $ | 383.8 | $ | 427.4 | ||||||
| Weighted-average common shares outstanding | 360.1 | 360.1 | ||||||||
| Dilutive effect of common share equivalents | 1.8 | 1.8 | ||||||||
| Weighted-average common shares outstanding, assuming dilution | 361.9 | 361.9 | ||||||||
| Diluted earnings per share | $ | 1.06 | $ | 1.18 | ||||||
| Weighted-average anti-dilutive common share equivalents | 0.2 | 0.6 |
Weighted-average common share equivalents that had an anti-dilutive impact are excluded from the computation of diluted earnings per share.
Note D: Business Combinations
The Company accounts for acquisitions in accordance with the guidance in FASB Accounting Standards Codification 805, Business Combinations ("ASC 805"). This guidance requires disclosure of consideration transferred, including any contingent consideration, assets acquired, and liabilities assumed to be measured at their fair values as of the acquisition date. This guidance further provides that: (1) acquisition costs will generally be expensed as incurred, (2) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (3) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of the purchase price over the fair values of the net assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.
Paycor HCM, Inc.
On April 14, 2025, the Company completed its acquisition of Paycor HCM, Inc. (“Paycor”) for total purchase consideration of approximately $4.1 billion, of which $4.06 billion was paid in cash and $25.1 million was paid in the form of replacement awards. To finance the purchase consideration, Paychex issued a $4.2 billion aggregate principal amount of fixed-rate corporate bonds ("Corporate Bonds"). Refer to Note N of the Notes to Consolidated Financial Statements contained in Item 8 of the Company's Form 10-K for fiscal 2025 for further details on the Corporate Bonds. Paycor is a leading Software-as-a-Service (“SaaS”) provider of HCM solutions for small and medium-sized businesses across all 50 states within the U.S.
Acquisition related costs consist of miscellaneous professional service fees and expenses for our recent acquisitions. The Company recognized $84.1 million of acquisition-related costs, including $61.1 million related to amortization for step-up basis intangible assets, that were expensed in the three months ended August 31, 2025. These costs are shown as part of selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income.
The transaction aims to enhance the Company’s capabilities in the upmarket segment and expand its suite of AI-driven HCM solutions.
Purchase Price Allocation
The purchase price allocation as of the acquisition date is subject to change as additional information about the fair values of assets acquired and liabilities assumed becomes available. These adjustments will be finalized no later than one year from the acquisition date.
During the three months ended August 31, 2025, the Company adjusted its purchase price allocation, which increased goodwill $5.8 million, primarily resulting from the write-down of a building by $4.9 million, net of deferred taxes of $1.9 million as a result of an updated valuation. The impact of these changes on previously reported earnings was not material.
| In millions | |||||
| Total purchase price | $ | 4,085.7 | |||
| Assets Acquired | |||||
| Cash and cash equivalents | $ | 168.8 | |||
| Restricted cash | 0.0 | ||||
| Interest receivable | 0.7 | ||||
| Accounts receivable | 26.5 | ||||
| Prepaid income taxes | 1.0 | ||||
| Prepaid expenses and other current assets | 29.3 | ||||
| Funds held for clients | 1,288.2 | ||||
| Property and equipment | 27.6 | ||||
| Operating lease right-of-use assets | 9.1 | ||||
| Intangible assets (new fair value) | 1,776.5 | ||||
| Other long-term assets | 1.9 | ||||
| Total assets | $ | 3,329.6 | |||
| Liabilities Assumed | |||||
| Current liabilities | $ | 136.3 | |||
| Client funds obligation | 1,288.9 | ||||
| Deferred income taxes | 342.4 | ||||
| Other long-term liabilities | 69.7 | ||||
| Total Liabilities | $ | 1,837.3 | |||
| Fair value of purchase consideration | 4,085.7 | ||||
| Less: fair value of net assets | 1,492.3 | ||||
| Goodwill | $ | 2,593.4 |
Customer relationships were the most significant of the acquired identifiable intangible assets. The fair value of the customer relationship intangible asset was estimated using a multi-period excess earnings method. The cash flow projections for the acquired Paycor customer relationships reflected significant judgments and assumptions including the revenue growth rate, customer attrition rate, and discount rate. The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed (the useful life).
The goodwill is attributable primarily to the expected revenue synergies expected from combining the operations of both entities, and intangible assets that do not qualify for separate recognition, including assembled workforce acquired through the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
Unaudited Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations are provided for illustrative purposes only and present the estimated unaudited pro forma combined results of Paychex and Paycor for three months ended August 31, 2024, as if the acquisition had occurred on June 1, 2023:
| Three months ended | |||||
| In millions | August 31, 2024 | ||||
| Revenues | $ | 1,486.0 | |||
| Net income | $ | 345.6 |
The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Paychex and Paycor. The supplemental pro forma financial information does not necessarily represent what the combined companies’ revenue or results of operations would have been had the Paycor Acquisition been completed on June 1, 2023, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Paychex and Paycor.
The unaudited supplemental pro forma financial information reflects primarily pro forma adjustments related to removal of seller's amortization of cost to obtain and fulfill contracts, elimination of seller's stock-based compensation expense offset by compensation expense related to replacement awards and settlement of seller awards, amortization expense for step-up in fair value estimates of intangible assets, and interest expense and deferred financing cost amortization related to the Corporate Bonds issued to finance the Paycor acquisition. The unaudited supplemental pro forma financial information includes transaction charges associated with the Paycor acquisition. There are no material, nonrecurring pro forma adjustments directly attributable to the Paycor acquisition included in the reported pro forma revenue and loss from continuing operations before income taxes.
Paycor’s fiscal year end was June 30. Since Paycor and the Company had different fiscal year end dates, the unaudited pro forma operating results were prepared based on comparable periods. The pro forma financial information does not purport to be indicative of the results that would have been obtained had the transactions been completed as of June 1, 2023, for the period presented and are not intended to be a projection of future results or trends.
Note E: Other Income, Net
Other income, net, consisted of the following items:
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Interest income on corporate investments | $ | 18.7 | $ | 19.9 | ||||||
| Other | 5.1 | 0.1 | ||||||||
| Other income, net | $ | 23.8 | $ | 20.0 |
Note F: Funds Held for Clients and Corporate Investments
Funds held for clients and corporate investments were as follows:
| August 31, 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 | $ | 775.2 | $ | — | $ | — | $ | 775.2 | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | 165.6 | 1.6 | (0.1 | ) | 167.1 | |||||||||||||||
| Corporate bonds | 1,922.6 | 20.0 | (5.0 | ) | 1,937.6 | |||||||||||||||
| Municipal bonds | 973.2 | 1.0 | (33.2 | ) | 941.0 | |||||||||||||||
| U.S. government agency and treasury securities | 1,111.8 | 7.2 | (12.5 | ) | 1,106.5 | |||||||||||||||
| Variable rate demand notes | 824.6 | — | — | 824.6 | ||||||||||||||||
| Total AFS securities | 4,997.8 | 29.8 | (50.8 | ) | 4,976.8 | |||||||||||||||
| Other | 34.3 | 3.5 | (0.5 | ) | 37.3 | |||||||||||||||
| Total funds held for clients and corporate investments | $ | 5,807.3 | $ | 33.3 | $ | **(**51.3 | ) | $ | 5,789.3 |
| May 31, 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 | $ | 1,057.8 | $ | — | $ | — | $ | 1,057.8 | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | 158.3 | 0.9 | (0.0 | ) | 159.2 | |||||||||||||||
| Corporate bonds | 1,640.3 | 10.7 | (7.0 | ) | 1,644.0 | |||||||||||||||
| Municipal bonds | 1,017.3 | 0.5 | (44.3 | ) | 973.5 | |||||||||||||||
| U.S. government agency and treasury securities | 993.2 | 2.3 | (16.7 | ) | 978.8 | |||||||||||||||
| Variable rate demand notes | — | — | — | — | ||||||||||||||||
| Total AFS securities | 3,809.1 | 14.4 | (68.0 | ) | 3,755.5 | |||||||||||||||
| Other | 33.1 | 2.3 | (0.9 | ) | 34.5 | |||||||||||||||
| Total funds held for clients and corporate investments | $ | 4,900.0 | $ | 16.7 | $ | **(**68.9 | ) | $ | 4,847.8 |
Included in funds held for clients' money market securities and other restricted cash equivalents as of August 31, 2025 were corporate bonds, municipal bonds, U.S. government agency and treasury securities, bank demand deposit accounts, and money market funds with maturities of 90 days or less.
Included in asset-backed securities as of August 31, 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 August 31, 2025.
Included in corporate bonds as of August 31, 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 September 1, 2025 through January 23, 2035.
Included in municipal bonds as of August 31, 2025 were general obligation bonds and revenue bonds primarily carrying credit ratings of AA or better and have maturities ranging from September 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:
| August 31, | May 31, | |||||||||
| In millions | 2025 | 2025 | ||||||||
| Funds held for clients | $ | 4,927.4 | $ | 4,813.3 | ||||||
| Corporate investments | 861.9 | 34.5 | ||||||||
| Total funds held for clients and corporate investments | $ | 5,789.3 | $ | 4,847.8 |
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 $21.0 million and $53.6 million as of August 31, 2025 and May 31, 2025, respectively. Included in net unrealized losses as of August 31, 2025 and May 31, 2025, were 505 and 600 AFS securities in an unrealized loss position, representing approximately 45% and 50% 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:
| August 31, 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 | ) | $ | — | $ | (0.1 | ) | $ | 2.8 | $ | (0.1 | ) | $ | 2.8 | |||||||||||||||
| Corporate bonds | (0.1 | ) | 56.5 | (4.9 | ) | 207.2 | (5.0 | ) | 263.7 | |||||||||||||||||||||
| Municipal bonds | (2.5 | ) | 44.9 | (30.7 | ) | 843.2 | (33.2 | ) | 888.1 | |||||||||||||||||||||
| U.S. government agency and treasury securities | (0.7 | ) | 73.2 | (11.8 | ) | 506.4 | (12.5 | ) | 579.6 | |||||||||||||||||||||
| Total | $ | **(**3.3 | ) | $ | 174.6 | $ | **(**47.5 | ) | $ | 1,559.6 | $ | **(**50.8 | ) | $ | 1,734.2 |
| May 31, 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 | ) | $ | 16.4 | $ | (0.0 | ) | $ | 2.8 | $ | (0.0 | ) | $ | 19.2 | |||||||||||||||
| Corporate bonds | (0.1 | ) | 83.2 | (6.9 | ) | 236.7 | (7.0 | ) | 319.9 | |||||||||||||||||||||
| Municipal bonds | (2.2 | ) | 48.5 | (42.1 | ) | 880.1 | (44.3 | ) | 928.6 | |||||||||||||||||||||
| U.S. government agency and treasury securities | (0.7 | ) | 152.0 | (16.0 | ) | 531.8 | (16.7 | ) | 683.8 | |||||||||||||||||||||
| Total | $ | **(**3.0 | ) | $ | 300.1 | $ | **(**65.0 | ) | $ | 1,651.4 | $ | **(**68.0 | ) | $ | 1,951.5 |
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 August 31, 2025 that had gross unrealized losses of $50.8 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 August 31, 2025 and as of May 31, 2025 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 | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Gross realized gains | $ | 0.0 | $ | 0.0 | ||||||
| Gross realized losses | (0.0 | ) | (0.0 | ) | ||||||
| Net realized (losses)/gains | $ | **(**0.0 | ) | $ | **(**0.0 | ) |
The amortized cost and fair value of AFS securities that had stated maturities as of August 31, 2025 are shown below by expected maturity.
| August 31, 2025 | ||||||||||
| Amortized | Fair | |||||||||
| In millions | cost | value | ||||||||
| Maturity date: | ||||||||||
| Due in one year or less | $ | 677.9 | $ | 672.2 | ||||||
| Due after one year through three years | 2,104.8 | 2,078.7 | ||||||||
| Due after three years through five years | 645.9 | 650.2 | ||||||||
| Due after five years | 1,569.2 | 1,575.7 | ||||||||
| Total | $ | 4,997.8 | $ | 4,976.8 |
Variable rate demand notes (“VRDNs”) are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.
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:
| August 31, 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: | ||||||||||||||||||||
| Corporate bonds | $ | 7.5 | $ | — | $ | 7.5 | $ | — | ||||||||||||
| Municipal bonds | 0.8 | — | 0.8 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 284.9 | — | 284.9 | — | ||||||||||||||||
| Money market securities | 67.7 | 67.7 | — | — | ||||||||||||||||
| Total restricted and unrestricted cash equivalents | $ | 360.9 | $ | 67.7 | $ | 293.2 | $ | — | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | $ | 167.1 | $ | — | $ | 167.1 | $ | — | ||||||||||||
| Corporate bonds | 1,937.6 | — | 1,937.6 | — | ||||||||||||||||
| Municipal bonds | 941.0 | — | 941.0 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 1,106.5 | — | 1,106.5 | — | ||||||||||||||||
| VRDNs | 824.6 | — | 824.6 | — | ||||||||||||||||
| Total AFS securities | $ | 4,976.8 | $ | — | $ | 4,976.8 | $ | — | ||||||||||||
| Other | $ | 37.3 | $ | 37.3 | $ | — | $ | — | ||||||||||||
| Liabilities: | ||||||||||||||||||||
| Other long-term liabilities | $ | 37.3 | $ | 37.3 | $ | — | $ | — |
| May 31, 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: | ||||||||||||||||||||
| Corporate bonds | $ | 4.7 | $ | — | $ | 4.7 | $ | — | ||||||||||||
| Municipal bonds | 0.4 | 0.4 | — | |||||||||||||||||
| U.S. government agency and treasury securities | 615.5 | — | 615.5 | — | ||||||||||||||||
| Money market securities | 42.8 | 42.8 | — | — | ||||||||||||||||
| Total restricted and unrestricted cash equivalents | $ | 663.4 | $ | 42.8 | $ | 620.6 | $ | — | ||||||||||||
| AFS securities: | ||||||||||||||||||||
| Asset-backed securities | $ | 159.2 | $ | — | $ | 159.2 | $ | — | ||||||||||||
| Corporate bonds | 1,644.0 | — | 1,644.0 | — | ||||||||||||||||
| Municipal bonds | 973.5 | — | 973.5 | — | ||||||||||||||||
| U.S. government agency and treasury securities | 978.8 | — | 978.8 | — | ||||||||||||||||
| VRDNs | — | — | — | — | ||||||||||||||||
| Total AFS securities | $ | 3,755.5 | $ | — | $ | 3,755.5 | $ | — | ||||||||||||
| Other | $ | 34.5 | $ | 34.5 | $ | — | $ | — | ||||||||||||
| Liabilities: | ||||||||||||||||||||
| Other long-term liabilities | $ | 34.5 | $ | 34.5 | $ | — | $ | — |
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 corporate bonds, municipal bonds, and 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 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.
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. The amortized cost and fair value of these borrowings were as follows:
| August 31, 2025 | May 31, 2025 | |||||||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||||||
| In millions | cost | value | cost | value | ||||||||||||||||
| Senior Notes, Series A | $ | 399.9 | $ | 399.3 | $ | 399.8 | $ | 398.3 | ||||||||||||
| Senior Notes, Series B | 399.3 | 400.5 | 399.3 | 395.5 | ||||||||||||||||
| 5-Year Fixed Rate Corporate Bonds | 1,485.6 | 1,529.2 | 1,484.8 | 1,505.1 | ||||||||||||||||
| 7-Year Fixed Rate Corporate Bonds | 1,483.3 | 1,533.3 | 1,482.7 | 1,504.9 | ||||||||||||||||
| 10-Year Fixed Rate Corporate Bonds | 1,182.1 | 1,221.8 | 1,181.6 | 1,201.9 | ||||||||||||||||
| Total long-term borrowings, net of debt issuance costs | $ | 4,950.2 | $ | 5,084.1 | $ | 4,948.2 | $ | 5,005.7 |
The Company’s Senior Notes, Series A and Senior Notes, Series B 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 Company's Corporate Bonds are not traded on active markets. The fair value of Corporate Bonds was estimated using a market approach employing Level 2 valuation inputs obtained from an independent pricing service. The Company reviews the values generated by the independent pricing service for reasonableness and has not adjusted the prices obtained because it believes that they are appropriately valued.
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
Leases: As of August 31, 2025, the Company entered into two lease agreements that had not yet commenced for terms ranging from 7.58 years to 10.25 years. These leases will require aggregate lease payments of approximately $28.8 million over their respective terms.
Property and equipment, net of accumulated depreciation: Depreciation expense was $34.5 million for the three months ended August 31, 2025 compared to $27.2 million for the three months ended August 31, 2024.
Goodwill and intangible assets, net of accumulated amortization: Amortization expense relating to intangible assets was $74.8 million for the three months ended August 31, 2025 compared to $11.8 million for the three months ended August 31, 2024. During the three months ended August 31, 2025, goodwill related to the acquisition of Paycor increased $5.8 million, primarily due to the write-down of a building by $4.9 million, net of deferred taxes of $1.9 million as a result of an updated valuation. 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 three months ended August 31, 2025 or August 31, 2024.
Short-term financing: Outstanding borrowings on the Company’s credit facilities had a weighted-average interest rate of 4.03% and 3.87% as of August 31, 2025 and May 31, 2025, respectively. The unused amount available under these credit facilities as of August 31, 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 August 31, 2025.
Letters of credit: The Company had irrevocable standby letters of credit available totaling $177.2 million and $165.0 million as of August 31, 2025 and May 31, 2025, respectively, primarily to secure commitments for certain insurance policies. The letters of credit expire at various dates between September 01, 2025 and February 28, 2027. No amounts were outstanding on these letters of credit as of, or during the three months ended August 31, 2025 and August 31, 2024, or as of May 31, 2025.
Long-term debt: There have been no material changes to the Company's long-term debt agreement or balances subsequent to May 31, 2025. The Company’s long-term debt agreement and Corporate Bonds contain 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 August 31, 2025.
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 $9.2 million as of August 31, 2025 and $4.9 million as of May 31, 2025.
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 non-officer fiduciaries of our pooled employer plan retirement offering, 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, medical, and workers' compensation 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 August 31, 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 22.9% for the three months ended August 31, 2025, compared to 23.3% for the three months ended August 31, 2024. Both periods were impacted by the recognition of excess tax benefits related to employee stock-based compensation payments.
On July 4, 2025, the One Big Beautiful Bill Act (the “Act”) was enacted into law. The most significant provisions applicable to the Company relate to accelerated tax deductions for qualified property and research expenditures. As a result, the Company’s deferred tax liabilities will be impacted in fiscal 2026 by the deductibility of previously capitalized research expenditures and accelerated tax depreciation. The Act is not expected to have a significant impact on the Company’s effective tax rate.
Note K: Segment Reporting
Total revenue, net income, and significant expenses used by the chief operating decision maker for the purpose of allocating resources and evaluating the Company's financial performance were as follows:
| For the three months ended | ||||||||||
| August 31, | August 31, | |||||||||
| In millions | 2025 | 2024 | ||||||||
| Total revenue | $ | 1,540.0 | $ | 1,318.5 | ||||||
| Core business operations: | ||||||||||
| Compensation-related expenses | 530.0 | 451.3 | ||||||||
| PEO direct insurance costs | 138.6 | 130.3 | ||||||||
| Depreciation and amortization | 48.2 | 39.0 | ||||||||
| Other segment items(1) | 196.5 | 151.2 | ||||||||
| Non-core business operations: | ||||||||||
| Acquisition-related costs(2) | 84.8 | — | ||||||||
| Total expenses | 998.1 | 771.8 | ||||||||
| Interest expense | (68.2 | ) | (9.6 | ) | ||||||
| Other income, net | 23.8 | 20.0 | ||||||||
| Income before income taxes | 497.5 | 557.1 | ||||||||
| Income tax expense | 113.7 | 129.7 | ||||||||
| Net income | $ | 383.8 | $ | 427.4 |
(1)
Other segment items include professional service expense, marketing and advertising expenses, and other overhead expenses.
(2)
Acquisition-related costs included in total expenses include the amortization of intangibles acquired in the acquisition of Paycor, compensation costs related to the acquisition and integration of Paycor, including replacement awards, severance, and retention bonuses, and other acquisition-related costs, primarily reflecting third-party professional service fees.
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