PAYCHEX INC

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Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc. and its wholly owned subsidiaries (“Paychex,” the “Company,” “we,” “our,” or “us”) for the three months ended February 28, 2026 (the “third quarter”), the nine months ended February 28, 2026 (the "nine months"), the respective prior year periods ended February 28, 2025 (the “prior year periods”), and our financial condition as of February 28, 2026. The focus of this review is on the underlying business reasons for material changes and trends affecting our revenue, expenses, net income, and financial condition. This review should be read in conjunction with the February 28, 2026 consolidated financial statements and the related Notes to Consolidated Financial Statements (Unaudited) contained in this Quarterly Report on Form 10-Q (“Form 10-Q”). This review should also be read in conjunction with our Annual Report on Form 10-K (“Form 10-K”) for the year ended May 31, 2025 (“fiscal 2025”). Forward-looking statements in this Form 10-Q are qualified by the cautionary statement included under the next sub-heading, “Cautionary Note Regarding Forward-Looking Statements.”

Current wording

Management's Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc. and its wholly owned subsidiaries ("Paychex," the "Company," "we," "our," or "us") for the three months ended August 31, 2026 (the "first quarter"), the respective prior year period ended August 31, 2025 (the "prior year period"), and our financial condition as of August 31, 2026. The focus of this review is on the underlying business reasons for material changes and trends affecting our revenue, expenses, net income, and financial condition. This review should be read in conjunction with the August 31, 2026 consolidated financial statements and the related Notes to Consolidated Financial Statements (Unaudited) contained in this Quarterly Report on Form 10-Q ("Form 10-Q"). This review should also be read in conjunction with our Annual Report on Form 10-K ("Form 10-K") for the year ended May 31, 2026 ("fiscal 2026"). Forward-looking statements in this Form 10-Q are qualified by the cautionary statement included under the next sub-heading, "Cautionary Note Regarding Forward-Looking Statements."

Previous wording

Certain written and oral statements made by management of Paychex may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States (“U.S.”) Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as “aim,” “expect,” “outlook,” “will,” “guidance,” “projections,” “strategy,” “mission,” “anticipate,” “believe,” “can,” “could,” “design,” “may,” “possible,” “potential,” “should,” “view,” and other similar words or phrases. Forward-looking statements include, without limitation, all matters that are not historical facts. Examples of forward-looking statements include, among others, statements we make regarding the integration of Paycor HCM, Inc. ("Paycor"), operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, and similar projections.

Current wording

Certain written and oral statements made by management of Paychex may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the United States ("U.S.") Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words and phrases as "aim," "expect," "estimate," "intend," "outlook," "will," "would," "projections," "strategy," "mission," "anticipate," "believe," "can," "continue," "could," "design," "future," "may," "opportunities," "plan," "possible," "potential," "purpose," "should," "view," "see," and other similar words or phrases. Forward-looking statements include, without limitation, all matters that are not historical facts. Examples of forward-looking statements include, among others, statements we make regarding operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to our outlook, revenue growth, earnings, earnings-per-share growth, and similar projections.

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

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

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

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our customers' failure to reimburse us for payments made by us on their behalf;

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

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

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

Current wording

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

Previous wording

We support our clients with three proprietary SaaS-based HCM platforms: SurePayroll®, Paychex Flex®, and Paycor®, each designed to meet diverse client needs and business requirements. For example, larger clients often have more complex HCM demands. Our integrated HCM solutions span the entire employee life cycle, enabling clients to choose from a broad range of solutions that seamlessly integrate with leading HR, accounting, enterprise resource planning, and point-of-sale applications. Our technology is complemented by a wide array of advisory, benefits, and insurance solutions. In today's dynamic, complex regulatory landscape, we see growing demand for HR outsourcing solutions.

Current wording

We support our clients with three proprietary SaaS-based HCM platforms: SurePayroll®, Paychex Flex®, and Paycor®, each designed to meet diverse client needs and business requirements. Our integrated HCM solutions span the entire employee life cycle, enabling clients to choose from a broad range of solutions that seamlessly integrate with leading HR, accounting, enterprise resource planning, and point-of-sale applications. Our technology is complemented by a wide array of advisory, benefits, and insurance solutions. In today's dynamic, complex regulatory landscape, we see growing demand for HR outsourcing solutions.

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As the digitally driven HR leader, our mission is to help businesses succeed. Our strategy includes growing our client base; increasing product penetration; driving technology innovation; and pursuing strategic acquisitions, all aimed at achieving long-term financial success.

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As a digitally driven HR leader, our mission is to help businesses succeed. Our strategy includes growing our client base; increasing product penetration; driving technology innovation; and pursuing strategic acquisitions, all aimed at achieving long-term financial success.

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We maintain industry-leading margins by efficiently managing costs while strategically investing in our business, particularly in sales and marketing and leading-edge, AI-driven technology and advisory solutions, which we view as critical to our ongoing success. Looking ahead, we believe that investing in our solutions, people, and digital capabilities positions us to capitalize on long-term growth opportunities.

Current wording

We maintain industry-leading margins by efficiently managing costs while strategically investing in our business, particularly in sales and marketing and leading-edge, AI-driven technology and advisory solutions, which we view as critical to our ongoing success. Looking ahead, we believe that investing in our solutions, people, and AI capabilities positions us to capitalize on long-term growth opportunities.

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By closely monitoring client needs and challenges, we proactively assist our clients in navigating legislative changes and other employment complexities. Our unique blend of innovative technology and extensive HR expertise enables clients to more effectively hire, develop, and retain top talent in this tight labor market. Ongoing investments in our platforms have equipped us well to meet the current business demands and regulatory compliance, resulting in high levels of client satisfaction and retention.

Current wording

By closely monitoring client needs and challenges, we proactively assist our clients in navigating legislative changes and other employment complexities. Our unique blend of innovative technology and extensive HR expertise enables clients to more effectively hire, develop, and retain top talent in this tight labor market. Ongoing investments in our platforms have equipped us well to meet current business demands and regulatory compliance, resulting in high levels of client satisfaction and retention.

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Highlights compared to the prior year periods are as follows:

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Highlights compared to the prior year period are as follows:

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For further analysis of our results of operations for the third quarter and nine months, the prior year periods, and our financial position as of February 28, 2026, refer to the tables and analysis in the “Results of Operations” and “Liquidity and Capital Resources” sections of this Item 2.

Current wording

For further analysis of our results of operations for the first quarter and prior year period, and our financial position as of August 31, 2026, refer to the tables and analysis in the "Results of Operations" and "Liquidity and Capital Resources" sections of this Item 2.

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Total revenue increased to $1.8 billion for the third quarter and $4.9 billion for the nine months, reflecting increases of 20% and 18%, respectively, over the prior year periods. The changes in revenue as compared to the prior year periods were primarily driven by the following factors:

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Total revenue increased to $1.6 billion for the first quarter, reflecting an increase of 6% over the prior year period. The changes in revenue as compared to the prior year period were primarily driven by the following factors:

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Higher revenue per client driven by Paycor's upmarket client base, price realization, and product penetration.

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Higher revenue per client resulting from price realization and product penetration.

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Growth in the number of average PEO worksite employees; and

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Growth in the average number of PEO worksite employees ("WSEs"); and

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(1) The net unrealized loss on our investment portfolio was approximately $55.3 million as of March 24, 2026. Refer to Note F in the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 and the "Market Risk Factors" caption contained in Item 2 of this Form 10-Q for more information regarding AFS securities held in an unrealized loss position.

Current wording

(1) The net unrealized loss on our investment portfolio was approximately $151.2 million as of September 23, 2026. Refer to Note E in the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 and the "Market Risk Factors" caption contained in Item 2 of this Form 10-Q for more information regarding AFS securities held in an unrealized loss position.

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(2) The Federal Funds rate was in the range of 3.50% to 3.75% as of February 28, 2026 and 4.25% to 4.50% as of May 31, 2025.

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(2) The Federal Funds rate was in the range of 3.50% to 3.75% as of August 31, 2026 and 3.50% to 3.75% as of May 31, 2026. Effective September 17, 2026, the Federal Reserve increased the Federal Funds rate to a range of 3.75% to 4.00%.

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Total expenses: Total expenses, which reflects the total combined cost of service revenue and selling, general and administrative expenses, increased 24% to $1.0 billion for the third quarter and 27% to $3.0 billion for the nine months. The following table summarizes the components of total expenses:

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Total expenses: Total expenses, which include the combined cost of service revenue and selling, general and administrative expenses, were relatively unchanged at $1.0 billion for the first quarter. The following table summarizes the components of total expenses:

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The changes in total expenses as compared to the prior period were primarily driven by the following factors:

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The changes in total expenses compared with the prior year period were primarily driven by the following factors:

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PEO direct insurance costs: $139.7 million for the third quarter and $415.3 million for the nine months, reflecting increases of 9% and 7% respectively, related to growth in average worksite employees and PEO insurance revenues.

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Growth in average worksite employees; and

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Depreciation and amortization: $50.6 million for the third quarter and $147.9 million for the nine months, reflecting increases of 17% and 19% respectively, primarily due to higher property and equipment balances compared to the prior year period, including an increase in the development and enhancement of our client-facing internal-use software.

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Higher property and equipment balances, including an increase in the development and enhancement of our client-facing internal-use software.

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Other expenses:$224.5 million for the third quarter and $618.0 million for the nine months, reflecting increases of 29% and 30%, respectively, primarily due to higher technology, selling, and marketing investments driven by the acquisition of Paycor and continued investments in our strategic priorities. The increase also reflects general cost increases to support business growth.

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General cost increases to support business growth.

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Acquisition-related costs:$71.2 million for the third quarter and $233.1 million for the nine months, primarily due to the acquisition of Paycor in April 2025. Acquisition-related costs reflect 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.

Current wording

Acquisition-related costs were primarily associated with the April 2025 acquisition of Paycor and 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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Operating income: Operating income increased 14% to $792.0 million for the third quarter and 7% to $1.9 billion for the nine months. Adjusted operating income(1), which excludes acquisition-related costs included in selling, general and administrative expenses, grew 22% to $863.2 million for the third quarter and 19% to $2.1 billion for the nine months.

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Operating income: Operating income increased 14% to $619.2 million for the first quarter. Adjusted operating income(1), which excludes acquisition-related costs included in selling, general and administrative expenses, grew 9% to $684.7 million for the first quarter.

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

Current wording

Adjusted operating income and adjusted operating margin are not U.S. GAAP measures. Refer to the "Non-GAAP Financial Measures" section of this Item 2 for a discussion of non-GAAP measures and a reconciliation to the U.S. GAAP measure of operating income.

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Income taxes: Our effective income tax rate was 24.2% for the third quarter and 23.7% for the nine months compared to 24.3% and 23.9%, for the prior year periods respectively. The effective income tax rates in all periods were affected by the recognition of discrete tax impacts related to employee stock-based compensation payments.

Current wording

Income taxes: Our effective income tax rate was 24.0% for the first quarter, compared to 22.9% for the prior year period. The effective income tax rate in both periods was affected by the recognition of discrete tax impacts related to employee stock-based compensation payments.

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$60.5 million for the third quarter and $181.5 million for the nine months in amortization of intangibles acquired in the acquisition of Paycor;

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$56.9 million for the first quarter compared to $61.1 million for the corresponding prior-year period, in amortization of intangibles acquired in the acquisition of Paycor,

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$9.8 million for the third quarter and $41.7 million for the nine months in compensation costs related to the acquisition and integration of Paycor, including replacement awards, severance and retention bonuses; and

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$8.5 million for the first quarter compared to $18.7 million for the corresponding prior-year period, in compensation costs related to the acquisition and integration of Paycor, including replacement awards, severance and retention bonuses, and

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$0.9 million for the third quarter and $9.9 million for the nine months compared to $16.7 million for both corresponding prior year periods, in other acquisition-related costs, primarily reflecting professional service fees.

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$0.1 million for the first quarter compared to $5.0 million for the corresponding prior-year period, in other acquisition-related costs.

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

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Net tax windfall related to stock-based compensation payments recognized in income taxes. This item is subject to volatility and will vary based on option-holder decisions relating to exercising stock options and fluctuations in our stock price, neither of which is within the control of management.

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Our financial position as of February 28, 2026 remained strong with cash, restricted cash, and total corporate investments of $1.8 billion. Long-term borrowings of $5.0 billion were outstanding as of February 28, 2026. Our unused capacity under our unsecured credit facilities was $2.0 billion as of February 28, 2026. Our primary source of cash is our ongoing operations, which was $2.0 billion for the nine months. Our positive cash flows have allowed us to support our business and pay dividends. We currently anticipate that corporate cash, corporate restricted cash, and total corporate investments as of February 28, 2026, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, primarily investment in our technology solutions, share repurchases, dividend payments, acquisitions, and debt service for the foreseeable future.

Current wording

Our financial position as of August 31, 2026 remained strong with cash, restricted cash, and total corporate investments of $1.0 billion. Long-term borrowings of $4.6 billion were outstanding as of August 31, 2026. Our unused capacity under our unsecured credit facilities was $2.0 billion as of August 31, 2026. Our primary source of cash is our ongoing operations, which was $413.5 million during the first quarter. Our positive cash flows enabled us to support our business and pay dividends. We currently anticipate that corporate cash, corporate restricted cash, and total corporate investments as of August 31, 2026, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, primarily investment in our technology solutions, share repurchases, dividend payments, and debt service for the foreseeable future.

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Effective January 23, 2026, we entered into amendments of our $750.0 million, five-year, unsecured, revolving credit facility (the "2017 Credit Facility") and our $1.0 billion, five-year, unsecured, revolving credit facility (the "2019 Credit Facility") with a syndicate of lenders for which JPM acts as administrative agent. In connection with these amendments, we terminated our three-year, $250 million, unsecured, revolving credit facility for which PNC Bank, N.A. acted as administrative agent (the "2020 PNC Credit Facility"). As of the date of its termination, there were no outstanding loans under the PNC Bank, N.A. Credit Facility. Refer to Note H in the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q and our Current Report on Form 8-K filed on January 26, 2026, for additional information.

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Effective January 23, 2026, we entered into amendments of our $750.0 million, five-year, unsecured, revolving credit facility (the "2017 Credit Facility") and our $1.0 billion, five-year, unsecured, revolving credit facility (the "2019 Credit Facility") with a syndicate of lenders for which JPM acts as administrative agent. The amendments to these credit facilities, among other things, increase the aggregate amount of principal available under the 2017 Credit Facility from $750 million to $1.0 billion, extend the maturity date for the 2017 Credit Facility from September 17, 2026 to January 23, 2031, and amend certain interest provisions and covenants under both credit facilities. In connection with these amendments, we terminated our three-year, $250 million, unsecured, revolving credit facility for which PNC Bank, N.A. acted as administrative agent (the "2020 PNC Credit Facility"). As of the date of its termination, there were no outstanding loans under the 2020 PNC Credit Facility. Refer to Note M in the Notes to Consolidated Financial Statements contained in Item 8 of our Form 10-K for fiscal 2026 for additional information.

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Details of borrowings under each credit facility during the third quarter were as follows:

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Details of borrowings under each credit facility during the first quarter were as follows:

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Letters of credit: As of February 28, 2026, we had irrevocable standby letters of credit available totaling $179.1 million, primarily to secure commitments for certain insurance policies. The letters of credit expire at various dates between March 03, 2026 and February 28, 2027. No amounts were outstanding on these letters of credit during the third quarter or as of February 28, 2026.

Current wording

Letters of credit: As of August 31, 2026, we had irrevocable standby letters of credit available totaling $173.0 million, primarily to secure commitments for certain insurance policies. The letters of credit expire at various dates between September 01, 2026 and December 24, 2027. No amounts were outstanding on these letters of credit during the first quarter or as of August 31, 2026.

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Long-term financing: We have borrowed $0.8 billion through the issuance of long-term private placement debt (“Senior Notes”) and $4.2 billion through the issuance of three fixed rate corporate bonds ("Corporate Bonds"). The following is information on each of our long-term financing arrangements related to future cash commitments:

Current wording

Long-term financing: We have borrowed $0.4 billion through the issuance of long-term private placement debt ("Senior Notes") and $4.2 billion through the issuance of three fixed rate corporate bonds ("Corporate Bonds"). The following is information on each of our long-term financing arrangements related to future cash commitments:

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Subsequent to February 28, 2026, we repaid our long-term private placement debt Senior Notes, Series A for $400.0 million, which matured on March 13, 2026.

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During fiscal 2026, we repaid our long-term private placement debt Senior Notes, Series A for $400.0 million, which matured on March 13, 2026.

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Other commitments: We had outstanding commitments under existing workers’ compensation insurance agreements and legally binding contractual arrangements. We also entered into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase approximately $10.7 million of capital assets as of February 28, 2026. In addition, we are involved in six limited partnership agreements to contribute a maximum of $37.5 million to venture capital funds. As of February 28, 2026, we have contributed approximately $32.1 million of the total funding commitment.

Current wording

Other commitments: We had outstanding commitments under existing workers' compensation insurance agreements and legally binding contractual arrangements. We also entered into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase approximately $9.7 million of capital assets as of August 31, 2026. In addition, we are involved in seven limited partnership agreements to contribute a maximum of $40.5 million to venture capital funds. As of August 31, 2026, we have contributed approximately $35.1 million of the total funding commitment.

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We currently self-insure the deductible portion of various insured exposures under certain corporate employee and PEO employee health and medical benefit plans. Historically, the amounts accrued for these plans have not been material and were not material as of February 28, 2026. We also self-insure the deductible portion of certain PEO workers' compensation benefit plans. Refer to Note A in the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q for additional information regarding our estimated loss exposure under these PEO workers' compensation benefit plans.

Current wording

We currently self-insure the deductible portion of various insured exposures under certain corporate employee and PEO employee health benefit plans, including medical, dental, vision, life insurance, and disability plans. Historically, the amounts accrued for these plans have not been material and were not material as of August 31, 2026. We also self-insure the deductible portion of certain PEO workers' compensation benefit plans. Refer to Note A in the Notes to Consolidated Financial Statements (Unaudited) contained in Item 1 of this Form 10-Q for additional information regarding our estimated loss exposure under these PEO workers' compensation benefit plans.

Previous wording

We also maintain corporate insurance coverage, in addition to our purchased primary insurance policies, for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism, as well as capacity for deductibles and self-insured retention through our captive insurance company.

Current wording

In addition to our purchased primary insurance policies, we utilize our captive insurance company to provide insurance coverage for certain risks where commercial coverage is limited, unavailable, or not economically practical. Such coverage includes employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism. The captive also supplements our third-party insurance programs by funding certain deductibles, self-insured retentions, and providing excess coverage.

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Primary sources of cash, restricted cash, and equivalents are through collections for services rendered to our customers and interest earned on funds held for clients and corporate investments. Primary uses of cash include employee compensation and contractual obligations related to business operations, cash dividends paid, share repurchases, purchases of property and equipment, long-term debt service, and acquisitions.

Current wording

Primary sources of cash, restricted cash, and equivalents are through collections for services rendered to our customers and interest earned on funds held for clients and corporate investments. Primary uses of cash include employee compensation and contractual obligations related to business operations, cash dividends paid, share repurchases, purchases of property and equipment and long-term debt service.