Paychex

(2)

Net tax shortfall/(windfall) 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)

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, operating margin, 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, 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 SEC. As such, they should not be considered a substitute for the U.S. GAAP measures of operating income, operating margin, 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.

(3)

Percentage changes are calculated based on unrounded numbers.

For further analysis of our results of operations for fiscal years 2026 and 2025, and our financial position as of May 31, 2026, refer to the tables and analysis in the “Results of Operations” and “Liquidity and Capital Resources” sections of this Item 7.

Business Outlook

During fiscal 2026, we served approximately 840,000 total customers across the U.S. and parts of Europe, of which approximately 800,000 are payroll clients. During fiscal 2025, we served approximately 800,000 payroll clients. Payroll client retention was in the range of 82% to 83% of our beginning client base for both fiscal 2026 and fiscal 2025 and we have sustained high revenue retention.

We continue to increase penetration of our integrated solutions beyond payroll processing, including our HR outsourcing (ASO and PEO) and retirement solutions.

A breach, despite the company's security systems including its Cyber Fusion Center, could substantially harm the business, incur significant liabilities, deter new customers, cause terminations, damage reputation and bring lawsuits, regulatory fines or other liabilities.

A captive insurance company provides coverage for certain risks where commercial coverage is limited, unavailable or not economically practical, including employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats and acts of terrorism, and supplements third-party programs by funding certain deductibles, self-insured retentions and excess coverage.

A cyberattack, unauthorized intrusion, malware, network disruption, data corruption or theft of personal/sensitive information could materially adversely affect the company's operations or customers, create liability or regulatory sanction and harm its reputation.