Paychex(PAYX) - 2025 Q4 - Annual Report

Part I Item 1. Business Paychex is a leading Human Capital Management (HCM) company providing a full suite of technology and advisory solutions in HR, benefits, insurance, and payroll to approximately 800,000 clients - Paychex is an industry-leading Human Capital Management (HCM) company serving approximately 800,000 clients across the U.S. and parts of Europe as of May 31, 2025[18] - On April 14, 2025, the company completed its acquisition of Paycor HCM, Inc. to enhance its capabilities in the upmarket segment, expand its sales force, and bolster its AI-driven HCM solutions[22] - The company's strategy is centered on four key elements: growing its client base, expanding share of wallet with a full suite of solutions, driving technology innovation with AI, and pursuing strategic acquisitions[24][30] - Client retention for fiscal 2025 was strong, remaining in the range of 82% to 83% of the beginning client base[26] Our Solutions Paychex provides comprehensive Human Capital Management solutions, including technology platforms for payroll, HR, and benefits, alongside PEO and insurance services, notably as the largest 401(k) recordkeeper for small businesses - Paychex offers a comprehensive portfolio of solutions categorized into Management Solutions and PEO/Insurance Solutions, including HCM technology platforms and modules for payroll, HR, talent, and benefits administration[31][33][36] - The company is the largest 401(k) recordkeeper for small businesses in the U.S., offering a variety of retirement solutions including 401(k) plans, SIMPLE and SEP IRAs, and Pooled Employer Plans[36] Sales and Marketing The company leverages a direct sales force and significant referral channels, including a key partnership with the AICPA, to drive new client acquisition - The company utilizes a direct sales force and indirect channels, including referrals from existing clients, CPAs, benefit brokers, and banks, with over 50% of new payroll clients originating from these referral sources[34][35] - Paychex has a long-standing partnership with the AICPA as the preferred payroll provider, with the current agreement in place through September 2027[37] Human Capital As of May 31, 2025, Paychex employed approximately 19,000 people, with compensation representing 55% of total expenses, and has been consistently recognized for its ethical practices - As of May 31, 2025, Paychex employed approximately 19,000 people, primarily in the U.S. on a full-time basis, with none covered by collective bargaining agreements[48] - For fiscal year 2025, compensation-related expenses accounted for approximately 55% of the company's total expenses[52] - Paychex was recognized by Ethisphere as one of the World's Most Ethical Companies for the 17th consecutive time in 2025[49] Item 1A. Risk Factors The company identifies several key risks that could materially affect its business, including operational, financial, regulatory, and general macroeconomic factors - Business & Operational Risks: The company faces risks from rapid technological changes, potential software defects, cyberattacks targeting its vast data stores, and challenges related to the successful integration of acquisitions, specifically mentioning Paycor[62][64][72] - Financial Risks: Key financial risks include potential losses if clients have insufficient funds for payroll, the impact of regulatory changes on interest earned from client funds, and risks associated with its $4.2 billion in corporate bonds issued in April 2025 to fund the Paycor acquisition, requiring adherence to debt covenants including a maximum leverage ratio of 3.5:1.0[75][76][77][80] - Legal & Regulatory Risks: The business is subject to complex and changing government regulations, including data privacy laws (like GDPR and CCPA), anti-money laundering rules, and employment laws, with failure to comply potentially resulting in significant penalties and reputational damage[85][86][88] - General Risks: Macroeconomic factors such as inflation and interest rate changes can adversely impact Paychex's small and medium-sized business clients, potentially reducing demand for its services, and the company also faces risks from political volatility and competition for qualified talent[93][94][97] Item 1C. Cybersecurity Paychex's cybersecurity program is aligned with the NIST Cybersecurity Framework 2.0, employing a layered controls approach to manage threats, overseen by the Audit Committee and managed by the Enterprise Security Organization - The company's security program is aligned with the National Institute of Standards and Technology Version 2.0 Cybersecurity Framework (NIST CSF) and uses a layered controls approach[101] - Cybersecurity governance is handled by the Audit Committee of the Board, which receives quarterly updates from the Chief Information Security Officer (CISO), with management's implementation overseen by a Security Governance Council (SGC) chaired by the CISO[107][108] - The Enterprise Security Organization (ESO) includes the Paychex Cyber Fusion Center, which provides 24x7x365 cybersecurity monitoring and incident response[103] - As of May 31, 2025, the company is not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[106] Item 2. Properties As of May 31, 2025, Paychex owned approximately 998,000 square feet of facility space, primarily in Rochester, NY, and leased approximately 1,198,000 square feet across the U.S. and international locations Owned and Leased Properties as of May 31, 2025 | Facility Type | Location | Square Feet | | :--- | :--- | :--- | | Owned | Rochester, NY | 832,000 | | | Other U.S. locations | 166,000 | | | Total Owned | 998,000 | | Leased | Rochester, NY | 53,000 | | | Other U.S. locations | 865,000 | | | International locations | 280,000 | | | Total Leased | 1,198,000 | Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Paychex common stock trades on the NASDAQ Global Select Market under the symbol 'PAYX', with the company having a history of paying quarterly dividends and a share repurchase program approved in January 2024 Fiscal 2025 Share Repurchases | Period | Total Shares Purchased (millions) | Average Price Paid per Share | Total Dollars (millions) | Approximate Value Remaining for Purchase (millions) | | :--- | :--- | :--- | :--- | :--- | | First Quarter | 0.8 | $125.50 | $104.0 | $296.0 | | Second Quarter | — | $— | $— | $296.0 | | Third Quarter | — | $— | $— | $296.0 | | Fourth Quarter | — | $— | $— | $296.0 | | Fiscal Year Total | 0.8 | $125.50 | $104.0 | $296.0 | Five-Year Cumulative Total Return Comparison | Date | Paychex | S&P 500 | Peer Group | | :--- | :--- | :--- | :--- | | May 31, 2020 | $100.00 | $100.00 | $100.00 | | May 31, 2021 | $144.16 | $140.30 | $127.00 | | May 31, 2022 | $180.70 | $139.86 | $118.53 | | May 31, 2023 | $157.41 | $143.91 | $121.82 | | May 31, 2024 | $185.79 | $184.45 | $153.68 | | May 31, 2025 | $251.16 | $209.35 | $186.69 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2025, Paychex's total revenue grew 6% to $5.6 billion, driven by growth in both Management Solutions and PEO and Insurance Solutions, along with higher interest on funds held for clients, with the Paycor acquisition contributing to this growth Fiscal 2025 Financial Highlights vs. Fiscal 2024 | Metric | Fiscal 2025 (in millions) | Fiscal 2024 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $5,571.7 | $5,278.3 | 6% | | Operating Income | $2,207.7 | $2,174.1 | 2% | | Adjusted Operating Income | $2,370.0 | $2,213.6 | 7% | | Net Income | $1,657.3 | $1,690.4 | (2)% | | Adjusted Net Income | $1,802.9 | $1,709.1 | 5% | | Diluted EPS | $4.58 | $4.67 | (2)% | | Adjusted Diluted EPS | $4.98 | $4.72 | 6% | - The acquisition of Paycor on April 14, 2025, is a key event, extending the company's upmarket position and expanding its suite of HR technology and advisory solutions[134] HR Solutions Client Metrics | Metric (as of May 31) | 2025 | 2024 | % Change | | :--- | :--- | :--- | :--- | | Paychex HR solutions (ASO and PEO) client worksite employees | 2,460,000 | 2,332,000 | 5% | | Retirement solutions plans | 124,000 | 121,000 | 3% | | Asset value of retirement solutions participants' funds (in billions) | $55.7 | $51.8 | 8% | Results of Operations In fiscal 2025, total revenue increased 6% to $5.57 billion, primarily from service revenue and interest on client funds, while adjusted operating margin improved despite a slight decline in reported operating margin Revenue Breakdown (Fiscal Year 2025 vs 2024) | Revenue Source | FY 2025 (in millions) | FY 2024 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Management Solutions | $4,067.1 | $3,866.4 | 5% | | PEO and Insurance Solutions | $1,342.9 | $1,265.6 | 6% | | Total Service Revenue | $5,410.0 | $5,132.0 | 5% | | Interest on funds held for clients | $161.7 | $146.3 | 10% | | Total Revenue | $5,571.7 | $5,278.3 | 6% | Expense Breakdown (Fiscal Year 2025 vs 2024) | Expense Category | FY 2025 (in millions) | FY 2024 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Compensation-related expenses | $1,853.0 | $1,810.4 | 2% | | PEO direct insurance costs | $520.1 | $471.3 | 10% | | Other expenses | $659.8 | $606.5 | 9% | | Acquisition-related costs | $162.3 | $— | n/m | | Cost optimization initiatives | $— | $39.5 | n/m | | Total Expenses | $3,364.0 | $3,104.2 | 8% | - Operating margin for fiscal 2025 was 39.6%, down from 41.2% in fiscal 2024, however, the adjusted operating margin, which excludes acquisition costs and other non-core items, increased to 42.5% from 41.9%[148] Liquidity and Capital Resources The company maintains a strong financial position with $1.7 billion in cash and investments, supported by $5.0 billion in long-term debt, primarily from financing the Paycor acquisition - The company's financial position remains strong with $1.7 billion in cash, restricted cash, and total corporate investments as of May 31, 2025, and it has $5.0 billion in long-term borrowings outstanding[157] - To finance the Paycor acquisition, the company issued $4.2 billion in fixed-rate corporate bonds in April 2025 and entered into a bridge loan commitment which was subsequently canceled[167][168] Cash Flow Summary (Fiscal Year 2025 vs 2024) | Cash Flow Activity (in millions) | FY 2025 | FY 2024 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,900.9 | $1,897.7 | $3.2 | | Net cash used in investing activities | $(3,356.8) | $(260.9) | $(3,095.9) | | Net cash provided by/(used in) financing activities | $2,293.2 | $(1,874.7) | $4,167.9 | - The significant increase in cash used in investing activities and cash provided by financing activities in FY2025 is primarily due to the acquisition of Paycor and the related debt issuance[181][190] Critical Accounting Policies and Estimates Critical accounting policies encompass revenue recognition, PEO insurance reserves, goodwill and intangible asset impairment, stock-based compensation, and business combinations, with significant judgment applied to PEO reserves and acquisition accounting - Key critical accounting policies include revenue recognition, accounting for PEO insurance reserves, goodwill and intangible asset impairment testing, stock-based compensation valuation, and accounting for business combinations[186] - PEO insurance reserves are a critical estimate, particularly for workers' compensation, which involves using independent actuarial estimates based on historical claims, loss development factors, and future cost trends[194] - For business combinations, the company uses the acquisition method, which requires significant judgment in allocating the purchase price to the fair values of assets acquired and liabilities assumed, with the excess recorded as goodwill[206] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Paychex is primarily exposed to market risk from changes in interest rates, affecting earnings on client funds and corporate investments, which it manages by investing in high-quality, short- to intermediate-term instruments - The average interest rate earned on the combined funds held for clients and corporate investment portfolios was 3.7% in fiscal 2025, down from 3.8% in fiscal 2024[212] - A 25-basis-point change in short-term interest rates is estimated to affect after-tax earnings by approximately $6.0 million to $6.5 million over a twelve-month period[217] - As of May 31, 2025, the combined funds held for clients and corporate available-for-sale securities had net unrealized losses of $53.6 million, a significant improvement from $162.5 million at the end of fiscal 2024[219] - The company is also exposed to credit risk through its investments and client receivables, but believes its high-quality portfolio (predominantly AA rated or higher) and monitoring procedures mitigate this risk, with no investments deemed impaired due to credit risk as of May 31, 2025[224][225] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended May 31, 2025, and the preceding two years, along with the auditor's report and notes - Management concluded that the company maintained effective internal control over financial reporting as of May 31, 2025, with the assessment excluding the recently acquired Paycor, which represented approximately 8% of total assets and 2% of revenues[233][234] - The independent auditor, PricewaterhouseCoopers LLP, identified two Critical Audit Matters: (1) the valuation of PEO workers' compensation insurance reserves due to significant management judgment, and (2) the valuation of customer relationships acquired in the Paycor acquisition due to the subjectivity of assumptions like revenue growth and discount rates[247][249][252] Consolidated Financial Statements This section presents the company's audited consolidated financial statements, including income statements, balance sheets, and cash flow statements, for the fiscal years ended May 31, 2025, 2024, and 2023 Consolidated Statement of Income (in millions, except per share) | Metric | FY 2025 | FY 2024 | FY 2023 | | :--- | :--- | :--- | :--- | | Total Revenue | $5,571.7 | $5,278.3 | $5,007.1 | | Operating Income | $2,207.7 | $2,174.1 | $2,033.1 | | Net Income | $1,657.3 | $1,690.4 | $1,557.3 | | Diluted EPS | $4.58 | $4.67 | $4.30 | Consolidated Balance Sheet (in millions) | Metric | As of May 31, 2025 | As of May 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $8,916.5 | $7,251.5 | | Goodwill | $4,514.1 | $1,882.7 | | Total Assets | $16,564.1 | $10,383.1 | | Total Current Liabilities | $6,956.3 | $5,309.1 | | Long-term Debt, net | $4,548.4 | $798.6 | | Total Liabilities | $12,436.1 | $6,582.1 | | Total Stockholders' Equity | $4,128.0 | $3,801.0 | Notes to Consolidated Financial Statements Key notes detail the $4.1 billion Paycor acquisition, which significantly impacted goodwill and intangible assets, an increase in stock-based compensation, and the company's $5.0 billion long-term debt structure - Note D (Business Combinations): On April 14, 2025, Paychex acquired Paycor for total consideration of approximately $4.1 billion, adding $2.6 billion in goodwill and $1.8 billion in identifiable intangible assets, primarily customer relationships ($1.1 billion) and developed technology ($367 million)[337][346][348] - Note F (Stock-Based Compensation): Total stock-based compensation expense was $111.8 million in FY2025, up from $61.1 million in FY2024, partly due to replacement awards issued in the Paycor acquisition[356][361] - Note N (Long-term Financing): As of May 31, 2025, total long-term debt was $5.0 billion, consisting of $0.8 billion in Senior Notes and $4.2 billion in Corporate Bonds issued in April 2025 to finance the Paycor acquisition[414] Item 9A. Controls and Procedures Based on an evaluation as of May 31, 2025, the company's principal executive officer and principal financial officer concluded that Paychex's disclosure controls and procedures were effective - The company's principal executive and financial officers concluded that as of May 31, 2025, the company's disclosure controls and procedures were effective[437] - No changes occurred during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[438] Part III Item 10. Directors, Executive Officers and Corporate Governance This section provides information on the company's executive officers as of May 31, 2025, including their ages, positions, and business experience, with new executives joining from the Paycor acquisition Key Executive Officers as of May 31, 2025 | Name | Age | Position | | :--- | :--- | :--- | | John B. Gibson | 59 | President and CEO | | Robert L. Schrader | 53 | Chief Financial Officer | | Mason Argiropoulos | 47 | Chief Human Resources Officer | | Sipi Bhandari | 54 | Chief Legal Officer, Chief Ethics Officer and Secretary | | Adam Ante | 44 | Senior Vice President, Paycor | | Ryan Bergstrom | 46 | Chief Product Officer | Item 11. Executive Compensation All detailed information regarding executive compensation, including the Compensation Discussion and Analysis, executive and director compensation tables, and the Compensation and Leadership Committee Report, is incorporated by reference from the company's forthcoming 2025 Proxy Statement - All detailed information regarding executive compensation is incorporated by reference from the company's forthcoming 2025 Proxy Statement[448] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on the company's equity compensation plans as of May 31, 2025, including securities to be issued upon option exercise and those remaining available for future issuance Equity Compensation Plan Information as of May 31, 2025 | Plan Category | Number of securities to be issued upon exercise of outstanding options (in millions) | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance (in millions) | | :--- | :--- | :--- | :--- | | Equity compensation plan approved by security holders | 3.0 | $84.33 | 12.0 | Item 13. Certain Relationships and Related Transactions, and Director Independence All detailed information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's forthcoming 2025 Proxy Statement - All detailed information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's forthcoming 2025 Proxy Statement[452] Item 14. Principal Accounting Fees and Services All detailed information regarding principal accounting fees and services is incorporated by reference from the company's forthcoming 2025 Proxy Statement - All detailed information regarding principal accounting fees and services is incorporated by reference from the company's forthcoming 2025 Proxy Statement[453] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, including the Paycor merger agreement and debt agreements - This section contains a comprehensive list of all exhibits filed with the Form 10-K, including material contracts, debt instruments, and governance documents[455] Item 16. Form 10-K Summary This item is not applicable as the report indicates there is no Form 10-K summary provided - The registrant has provided no summary for Form 10-K[459]