Paychex, Inc. Form 10-Q Summary
Business context and reporting period
Paychex is a human capital management company providing payroll, HR, employee benefits, insurance, and professional employer organization services in the United States and parts of Europe, with operations in Canada, India, and Israel. The company reports one segment and offers the SurePayroll, Paychex Flex, and Paycor platforms.
This filing covers the three months ended August 31, 2026, the first quarter of fiscal 2027, compared with the three months ended August 31, 2025. The financial statements are unaudited and prepared under U.S. GAAP for interim reporting.
Financial performance and position
| Metric | Q1 FY2027 | Q1 FY2026 | Change |
|---|---|---|---|
| Management Solutions revenue | $1,213.1 million | $1,163.3 million | 4% |
| PEO and Insurance Solutions revenue | $367.6 million | $329.1 million | 12% |
| Total service revenue | $1,580.7 million | $1,492.4 million | 6% |
| Interest on funds held for clients | $49.8 million | $47.6 million | 5% |
| Total revenue | $1,630.5 million | $1,540.0 million | 6% |
| Operating income | $619.2 million | $541.9 million | 14% |
| Operating margin | 38.0% | 35.2% | Up 280 basis points |
| Net income | $429.7 million | $383.8 million | 12% |
| Diluted EPS | $1.21 | $1.06 | 14% |
| Net cash from operating activities | $413.5 million | $718.4 million | Down $304.9 million |
Adjusted operating income was $684.7 million, up 9%, and adjusted operating margin was 42.0%, compared with 40.7% in the prior-year period. Adjusted net income was $479.2 million, up 9%, and adjusted diluted EPS was $1.34, up 10%. These are non-GAAP measures and primarily exclude Paycor acquisition-related costs.
Total expenses increased only 1% to $1,011.3 million. Compensation-related expenses declined 1%, while PEO direct insurance costs and depreciation and amortization each increased 10%. Acquisition-related costs declined 23% to $65.5 million, primarily reflecting lower Paycor integration, compensation, and other acquisition expenses.
The effective tax rate increased to 24.0% from 22.9%, partly reflecting discrete tax effects related to employee stock-based compensation. Other income declined to $10.9 million from $23.8 million, principally because interest income on corporate investments fell to $10.2 million from $18.7 million.
Liquidity, debt, investments, and cash flow
- Cash and cash equivalents were $600.9 million at August 31, 2026, compared with $1,088.2 million at May 31, 2026. Cash, restricted cash, and equivalents totaled $655.9 million.
- Corporate investments were $333.3 million, and management reported cash, restricted cash, and total corporate investments of approximately $1.0 billion.
- Funds held for clients were $4.35 billion, compared with $4.83 billion at May 31, 2026. Client fund obligations were $4.44 billion.
- Long-term borrowings were $4.56 billion, with an estimated fair value of $4.54 billion. There were no outstanding short-term borrowings at quarter-end.
- The company had $2.0 billion of unused capacity under two unsecured revolving credit facilities, with maturities in April 2029 and January 2031. The company was in compliance with applicable debt covenants.
- Operating cash flow was $413.5 million. Investing cash outflows were $335.8 million, including $56.1 million of capital expenditures and $18.1 million for acquisitions. Financing cash outflows were $906.6 million, including $424.1 million of dividends, a $443.9 million reduction in client fund obligations, and $15.0 million of contingent acquisition consideration.
- No common shares were repurchased during the quarter. The remaining authorization under the share repurchase program was $675.6 million at August 31, 2026.
The investment portfolio had a fair value of $4.64 billion for available-for-sale securities and net unrealized losses of $92.4 million at August 31, 2026, compared with $52.5 million at May 31, 2026. Management attributed the losses to interest-rate movements rather than credit deterioration and stated that it did not expect to be required to sell the securities before recovery or maturity.
Material changes versus the prior comparable period
- Revenue growth was led by higher revenue per Management Solutions client from price realization and product penetration, and by increased PEO worksite employees and insurance volumes.
- Operating margin expanded to 38.0% from 35.2%, supported by revenue growth, relatively controlled operating expenses, and lower acquisition-related costs.
- Net income and diluted EPS increased faster than revenue, aided by operating leverage and approximately 1.5% fewer diluted weighted-average shares.
- Operating cash flow declined primarily because of working-capital timing, including PEO receivables, payroll-tax settlements, client refunds, and accrued corporate compensation.
- Investing cash outflows improved substantially from the prior year, when net investing outflows were $1.30 billion, while financing outflows increased because of the decline in client fund obligations and higher dividends.
- The quarterly dividend increased to $1.19 per share from $1.08 per share.
Guidance, outlook, risks, and unusual items
The filing does not provide explicit fiscal 2027 revenue, earnings, or margin guidance. Management expects its corporate liquidity, projected operating cash flow, available financing, and investments to support operations, capital expenditures, dividends, share repurchases, and debt service for the foreseeable future.
Management expects the total investment portfolio to average approximately $7.0 billion in fiscal 2027, with approximately 35% in short-term securities and variable-rate demand notes and 65% in available-for-sale securities. A 25-basis-point change in short-term interest rates is estimated to affect earnings by approximately $4.5 million to $5.0 million after tax over 12 months. A 25-basis-point change in longer-term rates could change the fair value of the available-for-sale portfolio by approximately $30 million to $35 million, with the effect generally recorded in equity unless credit-related impairment occurs.
- Key risks include cybersecurity, data privacy, software defects, technology and artificial intelligence execution, third-party service-provider failures, and business-continuity disruptions.
- PEO risks include workers' compensation and health insurance claims, co-employment obligations, insurance pricing, and reserve estimation uncertainty.
- Other risks include customer credit losses, regulatory and tax changes, interest-rate volatility, acquisition integration, litigation, macroeconomic weakness among small and midsize business customers, and employee retention.
- Workers' compensation reserves totaled $249.3 million at August 31, 2026. Management stated that reserve adjustments were not material during the quarter, but ultimate claims may differ materially from estimates.
- The investment portfolio included $94.2 million of gross unrealized losses on available-for-sale securities, and the filing reported that the estimated net unrealized loss had increased to approximately $151.2 million as of September 23, 2026.
- Outstanding standby letters of credit totaled $173.0 million, primarily supporting insurance commitments. No amounts were drawn.
- Outstanding capital-asset purchase commitments were approximately $9.7 million. The company also had maximum remaining commitments of approximately $5.4 million to venture-capital funds.
- Management believes pending legal matters will not materially affect financial position or results, but acknowledges that litigation outcomes are inherently uncertain.
The company adopted a new credit-loss practical expedient in fiscal 2027 with no material financial statement impact. Newly issued accounting standards discussed in the filing are expected to affect disclosures or are not expected to have a material impact.
Important facts for investors to verify
- Confirm whether revenue growth, particularly the 12% increase in PEO and Insurance Solutions, is sustained and whether PEO worksite employee growth continues.
- Monitor the pace of Paycor acquisition-related cost reductions and the effect on GAAP versus adjusted margins and earnings.
- Assess operating cash conversion, including working-capital movements and fluctuations in client fund obligations.
- Track interest rates, portfolio duration, unrealized investment losses, and the resulting impact on interest income, equity, and liquidity.
- Review the company’s $4.6 billion of long-term debt, refinancing and covenant requirements, and use of revolving credit facilities for client-fund liquidity.
- Evaluate workers' compensation and health insurance reserve development, claims trends, and potential reserve volatility.
- Review cybersecurity, AI, data privacy, regulatory, litigation, and acquisition-integration disclosures in future filings.
- Confirm future dividend and repurchase decisions, as both remain subject to cash flow, earnings, market conditions, and board discretion.