What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 86 added, 74 removed, 430 unchanged (27% of the section changed)

3 unchanged sentences

(in thousands, except per share amounts)

June 30, 2020

September 30, 2020

December 31, 2019

29 unchanged sentences

Stockholders' equity:

Common stock, $ 0.01 par value ( 100,000 shares authorized, 61,613 and 61,350 shares issued at June 30, 2020 and December 31, 2019, respectively;

57,588 and 57,660 shares outstanding at June 30, 2020 and December 31, 2019, respectively)

Common stock, $ 0.01 par value ( 100,000 shares authorized, 61,639 and 61,350 shares issued at September 30, 2020 and December 31, 2019, respectively;

57,605 and 57,660 shares outstanding at September 30, 2020 and December 31, 2019, respectively)

Additional paid-in capital

Retained earnings

Treasury stock, at cost ( 4,025 and 3,689 shares at June 30, 2020 and December 31, 2019, respectively)

Treasury stock, at cost ( 4,034 and 3,689 shares at September 30, 2020 and December 31, 2019, respectively)

Total stockholders' equity

4 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Implementation and other

35 unchanged sentences

Balances at June 30, 2019

Vesting of restricted stock

Stock-based compensation

Repurchases of common stock

Balances at September 30, 2019

Treasury Stock

10 unchanged sentences

Balances at June 30, 2020

Vesting of restricted stock

Stock-based compensation

Repurchases of common stock

Balances at September 30, 2020

See accompanying notes to the unaudited consolidated financial statements.

2 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

29 unchanged sentences

Payment of debt issuance costs

Net cash (used in) provided by financing activities

(Decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents

Net cash used in financing activities

Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents

1 unchanged sentence

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

Six Months Ended June 30,

Nine Months Ended September 30,

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents

25 unchanged sentences

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes presented in the Form 10-K.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results expected for the full year.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full year.

Recently Adopted Accounting Pronouncements

34 unchanged sentences

The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date.

As of June 30, 2020 and December 31, 2019, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit.

As of September 30, 2020 and December 31, 2019, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit.

Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets.

5 unchanged sentences

Most recently, in March 2020, our Board of Directors authorized the repurchase of up to $ 250.0 million of our common stock.

As of June 30, 2020, there was $ 174.8 million available for repurchases under our stock repurchase plan.

As of September 30, 2020, there was $ 172.0 million available for repurchases under our stock repurchase plan.

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

1 unchanged sentence

The current stock repurchase plan will expire on March 12, 2022 .

During the six months ended June 30, 2020, we repurchased an aggregate of 295,227 shares of our common stock at an average cost of $ 227.35 per share, including 90,157 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.

During the nine months ended September 30, 2020, we repurchased an aggregate of 344,216 shares of our common stock at an average cost of $ 227.00 per share, including 99,785 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.

Recently Issued Accounting Pronouncements

11 unchanged sentences

In December 2019, the Financial Accounting Standards Board issued ASU No.

2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”).

The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes.

This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted.

2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Ta xes” (“ASU 2019-12”).

ASU 2019-12 also clarifies and simplifies other aspects of the account ing for income taxes.

This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with ea rly adoption permitted.

We are currently evaluating the impact that this guidance will have on our financial position and results of operations, if any.

23 unchanged sentences

(tabular dollars and shares in thousands, except per share amounts)

Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client.

However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period.

7 unchanged sentences

Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Changes in deferred revenue related to material right performance obligations as of June 30, 2020 and 2019 were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Changes in deferred revenue related to material right performance obligations as of September 30, 2020 and 2019 were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Balance, beginning of period

19 unchanged sentences

The following tables present the asset balances and related amortization expense for these contract costs:

As of and for the Three Months Ended June 30, 2020

As of and for the Three Months Ended September 30, 2020

Capitalization

1 unchanged sentence

Costs to fulfill a contract

As of and for the Three Months Ended June 30, 2019

As of and for the Three Months Ended September 30, 2019

Capitalization

1 unchanged sentence

Costs to fulfill a contract

As of and for the Six Months Ended June 30, 2020

As of and for the Nine Months Ended September 30, 2020

Capitalization

1 unchanged sentence

Costs to fulfill a contract

As of and for the Six Months Ended June 30, 2019

As of and for the Nine Months Ended September 30, 2019

Capitalization

3 unchanged sentences

Property and equipment and accumulated depreciation and amortization were as follows:

June 30, 2020

September 30, 2020

December 31, 2019

8 unchanged sentences

We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40.

For the three and six months ended June 30, 2020, we capitalized $ 11.0 million and $ 20.7 million, respectively, of computer software development costs related to software developed for internal use.

For the three and six months ended June 30, 2019, we capitalized $ 6.7 million and $ 15.6 million, respectively, of computer software development costs related to software developed for internal use.

For the three and nine months ended September 30, 2020, we capitalized $ 11.7 million and $ 32.4 million, respectively, of computer software development costs related to software developed for internal use.

For the three and nine months ended September 30, 2019, we capitalized $ 7.1 million and $ 22.7 million, respectively, of computer software development costs related to software developed for internal use.

Paycom Software, Inc.

4 unchanged sentences

We capitalize interest incurred for indebtedness related to construction in progress.

For the three and six months ended June 30, 2020, we incurred interest costs of $ 0.4 million and $ 0.8 million, respectively, of which we capitalized $ 0.4 million and $ 0.8 million, respectively.

For the three and six months ended June 30, 2019, we incurred interest costs of $ 0.4 million and $ 0.8 million, respectively, of which we capitalized $ 0.1 million and $ 0.2 million, respectively.

Included in the construction in progress balance at June 30, 2020 and December 31, 2019 is $ 2.4 million and $ 2.2 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $ 13.0 million and $ 25.2 million, respectively, for the three and six months ended June 30, 2020.

Depreciation and amortization expense for property and equipment was $ 10.3 million and $ 19.6 million, respectively, for the three and six months ended June 30, 2019.

For the three and nine months ended September 30, 2020, we incurred interest costs of $ 0.4 million and $ 1.1 million, respectively, of which we capitalized $ 0.4 million and $ 1.1 million, respectively.

For the three and nine months ended September 30, 2019, we incurred interest costs of $ 0.3 million and $ 1.1 million, respectively, of which we capitalized $ 0.2 million and $ 0.4 million, respectively.

Included in the construction in progress balance at September 30, 2020 and December 31, 2019 is $ 2.9 million and $ 2.2 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $ 13.8 million and $ 39.1 million, respectively, for the three and nine months ended September 30, 2020.

Depreciation and amortization expense for property and equipment was $ 10.9 million and $ 30.5 million, respectively, for the three and nine months ended September 30, 2019.

GOODWILL AND INTANGIBLE ASSETS, NET

As of both June 30, 2020 and December 31, 2019, goodwill was $ 51.9 million.

As of both September 30, 2020 and December 31, 2019, goodwill was $ 51.9 million.

We have selected June 30 as our annual goodwill impairment testing date.

We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of June 30, 2020.

As of June 30, 2020 and December 31, 2019, there were no indicators of impairment.

As of September 30, 2020 and December 31, 2019, there were no indicators of impairment.

All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization.

The following tables provide the components of intangible assets, which are included in Other assets in our consolidated balance sheets:

June 30, 2020

September 30, 2020

Weighted Average Remaining

1 unchanged sentence

Weighted Average Remaining

The weighted average remaining useful life of our intangible assets was 2.0 years as of June 30, 2020.

Amortization of intangible assets for the three and six months ended June 30, 2020 was less than $ 0.1 million and $ 0.1 million, respectively.

Amortization of intangible assets for the three and six months ended June 30, 2019 was less than $ 0.1 million and $ 0.1 million, respectively.

The weighted average remaining useful life of our intangible assets was 1.8 years as of September 30, 2020.

Amortization of intangible assets for the three and nine months ended September 30, 2020 was less than $ 0.1 million and $ 0.2 million, respectively.

Amortization of intangible assets for the three and nine months ended September 30, 2019 was $ 0.1 million and $ 0.2 million, respectively.

LONG-TERM DEBT, NET

Long-term debt consisted of the following:

June 30, 2020

September 30, 2020

December 31, 2019

10 unchanged sentences

The Term Loans mature on September 7, 2025 and bear interest, at our option, at either (a) a prime rate plus 1.0 % or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5 %.

As of June 30 , 20 20 , our indebtedness of $ 30.0 million consisted solely of Term Loans made under the Term Credit Agreement.

Unamortized debt issuance costs of $ 0.2 million as of both Ju n e 30 , 20 20 and December 31, 201 9 are presented as a direct deduction from the carrying amount of the debt liability.

As of September 30, 2020, our indebtedness of $ 29.6 million consisted solely of Term Loans made under the Term Credit Agreement.

Unamortized debt issuance costs of $ 0.2 million as of both September 30, 2020 and December 31, 2019 are presented as a direct deduction from the carrying amount of the debt liability.

Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0.

As of June 30, 2020, we were in compliance with these covenants.

As of September 30, 2020, we were in compliance with these covenants.

On February 12, 2018 , we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A.

9 unchanged sentences

Letters of credit are to be issued only to support our business operations.

As of June 30, 2020, we did no t have any borrowings outstanding under the Facility.

As of September 30, 2020, we did no t have any borrowings outstanding under the Facility.

Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0 .

Additionally, the Revolving 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 certain 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 for a facility of the size and type of the Facility.

As of June 30, 2020, we were in compliance with all covenants related to the Revolving Credit Agreement.

As of June 30, 2020 and December 31, 2019, the carrying value of our total long-term debt approximated its fair value as of such date.

As of September 30, 2020, we were in compliance with all covenants related to the Revolving Credit Agreement.

As of September 30, 2020 and December 31, 2019, the carrying value of our total long-term debt approximated its fair value as of such date.

The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.

10 unchanged sentences

The interest rate swap agreement has a maturity date of September 7, 2025 .

For the three and six months ended June 30, 2020, we recorded losses of $ 0.1 million and $ 1.7 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income.

For the three and six months ended June 30, 2019, we recorded losses of $ 0.8 million and $ 1.4 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income.

For the three months ended September 30, 2020, we recorded a gain of $ 0.1 million and for the nine months ended September 30, 2020, we recorded a loss of $ 1.6 million, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income.

For the three and nine months ended September 30, 2019, we recorded losses of $ 0.4 million and $ 1.8 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income.

Paycom Software, Inc.

8 unchanged sentences

These available-for-sale securities are recognized in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities.

As of June 30, 2020 and December 31, 2019, all available-for-sale securities and certificates of deposit were due in thirteen months or less.

As of September 30, 2020 and December 31, 2019, all available-for-sale securities and certificates of deposit were due in thirteen months or less.

As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap.

4 unchanged sentences

Level 3 – Unobservable inputs in which there is little or no market data

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

June 30, 2020

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:

September 30, 2020

Commercial paper

15 unchanged sentences

(tabular dollars and shares in thousands, except per share amounts)

three and six months ended June 30, 2020, respectively.

Matching contributions were $ 1.7 million and $ 3.3 million for the three and six months ended June 30 , 2019, respectively.

three and nine months ended September 30, 2020 , respectively.

Matching contributions were $ 1.5 million and $ 4.8 million for the three and nine months ended September 30 , 2019, respectively.

The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months.

4 unchanged sentences

The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares.

Eligible employees purchased 32,764 and 28,475 shares of the Company’s common stock under the ESPP during the six months ended June 30, 2020 and 2019, respectively.

Eligible employees purchased 42,966 and 39,137 shares of the Company’s common stock under the ESPP during the nine months ended September 30, 2020 and 2019, respectively.

Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period.

Our compensation expense related to the ESPP was $ 0.4 million and $ 0.8 million for the three and six months ended June 30, 2020, respectively.

Our compensation expense related to the ESPP was $ 0.3 million and $ 0.9 million for the three and six months ended June 30, 2019, respectively.

Our compensation expense related to the ESPP was $ 0.7 million and $ 1.5 million for the three and nine months ended September 30, 2020, respectively.

Our compensation expense related to the ESPP was $ 0.4 million and $ 1.3 million for the three and nine months ended September 30, 2019, respectively.

EARNINGS PER SHARE

5 unchanged sentences

The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

income allocable to participating securities

11 unchanged sentences

STOCK-BASED COMPENSATION

The following table summarizes restricted stock awards activity for the six months ended June 30, 2020:

The following table summarizes restricted stock awards activity for the nine months ended September 30, 2020:

Restricted Stock Awards

5 unchanged sentences

Unvested shares of restricted stock outstanding at December 31, 2019

Unvested shares of restricted stock outstanding at June 30, 2020

During the six months ended June 30, 2020, we issued an aggregate of 507,860 restricted shares of common stock to our executive officers and certain non-executive employees under the Paycom Software, Inc.

Unvested shares of restricted stock outstanding at September 30, 2020

During the nine months ended September 30, 2020, we issued an aggregate of 507,860 restricted shares of common stock to our executive officers and certain non-executive employees under the Paycom Software, Inc.

2014 Long-Term Incentive Plan (the “LTIP”), consisting of 360,948 shares subject to market-based vesting conditions (“Market-Based Shares”) and 146,912 shares subject to time-based vesting conditions (“Time-Based Shares”).

4 unchanged sentences

Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date.

For the three and six months ended June 30, 2020, our total compensation expense related to restricted stock was $ 21.2 million and $ 37.0 million, respectively.

For the three and six months ended June 30, 2019, our total compensation expense related to restricted stock was $ 5.6 million and $ 36.7 million, respectively.

There was $ 129.4 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of restricted stock outstanding as of June 30, 2020.

The unrecognized compensation cost for the unvested shares is expected to be recognized over a weighted average period of 1.8 years as of June 30, 2020.

We capitalized stock-based compensation costs related to software developed for internal use of $ 2.1 million and $ 3.7 million for the three and six months ended June 30, 2020, respectively.

We capitalized stock-based compensation costs related to software developed for internal use of $ 0.7 million and $ 4.0 million for the three and six months ended June 30, 2019, respectively.

For the three and nine months ended September 30, 2020, our total compensation expense related to restricted stock was $ 19.5 million and $ 56.5 million, respectively.

For the three and nine months ended September 30, 2019, our total compensation expense related to restricted stock was $ 4.5 million and $ 41.1 million, respectively.

There was $ 106.3 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of restricted stock outstanding as of September 30, 2020.

The unrecognized compensation cost for the unvested shares is expected to be recognized over a weighted average period of 1.6 years as of September 30, 2020.

We capitalized stock-based compensation costs related to software developed for internal use of $ 1.6 million and $ 5.3 million for the three and nine months ended September 30, 2020, respectively.

We capitalized stock-based compensation costs related to software developed for internal use of $ 0.3 million and $ 4.3 million for the three and nine months ended September 30, 2019, respectively.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

COMMITMENTS AND CONTINGENCIES

1 unchanged sentence

In connection with this matter, we identified less than 250 affected clients, representing approximately 0.5 % of our client base as of December 31, 2019.

Since December 2019, we have been notifying clients affected by such charges between approximately 2011 and 2019 and have refunded approximately $ 2.5 million, in the aggregate, to such clients.

Since December 2019, we have been in the process of notifying clients affected by such charges between approximately 2011 and September 2020 and have refunded approximately $ 2.5 million, in the aggregate, to such clients.

This issue did not have a material impact on our financial results for any prior period.

3 unchanged sentences

Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share amounts)

The Company’s effective income tax rate was 20.4 % and 16.1 % for the six months ended June 30, 2020 and 2019, respectively.

The higher effective tax rate for the six months ended June 30, 2020 is primarily related to a decrease in excess tax benefits from stock-based compensation related to vesting events as compared to the six months ended June 30, 2019.

The Company’s effective income tax rate was 20.3 % and 18.0 % for the nine months ended September 30, 2020 and 2019, respectively.

The higher effective tax rate for the nine months ended September 30, 2020 is primarily related to a decrease in excess tax benefits from stock-based compensation related to vesting events as compared to the nine months ended September 30, 2019.

SUBSEQUENT EVENTS

On October 22, 2020, the Company’s TEV exceeded $ 19.8 billion, which resulted in the vesting of 40,146 Market-Based Shares issued on January 30, 2020.

For additional information on our stock-based compensation, see “Note 11.

Stock-Based Compensation” in this Form 10-Q.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements