What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 121 added, 78 removed, 274 unchanged (42% 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 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.

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, 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.

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our expected income tax rate for future periods;

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

and the impact of the 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,” “might,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

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

the impact of the COVID-19 pandemic on the U.S.

economy, including reductions in employment levels, business disruptions resulting from government-mandated mitigation measures and an increase in business failures;

our compliance with data privacy laws and regulations;

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the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional;

the impact of the COVID-19 pandemic on the U.S.

our failure to develop and maintain our brand cost-effectively;

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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 three months ended March 31, 2022.

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

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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.

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

In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers, blogs, podcast episodes and webinars.

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Our target client size range is 50 to 10,000 employees.

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.

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.

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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 March 31, 2022 and 2021, our total gross margins were approximately 86% and 87%, respectively.

For the three months ended June 30, 2022 and 2021, our total gross margins were approximately 84% and 85%, respectively.

For the six months ended June 30, 2022 and 2021, our total gross margins were approximately 85% and 86%, 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

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 .

The COVID-19 pandemic has created uncertainty and impacted the operations of many of our clients and client prospects.

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.

At the onset of the COVID-19 pandemic, our sales force began meeting virtually with prospective clients to sell our solution.

The remote work environment resulting from the COVID-19 pandemic has presented an opportunity for our sales force, in that 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 changes how our clients and client prospects meet, we will continue to adapt 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 the pandemic.

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.

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.

Further, while our revenue and earnings are relatively predictable, the effect of the ongoing COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods.

Results of Operations

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,

The following table sets forth certain 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,

Implementation and other

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Provision for income taxes

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 increase in total revenues for the three and six months ended June 30, 2022 compared to the same periods 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 in the first quarter contributed to the increase in total revenues for the six months ended June 30, 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 months ended March 31, 2022 described above were impacted by the headcount fluctuations within 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, 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.

Additionally, rising interest rates and a higher average funds held for clients balance during the three and six months ended June 30, 2022 as compared to the same periods 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 and six months ended June 30, 2022 from the same periods 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 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.

During the three months ended June 30, 2022, operating expenses increased from the comparable prior year period by $10.8 million due to a $8.5 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $1.9 million increase in shipping and supplies fees and a $0.6 million increase in automated clearing house fees in connection with the increase in revenues, which were partially offset by a $0.2 million decrease in costs associated with time clock sales.

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 six months ended June 30, 2022, operating expenses increased from the comparable prior year period by $20.3 million due to a $16.0 million increase in employee-related expenses primarily attributable to growth in the number of operating personnel, a $2.9 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.

Depreciation and amortization expense increased $5.6 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 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.

During the three months ended June 30, 2022, sales and marketing expenses increased from the comparable prior year period by $19.7 million due to a $15.2 million increase in employee-related expenses, including commissions and bonuses, and a $4.5 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, 2022, sales and marketing expenses increased from the comparable prior year period by $32.0 million due to a $24.6 million increase in employee-related expenses, including commissions and bonuses, and a $7.4 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 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.

During the three and six months ended June 30, 2022, research and development expenses increased from the comparable prior year periods due to increases in employee-related expenses of $8.6 million and $15.5 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 months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The table below sets forth the amounts of capitalized and expensed research and development costs for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended June 30,

Capitalized portion of research and development

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General and Administrative

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.

During the three months ended June 30, 2022, general and administrative expenses increased $3.8 million from the comparable prior year period due to a $5.8 million increase in employee-related expenses, which was partially offset by a $2.0 million decrease in accounting and legal expenses.

During the six months ended June 30, 2022, general and administrative expenses increased $18.2 million from the comparable prior year period due to a $20.1 million increase in employee-related expenses, which was partially offset by a $1.9 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 comprehensive income:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Non-cash stock-based compensation expense

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Total non-cash stock-based compensation expense

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 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.

During the three and six months ended June 30, 2022, 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 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.

The increase in interest expense for the three and six months ended June 30, 2022, as compared to the comparable prior year periods, is due to 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 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 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.

The change in other income (expense), net for the three and six months ended June 30, 2022 was primarily due to the increase in the fair value of our interest rate swap as compared to the comparable prior year periods.

Provision for Income Taxes

The provision 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 25.5% and 17.9 % for the six months ended June 30, 2022 and 2021, respectively.

The increase in the effective income tax rate for the six months ended June 30, 2022 is primarily related to a decrease of excess tax benefits from stock-based compensation.

Liquidity and Capital Resources

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Our cash and cash equivalents consist primarily of demand deposit accounts, money market funds and certificates of deposit.

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 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.

Additionally, we maintain a $650.0 million senior secured revolving credit facility (the “July 2022 Revolving Credit Facility”), and a $750.0 million senior secured delayed draw term loan facility (the “July 2022 Term Loan Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances.

As of August 3, 2022, we have no outstanding borrowings under the July 2022 Revolving Credit Facility and $29.0 million of outstanding borrowings under the July 2022 Term Loan Facility.

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

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2017 Term Credit Agreement.

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 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.

On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “2017 Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A.

and Kirkpatrick Bank made certain term loans to us (the “2017 Term Loans”).

All 2017 Term Loans were used to finance construction

projects at our corporate headquarters.

Our obligations under the 2017 Term Loans were secured by a mortgage and first priority security interest in our corporate headquarters property.

The 2017 Term Loans were due to mature on September 7, 2025 and bore 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 2017 Term Loan plus 1.5%.

As discussed below, the 2017 Term Loans were repaid in full on May 4, 2022 and the 2017 Term Credit Agreement was terminated.

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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 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.

For the three and six months ended June 30, 2022, we recorded gains of $0.4 million and $1.7 million, respectively, for the change in fair value of the interest rate swap, and 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 the 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 .

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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.

May 2022 Revolving Credit Agreement .

On May 4, 2022, we entered into a new credit agreement (the “May 2022 Revolving Credit Agreement”) with Bank of America, N.A., as a lender, swingline lender and letters of credit issuer, the lenders from time to time party thereto, and Bank of America, N.A., as the administrative agent, which provided for a senior secured revolving credit facility in the initial 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 (the “May 2022 Facility”).

The May 2022 Facility included 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 May 2022 Facility to repay the 2017 Term Loans, along with accrued interest, expenses and fees.

On June 7, 2022, the aggregate commitments under the May 2022 Revolving Credit Agreement were increased from $250.0 million to $350.0 million.

The May 2022 Facility was scheduled to mature on May 4, 2027.

We had the option to borrow under the May 2022 Facility in the form of either base rate loans or BSBY rate loans.

Each BSBY rate loan would bear interest at a rate per annum equal to the BSBY rate plus (i) 1.125% if the Company’s consolidated leverage ratio was less than 1.0 to 1.0 or (ii) 1.375% if the Company’s consolidated leverage ratio was greater than or equal to 1.0 to 1.0.

Each base rate loan would bear interest at a rate per annum equal to (x) a fluctuating rate of interest per annum equal to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the BSBY rate plus 1.0%, subject to the interest rate floors set forth therein, plus (y) 0.125% if the Company’s consolidated leverage ratio was less than 1.0 to 1.0, or (ii) 0.375% if the Company’s consolidated leverage ratio was greater than or equal to 1.0 to 1.0.

We were required to pay a quarterly commitment fee at a rate of 0.20% per annum on the daily amount of the undrawn portion of the revolving commitments under the May 2022 Facility.

As of June 30, 2022, we had $29.0 million outstanding under the May 2022 Facility.

As discussed below, on July 29, 2022, we entered into the July 2022 Credit Agreement (as defined below) and borrowed $29.0 million to repay the outstanding indebtedness under the May 2022 Facility along with accrued interest, expenses and fees.

In connection with the repayment, the May 2022 Revolving Credit Agreement was terminated on July 29, 2022.

July 2022 Credit Agreement .

On July 29, 2022 (the “July 2022 Facility Closing Date”), we entered into a new credit agreement (the “July 2022 Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “July 2022 Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent.

The July 2022 Credit Agreement provides for the July 2022 Revolving Credit Facility in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

The July 2022 Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit.

The July 2022 Credit Agreement also provides for the July 2022 Term Loan Facility in the aggregate amount of up to $750.0 million.

All loans under the July 2022 Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”).

The borrowings under the July 2022 Credit Agreement will bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (x) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (the “Adjusted Term SOFR Rate”) or (y) the daily SOFR plus 0.10%, in each case plus an applicable margin (“SOFR Rate Loans”).

ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%;

provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%.

The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0;

(ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0;

(iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0;

or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0;

(ii) 1.5% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0;

(iii) 1.75% if the Company’s consolidated leverage ratio is greater than 2.0 to 1.0 but less than 3.0 to 1.0;

or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the July 2022 Revolving Credit Facility and a quarterly ticking fee on the daily amount of the undrawn portion of the July 2022 Term Loan Facility, in each case at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0;

(ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0;

(iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0;

or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

We are also required to pay customary letter of credit fees upon drawing any letter of credit.

The July 2022 Revolving Credit Facility provides for no scheduled principal amortization prior to the Scheduled Maturity Date.

Subject to certain conditions set forth in the July 2022 Credit Agreement, we may borrow, prepay and reborrow under the July 2022 Revolving Credit Facility and terminate or reduce the July 2022 Lenders’ commitments at any time prior to the Scheduled Maturity Date.

We may make up to ten draws under the July 2022 Term Loan Facility at any time during the period from and after the July 2022 Facility Closing Date through twelve months after the July 2022 Facility Closing Date.

Loans under the July 2022 Term Loan Facility will amortize in equal quarterly installments commencing with the first full fiscal quarter after the earlier of (x) the date on which the July 2022 Term Loan Facility has been fully drawn and (y) the expiration of the draw period, in an aggregate annual amount equal to 7.5% in year one (if applicable) and year two, and 10% thereafter.

The proceeds of the loans and letters of credit under the July 2022 Credit Agreement are to be used for ongoing working capital and general corporate purposes, permitted acquisitions, share repurchases and refinancing the May 2022 Facility.

On the July 2022 Facility Closing Date, we borrowed $29.0 million under the July 2022 Term Loan Facility to repay the outstanding indebtedness under the May 2022 Facility, along with accrued interest, expenses and fees.

The loan on the July 2022 Facility Closing Date will bear interest at the Adjusted Term SOFR Rate plus 1.25%.

In connection with the repayment of the May 2022 Facility, the May 2022 Revolving Credit Agreement was terminated on July 29, 2022.

Under the July 2022 Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.75 to 1.0, stepping down to 3.0 to 1.0 at intervals thereafter.

Additionally, the July 2022 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.

Our obligations under the July 2022 Credit Agreement are secured by a senior security interest in all of the Company’s personal property.

The events of default under the July 2022 Credit Agreement include, among others, payment defaults, breaches of covenants, defaults under the related loan documents, material misrepresentations, cross defaults with certain other material indebtedness, bankruptcy and insolvency events, judgment defaults, certain events related to plans subject to the Employee Retirement Income Security Act of 1974, as amended, invalidity of the July 2022 Credit Agreement or the related loan documents and change in control events.

The occurrence of an event of default could result in the acceleration of our obligations under the July 2022 Credit Agreement, the requirement to post cash collateral with respect to letters of credit, the termination of the July 2022 Lenders’ commitments and a 2.0% increase in the rate of interest.

Stock Repurchase Plan and Withholding Shares to Cover Taxes.

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Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time.

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

As of March 31, 2022, there was $266.1 million available for repurchases under our stock repurchase plan.

Most recently, in June 2022, our Board of Directors authorized the repurchase of up to $550.0 million of our common stock.

As of June 30, 2022, there was $550.0 million available for repurchases under our stock repurchase plan.

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

The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations.

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

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.

The current stock repurchase plan will expire on June 7, 2024.

During the six months ended June 30, 2022, we repurchased an aggregate of 363,569 shares of our common stock at an average cost of $273.52 per share, including 16,257 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 $4.8 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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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 three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The following table summarizes the consolidated statements of cash flows for the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

Net cash provided by (used in):

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Operating Activities

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 provided by operating activities for the six months ended June 30, 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 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.

Compared to the six months ended June 30, 2021, our operating cash flows for the six months ended June 30, 2022 were positively impacted by the growth of our business.

Investing Activities

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.

Cash flows used in investing activities for the six months ended June 30, 2022 decreased from the comparable prior year period due to a $124.0 million increase in proceeds from maturities from funds held for clients, which was partially offset by a $91.7 million increase in purchases of investments from funds held for clients and a $5.0 million increase in purchases of property and equipment.

Financing Activities

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 .

Cash flows provided by financing activities for the six months ended June 30, 2022 increased from the comparable prior year period primarily due to the impact of a $1,167.1 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, a $29.0 million increase in proceeds from the issuance of long-term debt and a $27.6 million decrease in the withholding taxes paid related to net share settlements.

The increase in cash flows provided by financing activities was partially offset by a $94.7 million increase in common stock repurchases, a $28.4 million increase in payments on long-term debt and a $1.3 million increase in payments of debt issuance costs.

Contractual Obligations

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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.

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 May 2022 Revolving Credit Agreement, repaid the 2017 Term Loans and terminated the 2017 Term Credit Agreement.

On July 29, 2022, we entered into the July 2022 Credit Agreement and terminated the May 2022 Revolving Credit Agreement.

Outside of the maturation of the 2018 Revolving Credit Agreement, changes related to the May 2022 Revolving Credit Agreement, repayment of the 2017 Term Loans, termination of the 2017 Term Credit Agreement and changes related to the July 2022 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.

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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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income to adjusted EBITDA:

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Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income to non-GAAP net income:

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Non-GAAP net income per share, diluted

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

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

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Non-GAAP net income per share, basic

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 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