Revenue Climbs 15%
Diluted Earnings Per Share Increases 23%
Full Year Guidance Adjusted Upward

Paychex, Inc. (the “Company,” “Paychex,” “we,” “our,” or “us”) today announced the following results for the quarter ended February 28, 2022 (the “third quarter”), as compared to the corresponding prior year period:

Martin Mucci, Chairman and Chief Executive Officer, commented, “Our strong results for the third quarter, including double-digit growth in both revenue and earnings are a result of progress against key initiatives. We had a strong calendar year end and selling season, delivering a record quarter for new sales revenue and maintaining high levels of client retention. Our value proposition continues to resonate in the market with our unique blend of innovative Paychex Flex® technology and breadth of solutions to help small and mid-sized businesses.”

Mucci added, “While the impacts of COVID-19 are abating, businesses are still operating in a very complex and volatile environment. Focus is shifting from operational and financial survival during the height of the pandemic back to an employee-centric focus, with attracting and retaining talent, remote work, and workplace safety being top areas of concern. Now more than ever businesses need trusted partners, like Paychex, to provide them the right human resource (“HR”) technology solutions as well as help them navigate the complex HR landscape. As a trusted partner, we have helped small businesses obtain over $7 billion in combined Employee Retention and Paid Leave tax credits. We continuously monitor evolving workplace trends, providing solutions that meet the needs of our clients today and in the future.”

Third Quarter Business Highlights

Highlights as compared to the corresponding prior year period are as follows:

Management Solutions revenue was $959.9 million, an increase of 13%, mainly driven by the following factors:

• Increase in client bases across human capital management (“HCM”) offerings resulting from strong sales performance and high levels of retention, with continued strong demand for HR Solutions.
• Growth in checks per payroll for HCM and higher worksite employees for HR Solutions.
• Improved revenue per client resulting from enhanced price realization.
• Expansion of HCM ancillary services.
• Growth in payroll funding and outsourcing services for temporary staffing clients.

Professional Employer Organization (“PEO”) and Insurance Solutions revenue was $301.7 million, an increase of 21%, primarily due to the following:

• Increase in the number of average worksite employees and growth in average wages per worksite employee.
• Growth in PEO health insurance revenue.
• Higherstate unemployment insurance revenues.

Total expenses increased 11% to $713.2 million, as a result of the following:

• Higher compensation costs due to increases in headcount and wage rates, performance-based compensation, and fringe benefits.
• PEO direct insurance costs increased as a result of growth in number of PEO worksite employees and health insurance revenue.
• Further investment in product development and information technology, and
• Increases in advertising expense during peak selling season.

Operating income grew 20% to $562.8 million as a result of double-digit revenue growth which outpaced expense increases. Operating margin (operating income as a percentage of total revenue) was 44.1% compared to 42.2% for the prior year period.

Our effective income tax rate was 22.3% compared to 24.2% for the prior year period. All periods were impacted by the recognition of net discrete tax benefits related to employee stock-based compensation payments. The current period effective tax rate was also impacted by the recording of a tax benefit related to prior and current years’ research and development expenses incurred in the production of customer-facing software.

Fiscal Year-To-Date Business Highlights

Highlights for the nine months ended February 28, 2022 (the “nine months”) as compared to the corresponding prior year period are as follows:

• Revenue and earnings grew by double-digits for three consecutive quarters.
• Total service revenue and total revenue each increased 15%, with total revenue of $3.5 billion.
• Operating income increased 31% to $1.4 billion. Adjusted operating income⁽¹⁾increased 27% to $1.4 billion.
• Diluted earnings per share increased 31% to $3.02 per share. Adjusted diluted earnings per share⁽¹⁾ increased 27% to $2.95 per share.

⁽¹⁾ Adjusted operating income and adjusted diluted earnings per share are not U.S. GAAP measures. Please refer to the “Non-GAAP Financial Measures” section on page 4 of this press release for a discussion of these non-GAAP measures.

Financial Position and Liquidity

Our financial position and cash flow generation remained strong. As of February 28, 2022, we had:

• Cash, restricted cash, and total corporate investments of $1.4 billion.
• Short-term and long-term borrowings, net of debt issuance costs, of $806.3 million.
• Cash flow from operations was $1.2 billion for the nine months.

Return to Stockholders During the Nine Months

• Paid cumulative dividends of $1.98 per share totaling $714.9 million.

⁽¹⁾ One-time costs and corresponding tax benefit recognized during fiscal 2021 related to the acceleration of cost-saving initiatives, including the long-term strategy to reduce our geographic footprint and headcount optimization. These events are not expected to recur.

⁽²⁾ Net tax windfall benefits related to employee stock-based compensation payments recognized in income taxes. This item is subject to volatility and will vary based on employee decisions on exercising employee stock options and fluctuations in our stock price, neither of which is within the control of management.

⁽³⁾ Non-recurring tax benefit derived from prior years’ research and development costs incurred in the production of customer-facing software.

⁽⁴⁾ The calculation of the impact of non-GAAP adjustments on diluted earnings per share is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.

In addition to reporting operating income, net income, and diluted earnings per share, which are U.S. GAAP measures, we present adjusted operating income, adjusted operating margin, adjusted net income, adjusted diluted earnings per share, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and adjusted EBITDA, which are non-GAAP measures. We believe these additional measures are indicators of our core business operations’ performance period over period. Adjusted operating income, adjusted operating margin, adjusted net income, adjusted diluted earnings per share, EBITDA, and adjusted EBITDA, are not calculated through the application of U.S. GAAP and are not required forms of disclosure by the Securities and Exchange Commission (“SEC”). As such, they should not be considered a substitute for the U.S. GAAP measures of operating income, net income, and diluted earnings per share, and, therefore, they should not be used in isolation but in conjunction with the U.S. GAAP measures. The use of any non-GAAP measure may produce results that vary from the U.S. GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

Business Outlook

Our outlook for the fiscal year ending May 31, 2022 (“fiscal 2022”) incorporates current assumptions and market conditions. Changes in the macroeconomic environment could alter our guidance. With consideration of these impacts, we have updated our guidance as follows:

• Management Solutions revenue is now anticipated to grow in the range of 12% to 13%;
• PEO and Insurance Solutions revenue is now anticipated to grow in the range of 13% to 14%;
• Total revenue is now anticipated to grow in the range of 12% to 13%;
• Adjusted operating margin⁽¹⁾ is anticipated to be approximately 40%;
• Adjusted EBITDA margin⁽¹⁾ is anticipated to be in the range of 44% to 45%;
• Other expense, net is now anticipated to be approximately $15 million;
• The effective income tax rate for fiscal 2022 is anticipated to be approximately 24%; and
• Adjusted diluted earnings per share⁽¹⁾ is now anticipated to grow in the range of 22.5% to 23%.

Other aspects of our guidance for fiscal 2022 remain unchanged from what we provided previously.

⁽¹⁾ Adjusted operating margin, adjusted EBITDA margin and adjusted diluted earnings per share are not U.S. GAAP measures. Adjusted operating margin is calculated as operating margin, adjusted for one-time non-recurring items, as a percentage of total revenue. Adjusted EBITDA margin is calculated as net income, adjusted for interest, taxes, depreciation, amortization, and one-time non-recurring items, as a percentage of total revenue. We believe that the exclusion of certain one-time non-recurring items when calculating adjusted operating margin and adjusted EBITDA margin provides a better indicator of our core business operations’ performance period over period. Please refer to the “Non-GAAP Financial Measures” section on page 4 of this press release for a discussion of these non-GAAP measures.

Environmental, Social, and Governance (“ESG”)

As part of what it means to be Paychex, we are focusing our ESG efforts on actions we can take to create positive impact. To learn more about our latest initiatives, please visit the Corporate Social Responsibility section of our website. The information available on our website is not a part of, and is not incorporated into, this press release.

Quarterly Report on Form 10-Q (“Form 10-Q”)

We anticipate filing our Form 10-Q for the third quarter within the next day, and it will be available at Paychex Investor Relations portal. This press release should be read in conjunction with the Form 10-Q and the related Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in that Form 10-Q.

Webcast Details

Interested parties may access the webcast of our Earnings Release Conference Call, scheduled for March 30, 2022, at 9:30 a.m. Eastern Time, at Paychex Investor Relations portal. The webcast will be archived for approximately 90 days. Our news releases, current financial information, SEC filings, and investor presentations are also accessible at Paychex Investor Relations portal.

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