Note D — Business Combinations

The Company accounts for acquisitions in accordance with the guidance in FASB ASC 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. Refer to Note N for further details on the issued fixed rate 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.

Each unvested award of time-based restricted stock units ("RSUs") and restricted stock awards ("RSAs") granted under the Paycor 2021 Omnibus Incentive Plan held by employees at the Director and above level was replaced with either Paychex RSUs or Paychex RSAs subject to the original vesting conditions. These replaced awards represent $15.9 million of the $25.1 million of fair value attributable to pre-combination services. Refer to Note F for further details on the replaced RSUs and RSAs. For unvested RSUs held by employees below the level of Director or each unvested phantom award held by Serbia-based Paycor employees at any level, these awards were converted into a cash award for the right to receive $22.50 in cash per share, subject to the original vesting conditions. These cash awards represent $9.2 million of the $25.1 million of fair value attributable to pre-combination services.

The amount of Paycor revenue and net loss included in the Company’s condensed Consolidated Statements of Income and Comprehensive Income from the acquisition date through May 31, 2025, was $92.5 million and $75.9 million, respectively. Paycor's financial results include acquisition-related costs of $84.5 million, net of tax. Refer to Note R for additional discussion on these acquisition-related costs.

Acquisition related costs consist of miscellaneous professional service fees and expenses for our recent acquisitions. The Company recognized $49.2 million of acquisition-related costs that were expensed in the current fiscal year. These costs are shown as part of selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

The transaction aims to enhance the Company’s capabilities in the upmarket segment and expand its suite of AI-driven HCM solutions.

Purchase Consideration and Allocation

The Company accounted for the Paycor acquisition as a business combination using the acquisition method of accounting in accordance with ASC 805. The assets acquired and liabilities assumed in the acquisition of Paycor were recorded at their respective fair values as of the acquisition date. Estimates of fair value represent management’s best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of certain assets and liabilities. 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 year ended May 31, 2025, purchase price allocation adjustments were immaterial.

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 preliminary fair values allocated to the identifiable intangible assets and their preliminary estimated useful lives are as follows:

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 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 fixed rate-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 is June 30th. 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 periods presented and are not intended to be a projection of future results or trends.

Alterna Capital Solutions LLC

Effective July 31, 2023, substantially all of the net assets of Alterna Capital Solutions LLC (“Alterna”), were acquired by a wholly owned subsidiary of the Company. Alterna purchases outstanding accounts receivable of their customers under non-recourse arrangements. This acquisition allows the Company to increase and diversify its portfolio of solutions and support serving small- to medium-sized businesses. The acquisition consideration was comprised of a base purchase price of $95.1 million plus immediate settlement of debt totaling $128.9 million, net of $15.7 million in cash and restricted cash acquired. Accounts receivable balances acquired, net of allowance for doubtful accounts, and less amounts due to clients related to funding arrangements, totaled $146.1 million. Management determined that intangible assets related to the client list were $18.9 million to be amortized utilizing an accelerated method of amortization over a weighted average of 8 years. Goodwill in the amount of $46.7 million was recorded as a result of the acquisition, which is tax-deductible. The Company finalized the purchase price allocation for the acquisition of Alterna as of November 30, 2023. The financial results of Alterna are included in the Company’s consolidated financial statements from its respective date of acquisition. This acquisition was not material to the Company’s results of operations, financial position, or cash flows.