Paychex, Inc. Reports Record Fiscal 2006 Results

Fiscal Year 2006 Highlights:

-- Increase of 26% in net income to $464.9 million.

-- Diluted earnings per share were $1.22, an increase of 26%.

-- Total revenues up 16%.

-- Payroll service revenue up 10% to $1,248.9 million.

-- Human Resource Services revenue grew 29% to $324.9 million.

-- Cash flow from operations was $569.2 million.

-- Dividends paid of $231.5 million, representing 50% of net income.

Paychex, Inc. ("we," "our," or "us") (NASDAQ:PAYX) today announcedrecord net income of $464.9 million, or $1.22 diluted earnings pershare, for the fiscal year ended May 31, 2006 ("fiscal 2006"), a 26%increase over net income of $368.8 million, or $0.97 diluted earningsper share, for the prior fiscal year. Total revenues were $1,674.6million, a 16% increase over $1,445.1 million for the prior fiscalyear.

"Fiscal 2006 was an exceptional year by all measures," commentedJonathan J. Judge, President and Chief Executive Officer of Paychex,Inc. "Our sixteenth consecutive year of record revenues and earningsincluded a 4% increase in our client base that now consists ofapproximately 543,000 clients, record client retention levels, andrevenue and profit results that exceeded our long term objectives.Looking to fiscal 2007, we are well positioned to continue ourtradition of excellent growth in all areas by continually improvingour client service levels, offering new and enhanced services, andincreasing ancillary product penetration within our client base."

Payroll service revenue grew 10% over the prior fiscal year as webenefited from growth in clients, check volume, and utilization ofpayroll-related ancillary services. Utilization of our payroll taxadministration services was 92% at May 31, 2006 compared to 90% at May31, 2005, and over 95% of our new clients purchase these services.Employee payment services utilization was 68% at May 31, 2006 comparedto 65% at May 31, 2005, and over 75% of our new clients purchase theseservices.

Human Resource Services revenue increased 29% to $324.9 millionfor fiscal 2006. The increase for the fiscal year reflects growth inthe following services: Retirement Services revenue increased 16% to$106.1 million; administrative fee revenue from Paychex Premier(SM)Human Resources increased 57% to $52.6 million; revenue fromProfessional Employer Organization services increased 25% to $67.1million; and revenues from other Human Resource Services increased 36%to $99.0 million.

Total expenses increased 12% to $1,025.0 million for fiscal 2006.Total expenses were affected by an exceptionally strong sales year asour sales force exceeded their targets resulting in higher than normallevels of sales expense, continued investments in new products andservices, geographic expansion within Germany, and other expendituresto continually improve client service at all levels. For fiscal 2006,our operating income was $649.6 million, an increase of 22% over theprior fiscal year. Operating income excluding interest on funds heldfor clients increased 16% to $548.8 million.

Interest on funds held for clients increased 67% to $100.8 millionand corporate investment income increased 103% to $25.2 million,attributable to higher average interest rates and higher averageinvestment balances, as summarized below:
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For the three For the twelve
months ended months ended
May 31, May 31,
------------------ ------------------
$ in millions 2006 2005 2006 2005
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Average investment balances:
Funds held for clients $3,445.8 $3,141.4 $3,080.3 $2,759.7
Corporate investments $ 966.6 $ 696.7 $ 840.3 $ 599.5

Average interest rates earned:
Funds held for clients 3.7% 2.6% 3.2% 2.2%
Corporate investments 3.3% 2.4% 2.9% 2.1%
----------------------------------------------------------------------

Fourth Quarter Fiscal 2006 Highlights:

The highlights for the three months ended May 31, 2006 are asfollows:

-- Net income increased 21% to $122.7 million.

-- Diluted earnings per share were $0.32, an increase of 19%.

-- Total revenues increased 16% to $440.5 million.

-- Payroll service revenue was up 11% to $316.4 million.

-- Human Resource Services generated $92.1 million in revenues from the following:
-- Retirement Services revenue grew 17% to $28.1 million.

-- Administrative fee revenue from Paychex Premier (SM) Human
Resources increased 42% to $14.6 million.

-- Revenue from Professional Employer Organization services
increased 2% to $17.4 million and was impacted by
fluctuations in workers' compensation insurance claims.

-- Revenue from other Human Resource Services increased 42%
to $31.9 million resulting primarily from higher revenue
from state unemployment services and time and attendance
solutions.

-- Operating income increased 17% to $167.5 million.

Outlook:

Our current outlook for the full fiscal year ended May 31, 2007 isbased upon current economic conditions and interest rate levels and issummarized as follows:

-- Payroll service revenue growth is projected to be in the range of 9% to 11%.

-- Human Resource Services revenue growth is expected to be in the range of 20% to 23%.

-- Total service revenue growth is projected to be in the range of 11% to 13%.

-- Interest on funds held for clients is expected to increase approximately 28% to 30%.

-- Total revenue growth is estimated to be in the range of 12% to 14%.

-- Corporate investment income is anticipated to increase approximately 45% to 50%.

-- Stock-based compensation costs will be primarily included in selling, general and administrative expenses and are expected to impact pre-tax and net income in the range of 4% to 5%.

-- The effective income tax rate is expected to approximate 31.0%.

-- Net income growth is expected to be in the range of 12% to 14%.

CONFERENCE CALL

Interested parties may access the webcast of the Paychex, Inc.(the "Company" or "Paychex") Earnings Release Conference Call,scheduled for June 29, 2006 at 10:30 a.m. Eastern Time, atwww.paychex.com at the Investor Relations page. The webcast will alsobe archived on the Investor Relations page for approximately onemonth. Paychex, Inc.'s news releases, current financial information,SEC filings, and investor presentations are also accessible atwww.paychex.com. For more information, contact:
Investor Relations: John Morphy, CFO, or
Terri Allen 585-383-3406
Media Inquiries: Laura Saxby Lynch 585-383-3074

ABOUT PAYCHEX

Paychex, Inc. is a leading provider of payroll, human resource,and benefits outsourcing solutions for small- to medium-sizedbusinesses. The company offers comprehensive payroll services,including payroll processing, payroll tax administration, and employeepay services, including direct deposit, check signing, andReadychex(R). Human Resource Services include 401(k) planrecordkeeping, workers' compensation administration, section 125plans, a professional employer organization, time and attendancesolutions, and other administrative services for business. Paychex wasfounded in 1971. With headquarters in Rochester, New York, the companyhas more than 100 offices and serves approximately 543,000 payrollclients nationwide. For more information about Paychex and ourproducts, visit www.paychex.com.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995

Certain written and oral statements made by management of Paychex,Inc. and its wholly owned subsidiaries may constitute "forward-lookingstatements" as defined in the Private Securities Litigation Reform Actof 1995 (the "Reform Act"). Forward-looking statements are identifiedby such words and phrases as "we expect," "expected to," "estimates,""estimated," "current outlook," "we look forward to," "would equateto," "projects," "projections," "projected to be," "anticipates,""anticipated," "we believe," "could be," and other similar phrases.All statements addressing operating performance, events, ordevelopments that the Company expects or anticipates will occur in thefuture, including statements relating to revenue growth, earnings,earnings-per-share growth, or similar projections, are forward-lookingstatements within the meaning of the Reform Act. Because they areforward-looking, they should be evaluated in light of important riskfactors. These risk factors include, but are not limited to, thefollowing risks, as well as those that are described in the Company'sfilings with the Securities and Exchange Commission: general marketand economic conditions, including, among others, changes in UnitedStates employment and wage levels, changes in new hiring trends,changes in short- and long-term interest rates, and changes in themarket value and the credit rating of securities held by the Company;changes in demand for the Company's products and services, ability todevelop and market new products and services effectively, pricingchanges and impact of competition, and the availability of skilledworkers; changes in the laws regulating collection and payment ofpayroll taxes, professional employer organizations, and employeebenefits, including retirement plans, workers' compensation, stateunemployment, and section 125 plans; changes in Professional EmployerOrganization direct costs, including, but not limited to, workers'compensation rates and underlying claims trends; the possibility offailure to keep pace with technological changes and provide timelyenhancements to products and services; the possibility of failure ofthe Company's operating facilities, computer systems, andcommunication systems during a catastrophic event; the possibility ofthird-party service providers failing to perform their functions; thepossibility of penalties and losses resulting from errors andomissions in performing services; the possible inability of theCompany's clients to meet their payroll obligations; the possiblefailure of internal controls or the Company's inability to implementbusiness processing improvements; and potentially unfavorable outcomesrelated to pending legal matters. All of these factors could cause theCompany's actual results to differ materially from its anticipatedresults. The information provided in this document is based upon thefacts and circumstances known at this time. The Company undertakes noobligation to update these forward-looking statements to reflectevents or circumstances after the date of issuance of this release, orto reflect occurrence of unanticipated events.
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)

----------------------------------------------------------------------
For the three
months ended
May 31,
------------------
%
2006 2005 Change
----------------------------------------------------------------------
Revenues:
Payroll service revenue $316,412 $284,754 11%
Human Resource Services revenue 92,059 73,747 25%
----------------------------------------------------------------------
Total service revenues 408,471 358,501 14%
Interest on funds held for clients (A) 32,009 20,521 56%
----------------------------------------------------------------------
Total revenues 440,480 379,022 16%

Expenses:
Operating expenses 145,998 124,734 17%
Selling, general and administrative
expenses 126,936 111,461 14%
----------------------------------------------------------------------
Total expenses 272,934 236,195 16%
----------------------------------------------------------------------

Operating income 167,546 142,827 17%

Investment income, net (A) 8,426 4,282 97%
----------------------------------------------------------------------
Income before income taxes 175,972 147,109 20%

Income taxes 53,232 45,628 17%
----------------------------------------------------------------------
Net income $122,740 $101,481 21%
======================================================================


Basic earnings per share $ 0.32 $ 0.27 19%
----------------------------------------------------------------------

Diluted earnings per share $ 0.32 $ 0.27 19%
----------------------------------------------------------------------

Weighted-average common shares
outstanding 380,092 378,569
----------------------------------------------------------------------

Weighted-average common shares
outstanding, assuming dilution 382,207 379,831
----------------------------------------------------------------------

Cash dividends per common share $ 0.16 $ 0.13 23%
----------------------------------------------------------------------


For the twelve
months ended
May 31,
---------------------
%
2006 2005 Change
----------------------------------------------------------------------
Revenues:
Payroll service revenue $1,248,924 $1,133,439 10%
Human Resource Services revenue 324,873 251,235 29%
----------------------------------------------------------------------
Total service revenues 1,573,797 1,384,674 14%
Interest on funds held for clients
(A) 100,799 60,469 67%
----------------------------------------------------------------------
Total revenues 1,674,596 1,445,143 16%

Expenses:
Operating expenses 560,255 499,025 12%
Selling, general and administrative
expenses 464,770 412,343 13%
----------------------------------------------------------------------
Total expenses 1,025,025 911,368 12%
----------------------------------------------------------------------

Operating income 649,571 533,775 22%

Investment income, net (A) 25,195 12,391 103%
----------------------------------------------------------------------
Income before income taxes 674,766 546,166 24%

Income taxes 209,852 177,317 18%
----------------------------------------------------------------------
Net income $ 464,914 $ 368,849 26%
======================================================================


Basic earnings per share $ 1.23 $ 0.97 27%
----------------------------------------------------------------------

Diluted earnings per share $ 1.22 $ 0.97 26%
----------------------------------------------------------------------

Weighted-average common shares
outstanding 379,465 378,337
----------------------------------------------------------------------

Weighted-average common shares
outstanding, assuming dilution 381,351 379,763
----------------------------------------------------------------------

Cash dividends per common share $ 0.61 $ 0.51 20%
----------------------------------------------------------------------

Note: Certain prior period amounts have been reclassified to
conform to the current period presentation, as more fully
described in the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 28, 2006.

(A) Further information on interest on funds held for clients and
investment income, net, and the short- and long-term effects
of changing interest rates can be found in the Company's
filings with the Securities and Exchange Commission, including
the Company's Forms 10-K and 10-Q, as applicable, under the
caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and subheadings "Results
of Operations" and "Market Risk Factors." These filings are
accessible at the Company's website www.paychex.com.



PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share amount)

----------------------------------------------------------------------
May 31, May 31,
2006 2005
----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 137,423 $ 77,669
Corporate investments (A) 440,007 225,719
Interest receivable 38,139 31,108
Accounts receivable, net of allowance for
doubtful accounts 189,835 161,849
Deferred income taxes 18,314 19,946
Prepaid income taxes 7,574 5,781
Prepaid expenses and other current assets 21,398 20,587
----------------------------------------------------------------------
Current assets before funds held for clients 852,690 542,659
Funds held for clients (A) 3,591,611 2,979,348
----------------------------------------------------------------------
Total current assets 4,444,301 3,522,007
Long-term corporate investments (A) 384,481 404,152
Property and equipment, net of accumulated
depreciation 234,664 205,319
Intangible assets, net of accumulated
amortization 60,704 71,458
Goodwill 405,842 405,992
Deferred income taxes 12,783 1,213
Other long-term assets 6,527 7,277
----------------------------------------------------------------------
Total assets $5,549,302 $4,617,418
======================================================================

LIABILITIES
Accounts payable $ 46,668 $ 30,385
Accrued compensation and related items 130,069 106,635
Deferred revenue 5,809 4,271
Legal reserve 15,625 25,271
Other current liabilities 34,008 28,391
----------------------------------------------------------------------
Current liabilities before client fund deposits 232,179 194,953
Client fund deposits 3,606,193 2,985,386
----------------------------------------------------------------------
Total current liabilities 3,838,372 3,180,339
Deferred income taxes 15,481 17,545
Other long-term liabilities 40,606 33,858
----------------------------------------------------------------------
Total liabilities 3,894,459 3,231,742

STOCKHOLDERS' EQUITY
Common stock, $.01 par value; Authorized:
600,000 shares; Issued and outstanding:
380,303 shares at May 31, 2006, and 378,629
shares at May 31, 2005, respectively 3,803 3,786
Additional paid-in capital 284,395 240,700
Retained earnings 1,380,971 1,147,611
Accumulated other comprehensive loss (14,326) (6,421)
----------------------------------------------------------------------
Total stockholders' equity 1,654,843 1,385,676
----------------------------------------------------------------------
Total liabilities and stockholders' equity $5,549,302 $4,617,418
======================================================================

Note: Certain prior period amounts have been reclassified to
conform to the current period presentation, as more fully
described in the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 28, 2006.

(A) The available-for-sale securities within the funds held for
clients and corporate investment portfolios reflected a net
unrealized loss position of $22.0 million at May 31, 2006,
compared with a net unrealized loss position of $9.9 million
at May 31, 2005. During the twelve months ended May 31, 2006,
the net unrealized loss position ranged from $25.2 million to
$6.1 million. The net unrealized loss position of the
Company's combined investment portfolios was approximately
$29.0 million at June 23, 2006.