01—Abstract
Summary
Summary of the 10-Q filed March 26, 2025. Cited figures are marked; the original filing is the authoritative source.
Paychex, Inc. reported third-quarter fiscal 2025 results for the three months ended February 28, 2025, with total revenue of $1.51 billiona (up 5% from the prior year period) and net income of $519.3 million, compared with $498.6 million a year earlier.
For the nine months, total revenue was $4.14 billionb, up 4%, and net income was $1.36 billion, up 4%. Operating income rose 6% to $691.8 million for the quarter, and diluted earnings per share were $1.43 versus $1.38. The company attributes revenue growth to client growth and price realization in Management Solutions, growth in average PEO worksite employees, and higher PEO insurance revenue, partly offset by the expiration of the Employee Retention Tax Credit program.
Adjusted diluted EPS, a non-GAAP measure, was $1.49c for the quarter after excluding $16.7 million of acquisition-related costs and $13.2 million of related financing and swaption costs recorded in other expense. The filing is dominated by the pending acquisition of Paycor HCM, Inc. for $22.50 per eligible share in cash, representing an enterprise value of approximately $4.1 billion. The Hart-Scott-Rodino waiting period expired on February 21, 2025, and the deal is expected to close in April 2025 subject to customary conditions.
Paychex has a $3.5 billiond bridge loan commitment from JPMorgan Chase Bank, N.A. and executed three interest rate swaption contracts with a $3.0 billion aggregate notional amount to hedge anticipated long-term fixed-rate debt issuance. No bridge borrowings had been drawn as of February 28, 2025. Balance-sheet liquidity remained substantial: cash and cash equivalents were $1.56 billion, and the company had about $2.0 billion of unused credit facility capacity, with $17.6 million of short-term borrowings outstanding.
Long-term borrowings were $799.0 million. Cash dividends declared were $0.98 per share in the quarter and $2.94 per share for the nine months, and $296.0 million remained available under the share repurchase program, with no shares repurchased in the quarter.
02—Key points
Key Highlights
- Total revenue of $1,509.0 million for the third quarter, up 5% from $1,439.3 million; nine-month revenue of $4,144.4 million, up 4%.
- Net income of $519.3 million for the quarter, up 4% from $498.6 million; diluted EPS of $1.43 versus $1.38 a year earlier.
- Operating income of $691.8 million for the quarter, up 6%, with operating margin of 45.8% versus 45.1%; adjusted operating income excluding $16.7 million of acquisition costs rose 9% to $708.5 million.
- Pending acquisition of Paycor HCM, Inc. at $22.50 per share in cash, an enterprise value of about $4.1 billion, expected to close in April 2025 after the HSR waiting period expired on February 21, 2025.
- Financing for the Paycor deal includes a $3.5 billion bridge loan commitment from JPMorgan Chase Bank, N.A. (undrawn at quarter end) and three swaption contracts with a $3.0 billion aggregate notional amount.
- Funds held for clients and corporate investments totaled $4.22 billion at fair value, with net unrealized losses on available-for-sale securities of $67.9 million; the weighted-average yield-to-maturity was 3.1%.
- Cash dividends of $2.94 per share were declared for the nine months, and $296.0 million remained available under the $400.0 million share repurchase program, with no repurchases in the third quarter.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q3 FY2025, Paychex kept $0.34.
- Revenue$1.51B100.0%
- Cost of revenue−$387.4M25.7%
- Gross profit$1.12B74.3%
- Operating costs−$429.8M28.5%
- Operating income$691.8M45.8%
- Interest, other & tax−$172.5M11.4%
- Net income$519.3M34.4%
04—Financials
Financial Highlights
Figures from 10-QQ3 FY2025filed March 26, 2025Financial Statements
Q3 FY2025 against Q3 FY2024
| Line item | Q3 FY2025Q3 FY2024 | Change |
|---|---|---|
| Revenue | $1.51B$1.44B | +4.8% |
| Cost of Revenue | $387.40M$379.80M | +2.0% |
| Gross Profit | $1.12B$1.06B | +5.9% |
| SG&A Expenses | $429.80M$409.70M | +4.9% |
| Operating Expenses | $817.20M$789.50M | +3.5% |
| Operating Income | $691.80M$649.80M | +6.5% |
| Interest Expense | $22.60M$9.90M | +128.3% |
| Net Income | $519.30M$498.60M | +4.2% |
| EPS (Basic) | $1.44$1.39 | +3.6% |
| EPS (Diluted) | $1.43$1.38 | +3.6% |
| Shares Outstanding (Basic) | 360.10M359.90M | +0.1% |
| Shares Outstanding (Diluted) | 362.00M361.70M | +0.1% |
05—Questions
Frequently Asked Questions
What drove Paychex's revenue growth in the third quarter?
Management Solutions revenue rose 5% to $1.10 billion, driven by growth in clients served, higher revenue per client from price realization and product penetration, including HR solutions and retirement, partly offset by lower ancillary revenue from the expiration of the Employee Retention Tax Credit program. PEO and Insurance Solutions revenue rose 6% to $365.4 million on growth in average PEO worksite employees and higher PEO insurance revenue. Interest on funds held for clients fell 2% to $42.9 million on lower average interest rates.
What is the Paycor acquisition and how is it being financed?
Paychex agreed on January 7, 2025 to acquire Paycor HCM, Inc. in an all-cash transaction at $22.50 per eligible share, representing an enterprise value of approximately $4.1 billion. The company entered a 364-day bridge loan commitment of up to $3.5 billion with JPMorgan Chase Bank, N.A., and it expects to secure long-term fixed-rate financing before closing. Three swaption contracts with a $3.0 billion aggregate notional amount were executed to hedge the interest rate exposure on that anticipated debt. The company incurred $11.4 million in debt financing fees, and no bridge borrowings were outstanding at February 28, 2025.
How much did the Paycor acquisition cost Paychex in the quarter?
Acquisition-related costs were $29.9 million pre-tax for the third quarter and nine months. Of this, $16.7 million reflects third-party professional service fees in selling, general and administrative expenses, and $13.2 million reflects amortization of financing fees and the excluded component of the swaption contracts recorded in other (expense)/income, net. After an income tax benefit of $7.3 million, these costs reduced GAAP net income, which is why adjusted diluted EPS of $1.49 exceeded GAAP diluted EPS of $1.43.
How strong is Paychex's liquidity and capital position?
Cash and cash equivalents were $1.56 billion at February 28, 2025, up from $1.47 billion at May 31, 2024. The company reported unused capacity of approximately $2.0 billion under its unsecured credit facilities, with $17.6 million of short-term borrowings outstanding. Long-term borrowings were $799.0 million on the balance sheet. Net cash provided by operating activities was $1.56 billion for the nine months, and cash dividends paid totaled $1.06 billion.
What were the risks related to the investment portfolio?
The company held $3.4 billion of available-for-sale securities at fair value, with gross unrealized losses of $79.1 million, which management attributes to interest rate changes rather than credit risk. A substantial portion of these securities carried an AA rating or better. Net unrealized losses were $67.9 million at February 28, 2025, and the weighted-average duration was 2.2 years. The filing states that a hypothetical 25-basis-point decline in longer-term rates would increase portfolio fair value by roughly $20.0 million to $25.0 million.
06—Continue