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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 87 added, 71 removed, 287 unchanged (36% of the section changed)

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results.

The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and six months ended June 30, 2021, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2021 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K.

The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2021, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2021 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K.

Except for certain information as of December 31, 2020, all amounts herein are unaudited.

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and the impact of the novel coronavirus (COVID-19) pandemic on our business, results of operations, cash flows, financial condition and liquidity.

In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “will,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.

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Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

changes in laws, government regulations and policies and interpretations thereof;

changes in laws, including proposed tax legislation, government regulations and policies and interpretations thereof;

the possibility of security vulnerabilities, cyberattacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions;

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We serve a diverse client base in terms of size and industry.

None of our clients constituted more than one-half of one percent of our revenues for the six months ended June 30, 2021.

None of our clients constituted more than one-half of one percent of our revenues for the nine months ended September 30, 2021.

Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives who sell new applications to existing clients.

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We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth.

We also plan to open additional sales offices in the future and leverage virtual sales meetings to further expand our presence in the U.S.

We also plan to open additional sales offices in the future and leverage virtual sales meetings to further expand our market presence.

Our principal marketing efforts include national and local advertising campaigns, email campaigns, social and digital media campaigns, search engine marketing methods, tradeshows, print advertising and outbound marketing including personalized direct mail campaigns.

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Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations.

For the three months ended June 30, 2021 and 2020, our total gross margins were approximately 85% and 84%, respectively.

For the six months ended June 30, 2021 and 2020, our total gross margins were approximately 86%.

For the three months ended September 30, 2021 and 2020, our total gross margins were approximately 83% and 84%, respectively.

For the nine months ended September 30, 2021 and 2020, our total gross margins were approximately 85%.

Although our gross margins may fluctuate from quarter to quarter due to seasonality and hiring trends, we expect that our gross margins will remain relatively consistent in future periods.

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In March 2020, we prohibited all business-related travel until further notice and began transitioning our employees to work-from-home arrangements.

As of June 30, 2021, 90% of our employees were working remotely.

Our sales employees have been conducting all meetings with current and prospective clients virtually since March 2020.

We have started transitioning certain employees to safely return to our offices and permitting a limited amount of business travel, and will continue to actively monitor the situation.

During the third quarter of 2021, we transitioned the majority of our employees back to our offices, with a large contingent temporarily utilizing alternating schedules between work-from-home and on-site arrangements.

Our sales employees have been conducting meetings with current and prospective clients virtually since March 2020, but as prospective clients begin to take meetings in-person, we expect our sales process would transition to include a combination of virtual and in-person meetings.

We are permitting a limited amount of business travel, and will continue to actively monitor the situation.

We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and clients.

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Between August 2019 and March 2020, the Federal Open Market Committee reduced the target range for short-term interest rates several times, with the most significant rate cut occurring in March 2020 to support the economy and potentially reduce the impacts of the COVID-19 pandemic.

Due to significantly lower average interest rates during the first six months of 2021, as compared to the majority of the first six months of 2020, interest earned on funds held for clients for the three and six months ended June 30, 2021 decreased from the comparable prior year periods, which had a negative effect on recurring revenue growth.

Due to significantly lower average interest rates during the first nine months of 2021, as compared to the first nine months of 2020, interest earned on funds held for clients for the three and nine months ended September 30, 2021 decreased from the comparable prior year periods, which had a negative effect on recurring revenue growth.

Demand for our solution remains high and, despite the economic challenges brought on by the COVID-19 pandemic, we remain confident in the overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy.

Prior to the COVID-19 pandemic, our sales force historically traveled frequently to sell our solution.

The current remote work environment presents a unique opportunity for our sales force, in that each sales employee is able to meet virtually with a greater number of client prospects in a given day than he or she would if conducting in-person meetings.

Internally, all applications within the Paycom solution, and more specifically Employee Self-Service®, Manager on-the-Go™, Documents and Checklists, Ask Here and our enhanced Learning Management System, have been instrumental in our ability to seamlessly manage and communicate with our remote workforce.

As many clients have also transitioned their workforces to work-from-home arrangements, we believe they too are recognizing the benefits of these applications and our focus on employee usage, as well as the strengths and advantages of our single database solution.

In contrast, we believe the remote work environment is exposing the weaknesses and disadvantages arising from the combination of disparate systems offered by some of our competitors.

The remote work environment has presented a unique opportunity for our sales force, in that each sales employee is able to meet virtually with a greater number of client prospects in a given day than he or she would if conducting in-person meetings.

Internally, all applications within the Paycom solution, and more specifically Employee Self-Service®, Manager on-the-Go®, Documents and Checklists, Ask Here and our enhanced Learning Management System, were instrumental in our ability to seamlessly manage and communicate with our remote workforce.

As many clients transitioned their workforces to work-from-home arrangements, we believe they too recognized the benefits of these applications and our focus on employee usage, as well as the strengths and advantages of our single database solution.

In contrast, we believe the remote work environment has exposed the weaknesses and disadvantages arising from the combination of disparate systems offered by some of our competitors.

We will continue to aggressively invest in sales and marketing and in research and development to drive future growth and expand our market share.

On November 4, 2021, the Department of Labor’s Occupational Safety and Health Administration released an emergency temporary standard requiring private employers with 100 or more employees to mandate vaccination or weekly testing and masking for their unvaccinated employees.

We are evaluating the impact this standard may have on our business and results of operations, including any potential impact it may have on our employees or the employees of our clients.

We are unable to estimate the full impact that the COVID-19 pandemic could have on our business and results of operations in the future due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the emergence of different COVID-19 variants, actions that may be taken by governmental authorities, the impact to the business of our clients and other factors identified in Part I, Item 1A “Risk Factors” in our Form 10-K that was filed with the SEC on February 18, 2021.

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The following table sets forth consolidated statements of income data and such data as a percentage of total revenues for the periods presented:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Implementation and other

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Income before income taxes

Provision (benefit) for income taxes

The increase in total revenues for the three and six months ended June 30, 2021 compared to the same periods in 2020 was primarily the result of the addition of new clients and productivity and efficiency gains in mature sales offices, which are offices that have been open for at least 24 months, and the sale of additional applications to our existing clients.

In addition, our tax forms filing business in the first quarter of 2021 contributed to the increase in total revenues for the six months ended June 30, 2021 as compared to the same period in 2020.

Provision for income taxes

The increase in total revenues for the three and nine months ended September 30, 2021 compared to the same periods in 2020 was primarily the result of the addition of new clients and productivity and efficiency gains in mature sales offices, which are offices that have been open for at least 24 months, and the sale of additional applications to our existing clients.

In addition, our tax forms filing business in the first quarter of 2021 contributed to the increase in total revenues for the nine months ended September 30, 2021 as compared to the same period in 2020.

The COVID-19 pandemic has resulted in, and may continue to result in, headcount fluctuations across our client base.

Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three and six months ended June 30, 2021 described above were impacted by the headcount fluctuations within our client base.

The negative effects on our client revenue of lower headcount resulting from the pandemic were more than offset by headcount additions from new clients and modestly improved headcount levels at existing clients throughout the second quarter of 2021.

Significantly lower average interest rates during the six months ended June 30, 2021 as compared to the majority of the six months ended June 30, 2020, had a negative effect on recurring revenue growth for the three and six months ended June 30, 2021.

Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three and nine months ended September 30, 2021 described above were impacted by the headcount fluctuations within our client base.

The negative effects on our client revenue of lower headcount resulting from the pandemic were more than offset by headcount additions from new clients and modestly improved headcount levels among our pre-pandemic client base throughout the third quarter of 2021.

Significantly lower average interest rates during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, had a negative effect on recurring revenue growth for the three and nine months ended September 30, 2021.

We expect that the foregoing adverse macroeconomic factors may continue to have a negative effect on recurring revenues in future periods for so long as such conditions persist .

The increase in implementation and other revenues for the three and six months ended June 30, 2021 from the same periods in 2020 was primarily the result of increased non-refundable upfront conversion fees collected from the addition of new clients.

The increase in implementation and other revenues for the three and nine months ended September 30, 2021 from the same periods in 2020 was primarily the result of increased non-refundable upfront conversion fees collected from the addition of new clients.

These fees are deferred and recognized ratably over the ten-year estimated life of our clients.

Cost of Revenues

During the three months ended June 30, 2021, operating expenses increased from the comparable prior year period by $5.5 million due to a $3.5 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $1.2 million increase in shipping and supplies fees and a $0.8 million increase in automated clearing house fees in connection with the increase in revenues.

Depreciation and amortization expense increased $1.3 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

During the six months ended June 30 , 202 1 , operating expenses increased from the comparable prior year period by $ 10.5 million due to a $ 6.

9 million increase in employee - related expenses primarily attributable to growth in the number of operating personnel, a $ 2.2 million increase in shipping and supplies fees and a $ 1.4 million increase in automated clearing house fees in connection with the increase in revenues.

During the three months ended September 30, 2021, operating expenses increased from the comparable prior year period by $10.5 million due to a $7.3 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $2.2 million increase in shipping and supplies fees and a $1.0 million increase in automated clearing house fees in connection with the increase in revenues.

Depreciation and amortization expense increased $1.3 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

During the nine months ended September 30 , 202 1 , operating expenses increased from the comparable prior year period by $ 21 .

0 million due to a $ 14 .

1 million increase in employee - related expenses primarily attributable to growth in the number of operating personnel, a $ 4 .

5 million increase in shipping and supplies fees and a $ 2 .

4 million increase in automated clearing house fees in connection with the increase in revenues.

Depreciation and amortization expense increased $ 3 .

9 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets .

Administrative Expenses

Sales and Marketing

During the three months ended June 30, 2021, sales and marketing expenses increased from the comparable prior year period by $11.9 million due to a $10.5 million increase in employee-related expenses, including commissions and bonuses, and a $1.4 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

During the six months ended June 30, 2021, sales and marketing expenses increased from the comparable prior year period by $19.6 million due to a $13.1 million increase in employee-related expenses, including commissions and bonuses and a $6.5 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

Based on positive results from recent advertising campaigns, we plan to continue to make significant investments in our marketing program and may increase spending in future periods as we see opportunities for returns on our investments.

During the three months ended September 30, 2021, sales and marketing expenses increased from the comparable prior year period by $7.6 million due to an $8.8 million increase in employee-related expenses, including commissions and bonuses, which was partially offset by a $1.2 million decrease in marketing and advertising expense.

During the nine months ended September 30, 2021, sales and marketing expenses increased from the comparable prior year period by $27.3 million due to a $22.0 million increase in employee-related expenses, including commissions and bonuses, and a $5.3 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

Based on positive results from our advertising campaigns, we plan to continue to make significant investments in our marketing program and may adjust spending levels in future periods as we see opportunities for returns on our investments.

Research and Development

During the three and six months ended June 30, 2021, research and development expenses increased from the comparable prior year periods due to an increase in employee-related expenses of $6.4 million and $9.5 million, respectively.

During the three and nine months ended September 30, 2021, research and development expenses increased from the comparable prior year periods due to an increase in employee-related expenses of $9.3 million and $18.8 million, respectively.

As we continue the ongoing development of our platform and product offerings, we generally expect research and development expenses (exclusive of stock-based compensation) to continue to increase, particularly as we hire more personnel to support our growth.

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The nature of the development projects underway during a particular period directly impacts the timing and extent of these capitalized expenditures and can affect the amount of research and development expenses in such period.

The table below sets forth the amounts of capitalized and expensed research and development costs for the three and six months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Six Months Ended June 30,

The table below sets forth the amounts of capitalized and expensed research and development costs for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

Capitalized portion of research and development

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General and Administrative

During the three months ended June 30, 2021, general and administrative expenses increased $13.2 million from the comparable prior year period primarily due to a $6.3 million increase in employee-related expenses, a $4.3 million increase in non-cash stock-based compensation as well as a $2.6 million increase in accounting and legal expenses.

During the six months ended June 30, 2021, general and administrative expenses increased $19.3 million from the comparable prior year period primarily due to a $12.5 million increase in non-cash stock-based compensation and a $9.2 million increase in employee-related expenses, which were partially offset by a $2.4 million decrease in accounting and legal expenses.

During the three months ended September 30, 2021, general and administrative expenses increased $19.5 million from the comparable prior year period primarily due to a $10.2 million increase in non-cash stock-based compensation and a $10.1 million increase in employee-related expenses, which were partially offset by a $0.8 million decrease in accounting and legal expenses.

During the nine months ended September 30, 2021, general and administrative expenses increased $38.7 million from the comparable prior year period primarily due to a $22.7 million increase in non-cash stock-based compensation and a $19.2 million increase in employee-related expenses, which were partially offset by a $3.2 million decrease in accounting and legal expenses.

Non-Cash Stock-Based Compensation Expense

The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of income:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Non-cash stock-based compensation expense

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Total non-cash stock-based compensation expense

During the three and six months ended June 30, 2021, our non-cash stock-based compensation expense increased $2.6 million and $10.3 million, respectively, from the comparable prior year periods due to an increase in both the number of employees who received awards and the grant date fair value associated with the issuances in 2021.

During the three and nine months ended September 30, 2021, our non-cash stock-based compensation expense increased $9.5 million and $19.8 million, respectively, from the comparable prior year periods due to an increase in both the number of employees who received awards and the grant date fair value associated with the issuances in 2021.

Also contributing to the increase in our non-cash stock-based compensation expense was the accelerated vesting of restricted stock subject to market-based vesting conditions.

Depreciation and Amortization

During the three and six months ended June 30, 2021, depreciation and amortization expense increased from the comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

During the three and nine months ended September 30, 2021, depreciation and amortization expense increased from the comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

Interest Expense

The decreases in interest expense for the three and six months ended June 30, 2021, as compared to the comparable prior year periods were due to the timing of construction of our expanded operations facility in Grapevine, Texas, which resulted in a higher capitalization rate of interest in 2021.

The decreases in interest expense for the three and nine months ended September 30, 2021, as compared to the comparable prior year periods, were due to the timing of construction of our expanded operations facility in Grapevine, Texas, which resulted in a higher capitalization rate of interest in 2021.

Other Income (Expense), net

The changes in other income (expense), net for the three and six months ended June 30, 2021 was primarily due to the increase in the fair value of our interest rate swap as compared to the comparable prior year periods.

The changes in other income (expense), net for the three and nine months ended September 30, 2021 was primarily due to the increase in the fair value of our interest rate swap as compared to the comparable prior year periods.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items.

Our effective income tax rate was 17.9% and 20.4 % for the six months ended June 30, 2021 and 2020, respectively.

The lower effective income tax rate for the six months ended June 30, 2021 primarily resulted from an increase in excess tax benefits from stock-based compensation as compared to the six months ended June 30, 2020.

Our effective income tax rate was 20.8% and 20.3 % for the nine months ended September 30, 2021 and 2020, respectively.

The higher effective income tax rate for the nine months ended September 30, 2021 is primarily related to a decrease in excess tax benefits from stock-based compensation as compared to the nine months ended September 30, 2020.

Liquidity and Capital Resources

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Term Credit Agreement.

As of June 30, 2021, our indebtedness consisted solely of term loans (the “Term Loans”) made under a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”) among the Company, certain of our subsidiaries, JPMorgan Chase Bank, N.A., Bank of America, N.A.

As of September 30, 2021, our indebtedness consisted solely of term loans (the “Term Loans”) made under a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”) among the Company, certain of our subsidiaries, JPMorgan Chase Bank, N.A., Bank of America, N.A.

and Kirkpatrick Bank.

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Additionally, the Term 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 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 credit ag reement of this size and type.

As of June 30 , 20 2 1 , we were in compliance with all covenants set forth in the Term Credit Agreement.

As of September 30 , 20 2 1 , we were in compliance with all covenants set forth in the Term Credit Agreement.

Interest Rate Swap Agreement.

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We have elected not to designate this interest rate swap as a hedge and, as such, changes in the fair value of the derivative instrument are recognized in our consolidated statements of income.

For the three and six months ended June 30, 2021, we recorded gains of less than $0.1 million and $0.7 million, respectively, for the change in fair value of the interest rate swap, and 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.

For the three and nine months ended September 30, 2021, we recorded gains of $0.2 million and $0.9 million, respectively, for the change in fair value of the interest rate swap, and 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.

The change in fair value of the interest rate swap is included in Other income (expense), net in the consolidated statements of income .

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Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%, in each case subject to certain conditions set forth in the Revolving Credit Agreement.

As of June 30, 2021, we did not have any borrowings outstanding under the Facility.

As of September 30, 2021, we did not have any borrowings outstanding under the Facility.

Stock Repurchase Plan and Withholding Shares to Cover Taxes.

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Most recently, in May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock.

As of June 30, 2021, there was $299.5 million available for repurchases under our stock repurchase plan.

As of September 30, 2021, there was $270.7 million available for repurchases under our stock repurchase plan.

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

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The current stock repurchase plan will expire on May 13, 2023.

During the six months ended June 30, 2021, we repurchased an aggregate of 94,997 shares of our common stock at an average cost of $340.59 per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.

During the nine months ended September 30, 2021, we repurchased an aggregate of 155,575 shares of our common stock at an average cost of $393.05 per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.

Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $61.1 million and, as such, we generally subtract the amounts attributable to such withheld shares from the aggregate amount available for future purchases under our stock repurchase plan.

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As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

We are currently focused on the ongoing construction of our new Texas operations facility in Grapevine, Texas.

We are currently focused on completing the construction of our new Texas operations facility in Grapevine, Texas.

Capital expenditures related to the construction of the facility began in the second quarter of 2019.

On November 3, 2021, we signed a construction contract for a fifth building at our Oklahoma City headquarters.

We estimate that the total cost of the project will be between $60 million and $70 million and construction will take approximately two years to complete.

In addition, we have purchased the naming rights to the downtown

Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise.

Under the terms of the naming rights agreement, we have committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035.

The payments are due in t he fourth quarter of each year.

Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period.

Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services.

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Our cash flows from financing activities are also affected by the extent to which we use available cash to purchase shares of common stock under our stock repurchase plan as well as restricted stock vesting events that result in net share settlements and the Company paying withholding taxes on behalf of certain employees.

The following table summarizes the consolidated statements of cash flows for the six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

The following table summarizes the consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

Net cash provided by (used in):

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Operating Activities

Cash provided by operating activities for the six months ended June 30, 2021 primarily consisted of payments received from our clients and interest earned on funds held for clients.

Cash provided by operating activities for the nine months ended September 30, 2021 primarily consisted of payments received from our clients and interest earned on funds held for clients.

Cash used in operating activities primarily consisted of personnel-related expenditures to support the growth and infrastructure of our business.

These payments included costs of operations, advertising and other sales and marketing efforts, IT infrastructure development, product research and development and security and administrative costs.

Compared to the six months ended June 30, 2020, our operating cash flows for the six months ended June 30, 2021 were positively impacted by the growth of our business.

Compared to the nine months ended September 30, 2020, our operating cash flows for the nine months ended September 30, 2021 were positively impacted by the growth of our business.

Investing Activities

Cash flows used in investing activities for the six months ended June 30, 2021 decreased from the comparable prior year period due to an $84.7 million increase in proceeds from maturities of short-term investments from funds held for clients and a $65.8 million decrease in purchases of short-term investments from funds held for clients.

This decrease was slightly offset by a $10.3 million increase in purchases of property and equipment.

Cash flows used in investing activities for the nine months ended September 30, 2021 decreased from the comparable prior year period due to an $101.4 million increase in proceeds from maturities of short-term investments from funds held for clients and a $47.1 million decrease in purchases of short-term investments from funds held for clients.

This decrease was slightly offset by a $13.2 million increase in purchases of property and equipment as well as a $1.5 million increase in purchases for intangible assets related to the naming rights agreement.

Financing Activities

Cash flows provided by financing activities for the six months ended June 30, 2021 increased from the comparable prior year period primarily due to the impact of a $1,041.1 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf as well as a $42.9 million decrease in common stock repurchases.

Cash flows provided by financing activities for the nine months ended September 30, 2021 increased from the comparable prior year period primarily due to the impact of a $1,486.9 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf as well as a $52.0 million decrease in common stock repurchases.

The increase in cash flows provided by financing activities was slightly offset by a $35.1 million increase in the withholding taxes paid related to net share settlements.

Contractual Obligations

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As discussed within “Note 5.

Goodwill and Intangible Assets, Net”, we have entered into a naming rights agreement pursuant to which we have committed to pay an annual fee escalating annually from $4.0 million to $6.1 million in exchange for arena naming rights and other associated benefits over the next 15.4 years.

Outside of the naming rights agreement, there have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K that was filed with the SEC on February 18, 2021.

Goodwill and Intangible Assets, Net”, we have entered into a naming rights agreement pursuant to which we have committed to pay an annual fee escalating annually from $4.0 million in 2021 to $6.1 million in 2035 in exchange for arena naming rights and other

associated benefits.

Outside of the naming rights agreement, t here have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results o f Operations in the Form 10-K that was filed with the SEC on February 18, 2021 .

For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “Note 5.

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Off-Balance Sheet Arrangements

As of June 30, 2021, we did not have any off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

As of September 30, 2021, we did not have any off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

Critical Accounting Policies and Estimates

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The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income to adjusted EBITDA:

Interest expense

Provision (benefit) for income taxes

Provision for income taxes

Depreciation and amortization

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Adjusted EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income to non-GAAP net income:

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Non-GAAP net income per share, diluted

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Earnings per share to non-GAAP net income per share, basic:

4 unchanged sentences

Non-GAAP net income per share, basic

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Earnings per share to non-GAAP net income per share, diluted:

5 unchanged sentences

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 2. Management’s Discussion and Analysis