PAYX 10-K & 10-Q changes, risk factors and insider trading

Our future results of operations are subject to risks and uncertainties that could cause actual results to differ materially from historical and current results, and from our projections. The following risk factors represent our current view of some of the most important risks facing our business and are important to understanding our business. This description reflects our beliefs and opinions as to factors that could materially and adversely affect us and our securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future. These are not the only risks we face. Additional factors not presently known to us or that we currently deem to be immaterial also may adversely affect, possibly to a material extent, our business, cash flows, financial condition, or results of operations in future periods. In addition, refer to the cautionary note regarding forward-looking statements at the beginning of Part I of this Form 10-K.

The market for our solutions is characterized by rapid technological advancements, changes in customer requirements, frequent new product introductions and enhancements, and changing industry standards. To maintain our growth strategy, we must adapt and respond to technological advances and technological requirements of our clients.customers. Our future success will depend on our ability to: enhance our current solutions and introduce new solutions in order to keep pace with solutions offered by our competitors, including the successful utilization of AI technologies (including generative AI and machine learning solutions); enhance capabilities and increase the performance of our internal systems, particularly our systems that meet our clients’customers’ requirements; and adapt to technological advancements and changing industry standards. We may pursue new target markets or implement new lines of business to grow our customer base, which may not be successful. For example, we intend to expand sales of solutions beyond our traditional payroll clients and to develop additional standalone offerings that can be sold independent of our core payroll and HCM solutions. In addition, we continue to make significant investments related to the development of new technology. If our systems or solutions become outdated, it may negatively impact our ability to meet performance expectations related to quality, time to market, cost and innovation relative to our competitors. The failure to provide a more efficient and user-friendly customer-facing digital experience across internet and mobile platforms as well as in physical locations may adversely impact our business and operating results. There can be no assurance that our efforts to update and integrate systems will be successful. If we do not integrate and update our systems in a timely manner, or if our investments in technology fail to provide the expected results, or if our efforts to target new markets or implement new lines of business are unsuccessful, there could be a material adverse effect to our business and results of operations. The failure to continually develop enhancements and use of technologies such as robotics and other workflow automation tools, natural language processing, and AI/machine learning may impact our ability to increase the efficiency of and reduce costs associated with operational risk management and compliance activities.

We may experience software defects, undetected errors, and development delays, which could damage our relationship with clients,customers, decrease our potential profitability and expose us to liability.

Our solutions rely on software and computing systems, including generative and agentic AI solutions, that can encounter development delays, complexities with integrating new technologies, and the underlying software may contain undetected errors, bias, viruses, or defects. Defects in our solutions, errors or delays caused by our solutions and generative AI solutions not working as anticipated could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential clients,customers, harm to our reputation and exposure to liability. In addition, we rely on technologies and software supplied by third parties that may also contain undetected errors, bias, viruses, or defects that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We rely upon information technology (“IT”) networks, cloud-based platforms, and systems to process, transmit, and store electronic information, and to support a variety of business processes, some of which are provided by third-party vendors. Cyberattacks and security threats are a risk to our business and reputation. A cyberattack, unauthorized intrusion, malicious software infiltration, network disruption or outage, corruption of data, or theft of personal or other sensitive information, could have a material adverse effect on our business operations or that of our clients,customers, result in liability or regulatory sanction, or cause harm to our business and reputation and result in a loss in confidence in our ability to serve clientscustomers all of which could have a material adverse effect on our business. The increasing velocity of disruptive innovations involving cyberattacks, security vulnerabilities, unintended data exposure, and Internet disruptions enabled by new and emerging technologies, such as advancements in AI andAI, machine learning, and quantum computing, may outpace our organization's ability to compete and/or manage the risk appropriately. In addition, threat actors may seek to engage in payment-related fraud or by more frequently attempting to gain access to our systems through phishing or other means.means that may include, but are not limited to, leveraging stolen identities. Furthermore, security industry experts and government officials have warned about the risks of threat actors and cyberattacks targeting IT products and businesses. Because techniques used to obtain unauthorized access or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Data Security and Privacy Leaks: We collect, use, and retain increasingly large amounts of personal information about our clients,customers, employees of our clients,customers, our employees, and other third parties, including: bank account, credit card, and social security numbers, tax return information, health care information, retirement account information, payroll information, system and network passwords, and other sensitive personal and business information. At the same time, the continued occurrence of high-profile cyber and ransomware attacks and data breaches provides evidence of an external environment increasingly hostile to information security. We may be particularly targeted for cyberattack because of the amount and type of personal and business information that we collect, use, and retain, as well as during and after periods in which we acquire other companies. Vulnerabilities, threats, and more sophisticated and targeted computer crimes pose a risk to the security of our systems and networks, and the confidentiality, availability, and integrity of our data. Furthermore, if any of our solutions contain a software vulnerability, the vulnerability may be exploited to obtain access to our data or our clients’customers’ data.

Our service platforms enable our clientscustomers to store and process personal data on premises or, increasingly, in a cloud-based environment that we host. The security of our IT infrastructure is an important consideration in our customers’ purchasing decisions. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, are increasingly more complex and sophisticated and may be difficult to detect for long periods of time, we may be unable or fail to anticipate these techniques or implement adequate or timely preventative or responsive measures. As cyber threats continue to evolve, we are focused on ensuring that our operating environments safeguard and protect personal and business information. We may be required to invest significant additional resources to comply with evolving cybersecurity regulations and to modify and enhance our information security and controls, and to investigate and remediate any security vulnerabilities. While we have security systems and IT infrastructure in place designed to detect and protect against unauthorized access to such information, including our Cyber Fusion Center, if our security measures are breached, either internally or externally, our business could be substantially harmed, and we could incur significant liabilities. Any such breach or unauthorized access could negatively affect our ability to attract new clients,customers, cause existing clientscustomers to terminate their agreements with us, result in reputational damage, and subject us to lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect our business and operating results. Third-parties, including vendors that provide services for our operations, could also be a source of security and reputational risk to us in the event of a failure of their own security systems and infrastructure.

Data Loss and Business Interruption: If our systems are disrupted or fail for any reason, or if our systems are infiltrated by unauthorized persons, the Company, our clientscustomers and employees of our clientscustomers could experience data loss, financial loss, harm to reputation, or significant business interruption. Hardware, applications, and services, including cloud-based services, that we develop or procure from third-party vendors may contain defects in design or other problems that could compromise the integrity and availability of our services. Any delays or failures caused by network outages, software or hardware failures, or other data processing disruptions, could result in our inability to provide services in a timely fashion or at all. The speed to closure of significant cybersecurity incidents may be influenced by the cooperation of governmental or law enforcement agencies. We may be required to incur significant costs to protect against damage caused by disruptions or security breaches in the future. Such events may expose us to unexpected liability, litigation, regulatory investigation and penalties, loss of clients’customers’ business, unfavorable impact to business reputation, and there could be a material adverse effect on our business and results of operations.

In the event of a catastrophe, our business continuity plan may fail, which could result in the loss of clientcustomer data and adversely interrupt operations.

Our operations are dependent on our ability to protect our infrastructure against damage from catastrophe or natural disaster, unauthorized security breach, power loss, telecommunications failure, terrorist attack or act of war, public health emergency, pandemic, or other events that could have a significant disruptive effect on our operations. Climate-related weather disasters, including hurricanes, flooding, snowstorms, and severe rainstorms, could also threaten the business continuity of our operations. We have a business continuity plan in place in the event of system failure due to any of these events. Our business continuity plan has been tested in the past by circumstances of severe weather, including hurricanes, floods, snowstorms, and rainstorms and has been successful. However, these past successes are not an indicator of success in the future. If the business continuity plan is unsuccessful in a disaster recovery scenario, we could potentially lose clientcustomer data or experience material adverse interruptions to our operations or delivery of services to our clients.customers. If that were to occur, there could be a material adverse effect on our business and results of operations.

As part of providing services to clients,customers, we rely on a number of third-party service providers. These third-party service providers include, but are not limited to, banks used to electronically transfer funds from clients to their employees, information technology vendors servicing cloud-based platforms, and other third-party providers supporting customer interactions. Failure by these service providers, or their respective outsourced providers, for any reason, to deliver their services in a timely manner and in compliance with applicable laws and regulations could result in material interruptions to our operations, impact clientcustomer relations, and result in significant penalties or liabilities to us.

Many federal and state laws that apply to the employer-employee relationship do not specifically address the obligations and responsibilities of the “co-employment” relationship within our PEO business. State and federal positions regarding co-employment relationships are in a constant state of flux and change with varying degrees of impact on our operations. We cannot predict when changes will occur or forecast whether any future changes will be favorable or unfavorable to our operations. There is a possibility that we may be subject to liability for violations of employment or discrimination laws by our clientscustomers and acts or omissions of clientcustomer employees, who may be deemed to be our agents, even if we do not participate in any such acts or violations. Although our agreements with clientscustomers provide that they will indemnify us for any liability attributable to their own or their employees’ conduct, we may not be able to effectively enforce or collect such contractual obligations. In addition, we could be subject to liabilities with respect to our employee benefit plans if it were determined that we are not the “employer” under any applicable state or federal laws. Incurring additional liabilities related to our PEO business may adversely affect our results of operations.

Within our PEO business, we maintain health and workers’ compensation insurance covering worksite employees. We establish workers’ compensation insurance reserves 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 these claims. The insurance costs are impacted by claims experience and are a significant portion of our PEO costs. If we experience a sudden or unexpected increase in claims activity, or our reserves were insufficient for claims activity, our costs could increase. In addition, in the event of expiration or cancellation of existing contracts, we may not be able to secure replacement contracts on competitive terms, if at all. Also, as a co-employer in the PEO, we assume or share many of the employer-related responsibilities associated with health care reform and recent efforts by local, state and federal governments to deregulate, which may result in increased costs. Increases in costs not incorporated into service fees timely or fully could have a material adverse effect on our results of operations. Incorporating cost increases into service fees could also impact our ability to attract and retain clients.customers.

Acquisitions subject us to risks, including increased debt, assumption of unforeseen liabilities, and difficulties in integrating operations. Successful integration involves many challenges, including the difficulty of developing and marketing new solutions and support, our exposure to unforeseen liabilities of acquired companies, and the loss of key employees of an acquired business. The integration and conversion of our acquired operations or other future acquisitions, if any, could result in increased operating costs if the anticipated synergies of operating these businesses as one are not achieved, a loss of strategic opportunities if management is distracted by the integration process, and a loss of customers if our service levels drop during or following the integration process. In addition, an acquisition could adversely impact cash flows and/or operating results, and dilute stockholder interests, for many reasons, including charges to our income to reflect the impairment of acquired intangible assets including goodwill, interest costs and debt service requirements for any debt incurred in connection with an acquisition, costs incurred to enforce our rights under acquisition agreements and any issuance of securities in connection with an acquisition or new business venture that dilutes or lessens the rights of our current stockholders. If the integration of any or all of our acquisitions or future acquisitions is not successful, it could have a material adverse impact on our operating results and stock price.

The Note Purchase and Guarantee Agreement (the “Agreement”) that we entered into in January 2019 in connection with our acquisition of Oasis Outsourcing Group Holdings, L.P., also contains covenants which may restrict our flexibility to operate our business. These covenants include restrictions regarding the incurrence of liens and indebtedness, substantial changes in the general nature of our business and our subsidiaries (taken as a whole), certain merger transactions, certain sales of assets and other matters, all subject to certain exceptions. The Agreement also contains financial covenants, which require us not to exceed a maximum leverage ratio of 3.5:1.0 and a minimum interest coverage ratio of 2.0:1.0, and limits certain of our indebtedness to not exceed 20% of our consolidated stockholders’ equity.

The Agreement, and the credit agreements providing for our credit facilities,facilities alsowith JP Morgan Chase Bank, N.A., contain similar financial covenants,covenants which are reviewed for compliance on a quarterly basis, thatalso require us not to exceed a maximum leverage ratio of 3.5:1.0 and a minimum interest coverage ratio of 2.0:1.0. InWe addition,monitor certaincompliance with all of our indebtednessdebt maycovenants noton exceeda 20%quarterly of our consolidated stockholders’ equity.basis. If we do not comply with these covenants, it could result in material adverse effects on our operating results and our financial condition.

Future acquisitions or transactions may bring us closer to thethese covenant thresholds previously outlined,thresholds, potentially requiring further amendments to our credit facilities and debt obligations on less favorable terms.

Many of our services, particularly payroll tax administration services, employee benefit plan administration services, and PEO services are designed according to government regulations that often change. Changes in regulations could affect the extent and type of benefits employers are required, or may choose, to provide employees or the amount and type of taxes employers and employees are required to pay. Such changes could reduce or eliminate the need for some of our services and substantially decrease our revenue. The addition of complex added requirements could also increase our cost of doing business.business and our ability to timely remit funds on behalf of our customers.

Our services are subject to various laws and regulations, including, but not limited to, the SECURE Act 2.0, data privacy regulations, and anti-money laundering rules. The growth of our international operations also subjects us to additional risks, such as compliance with foreign laws and regulations. The enactment of new laws and regulations, modifications of existing laws and regulations, or the adverse application or interpretation of new or existing laws or regulations can adversely affect our business. Additionally, as federal, state, and international regulations become more complex, the risk that we may be unable to comply with those regulations increases, particularly in the event there are different or additional regulatory standards in different jurisdictions. Failure to update our services to comply with modified or new legislation in the areas of payment networks, health care reform and retirement plans as well as failure to educate and assist our clientscustomers regarding this legislation could adversely impact our business reputation and negatively impact our clientcustomer base. Failure to comply with anti-money laundering laws and regulations, including but not limited to the Bank Secrecy Act of 1970 (as amended), which require us to develop and implement risk-based anti-money laundering programs, and maintain transaction records, could result in civil and criminal penalties and adversely impact our business reputation.

Our solutions require the storage and transmission of proprietary and confidential information of our clientscustomers and their employees, including personal or identifying information, as well as geolocation and biometric data. Certain solutions are enhanced with the use of AI and machine learning. Our solutions are subject to various complex government laws and regulations on the federal, state, and local levels, including those governing personal privacy, AI and machine learning, as well as ethical considerations.

Despite our efforts to protect our intellectual property and proprietary information, we may be unable to do so effectively in all cases. Our intellectual property could be wrongfully acquired as a result of the use of AI tools, a cyberattack, or other wrongful conduct by employees or third-parties. To the extent that our intellectual property is not protected effectively by trademarks, copyrights, patents, or other means, other parties with knowledge of our intellectual property, including former employees, may seek to exploit our intellectual property for their own and others’ advantage. Competitors may also misappropriate our trademarks, copyrights or other intellectual property rights or duplicate our technology and solutions. Any significant impairment or misappropriation of our intellectual property or proprietary information could harm our business and our brand and may adversely affect our ability to compete. Third parties may claim that we are infringing on their intellectual property rights. Additionally, there is uncertainty regarding intellectual property ownership and license rights of AI algorithms and content generated by AI and we could become subject to similar claims of infringement as we expand our use of AI.AI, enabled by WISE. To the extent we seek to enforce or must defend our intellectual property rights with litigation, we could incur significant expenses and/or be required to pay substantial damages. We may also be obligated to indemnify our customers or vendors in connection with claims or litigation. The litigation to enforce or defend our intellectual property rights could be costly and time-consuming.

We are involved in litigation from time to time arising from the operation of our business and acquisitions and, as such, we could incur substantial judgments, fines, legal fees, or other costs.

We and our clientscustomers are subject to the impacts related to inflationary pressure, economic instability, changes in interest rates, tariffs, potential instability of the banking environment, climate change-based obligations, and other macroeconomic and/or political events. Banking volatility may subject us and our clientscustomers to losses on uninsured funds and may make equity or debt financing more difficult to obtain, and additional equity or debt financing might not be available on reasonable terms, if at all. Additionally, our business is substantially dependent on our clients’customers’ continued use of our solutions and support, and our results of operations will decline if our clientscustomers are no longer willing or able to use them. Our clientscustomers are sensitive to negative changes in economic conditions. If they cease operations or file for bankruptcy protection, we may not be paid for solutions we already provided, and our clientcustomer base will shrink, which will lower our revenue. If under financial pressure, our clientscustomers may determine that they are no longer willing to pay for the solutions and support we provide, which would reduce our revenue. Our clientscustomers may decrease their workforce, which would decrease their demand for our solutions. Because of spending constraints on our clientscustomers and competition in the industry, we may face pricing pressure on our solutions and challenges in onboarding new clients,customers, which would reduce revenue and ultimately impact our results of operations. Furthermore, if the third-party service providers we rely on are unable to perform their services for us and our clients,customers, our operations could be materially disrupted, and we could face significant penalties or liabilities.

We may be adversely impacted by volatility and uncertainty in the political and economic environment.

Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit markets may experience periods of constriction and variability. Additionally, instability in the banking environment may adversely affect our business. These conditions may impact our business due to lower transaction volumes or an increase in the number of clientscustomers going out of business. Further, inflation and uncertainty about tariff implementation may negatively impact our business and/or our clients'customers' business, raise costs and reduce profitability. Current or potential clientscustomers may decide to reduce their spending on payroll and other outsourcing solutions. In addition, new business formation may be affected by an inability to obtain credit.

Constriction in the credit markets may impact the availability of financing, even to borrowers with the highest credit ratings. Historically, we have periodically borrowed against available credit arrangements to meet short-term liquidity needs. However, should we require additional short-term liquidity during days of large outflows of client funds, a credit constriction may limit our ability to access those funds or the flexibility to obtain them at interest rates that would be acceptable to us. Growth in customizable funding solutions offered to our clientscustomers by the purchasing of their accounts receivable through non-recourse arrangements, including funding payrolls of our clients in the temporary staffing industry, may be constricted if access to financing becomes limited. In addition, our ability to grow through significant acquisitions may be limited. See also “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” If all of these financial and economic circumstances were to remain in effect for an extended period of time, there could be a material adverse effect on our results of operations and financial condition.

Our success, growth, and financial results depend in part on our continuing ability to attract, retain, motivate, and motivateupskill highly qualified and diverse personnel in a rapidly changing environment at all levels, including management, technical, compliance, sales, and salessupport personnel. Competition for these individuals can be intense, and we may not be able to retain our key people, or attract, assimilate, or retain other highly-qualified individuals in the future, which could harm our future success.

In the event we receive negative publicity, our reputation and the value of our brand could be harmed, and clientscustomers may not use our solutions and support, which may have a material adverse effect on our business.

We are committed to good corporate citizenship, which is reflected in our company culture and core values. Disclosure of our corporate governance, responsibility, and sustainability practices, may draw negative publicity from stakeholders.

Negative publicity relating to events or activities attributed to us, our policies, our corporate employees, or others associated with us, whether or not justified, may tarnish our reputation and reduce the value of our brand. If we are unable to maintain quality HCM and employee benefit-related solutions and PEO and insurance solutions, our reputation with our clientscustomers may be harmed and the value of our brand may diminish. In addition, if our brand is negatively impacted, it may have a material adverse effect on our business, including challenges retaining clientscustomers or attracting new clientscustomers and recruiting talent and retaining employees.

We are an industry-leading human capital management (“HCM”) company deliveringproviding a full suite ofcomprehensive technology and advisory solutions in human resources (“HR”), payroll processing, employee benefits, insurance, and payroll for businesses and their employeesinsurance across the United States (“U.S.”) and parts of Europe.

Our portfolioofferings of technology, HR advisory, and employee benefits-related solutions isare disaggregated into two categories, (1) Management Solutions and (2) professional employer organization (“PEO”) and Insurance Solutions, as discussed under the heading “Our Solutions” in Part I, Item 1 of this Form 10-K.

OurAs a digitally driven HR leader, our mission is to be the leading provider of HR, employee benefits, insurance, and payroll solutions by being an essential partner tohelp businesses across the U.S. and parts of Europe.succeed. Our strategy focuses on providing industry-leading, integrated technology;includes growing our clientcustomer base; expandingincreasing ourproduct share of walletpenetration; driving technology innovation; and pursuing strategic acquisitions.acquisitions, Weall believeaimed thatat successfully executing this strategy will lead to strong,achieving long-term financial performance.success.

We maintain industry-leading margins by efficiently managing our personnel costs and expenses while continuingstrategically to investinvesting in our business, particularly in sales and marketing and leading-edgeleading-edge, technology.AI-driven Wetechnology believeand theseadvisory investmentssolutions, arewhich we view as critical to our ongoing success. Looking to the future,ahead, we believe that investing in our solutions, people, and digitalAI capabilities will positionpositions us to capitalize on opportunities for long-term growth.growth opportunities.

WeBy closely monitormonitoring thecustomer evolving challengesneeds and needschallenges, ofwe proactively assist our clients, and proactively aid our clientscustomers in navigating macroeconomic challenges, legislative changes,changes and other complexitiesemployment theycomplexities. may face. Through ourOur unique blend of innovative technology solutions, backed by ourand extensive compliance and HR expertise,expertise weenables helpcustomers clientsto more effectively hire, develop, and retain top talent in this challengingtight workforcelabor environment.market. Our ongoingOngoing investments in our platforms have preparedequipped us well forto the demands ofmeet the current business demands and regulatory environments, allowing us to adapt while maintaining strong solutions and support delivery,compliance, resulting in high levels of clientcustomer satisfaction and retention.

On April 14, 2025, we completed ourthe acquisition of Paycor HCM, Inc. ("Paycor"),Paycor, a leading provider of HCM, payrollpayroll, and talent software. This acquisition extendsexpands our upmarket position and expands ourposition, suite of HRHCM technology and advisorycross-sale solutions.potential. Refer to the "Results of Operations" and “Liquidity and Capital Resources” section of this Item 7 for additional information.

Adjusted operating income, adjusted net income, and adjusted diluted earnings per share are not United States ("U.S.") generally accepted accounting principleprinciples (“GAAP”) measures. Adjusted net income and adjusted diluted earnings per share in allboth periods include an adjustment for net tax windfall benefits related to employee stock-based compensation payments. Adjusted operating income, adjusted net income and adjusted diluted earnings per share in both periods also include adjustments for acquisition-related costs in fiscal 2025 and cost optimization initiatives in fiscal 2024.costs. Refer to the “Non-GAAP Financial Measures” section of this Item 7 for a discussion of non-GAAP measures and a reconciliation to the U.S. GAAP measures of operating income, net income and diluted earnings per share.

OurDuring payrollfiscal 2026, we served approximately 840,000 total customers across the U.S. and PEO client base, including clients added through the acquisitionparts of Paycor,Europe, wasof which approximately 800,000 clientsare aspayroll ofclients. MayDuring 31,fiscal 20252025, andwe served approximately 745,000800,000 clientspayroll asclients. ofPayroll May 31, 2024. Clientclient retention remained highwas in the range of 82% to 83% of our beginning client base for both fiscal 20252026 and fiscal 20242025 and we have sustained high revenue retention.

We continue to increase penetration of our integrated solutions beyond payroll processing, including our HR outsourcing (ASO and PEO) and retirement solutions. The following table illustrates selected HR solutions clientcustomer metrics:

In fiscal 2025,2026, we continued to make investments in technology a priority as companies look to leverage technology solutions to maintainincrease operations,productivity, stayenhance connected to employees,decision-making, and increasedeliver productivity.better outcomes. We implemented enhancements to our Paychex Flex, Paycor, and SurePayroll platforms designed to improve the clientcustomer and clientcustomer employee experiences from hiring and onboarding throughthroughout employee retention. In fiscal 2026, we successfully implemented several innovative AI capabilities that enhanced value for Paychex and our customers, including WISE. WISE, our AI-powered intelligence engine extends our existing capabilities into agentic AI. Today, it powers approximately 600 AI features and agents across our solutions and operations. We also continue to focus on AI and related technology to leverage innovative technology and advanced analytics to gain deeper insights into prospects and clientscustomers regarding their behavior, preferences, and evolving needs. In fiscal 2025, we successfully implemented several additional innovative AI models that significantly improved results for Paychex and our clients.

We have further strengthened our position in the industry by serving as a source of education and information to clients,customers, businesses of all sizes, and other interested parties. We provide free webinars, white papers, and other information on our website (www.paychex.com) to aid existing and prospective clientscustomers with the impact of regulatory changes. TheIn addition, the Paychex Insurance Agency, Inc. website, www.paychex.com/group-health-insurance, helps small-business owners navigate the area of insurance coverage.

Total revenue increased to $5.6$6.5 billion for fiscal 2025,2026, reflecting an increase of 6%17% compared to the prior year. Paycor, acquired in April 2025, contributed approximately 12% to total revenue growth for fiscal 2026. The changes in revenue as compared to the prior year were primarily driven by the following factors:

Management Solutions revenue: $4.1$4.9 billion for fiscal 2025,2026, reflecting an increase of 5%20%. Paycor contributed approximately 15% to Management Solutions revenue growth for fiscal 2026. Management Solutions revenue increased due to the following:

GrowthContinued growth in the number of average PEO worksite employees; and Increase in PEO insurance revenues.

TheIncrease in average headcount, driven by the acquisition of Paycor.

Acquisition-relatedPEO direct insurance costs: $162.3$563.2 million in fiscal 20252026, reflecting an 8% increase:

CostDepreciation optimizationand initiativesamortization: $39.5$200.6 million in fiscal 20242026, reflecting a 19% increase:

Operating income: Fiscal 20252026 operating income was $2.2$2.5 billion, an increase of 2%14% compared to fiscal 2024.2025. Adjusted operating income(1) of $2.4$2.8 billion, which excludes the acquisition related costs and cost optimization initiatives noted above, reflectsincreased an increase of 7%. Operating income for fiscal 2025 was impacted by the acquisition of Paycor and the expiration of the ERTC program.19%.

Adjusted operating income,income and adjusted operating margin, adjusted net income, and adjusted diluted earnings per sharemargin are not U.S. GAAP measures. Refer to the “Non-GAAP Financial Measures” section below for a discussion of these non-GAAP measures and a reconciliation to the most comparable GAAP measure of operating income, operating margin, net income and dilutedoperating earnings per share.margin.

Management’sManagement'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 FebruaryAugust 28, 2026 (the “third quarter”), the nine months ended February 28,31, 2026 (the "ninefirst monthsquarter"), the respective prior year periodsperiod ended FebruaryAugust 28,31, 2025 (the “"prior year periods”period"), and our financial condition as of FebruaryAugust 28,31, 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 FebruaryAugust 28,31, 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, 20252026 (“"fiscal 2025”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.”"

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,”" “guidance,”"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 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.

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

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

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

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

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.

As thea 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.

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 digitalAI capabilities positions us to capitalize on long-term growth opportunities.

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.

ThirdFirst Quarter and Year to Date Business Highlights

Highlights compared to the prior year periodsperiod are as follows:

For further analysis of our results of operations for the thirdfirst quarter and nine months, the prior year periods,period, and our financial position as of FebruaryAugust 28,31, 2026, refer to the tables and analysis in the “"Results of Operations”" and “"Liquidity and Capital Resources”" sections of this Item 2.

Total revenue increased to $1.8$1.6 billion for the thirdfirst quarter and $4.9 billion for the nine months,quarter, reflecting increasesan increase of 20% and 18%, respectively,6% over the prior year periods.period. The changes in revenue as compared to the prior year periodsperiod were primarily driven by the following factors:

PEO and InsuranceManagement Solutions revenue: $397.5 million for the third quarter and $1.1$1.2 billion for the ninefirst months,quarter, reflecting increasesan increase of 9% and 6%, respectively:4%.

Growth in the average number of average PEO worksite employees ("WSEs"); and Higher PEO insurance volumes.

Interest on funds held for clients: $56.8$49.8 million for the thirdfirst quarter and $158.7 million for the nine months,quarter, reflecting increasesan increase of 33% and 36% respectively:5%.

(1) The net unrealized loss on our investment portfolio was approximately $55.3$151.2 million as of MarchSeptember 24,23, 2026. Refer to Note FE 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.

(2) The Federal Funds rate was in the range of 3.50% to 3.75% as of FebruaryAugust 28,31, 2026 and 4.25%3.50% to 4.50%3.75% as of May 31, 2025.2026. Effective September 17, 2026, the Federal Reserve increased the Federal Funds rate to a range of 3.75% to 4.00%.

Total expenses: Total expenses, which reflectsinclude the total combined cost of service revenue and selling, general and administrative expenses, increasedwere 24%relatively tounchanged at $1.0 billion for the thirdfirst quarter and 27% to $3.0 billion for the nine months.quarter. The following table summarizes the components of total expenses:

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

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 higherHigher property and equipment balances compared to the prior year period,balances, including an increase in the development and enhancement of our client-facing internal-use software.

Acquisition-related costs: $71.2were millionprimarily forassociated with the thirdApril quarter and $233.1 million for the nine months, primarily due to the2025 acquisition of Paycor inand April 2025. Acquisition-related costs reflectinclude 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.

Operating income: Operating income increased 14% to $792.0$619.2 million for the thirdfirst quarter and 7% to $1.9 billion for the nine months.quarter. Adjusted operating income(1), which excludes acquisition-related costs included in selling, general and administrative expenses, grew 22%9% to $863.2$684.7 million for the thirdfirst quarter and 19% to $2.1 billion for the nine months.quarter.

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 measuresmeasure of netoperating income and diluted earnings per share.income.

Interest expense: Interest expense increaseddecreased $45.5by $3.1 million to $68.1$65.1 million for the thirdfirst quarter and $163.1 million to $204.8 million for the nine months,quarter, primarily duereflecting tolower the issuance of incrementaloutstanding debt to finance the acquisition of Paycor.balances.

Income taxes: Our effective income tax rate was 24.2%24.0% for the thirdfirst quarter and 23.7% for the nine monthsquarter, compared to 24.3% and 23.9%,22.9% for the prior year periods respectively.period. The effective income tax ratesrate in allboth periods werewas affected by the recognition of discrete tax impacts related to employee stock-based compensation payments.

$9.8$56.9 million for the thirdfirst quarter andcompared $41.7to $61.1 million for the ninecorresponding monthsprior-year period, in amortization of intangibles acquired in the acquisition of Paycor, $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;bonuses, and $0.9$0.1 million for the thirdfirst quarter andcompared $9.9to $5.0 million for the nine months compared to $16.7 million for both corresponding priorprior-year year periods,period, in other acquisition-related costs, primarily reflecting professional service fees.costs.

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 employeeoption-holder decisions onrelating to exercising employee stock options and fluctuations in our stock price, neither of which is within the control of management.

Our financial position as of FebruaryAugust 28,31, 2026 remained strong with cash, restricted cash, and total corporate investments of $1.8$1.0 billion. Long-term borrowings of $5.0$4.6 billion were outstanding as of FebruaryAugust 28,31, 2026. Our unused capacity under our unsecured credit facilities was $2.0 billion as of FebruaryAugust 28,31, 2026. Our primary source of cash is our ongoing operations, which was $2.0$413.5 billionmillion forduring the ninefirst months.quarter. Our positive cash flows have allowedenabled us to support our business and pay dividends. We currently anticipate that corporate cash, corporate restricted cash, and total corporate investments as of FebruaryAugust 28,31, 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, acquisitions, and debt service for the foreseeable future.

For client funds liquidity, we have the ability to borrow on our unsecured credit facilities or use corporate liquidity when necessary to meet short-term funding needs related to client fund obligations. Historically, we have borrowed, typically on an overnight basis, to settle short-term client fund obligations, rather than liquidate previously collected client funds invested in our long-term AFS portfolio. We believe that our investments in an unrealized loss position as of FebruaryAugust 28,31, 2026 were not impaired due to increased credit risk or other valuation concerns, nor has any event occurred subsequent to that date to indicate any change in our assessment. We do not intend to sell these investments until recovery of their amortized cost basis or maturity and further believe that it is not more-than-likely that we would be required to sell these investments prior to that time.

Details of our credit facilities as of FebruaryAugust 28,31, 2026 were as follows:

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 Bank, N.A. Credit Facility. Refer to Note HM in the Notes to Consolidated Financial Statements (Unaudited) contained in Item 18 of thisour Form 10-Q10-K andfor ourfiscal Current Report on Form 8-K filed on January 26, 2026,2026 for additional information.

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

Letters of credit: As of FebruaryAugust 28,31, 2026, we had irrevocable standby letters of credit available totaling $179.1$173.0 million, primarily to secure commitments for certain insurance policies. The letters of credit expire at various dates between MarchSeptember 03,01, 2026 and FebruaryDecember 28,24, 2027. No amounts were outstanding on these letters of credit during the thirdfirst quarter or as of FebruaryAugust 28,31, 2026.