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Item 2. Management’s Discussion and Analysis

2026-08-06 compared with 2026-05-07 · 103 added, 93 removed, 270 unchanged (42% of the section changed)

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three months ended March 31, 2026, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2025 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2026 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and six months ended June 30, 2026, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2025 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2026 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K.

Except for certain information as of December 31, 2025, all amounts herein are unaudited.

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how the performance of certain of our offerings is sensitive to changes in the labor market;

our plan to add sales teams and our ability to effectively execute such plan;

our plan to expand our sales capacity and our ability to effectively execute such plan;

the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months;

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Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

• the possibility of security vulnerabilities, cyber-attacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions;

• the possibility of security vulnerabilities, cyber-attacks and network disruptions, including breaches of data security and privacy incidents, data loss, and business interruptions;

• changes in laws, government regulations and policies and interpretations thereof;

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Growth Outlook, Opportunities and Challenges

As a result of our significant revenue growth and geographic expansion, we are presented with a variety of opportunities and challenges.

Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications.

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Our continued growth depends on attracting new clients by continuing to leverage our sales force productivity, penetrating existing markets and expanding into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base.

Client adoption of new applications and, historically,

client employee usage of both new and existing applications have been significant factors in our recurring revenue growth.

We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase recurring revenues in the future.

In addition, we plan to add sales teams in the future to further expand our market presence.

Client adoption of new applications and, historically, client employee usage of both new and existing applications have been significant factors in our recurring revenue growth.

believe our ability to continue to develop new applications and to improve existing applications will enable us to increase recurring revenues in the future.

In addition, we plan to expand our sales capacity in the future to grow our market presence.

The market for HCM software is highly competitive, rapidly evolving and fragmented.

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In addition, these seasonal fluctuations in recurring revenues impact operating income.

Growing our business has resulted in, and may continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs (including those related to our full solution automation and AI initiatives) and general and administrative expenses, which have increased and may continue to increase our expenses.

Historically, our revenue growth and geographic expansion have driven increases in (i) facility costs related to data centers, the expansion of our corporate headquarters, operations facilities and additional sales office leases and (ii) salaries and benefits and stock-based compensation expense.

Automating our core business systems is creating new efficiencies that have led to reductions in headcount and, as a result, contributed to decreases in certain employee-related expenses during the three months ended March 31, 2026, as compared to the prior year period.

Automating our core business systems is creating new efficiencies that have led to reductions in headcount and, as a result, contributed to decreases in certain employee-related expenses during the three and six months ended June 30, 2026, as compared to the prior year periods.

Results of Operations

The following table sets forth selected consolidated statements of income data and such data as a percentage of total revenues for each of the periods indicated, as well as period-over-period changes with respect to each line item:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Recurring and other

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Interest expense

Other income, net

Other income (expense), net

Income before income taxes

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Recurring and Other Revenues

The increase in recurring and other revenues for the three months ended March 31, 2026 compared to the three months ended March 31, 2025 was the result of the addition of new clients, increased revenue from sales of additional applications and services to existing clients, additions and increased usage of existing products and services, and the realization of pricing strategies.

The increase in recurring and other revenues for the three and six months ended June 30, 2026 compared to the respective prior year periods was the result of the addition of new clients, increased revenue from sales of additional applications and services to existing clients, additions and increased usage of existing products and services, and the realization of pricing strategies.

Client attrition, particularly among smaller clients, partially offset the favorable impact of these revenue drivers.

Interest on Funds Held for Clients

The impact of lower interest rates during the three months ended March 31, 2026 compared to the three months ended March 31, 2025 was partially offset by an increase in average funds held for client balances, but nonetheless resulted in decreased interest earned on funds held for clients for the three months ended March 31, 2026 as compared to the same period in 2025.

The average daily balance of funds held for clients was $3.1 billion and $2.9 billion for the three months ended March 31, 2026 and 2025, respectively.

The impact of lower interest rates during the three and six months ended June 30, 2026 compared to the three and six months ended June 30, 2025 was partially offset by an increase in average funds held for client balances, but nonetheless resulted in decreased interest earned on funds held for clients for the three and six months ended June 30, 2026 as compared to the prior year periods.

The average daily balance of funds held for clients was $3.0 billion and $2.8 billion for the six months ended June 30, 2026 and 2025, respectively.

Cost of Revenues

During the three months ended March 31, 2026, operating expenses decreased from the comparable prior year period by $3.4 million, primarily due to a $4.6 million decrease in employee-related expenses, partially offset by increases in banking-related fees and shipping and supplies fees.

During the three months ended June 30, 2026, operating expenses decreased from the comparable prior year period by $3.8 million, primarily due to an $8.1 million decrease in employee-related expenses attributable to lower headcount, partially offset by increases in other categories of service costs, none of which were individually material.

Depreciation and amortization expense increased $5.4 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other related fixed assets, partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.

During the six months ended June 30, 2026, operating expenses decreased from the comparable prior year period by $7.2 million, primarily due to a $12.7 million decrease in employee-related expenses attributable to lower headcount, partially offset by increases in other categories of service costs, none of which were individually material.

Depreciation and amortization expense increased $11.5 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other related fixed assets, partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.

Administrative Expenses

Sales and Marketing

During the three months ended March 31, 2026, sales and marketing expenses increased from the comparable prior year period by $6.7 million, primarily due to a $7.1 million increase in marketing and advertising expense and a $3.0 million increase in other expenses, partially offset by a decrease in employee-related expenses.

During the three months ended June 30, 2026, sales and marketing expenses increased from the comparable prior year period by $2.8 million, primarily due to a $4.6 million increase in marketing and advertising expense, partially offset by a decrease in employee-related expenses attributable to, among other things, lower headcount.

During the six months ended June 30, 2026, sales and marketing expenses increased from the comparable prior year period by $9.5 million, primarily due to an $11.7 million increase in marketing and advertising expense, partially offset by a decrease in employee-related expenses attributable to, among other things, lower headcount.

Research and Development

During the three months ended March 31, 2026, research and development expenses decreased from the comparable prior year period primarily due to a decrease in employee-related expenses.

During the three and six months ended June 30, 2026, research and development expenses decreased from the comparable prior year periods primarily due to a decrease in employee-related expenses.

As a result of reduced headcount, we expect research and development employee-related expenses to be lower in 2026 as compared to 2025.

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The nature of the development projects underway during a particular period directly impacts the timing and extent of these capitalized expenditures and can affect the amount of research and development expenses in such period.

The table below sets forth the amounts of capitalized and expensed research and development costs for the three months ended March 31, 2026 and 2025:

Three Months Ended March 31,

The table below sets forth the amounts of capitalized and expensed research and development costs for the three and six months ended June 30, 2026 and 2025:

Three Months Ended June 30,

Six Months Ended June 30,

Capitalized portion of research and development

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General and Administrative

During the three months ended March 31, 2026, general and administrative expenses increased $3.5 million from the comparable prior year period due to a $4.1 million increase in technology and communications expense and a $3.8 million increase in other expenses, partially offset by a $4.0 million decrease in employee-related expenses and a $0.4 million decrease in accounting and legal expenses.

During the three months ended June 30, 2026, general and administrative expenses increased $7.2 million from the comparable prior year period primarily due to a $4.2 million increase in professional fees and a $1.9 million increase in technology and communications expenses.

During the six months ended June 30, 2026, general and administrative expenses increased $10.6 million from the comparable prior year period primarily due to a $6.0 million increase in technology and communications expenses and a $3.9 million increase in professional fees.

The remaining increase was attributable to various other cost categories, none of which were individually material.

These increases were partially offset by a decrease in employee-related expenses attributable to lower headcount.

Non-Cash Stock-Based Compensation Expense

The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of comprehensive income:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Operating expenses

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Depreciation and Amortization

During the three months ended March 31, 2026, depreciation and amortization expense increased from the comparable prior year period primarily due to the development of additional technology and purchases of other related fixed assets, which was partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.

During the three months ended June 30, 2026, depreciation and amortization expense increased from the comparable prior year period primarily due to the development of additional technology and purchases of other related fixed assets, which was partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.

During the six months ended June 30, 2026, depreciation and amortization expense increased from the comparable prior year period primarily due to the development of additional technology and purchases of other related fixed assets, which was partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.

Interest Expense

The increase in interest expense for the three months ended March 31, 2026, as compared to the prior year period, was primarily due to the timing and amount of borrowings outstanding under the Revolving Credit Facility.

Other Income, net

Other income, net increased for the three months ended March 31, 2026 compared to the prior year period, primarily due to a $9.0 million gain resulting from the July 2025 amendment to the naming rights agreement.

See Note 5 “Goodwill and Intangible Assets, Net.” This increase was partially offset by a $2.9 million loss on the disposition of property and equipment.

In addition, lower interest income earned on corporate funds, driven by lower average interest rates, partially offset the increase in other income, net.

For the three months ended March 31, 2026 and 2025, interest income earned on corporate funds was $1.9 million and $4.7 million, respectively.

The increase in interest expense for the three and six months ended June 30, 2026, as compared to the prior year periods, was primarily due to the timing and amount of borrowings outstanding under the Revolving Credit Facility.

Other Income (Expense), net

Other income (expense), net decreased for the three and six months ended June 30, 2026 compared to the prior year periods, primarily due to lower interest income earned on corporate funds and higher losses on dispositions of property and equipment.

For the six months ended June 30, 2026, this decrease was partially offset by a $9.0 million gain recognized during the three months ended March 31, 2026 as a result of the July 2025 amendment to the naming rights agreement.

See Note 5 “Goodwill and Intangible Assets, Net” for further discussion of this gain.

For the three and six months ended June 30, 2026, interest income earned on corporate funds was $1.5 million and $3.5 million, respectively, compared to $5.5 million and $10.3 million for the corresponding prior year periods.

Provision for Income Taxes

The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items.

Our effective income tax rate was 27.7% and 26.8% for the three months ended March 31, 2026 and 2025, respectively.

The higher effective tax rate for the three months ended March 31, 2026 was primarily attributable to a decreased research and development credit for the quarter ended March 31, 2026 .

Our effective income tax rate was 29.3% and 25.6% for the six months ended June 30, 2026 and 2025, respectively.

The higher effective tax rate for the six months ended June 30, 2026 was primarily attributable to a decrease in excess tax benefits from stock-based compensation and a reduction of research and development credits.

Liquidity and Capital Resources

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Additionally, we maintain a $2.125 billion Revolving Credit Facility, which can be accessed as needed to supplement our operating cash flow and cash balances.

As of March 31, 2026, we had $675.0 million of outstanding borrowings under the Revolving Credit Facility, and we used these borrowings to fund stock repurchases.

As of June 30, 2026, we had $900.0 million of outstanding borrowings under the Revolving Credit Facility, and we used these borrowings to fund stock repurchases.

We fund our operations primarily from cash flows generated from operations.

Historically, we have funded all ongoing capital expenditures, cash dividends and stock repurchases from available cash.

During the first quarter of 2026, we borrowed $675.0 million under the Revolving Credit Facility to support our stock repurchase program.

Prior to 2026, we funded all ongoing capital expenditures, cash dividends and stock repurchases from available cash.

During the six months ended June 30, 2026, we borrowed $900.0 million under the Revolving Credit Facility to support our stock repurchase program.

We may determine that it is appropriate to fund future stock repurchases or other capital requirements in the future from a combination of available cash and additional borrowings under the Revolving Credit Facility.

We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, service debt, pay dividends and opportunistically repurchase shares for at least the next 12 months.

In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements.

In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from

operations and, as needed, financing arrangements.

To the extent we elect to finance our long-term liquidity needs, we believe that the potential financing capital available to us in the future will be sufficient.

Credit Agreement .

We are party to a credit agreement (as amended from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, the administrative agent, the swingline lender and the issuing bank, and the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”).

We are party to a credit agreement (as amended or amended and restated from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, the administrative agent, the swingline lender and the issuing bank, and the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”).

On April 23, 2026, the Credit Agreement was amended and restated and the aggregate commitments under the Revolving Credit Facility were increased to $2.125 billion.

See Note 15 “Subsequent Events.” All loans under the Credit Agreement will mature on April 23, 2031 (the “Scheduled Maturity Date”).

Subject to certain conditions set forth in the Credit Agreement, we may borrow, prepay and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Scheduled Maturity Date.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (a) the term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin (the “Term SOFR Rate”) or (b) in the event that the Term SOFR rate is unavailable, the daily SOFR, plus an applicable margin (“SOFR Rate Loans”).

ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Term SOFR Rate for a one-month interest period plus 1.00%;

provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%.

The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0;

(ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0;

(iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0;

or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0;

(ii) 1.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0;

(iii) 1.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0;

or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0;

(ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0;

(iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0;

or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

The Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit.

All loans under the Credit Agreement will mature on April 23, 2031 (the “Scheduled Maturity Date”).

The Revolving Credit Facility provides for no scheduled principal amortization, with all outstanding borrowings due at the Scheduled Maturity Date.

Borrowings under the Credit Agreement are secured by a senior security interest in all personal property of Paycom Payroll, LLC (the “Borrower”), the Company, and certain other subsidiaries of the Company.

The proceeds of the loans and letters of credit under the Credit Agreement are to be used for ongoing working capital and general corporate purposes, including permitted acquisitions and share repurchases.

The Credit Agreement also permits the Borrower to request an incremental facility of up to an additional $750.0 million, subject to obtaining additional lender commitments and satisfying certain conditions.

Borrowings under the Credit Agreement bear interest, at the Borrower’s election, at either (i) the Alternate Base Rate (“ABR”) plus an applicable margin or (ii) the term Secured Overnight Financing Rate (“Term SOFR Rate”) plus an applicable margin or, if the Term SOFR Rate is unavailable, the daily SOFR plus an applicable margin.

The applicable margin is determined based on the Company’s consolidated leverage ratio and ranges from 0.25% to 1.00% for ABR borrowings and from 1.25% to 2.00% for SOFR-based borrowings.

We are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.

The applicable commitment fee rate is determined based on the Company’s consolidated leverage ratio and ranges from 0.20% to 0.275% per annum.

Under the Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest coverage ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0.

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In addition, Restricted Payments are permitted if immediately before and after giving pro forma effect to such Restricted Payment, our consolidated leverage ratio on a pro forma basis is less than 3.0 to 1.0.

The Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make investments, dispose of assets, enter into certain transactions (including swap agreements and sale and leaseback transactions), pay dividends or distributions on our capital stock and enter into transactions with affiliates, in each case subject to customary exceptions.

As of June 30, 2026, we were in compliance with these covenants.

Stock Repurchase Plan and Withholding Shares to Cover Taxes.

In August 2022, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of up to $1.1 billion of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions (including accelerated share repurchases) or by other means in accordance with federal securities laws, including Rule 10b5-1 programs.

The stock repurchase plan was set to expire on August 15, 2024.

In July 2024, our Board of Directors increased and extended the stock repurchase plan, such that $1.5 billion is available for repurchases through August 15, 2026.

Our Board of Directors has authorized stock repurchase plans from time to time allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions (including accelerated share repurchases) or by other means in accordance with federal securities laws, including Rule 10b5-1 programs.

In July 2024, our Board of Directors authorized the repurchase of up to $1.5 billion of our common stock.

On March 5, 2026, the Board of Directors authorized the repurchase of up to an additional $200.0 million of shares of our common stock.

On March 12, 2026, the Board of Directors replenished the stock repurchase plan such that the aggregate value of shares of common stock that could be repurchased under the stock repurchase plan was $750.0 million, and as of March 31, 2026, there was $750.0 million available for repurchases under the stock repurchase plan.

On May 4, 2026, our Board of Directors approved a new stock repurchase plan authorizing the Company to repurchase up to $2.0 billion of shares of common stock.

On May 4, 2026, the Board of Directors approved a new stock repurchase plan authorizing the Company to repurchase up to $2.0 billion of shares of common stock.

The new stock repurchase plan replaced the prior authorization and has no expiration date.

As of June 30, 2026, there was $1,655.5 million available for repurchases under the stock repurchase plan.

Our stock repurchase plan may be suspended or discontinued at any time.

The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of equity incentive awards and other corporate considerations.

During the three months ended March 31, 2026, we repurchased an aggregate of 8,375,443 shares of our common stock at an average cost of $126.61 per share, including 47,844 shares withheld to satisfy tax withholding obligations for certain individuals upon the vesting of equity incentive awards.

Our payment of the taxes on behalf of those individuals resulted in an aggregate cash expenditure of $6.1 million and, as such, we generally subtract the amounts attributable to such withheld shares from the aggregate amount available for future purchases under our stock repurchase plan.

During the six months ended June 30, 2026, we repurchased an aggregate of 10,945,515 shares of our common stock at an average cost of $128.48 per share, including 125,148 shares withheld to satisfy tax withholding obligations for certain individuals upon the vesting of equity incentive awards.

Our payment of the taxes on behalf of those individuals resulted in an aggregate cash expenditure of $16.6 million.

We deduct the value of such withheld shares from the amount available for future repurchases under our stock repurchase plan.

Dividends on Common Stock.

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Dividends declared, as reported in the consolidated statements of stockholders’ equity, includes dividends and dividend equivalents payable to holders of unvested equity incentive awards and, as a result, exceeds the amount of total cash dividends paid presented in this column.

On May 4, 2026, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock payable on June 8, 2026 to stockholders of record at the close of business on May 26, 2026.

On August 3, 2026, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock payable on September 8, 2026 to stockholders of record at the close of business on August 24, 2026.

The declaration, timing and amount of each quarterly cash dividend are subject to the approval of the Board of Directors, including a determination that the dividend policy and the declaration of dividends thereunder are in the best interests of our stockholders, are in compliance with applicable law and are permitted under the Credit Agreement.

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In March 2026, a contingency specified in the July 2025 amendment was met, resulting in a reduction in the annual sponsorship fee for the remainder of the amended agreement term.

As a result, the Company recognized a $9.0 million gain during the three months ended March 31, 2026, which is included in other income, net in the consolidated statements of comprehensive income.

As a result, the Company recognized a $9.0 million gain during the three months ended March 31, 2026, which is included in other income (expense), net in the consolidated statements of comprehensive income for the six months ended June 30, 2026.

On July 4, 2025, H.R.

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The OBBBA allows an immediate deduction for domestic research and development expenditures and reinstates 100% bonus depreciation.

Our cash tax remittances decreased in the second half of 2025, and we anticipate that continued reductions will positively impact cash flows in future periods.

These provisions reduced our cash tax remittances during the second half of 2025 and the first half of 2026, which favorably impacted operating cash flows, and we expect they will continue to provide a benefit in future periods, although to a lesser extent.

As part of our payroll and payroll tax filing services, we collect funds from our clients for employment taxes and payroll obligations, which we remit to the appropriate tax agencies and accounts designated by our clients.

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Additionally, we intend to continue to pay a quarterly cash dividend, subject to the discretion of the Board of Directors.

The following table summarizes the consolidated statements of cash flows for the three months ended March 31, 2026 and 2025:

Three Months Ended March 31,

The following table summarizes the consolidated statements of cash flows for the six months ended June 30, 2026 and 2025:

Six Months Ended June 30,

Net cash provided by (used in):

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Operating Activities

Cash provided by operating activities for the three months ended March 31, 2026 primarily consisted of payments received from our clients and interest earned on funds held for clients.

Cash provided by operating activities for the six months ended June 30, 2026 primarily consisted of payments received from our clients and interest earned on funds held for clients.

Cash used in operating activities primarily consisted of personnel-related expenditures to support the growth and infrastructure of our business.

These payments included costs of operations, advertising and other sales and marketing efforts, information technology infrastructure development, product research and development and security and administrative costs.

Compared to the three months ended March 31, 2025, our operating cash flows for the three months ended March 31, 2026 were negatively impacted by changes in working capital.

Compared to the three and six months ended June 30, 2025, our operating cash flows for the three and six months ended June 30, 2026 were positively impacted by favorable changes in operating assets and liabilities.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2026 decreased from the comparable prior year period due to a $175.6 million decrease in purchases of investments from funds held for clients, a $167.0 million increase in proceeds from investments from funds held for clients, and a $6.5 million decrease in purchases of property and equipment.

Cash used in investing activities for the six months ended June 30, 2026 decreased from the comparable prior year period due to a $299.2 million decrease in purchases of investments from funds held for clients, a $167.0 million increase in proceeds from investments from funds held for clients, and a $44.6 million decrease in purchases of property and equipment.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2026 increased from the comparable prior year period due to the impact of a $1,086.3 million change related to the client funds obligation, which reflects the timing of receipts

from our clients and payments made on their behalf to employees and applicable taxing authorities, $1,054.3 million increase in repurchases of common stock, and a $0.9 million increase in withholding taxes paid related to net share settlements.

These increases were partially offset by $675.0 million of borrowings under the Revolving Credit Facility, a $3.6 million increase in proceeds from the employee stock purchase plan, and a $3.4 million decrease in dividends paid.

Cash used in financing activities for the six months ended June 30, 2026 increased from the comparable prior year period due to a $1,389.7 million increase in repurchases of common stock, the impact of an $82.4 million change related to the client funds obligation, which reflects the timing of receipts from our clients and payments made on their behalf to employees and applicable taxing authorities, and an $8.1 million increase in the payment of debt issuance costs.

These increases were partially offset by $900.0 million of borrowings under the Revolving Credit Facility, a $21.2 million decrease in withholding taxes paid related to net share settlements, a $7.4 million decrease in dividends paid, and a $4.4 million increase in proceeds from the employee stock purchase plan.

Contractual Obligations

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The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income to adjusted EBITDA:

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Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income to non-GAAP net income:

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Non-GAAP net income per share, diluted

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Earnings per share to non-GAAP net income per share, basic:

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Non-GAAP net income per share, basic

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Earnings per share to non-GAAP net income per share, diluted:

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Interest Rate Sensitivity

As of March 31, 2026, we had corporate cash and cash equivalents totaling $153.9 million and funds held for clients cash and cash equivalents totaling $2.2 billion.

As of June 30, 2026, we had corporate cash and cash equivalents of $198.0 million and funds held for clients cash and cash equivalents of $2.6 billion.

These amounts are invested primarily in demand deposit accounts and money market funds.

We consider all highly liquid debt instruments with an original maturity of three months or less and SEC registered money market mutual funds to be cash equivalents.

Additionally, we had available-for-sale securities totaling $374.8 million included within funds held for clients on the consolidated balance sheets as of March 31, 2026.

Additionally, we had $375.1 million of available-for-sale securities included within funds held for clients on the consolidated balance sheets.

Our available-for-sale securities consisted of U.S.

treasury securities with original maturities of two years or less and a certificate of deposit.

The primary objectives of our investing activities are capital preservation, meeting our liquidity needs and, with respect to investing client funds, generating interest income while maintaining the safety of principal.

We do not enter into investments for trading or speculative purposes.

Our investments are subject to market risk due to changes in interest rates.

The market value of fixed rate securities may be adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

We classify all debt securities with an original maturity greater than three months as available-for-sale and, as a result, no gains or losses are recognized due to changes in interest rates until such securities are sold or decreases in fair value are determined to be nonrecoverable.

To date, we have not recorded any credit impairment losses on our portfolio.

As of March 31, 2026, a hypothetical increase or decrease in interest rates of 100 basis points would result in an approximately $26.1 million increase or decrease, respectively, in interest earned on funds held for clients over the ensuing 12-month period.

treasury securities

with original maturities of two years or less and a certificate of deposit.

The primary objectives of our investing activities are capital preservation, liquidity, and, with respect to client funds, generating interest income while preserving principal.

We do not invest for trading or speculative purposes.

Our investments are subject to interest rate risk.

Rising interest rates generally reduce the market value of fixed-rate securities, while declining interest rates may reduce income earned on floating-rate investments.

Accordingly, changes in interest rates could reduce future investment income or result in losses if securities are sold before maturity.

Debt securities with original maturities greater than three months are classified as available-for-sale;

and unrealized gains and losses resulting from changes in interest rates are not recognized in earnings unless securities are sold or credit losses are recognized.

We have not recorded any credit losses on our portfolio.

As of June 30, 2026, a hypothetical 100 basis point increase or decrease in interest rates would have resulted in an approximately $25.7 million increase or decrease, respectively, in interest earned on funds held for clients over the ensuing 12-month period.

There are no incremental costs of revenue associated with changes in interest earned on funds held for clients.

An immediate increase in interest rates of 100 basis points would have resulted in a $1.8 million reduction in the aggregate market value of our available-for-sale securities as of March 31, 2026.

An immediate decrease in interest rates of 100 basis points would have resulted in a $1.8 million increase in the aggregate market value of our available-for-sale securities as of March 31, 2026.

These estimates are based on a sensitivity model that measures market value changes when changes in interest rates occur.

As of March 31, 2026, we had $675.0 million of indebtedness outstanding under the Revolving Credit Facility.

Our borrowings under the Revolving Credit Facility bear interest at a floating rate based on a variable reference rate for the interest period in effect, and as a result, we may be exposed to increased interest rate risk.

As of March 31, 2026, a hypothetical 100 basis point change in the applicable reference rates would result in a $5.6 million change in our interest expense over the ensuing 12-month period.

Please refer to Note 6 “Long-Term Debt” for additional information.

An immediate 100 basis point increase or decrease in interest rates would have decreased or increased, respectively, the aggregate market value of our available-for-sale securities by approximately $0.9 million as of June 30, 2026.

These estimates are based on a sensitivity model measuring the effect of interest rate changes on market values.

As of June 30, 2026, we had $900.0 million of indebtedness outstanding under the Revolving Credit Facility.

Because borrowings under the Revolving Credit Facility bear interest at floating rates, we are exposed to interest rate risk.

A hypothetical 100 basis point change in applicable reference rates would have resulted in a $5.9 million change in interest expense over the ensuing 12-month period.

See Note 6 “Long-Term Debt” for additional information.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis