What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 108 added, 130 removed, 244 unchanged (49% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective 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 months ended March 31, 2022, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2022 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, 2021, all amounts herein are unaudited.

18 unchanged sentences

the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months;

our ability to relocate our Texas operations facility within an expected timeframe;

our plans regarding our capital expenditures and investment activity as our business grows, including with respect to our new Texas operations facility and research and development;

our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development and the expansion of our corporate headquarters and other facilities;

the expected impact on our consolidated financial statements of new accounting pronouncements;

7 unchanged sentences

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

changes in laws, 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;

14 unchanged sentences

our reliance on relationships with third parties;

the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K, Part II, Item 1A, “Risk Factors” of this Form 10-Q and our other reports filed with the SEC.

the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K and our other reports filed with the SEC.

Forward-looking statements are based only on information currently available to us and speak only as of the date of this Form 10-Q and are subject to business and economic risks.

8 unchanged sentences

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 nine months ended September 30, 2021.

None of our clients constituted more than one-half of one percent of our revenues for the three months ended March 31, 2022.

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.

1 unchanged sentence

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 market presence.

In January 2022, we added new sales teams in Las Vegas, Jacksonville, New England and South Jersey, bringing our total to 55 sales teams (including one team consisting of client relations representatives and inside sales representatives) located in 28 states.

We 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.

9 unchanged sentences

Client adoption of new applications and client employee usage of both new and existing applications have been significant factors in our revenue growth, and we expect the continuation of this trajectory will depend, in part, on the introduction of applications to our existing client base that encourage and promote more employee usage.

For example, in 2021, we launched our industry-first Beti technology, which further automates and streamlines the payroll process by empowering employees to do their own payroll.

Moreover, in order to increase revenues and continue to improve our operating results, we must also attract new clients.

2 unchanged sentences

While we continue to serve a diversified client base ranging in size from one employee to many thousands of employees, the average size of our clients has grown significantly as we have organically grown our operations, increased the number of applications we offer and gained traction with larger companies.

We believe larger employers

represent a substantial opportunity to increase the number of potential clients and to increase our revenues per client, with limited incremental cost to us.

We believe larger employers represent a substantial opportunity to increase the number of potential clients and to increase our revenues per client, with limited incremental cost to us.

Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees of our clients will have a positive or negative impact, respectively, on our results of operations.

3 unchanged sentences

Those collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days.

We typically invest funds held for clients in money market funds, demand deposit accounts, commercial paper and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees.

We typically invest funds held for clients in money market funds, demand deposit accounts, U.S.

treasury securities, commercial paper and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees.

As we introduce new applications, expand our client base and renew and expand relationships with existing clients, we expect our average funds held for clients balance and, accordingly, interest earned on funds held for clients, will increase;

however, the amount of interest we earn can be positively or negatively impacted by changes in interest rates.

Even if our average funds held for clients balance increases, the impact of significantly lower average interest rates could partially offset the impact of such increased balance and, as a result, have a negative impact on recurring revenue growth.

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs and general and administrative expenses, which have increased and will continue to increase our expenses.

2 unchanged sentences

The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities.

Our revenues are seasonal in nature.

Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095, and revenues from processing unscheduled payroll runs (such as bonuses) for our clients.

Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters.

Our revenues are seasonal in nature and generally we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year.

Recurring revenues include revenues relating to the annual processing of payroll tax filing forms and ACA form filing requirements, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients.

As payroll tax forms are typically processed in the first quarter of the year, first quarter recurring revenues and margins are positively impacted.

In addition, unscheduled payroll runs at the end of the year often result in increased recurring revenues in the fourth quarter.

These seasonal fluctuations in revenues can also have an impact on gross profits.

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 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%.

For the three months ended March 31, 2022 and 2021, our total gross margins were approximately 86% and 87%, respectively.

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.

Impact of the COVID-19 Pandemic

Beginning in February 2020, we took various actions in order to minimize the risk of COVID-19 to our employees, our clients, and the communities in which we operate.

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

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.

The COVID-19 pandemic has created uncertainty and disrupted the operations of many of our clients and client prospects, and may continue to do so for an indefinite period of time .

Across many industries, temporary and permanent business closures as well as business occupancy limitations resulted in significant layoffs and employee furloughs beginning in late March 2020.

Because we charge our clients on a per-employee basis for certain services we provide, our recurring revenue has been negatively impacted by headcount reductions among our client base .

Nonetheless, 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 frequently met with prospective clients in-person to sell our solution.

The remote work environment resulting from the COVID-19 pandemic has presented an opportunity for our sales force, who have primarily been conducting meetings with current and prospective clients virtually since March 2020.

Each sales employee is able to meet with a greater number of client prospects in a given day than he or she would if conducting only in-person meetings.

As the COVID-19 pandemic has changed how our clients and client prospects meet, we are adapting our sales process to align with our clients’ and client prospects’ meeting preferences, whether virtually, in-person or a combination.

We are monitoring developments related to U.S.

federal, state and local vaccination mandates and testing requirements and are evaluating the impact such mandates and requirements may have on our business and results of operations, including any potential impact on our employees or the employees of our clients.

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.

Business continuity and safety will continue to guide our return-to-office plans.

The COVID-19 pandemic has disrupted the operations of our clients and client prospects and may continue to do so for an indefinite period of time.

Across many industries, temporary and permanent business closures as well as business occupancy limitations have resulted in significant layoffs and employee furloughs since late March 2020.

Because we charge our clients on a per-employee basis for certain services we provide, decreases in headcount at our clients as of the onset of the pandemic negatively impacted our recurring revenue beginning in the second quarter of 2020, and we expect that our recurring revenue in future periods will continue to be negatively impacted by such headcount reductions until employment levels among such client base return to pre-pandemic levels.

Further, at the onset of the COVID-19 pandemic, a limited number of new clients temporarily delayed service implementation.

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 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 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 17, 2022.

1 unchanged sentence

Results of Operations

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 September 30,

Nine Months Ended September 30,

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

Three Months Ended March 31,

Implementation and other

16 unchanged sentences

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 increase in total revenues for the three months ended March 31, 2022 compared to the same period in 2021 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, the performance of our tax forms filing business contributed to the increase in total revenues for the three months ended March 31, 2022 as compared to the same period in 2021.

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 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 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.

Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three months ended March 31, 2022 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 added since the beginning of the pandemic and modestly improved headcount levels among our pre-pandemic client base beginning in the second quarter of 2021.

Additionally, a higher average funds held for clients balance during the three months ended March 31, 2022 as compared to the same period in 2021, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue.

The increase in implementation and other revenues for the three months ended March 31, 2022 from the same period in 2021 was primarily the result of the 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 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.

During the three months ended March 31, 2022, operating expenses increased from the comparable prior year period by $9.4 million due to a $7.5 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $1.0 million increase in shipping and supplies fees and a $0.9 million increase in automated clearing house fees in connection with the increase in revenues.

Depreciation and amortization expense increased $2.8 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 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.

During the three months ended March 31, 2022, sales and marketing expenses increased from the comparable prior year period by $12.2 million due to a $9.3 million increase in employee-related expenses, including commissions and bonuses, and a $2.9 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 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.

During the three months ended March 31, 2022, research and development expenses increased from the comparable prior year period due to an increase in employee-related expenses of $6.9 million.

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.

3 unchanged sentences

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 nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

The table below sets forth the amounts of capitalized and expensed research and development costs for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

Capitalized portion of research and development

2 unchanged sentences

General and Administrative

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.

During the three months ended March 31, 2022, general and administrative expenses increased $14.3 million from the comparable prior year period due to a $14.2 million increase in employee-related expenses, including $5.7 million associated with an increase in additional paid time off and benefits awarded to employees, and a $0.1 million increase 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 September 30,

Nine Months Ended September 30,

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

Three Months Ended March 31,

Non-cash stock-based compensation expense

4 unchanged sentences

Total non-cash stock-based compensation expense

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.

During the three months ended March 31, 2022, our non-cash stock-based compensation expense decreased $1.5 million from the comparable prior year period due to the vesting of awards that were outstanding during the first quarter of 2021 that were no longer outstanding during the first quarter of 2022.

Depreciation and Amortization

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.

During the three months ended March 31, 2022, depreciation and amortization expense increased from the comparable prior year period 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 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.

The increase in interest expense for the three months ended March 31, 2022, as compared to the comparable prior year period, is due the timing and progress of construction of the expansion of our corporate headquarters and our expanded operations facility, which resulted in a lower capitalization rate of interest in 2022.

Other Income (Expense), net

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.

The change in other income (expense), net for the three months ended March 31, 2022 was primarily due to the increase in the fair value of our interest rate swap as compared to the comparable prior year period.

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 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.

Our effective income tax rate was 27.9% and 32.1 % for the three months ended March 31, 2022 and 2021, respectively.

The lower effective income tax rate for the three months ended March 31, 2022 is primarily related to a decrease in nondeductible expenses as compared to the three months ended March 31, 2021.

Liquidity and Capital Resources

2 unchanged sentences

Additionally, we maintain a senior secured revolving credit facility (the “2022 Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances.

The Facility provides us the ability to borrow funds in the aggregate principal amount of $75.0 million, which may be increased to $125.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

We believe our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months.

The 2022 Facility provides us the ability to borrow funds in the aggregate principal amount of up to $250.0 million, and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

As of May 4, 2022, we have $29.0 million of outstanding borrowings under the 2022 Facility.

We have historically funded our operations from cash flows generated from operations, cash from the sale of equity securities and debt financing.

Although we have funded most of the costs for ongoing construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs.

Although we have funded most of the costs for construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs.

We are funding the current building expansion at our Oklahoma City headquarters from available cash.

Further, all purchases under our stock repurchase plans were paid for from available cash.

We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures and opportunistically repurchase shares for at least the next 12 months.

In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements.

Term Credit Agreement.

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.

As of March 31 , 202 2 , 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 Ameri ca, N.A.

and Kirkpatrick Bank.

All Term Loans were used to finance construction projects at our corporate headquarters .

Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our corporate headquarters property.

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%.

Under the Term Credit Agreement, we are required to comply with certain financial and non-financial covenants, including maintaining 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 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 September 30 , 20 2 1 , we were in compliance with all covenants set forth in the Term Credit Agreement.

Our obligations under the Term Loans we re secured by a mortgage and first priority security interest in our corporate headquarters property.

The Term Loans were due to mature on September 7, 2025 and b o r e 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%.

Under the Term Credit Agreement, we were required to comply with certain financial and non-financial covenants, including maintaining 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 Term Credit Agreement contained 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 agreement of this size and type.

As of March 31, 2022, we were in compliance with all covenants set forth in the Term Credit Agreement.

As discussed below, the Term Loans were repaid in full on May 4, 2022 and the Term Credit Agreement was terminated.

Interest Rate Swap Agreement.

1 unchanged sentence

The Interest Rate Swap Agreement, which has a maturity date of September 7, 2025, provides that we receive quarterly variable interest payments based on the LIBOR rate and pay interest at a fixed rate.

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 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 .

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 comprehensive income.

For the three months ended March 31, 2022 and 2021, we recorded gains of $1.3 million and $0.7 million, respectively, 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 comprehensive income .

2018 Revolving Credit Agreement.

1 unchanged sentence

and Bank of America, N.A.

that provided for the Facility in the aggregate principal amount of $50.0 million (the “Revolving Commitment”), which could be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit.

that provided for a senior secured revolving credit facility (the “2018 Facility”) in the aggregate principal amount of $50.0 million (the “2018 Revolving Commitment”), which could have been increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

The 2018 Facility included a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit.

The 2018 Facility was scheduled to mature on February 12, 2020.

On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”).

Pursuant to the First Amendment, Wells Fargo Bank, N.A.

was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions.

The scheduled maturity date of the Facility was also extended to April 15, 2022.

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

On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement, pursuant to which (i) Wells Fargo Bank, N.A.

was added as a lender, (ii) the 2018 Revolving Commitment was increased to $75.0 million, which could have been further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions, and (iii) the scheduled maturity date of the 2018 Facility was extended to April 15, 2022.

As of March 31, 2022, we did not have any borrowings outstanding under the 2018 Facility.

The 2018 Facility matured pursuant to its terms on April 15, 2022.

2022 Revolving Credit Agreement .

On May 4, 2022, we entered into a new credit agreement (the “2022 Revolving Credit Agreement”) providing for a $250.0 million senior secured revolving credit facility and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

The 2022 Facility includes a $25.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit.

On May 4, 2022, we borrowed $29.0 million under the 2022 Facility to repay the Term Loans, along with accrued interest, expenses and fees.

See Part II, Item 5, “Other Information,” in this Form 10-Q for additional information.

Stock Repurchase Plan and Withholding Shares to Cover Taxes.

2 unchanged sentences

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

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

As of March 31, 2022, there was $266.1 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 May 13, 2023.

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.

During the three months ended March 31, 2022, we repurchased an aggregate of 594 shares of our common stock at an average cost of $366.49 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 $0.2 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.

4 unchanged sentences

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

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.

We are currently focused on the expansion of our corporate headquarters.

Capital expenditures related to this expansion began in the fourth quarter of 2021.

We estimate that the total cost of the project will be between $60 million and $70 million and we expect 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.

The payments are due in the 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.

2 unchanged sentences

As part of our payroll and payroll tax filing services, we collect funds from our clients for federal, state and local employment taxes, which we remit to the appropriate tax agencies.

We invest these funds in money market funds, demand deposit accounts, commercial paper and certificates of deposit from which we earn interest income during the period between their receipt and disbursement.

We invest these funds in money market funds, demand deposit accounts, commercial paper, U.S.

treasury securities and certificates of deposit from which we earn interest income during the period between their receipt and disbursement.

Our cash flows from investing and financing activities are influenced by the amount of funds held for clients, which can vary significantly from quarter to quarter.

1 unchanged sentence

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 nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

The following table summarizes the consolidated statements of cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

Net cash provided by (used in):

4 unchanged sentences

Operating Activities

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 provided by operating activities for the three months ended March 31, 2022 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 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.

Compared to the three months ended March 31, 2021, our operating cash flows for the three months ended March 31, 2022 were positively impacted by the growth of our business.

Investing Activities

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.

Cash flows used in investing activities for the three months ended March 31, 2022 increased from the comparable prior year period due to a $121.9 million increase in purchases of investments from funds held for clients and a $9.1 million increase in purchases of property and equipment.

The increase in cash flows used in investing activities was slightly offset by $56.0 million increase in proceeds from maturities of investments from funds held for clients.

Financing Activities

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.

Cash flows provided by financing activities for the three months ended March 31, 2022 increased from the comparable prior year period primarily due to the impact of a $1,413.3 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 taxin g authorities on their behalf as well as a $ 0 .

2 million decrease in the withholding taxes paid related to net share settlements .

Contractual Obligations

Our principal commitments primarily consist of long-term debt and leases for office space.

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 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 .

Our principal commitments primarily consist of long-term debt, leases for office space and the naming rights agreement.

As discussed in “Note 6.

Long-Term Debt, Net” and elsewhere in this Form 10-Q, the 2018 Revolving Credit Agreement matured on April 15, 2022, and on May 4, 2022, we entered into the 2022 Revolving Credit Agreement, repaid the Term Loans and terminated the Term Credit Agreement.

Outside of the maturation of the 2018 Revolving Credit Agreement, changes related to the 2022 Revolving Credit Agreement, repayment of the Term Loans and termination of the Term Credit 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 17, 2022.

For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “Note 4.

Goodwill and Intangible Assets, Net”, “Note 5.

Leases”, “Note 6.

2 unchanged sentences

Goodwill and Intangible Assets, Net”, “Note 6.

Long-Term Debt, Net” and “Note 1 2 .

Commitments and Contingencies” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Off-Balance Sheet Arrangements

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.

Long-Term Debt, Net”, “Note 13.

Commitments and Contingencies” and “Note 15.

Subsequent Events” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Critical Accounting Policies and Estimates

18 unchanged sentences

GAAP measure.

Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of income data prepared in accordance with U.S.

Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net income to adjusted EBITDA:

5 unchanged sentences

Adjusted EBITDA

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net income to non-GAAP net income:

8 unchanged sentences

Non-GAAP net income per share, diluted

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

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

4 unchanged sentences

Non-GAAP net income per share, basic

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

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