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| Business Combinations |
Note D: Business Combinations
The Company accounts for acquisitions in accordance with the guidance in FASB Accounting Standards Codification 805, Business Combinations ("ASC 805"). This guidance requires disclosure of consideration transferred, including any contingent consideration, assets acquired, and liabilities assumed to be measured at their fair values as of the acquisition date. This guidance further provides that: (1) acquisition costs will generally be expensed as incurred, (2) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (3) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of the purchase price over the fair values of the net assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.
Paycor HCM, Inc. On April 14, 2025, the Company completed its acquisition of Paycor HCM, Inc. (“Paycor”) for total purchase consideration of approximately $4.1 billion, of which $4.06 billion was paid in cash and $25.1 million was paid in the form of replacement awards. To finance the purchase consideration, Paychex issued a $4.2 billion aggregate principal amount of fixed-rate corporate bonds ("Corporate Bonds"). Refer to Note N of the Notes to Consolidated Financial Statements contained in Item 8 of the Company's Form 10-K for fiscal 2025 for further details on the Corporate Bonds. Paycor is a leading Software-as-a-Service (“SaaS”) provider of HCM solutions for small and medium-sized businesses across all 50 states within the U.S. Acquisition related costs consist of miscellaneous professional service fees and expenses for our recent acquisitions. The Company recognized $84.1 million of acquisition-related costs, including $61.1 million related to amortization for step-up basis intangible assets, that were expensed in the three months ended August 31, 2025. These costs are shown as part of selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income. The transaction aims to enhance the Company’s capabilities in the upmarket segment and expand its suite of AI-driven HCM solutions.
Purchase Price Allocation
The purchase price allocation as of the acquisition date is subject to change as additional information about the fair values of assets acquired and liabilities assumed becomes available. These adjustments will be finalized no later than one year from the acquisition date.
During the three months ended August 31, 2025, the Company adjusted its purchase price allocation, which increased goodwill $5.8 million, primarily resulting from the write-down of a building by $4.9 million, net of deferred taxes of $1.9 million as a result of an updated valuation. The impact of these changes on previously reported earnings was not material.
Customer relationships were the most significant of the acquired identifiable intangible assets. The fair value of the customer relationship intangible asset was estimated using a multi-period excess earnings method. The cash flow projections for the acquired Paycor customer relationships reflected significant judgments and assumptions including the revenue growth rate, customer attrition rate, and discount rate. The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed (the useful life).
The goodwill is attributable primarily to the expected revenue synergies expected from combining the operations of both entities, and intangible assets that do not qualify for separate recognition, including assembled workforce acquired through the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
Unaudited Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations are provided for illustrative purposes only and present the estimated unaudited pro forma combined results of Paychex and Paycor for three months ended August 31, 2024, as if the acquisition had occurred on June 1, 2023:
The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Paychex and Paycor. The supplemental pro forma financial information does not necessarily represent what the combined companies’ revenue or results of operations would have been had the Paycor Acquisition been completed on June 1, 2023, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Paychex and Paycor. The unaudited supplemental pro forma financial information reflects primarily pro forma adjustments related to removal of seller's amortization of cost to obtain and fulfill contracts, elimination of seller's stock-based compensation expense offset by compensation expense related to replacement awards and settlement of seller awards, amortization expense for step-up in fair value estimates of intangible assets, and interest expense and deferred financing cost amortization related to the Corporate Bonds issued to finance the Paycor acquisition. The unaudited supplemental pro forma financial information includes transaction charges associated with the Paycor acquisition. There are no material, nonrecurring pro forma adjustments directly attributable to the Paycor acquisition included in the reported pro forma revenue and loss from continuing operations before income taxes. Paycor’s fiscal year end was June 30. Since Paycor and the Company had different fiscal year end dates, the unaudited pro forma operating results were prepared based on comparable periods. The pro forma financial information does not purport to be indicative of the results that would have been obtained had the transactions been completed as of June 1, 2023, for the period presented and are not intended to be a projection of future results or trends.
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