Efrain Rivera
Senior Vice President, Chief Financial Officer, and Treasurer at Paychex
Thanks, Marty. Good morning. Thanks for being on the call. I'd like to remind everyone that today's conference call will contain forward-looking statements, refer to the customary disclosures. Let me start by providing some of the key points for the quarter. I'll follow up with greater detail in certain areas. I'll finish with a review of fiscal '22 outlook and some very, very, very preliminary thoughts on fiscal 2023. Our third quarter results reflect strong internal execution, as Marty mentioned, and continued improvement in key indicators, service revenue and total revenue increased 15% to $1.3 billion. Within service revenue, Management Solutions revenue increased 13% to $960 million driven by higher client bases across our HCM suite, check volumes, revenues per check, revenue per client, payroll funding and outsourced service for temporary staffing clients and ancillary HR services resulting from ERTC, which Marty just mentioned.
Although the revenue associated with ERTC is substantially nonrecurring, ERT has afforded Paychex the opportunity to continue to deepen its relationship with clients, increased revenue with client, and showcase its industry-leading suite of solutions for small and medium-sized businesses. A significant opportunity remains both inside and outside our base. And one thing I'd like to point out here is, there are a number of HCM platforms in the market, you all know that, but they're only a select few partners. In order for you to be able to access the opportunities that arise from having an HCM suite with bundled ancillary services, you have to be a partner, not simply a platform provider. There's only a few of those in the market. Our results demonstrate the power of being one, and we are one of the leading ones. So our results are not surprising to us. Our clients want to know the difference between a MEP, a SEP and a PEP. They want to know what the implication of the ERTC is for their business and they want to know what the implications of legislation like the Secure Act is -- how it's going to impact their business. We know that. We're experts and we're the partner that our clients look to, for solutions to those issues. Our results demonstrate that this quarter.
Now client base growth in the quarter resulted from both strong sales performance and high levels of client retention. In particular, HR Solutions business continues to benefit from strong demand as businesses look for more HR support. PEO and Insurance Solutions revenue increased 21% to $302 million. Our PEO business benefited from higher average worksite employees, state unemployment insurance revenue and health insurance attachment. Interest on funds held for clients decreased 5% for the quarter to $14 million as the impact of lower average interest rates was partially offset by an increase of 13% in average investment balances. And obviously, this is one of the things that's going to change as we go through both the remainder of the year and into the next year. We haven't seen the impact of rising rates yet, we will.
Total expenses increased 11% to $713 million. The growth in expenses resulted from higher PEO direct insurance costs, headcount to support our growing client base and continued investment in our product, technology, sales and marketing. Op income increased 20% to $563 million with an operating margin of 44.1%, an expansion of almost 200 basis points. Our effective income tax rate was 22.3% compared to 24.2% for the same period last year. Both periods reflect net discrete tax benefits related to both, to stock-based compensation benefits, or payments, I'm sorry. In addition, the current quarter includes tax benefits related to prior year research and development expenses incurred in the production of customer-facing software. So we had an adjustment there, and that's part of our lower tax rate.
Net income and diluted earnings per share both increased 23% for the quarter to $431 million and $1.19 per share, respectively. Adjusted net income and adjusted diluted earnings per share increased 20% for the quarter to $419 million and $1.15 per share, respectively. I'll quickly highlight our results for the nine-month period ending February 28. Both revenue and earnings have grown by double-digits for each of the past three quarters. Total service revenue and total revenue growth of 15% each to $3.4 billion and $3.5 billion, respectively. Expenses, excluding one-time costs incurred during the prior year, increased 7%. So we've gotten very good leverage. Operating income and adjusted operating income were $1.4 billion, increases of 31% and 27%, respectively. Diluted earnings per share increased 31% to $3.02 per share. Adjusted diluted earnings per share increased 27% to $2.95 a share.
Let me walk through the highlights of our financial position. As you all can see, it's very strong. Cash, restricted cash and total corporate investments now total of $1.4 billion and our total borrowings of approximately $806 million is where it stood at February 28, 2022. Cash flow from operations was robust in the quarter. It was at $1.2 billion, an increase of 34% from the same period last year. Free cash flow generated for the nine months was $1 billion, up 36% over last year. The increases were driven by higher net income and fluctuations in working capital. We paid out quarterly dividends at $0.06 a share for a total of $715 million during the first nine months. Our 12-month rolling return on equity was 44%. Those are strong numbers.
Now I will turn to our guidance for the current fiscal year ending May 31, 2022. The outlook reflects the current macro environment, which saw improvement in the quarter despite some disruption from Omicron. We've taken that into account -- we've taken into account the fact that third quarter results exceeded expectations, but have tempered our outlook given the changing macroeconomic environment, and we provided the following updated fiscal 2022 guidance as you saw Management Solutions revenue is now expected to grow in the range of 12% to 13%, we previously guided to growth in the range of 10% to 11%. PEO and Insurance Solutions is expected to grow in the range of 13% to 14%, we previously guided to growth in the range of 10% to 12%. Interest on funds held for client is expected to be relatively flat year-over-year. We won't see the impact yet significantly of Fed raises.
Total revenue is expected to grow in the range of 12% to 13%, we previously guided to growth in the range of 10% or 11%. Adjusted operating income margin is expected to be approximately 40%, up from previous guidance of 39% to 40%. Adjusted EBITDA margin is expected to be in the range of 44% to 45%, up from previous guidance of approximately 44%. Other expense net is expected to be approximately $15 million, our previous guidance was in the range of $15 million [Phonetic] to $18 million [Phonetic]. Effective income tax rate is expected to be approximately 24%, we previously guided in the range of 24% to 25%. Adjusted diluted earnings per share is expected to grow in the range of 22.5% to 23%, we previously guided to growth in the range of 18% to 20%. This guidance reflects our intention to continue to invest in our businesses to help drive future growth. And I would just comment that in the fourth quarter, we intend to take some additional actions with respect to investment in the business. So that will temper the margin a little bit as we head into 2023.
Now comments on 2023, we're currently in the process of preparing our annual plan. We'll provide guidance, final guidance for fiscal 2023 during our fiscal 2022 fourth quarter in June. But I want to provide a preliminary thought process around fiscal 2023, as we enter the planning cycle. On a preliminary basis, we believe the total revenue growth will be in the upper single digits. At this stage, I'd call that somewhere around 7%. I would caution that, there's a lot of work to be done to digest completely where the Fed's going to end up and how we position the portfolio. So there's still some moving pieces there.
The other thing we would say right now with respect to operating margins, we expect an improvement of about 50 basis points. You know that typically, that's what we're aiming for. We've had very, very significant operating margin improvement, but we're still committed to leveraging the business. So that's where we're at right now. I want to call out one thing that's important. Other expense net is going to be in the range of $25 million to $30 million next year due to the absence of equity gains that we got this year. So we have a portfolio that we invest in equity gains during the year. Those will not be in next year, at least, we don't -- can't plan on them or anticipate they will be there. And then the effective tax rate will be in the range of 24% to 25%.
Of course, all of this is very preliminary. It's subject to revision, and it's based on assumptions that could change given the uncertain macro environment, especially as we gain additional insight into what the Fed actually will do. We'll update you again on the fourth quarter call.
So with all of that, I'll turn it back over to Marty.