Paychex, Inc. (PAYX) FY2026 10-K and Q1 FY2027 10-Q Summary

Business

Source: Form 10-K for fiscal 2026, SEC accession 0001193125-26-307785.

Paychex sells human capital management (HCM) software and outsourced HR, payroll, employee-benefits and insurance services, mainly to small and mid-sized U.S. employers, with some operations in Europe. At May 31, 2026 it served about 840,000 customers, about 800,000 of them payroll clients. It says it pays 1 in 11 U.S. private-sector workers and moved about $1.3 trillion in the last fiscal year. Revenue comes from three sources: recurring service fees for software and outsourcing (Management Solutions), PEO and insurance fees (PEO and Insurance Solutions), and interest earned on client payroll and tax funds it holds before paying them out. More than 60% of revenue comes from solutions other than payroll processing. Paychex reports as a single segment and has dual headquarters in Rochester, New York and Cincinnati, Ohio.

Fiscal 2026 revenue of $6,512.0 million was split as follows:

• Management Solutions ($4,867.9 million). HCM software and HR outsourcing are delivered on three platforms. SurePayroll serves self-service small businesses. Paychex Flex serves small and mid-sized businesses. Paycor is the main platform for larger customers with more complex needs. Customers can add modules for payroll, HR, talent acquisition and management, workforce management (time, scheduling, labour), benefits administration and the Perks employee-benefits marketplace. The category also includes administrative services organization (ASO) HR outsourcing and retirement plans: Paychex calls itself a leading 401(k) recordkeeper, with over 130,000 customers and $66 billion of retirement assets. It also includes funding solutions that buy customers' receivables without recourse, through Paychex Advance for temporary-staffing firms and Alterna Capital Solutions for small businesses.
• PEO and Insurance Solutions ($1,433.2 million). In its professional employer organization (PEO), Paychex acts as co-employer of its clients' employees and takes on the risks and rewards of certain workers' compensation and health insurance. Paychex Insurance Agency sells property and casualty and health and benefits coverage from a range of carriers and earns commissions.
• Interest on funds held for clients ($210.9 million). This is income on client funds collected before they are remitted to employees and tax authorities. In fiscal 2026 these funds averaged $5,768.2 million.

Across its ASO and PEO HR outsourcing services, Paychex supports about 2.6 million worksite employees, with over 650 HR business professionals and about 250 compliance professionals. Its AI engine, WISE ("Workforce Intelligence Strengthened by Expertise"), powers about 600 AI features and agents and draws on what the company calls more than 26 trillion data points.

Most sales come from a direct sales force with field, inside and virtual reps. Referrals from CPAs, benefit brokers, banks and existing customers account for more than 50% of payroll clients. Paychex has been the AICPA's preferred payroll provider, under an agreement that runs through September 2027. Service agreements generally have no fixed term and either side can end them on 30 days' notice. Payroll client retention was 82% to 83% of the beginning client base in both fiscal 2026 and fiscal 2025. Competition comes from one primary national competitor, other national, regional and online payroll providers, in-house HR departments, and providers of retirement, insurance, HR consulting and PEO services. Paychex's peer group lists Automatic Data Processing as its direct competitor. Census data put more than 6 million U.S. employer firms in its target markets.

Paycor HCM, Inc. was bought on April 14, 2025, to move Paychex upmarket. Total purchase consideration was about $4.1 billion: $4,060.6 million in cash at $22.50 per Paycor share, plus $25.1 million of replacement awards. It was financed with $4.2 billion of fixed-rate corporate bonds. Paychex recorded $2,591.8 million of goodwill and $1,776.5 million of intangibles, of which $1,118.0 million was customer relationships amortized over 12 years. The purchase price allocation was finalized as of March 31, 2026.

The business has no significant seasonality. However, new payroll clients, retirement customers and worksite employees tend to peak in the third fiscal quarter, which ends in February, because many businesses switch providers at the start of the calendar year. Paychex had about 17,600 employees at May 31, 2026, and compensation-related costs were about 52% of fiscal 2026 total expenses.

Risk factors

Source: Form 10-K for fiscal 2026, Item 1A, SEC accession 0001193125-26-307785. The first-quarter 10-Q adds no new risk factors.

The 10-K groups its risks into operational, financial, legal and regulatory, and general economic risks. The ones most specific to Paychex:

• Technology and AI execution. Paychex has to keep three HCM platforms competitive and is building AI into its products and operations through WISE. AI can produce inaccurate or biased output, customers may not adopt it or may use AI from other providers, and new AI tools could disrupt the industry. The legal and IP position of AI-generated content is unsettled. Software defects or delays, including in generative and agentic AI, could cause liability and damage the company's reputation.
• Cybersecurity and data. Paychex holds bank account, Social Security, tax, health, retirement and payroll data for its customers and their employees. It says this may make it a particular target, especially during and after acquisitions. A breach or outage could lead to lost customers, litigation, regulatory penalties and business interruption. The company also depends on third parties, including the banks that move client funds and cloud vendors.
• PEO co-employment and insurance costs. As co-employer, Paychex can be held liable for its clients' employment-law violations. Workers' compensation and health-insurance claims are a significant part of PEO costs. If claims rise unexpectedly, reserves prove short, or cost increases cannot be passed on quickly through fees, margins would suffer.
• Client credit and funds-flow risk. Paychex moves money for clients and may be liable for payments it makes on their behalf if their accounts are short. Its purchased-receivables business depends on its clients' own customers paying. A rule change that cut tax withholding or shortened remittance windows would reduce the client-fund balances that earn interest.
• Debt and covenants. The $4.2 billion of Paycor-related bonds come with restrictions on liens, sale-leasebacks and mergers. The 2019 note agreement and the JPMorgan credit facilities cap leverage at 3.5 to 1.0. The note agreement also requires interest coverage of at least 2.0 to 1.0 and limits certain debt to 20% of stockholders' equity. Further acquisitions could bring Paychex close to these limits, and a weaker credit rating could raise short-term borrowing costs.
• Acquisition integration. The Paycor integration, and any future deals, carry risks: synergies may fall short, customers and key employees may leave, management may be distracted, and acquired goodwill and intangibles could be impaired.
• Regulation. Paychex's payroll-tax, benefit-plan and PEO services are built around government rules that change often. Changes could reduce demand or raise compliance costs. The company is also subject to anti-money-laundering rules (Bank Secrecy Act), OFAC sanctions, the FCPA, the SECURE Act 2.0, HIPAA, state privacy and biometric laws, the EU's GDPR, and emerging AI regulation.
• Macroeconomic and interest-rate exposure. Paychex's customers are mostly small and mid-sized businesses. Inflation, tariffs, banking instability or recession can cut their headcount and spending, push some out of business and put pressure on prices. Lower interest rates or smaller client balances reduce interest on client funds and corporate investments. Selling securities to meet funding needs could lock in losses, and tight credit markets could limit the short-term borrowing Paychex uses on days of heavy client-fund outflows.
• People and reputation. Paychex's growth depends on attracting and keeping technical, compliance, sales and service staff. Negative publicity, including about its governance or sustainability disclosures, could harm the brand and its ability to win customers.

Paychex says that as of May 31, 2026 it was not aware of any cybersecurity threat, including any previous incident, that had materially affected it or was reasonably likely to.

Management's discussion, fiscal 2026

Source: Form 10-K for fiscal 2026, Item 7, SEC accession 0001193125-26-307785.

Fiscal 2026 was the first full year that included Paycor, and it drove most of the growth. Total revenue rose 17% to $6,512.0 million from $5,571.7 million, and the company says Paycor contributed approximately 12% to total revenue growth. Management Solutions revenue grew 20% to $4,867.9 million, with Paycor contributing approximately 15% to that growth. The rest came from more clients and HR outsourcing worksite employees, plus higher revenue per client from Paycor's larger customers, price increases and selling more products to existing clients. PEO and Insurance Solutions revenue grew 7% to $1,433.2 million, as average PEO worksite employees and PEO insurance revenue both increased. Interest on funds held for clients rose 30% to $210.9 million. Paycor added to average client-fund balances, and realized gains came from repositioning the portfolio in the second quarter.

Total expenses grew faster than revenue, up 19% to $4,001.5 million:

• Compensation-related expenses rose 13% to $2,091.9 million, mainly because Paycor added headcount.
• PEO direct insurance costs rose 8% to $563.2 million.
• Depreciation and amortization rose 19% to $200.6 million.
• Other expenses rose 28% to $841.6 million on technology, selling and marketing spending.
• Acquisition-related costs rose 87% to $304.2 million. Of that, $242.0 million was amortization of Paycor intangibles, $52.1 million was Paycor-related compensation (replacement awards, severance and retention bonuses), and $10.1 million was other costs, mainly professional fees.

Operating income rose 14% to $2,510.5 million, but operating margin narrowed to 38.6% from 39.6%. Excluding acquisition-related costs, adjusted operating income rose 19% to $2,814.7 million and adjusted operating margin widened to 43.2% from 42.5%.

Interest expense more than doubled, rising $164.1 million to $269.5 million because of the Paycor bonds. Other income, net slipped 5% to $69.9 million as rates on corporate investments fell. The effective tax rate was 23.8% in both years. Net income rose 6% to $1,760.1 million and diluted EPS rose 7% to $4.89. On an adjusted basis, net income rose 10% to $1,984.8 million and diluted EPS rose 11% to $5.51. EBITDA was $2,959.6 million and adjusted EBITDA $3,021.8 million.

Customer metrics at May 31, 2026, compared with a year earlier:

• HR outsourcing (ASO and PEO) worksite employees: 2.6 million, up 6% from 2.46 million.
• Retirement plans: 130,000, up 4% from 124,000.
• Retirement participants' assets: $66.0 billion, up 19% from $55.7 billion.
• Unique employee purchases on Perks: 237,000, up 78% from 133,000.

Cash, capital return and balance sheet. Operating cash flow was $2,556.7 million, against $1,900.9 million in fiscal 2025. Paychex paid $1,589.6 million in dividends ($4.43 per share), about 90% of net income. It bought back 5.6 million shares for $611.0 million at an average of $108.81. The Board's earlier repurchase authorization expired on January 16, 2026, and the Board approved a new $1.0 billion program with no expiration date the same day. In March 2026 the company repaid its $400.0 million Series A senior notes at maturity.

At May 31, 2026, long-term debt was $4.6 billion:

• $0.4 billion of 4.25% Series B notes, due March 13, 2029.
• $1.5 billion of 5.10% bonds, due April 15, 2030.
• $1.5 billion of 5.35% bonds, due April 15, 2032.
• $1.2 billion of 5.60% bonds, due April 15, 2035.

Cash, restricted cash and corporate investments totalled $1.2 billion, and $2.0 billion of committed JPMorgan credit lines was unused. These were two $1.0 billion facilities maturing April 12, 2029 and January 23, 2031, after the January 2026 amendments. The company uses overnight borrowings under these lines to settle client-fund obligations rather than sell its long-term investments.

Current quarter, first quarter fiscal 2027 (three months ended August 31, 2026)

Sources: Form 10-Q for the quarter ended August 31, 2026, SEC accession 0000723531-26-000006; earnings release furnished on Form 8-K dated September 23, 2026 (Exhibit 99.1), SEC accession 0000723531-26-000004.

This is the first quarter in which Paycor is included for the whole of both the current and the prior-year period, so growth slowed to mid-single digits while margins widened. Total revenue rose 6% to $1,630.5 million:

• Management Solutions grew 4% to $1,213.1 million, from higher revenue per client through price increases and selling more products to existing clients.
• PEO and Insurance Solutions grew 12% to $367.6 million, on growth in average PEO worksite employees and higher PEO insurance volumes. It was the fastest-growing line.
• Interest on funds held for clients rose 5% to $49.8 million because average rates were higher. Average client-fund balances were flat at $5,401.6 million.

Total expenses rose only 1% to $1,011.3 million:

• Compensation-related expenses fell 1% to $526.8 million.
• PEO direct insurance costs rose 10% to $152.9 million, driven by growth in average worksite employees and higher PEO insurance volumes.
• Other expenses rose 8% to $213.2 million on technology and selling investments.
• Acquisition-related costs fell 23% to $65.5 million. Of that, $56.9 million was Paycor intangible amortization and $8.5 million was integration-related compensation.

Operating income rose 14% to $619.2 million, which the company attributes primarily to revenue growth and lower acquisition-related costs, and operating margin widened to 38.0% from 35.2%. Adjusted operating income rose 9% to $684.7 million, an adjusted margin of 42.0% against 40.7%. Interest expense fell $3.1 million to $65.1 million, which management attributes mainly to lower outstanding debt. Other income, net fell 54% to $10.9 million. Within it, interest income on corporate investments was $10.2 million against $18.7 million, and average corporate cash and investments were 30% lower at $1,240.9 million. The effective tax rate rose to 24.0% from 22.9%. Net income grew 12% to $429.7 million and diluted EPS 14% to $1.21, helped by fewer diluted shares. Adjusted diluted EPS rose 10% to $1.34.

Operating cash flow fell to $413.5 million from $718.4 million a year earlier. Management points to the timing of PEO tax settlements, fewer pandemic-era (CARES Act) tax refunds owed to clients, and payment of fiscal 2026 year-end bonuses. Higher accrued interest on the bonds, with the next payment due in October, partly offset these. Paychex paid $424.1 million of dividends ($1.19 per share, up from $1.08) and bought back no shares, leaving $675.6 million under the buyback program. It spent $18.1 million, net of cash acquired, on an acquisition that the 10-Q calls immaterial and does not name, and paid $15.0 million of contingent consideration for earlier acquisitions. At August 31, 2026, cash, restricted cash and corporate investments were $1.0 billion. Long-term borrowings were $4.6 billion, with no material change in the quarter, and $2.0 billion of credit lines was unused. Net unrealized losses on the securities portfolio widened to $92.4 million from $52.5 million at May 31.

In the earnings release, management highlighted AI: early-adopter results from WISE, the launch of the WISE Hire agentic recruiting tool, and WISE capabilities extended into Microsoft business applications. Paychex expects its total investment portfolio to average about $7.0 billion in fiscal 2027. It estimates a 25-basis-point change in short-term rates would move after-tax earnings by about $4.5 million to $5.0 million over twelve months.

Fiscal 2027 outlook. With the first-quarter results on September 23, 2026, Paychex kept its total revenue growth outlook at 5% to 6%, its adjusted operating margin at about 44% and its adjusted diluted EPS growth at 7% to 9%. It raised its outlook for PEO and Insurance Solutions revenue growth to 7% to 8% and for interest on funds held for clients to $200 million to $210 million.

Subsequent events

Source: Form 10-Q for the quarter ended August 31, 2026, SEC accession 0000723531-26-000006.

The 10-Q has no separate subsequent-events note. It discloses no acquisitions, divestitures, new debt issues or litigation outcomes after August 31, 2026. The post-period developments it does report concern liquidity and the investment portfolio:

• Short-term borrowing. After August 31, 2026, Paychex borrowed 13 times on an overnight basis under its JPMorgan credit facilities. The weighted-average amount borrowed was $523.8 million. The company uses these lines routinely to settle client-fund obligations.
• Portfolio mark-to-market. The net unrealized loss on the investment portfolio was about $151.2 million as of September 23, 2026, up from $92.4 million at quarter-end. The company attributes such swings to changes in market interest rates rather than credit quality.
• Interest rates. Effective September 17, 2026, the Federal Reserve raised the federal funds rate to a range of 3.75% to 4.00%, from 3.50% to 3.75% at quarter-end. The company notes that in a rising-rate environment its earnings increase first from short-term investments and, over time, from longer-term securities as they mature and are reinvested.

The fiscal 2026 10-K (accession 0001193125-26-307785) reported that after May 31, 2026, Paychex borrowed seven times overnight under the JPMorgan facilities, with a weighted-average amount of $478.2 million. Ten letters of credit that expired after year-end were renewed for one-year terms.