Paycom Software(PAYC) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements show strong 9-month revenue and net income growth, with balance sheet expansion Unaudited Consolidated Balance Sheets Total assets grew to $3.31 billion, liabilities decreased, and stockholders' equity increased to $1.08 billion by September 30, 2022 Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $3,314,570 | $3,215,145 | | Total current assets | $2,228,362 | $2,252,038 | | Total Liabilities | $2,238,190 | $2,321,431 | | Client funds obligation | $1,754,095 | $1,846,573 | | Total Stockholders' Equity | $1,076,380 | $893,714 | Unaudited Consolidated Statements of Comprehensive Income Q3 and 9-month revenues grew 30.4% to $334.2 million and $1.005 billion respectively, with significant net income increases Financial Performance (in thousands, except per share amounts) | Metric | Q3 2022 | Q3 2021 | % Change | Nine Months 2022 | Nine Months 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $334,167 | $256,194 | 30.4% | $1,004,610 | $770,538 | 30.4% | | Recurring Revenues | $328,150 | $251,306 | 30.6% | $987,848 | $756,665 | 30.6% | | Operating Income | $74,265 | $43,305 | 71.5% | $272,845 | $184,941 | 47.5% | | Net Income | $52,153 | $30,379 | 71.7% | $201,438 | $147,273 | 36.8% | | Diluted EPS | $0.90 | $0.52 | 73.1% | $3.46 | $2.53 | 36.8% | Unaudited Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $1.08 billion, driven by net income, partially offset by treasury stock repurchases - Total stockholders' equity grew to $1,076.4 million at September 30, 2022, from $893.7 million at December 31, 2021[15] - The increase was primarily driven by $201.4 million in net income for the nine-month period[15] - The company repurchased common stock, increasing the treasury stock balance from $(488.1) million to $(587.8) million during the first nine months of 2022[15] Unaudited Consolidated Statements of Cash Flows Operating cash flow increased slightly, while investing and financing activities used cash, primarily for debt and share repurchases Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $236,647 | $229,637 | | Net cash used in investing activities | $(32,028) | $(63,978) | | Net cash (used in) provided by financing activities | $(198,871) | $1,283,999 | Notes to the Unaudited Consolidated Financial Statements Notes detail revenue recognition, a new $1.1 billion stock repurchase plan, debt refinancing, and an increased effective tax rate - In August 2022, the Board of Directors authorized a new stock repurchase plan for up to $1.1 billion of common stock, expiring August 15, 2024[30] - The company entered into a new credit agreement in July 2022, providing a $650 million revolving credit facility and a $750 million delayed draw term loan facility, and used it to repay and terminate a prior facility[62][63][68] - The company's effective income tax rate was 26.9% for the nine months ended September 30, 2022, up from 20.8% in the prior year, primarily due to a decrease in excess tax benefits from stock-based compensation[103] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes revenue growth to client expansion and higher interest, detailing increased operating expenses and strong liquidity Results of Operations Q3 revenues grew 30.4% to $334.2 million, with operating income up 71.5%, driven by client growth and increased operating expenses Q3 2022 vs Q3 2021 Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $334,167 | $256,194 | 30.4% | | Total Operating Expenses | $259,902 | $212,889 | 22.1% | | Operating Income | $74,265 | $43,305 | 71.5% | | Net Income | $52,153 | $30,379 | 71.7% | - Revenue growth was primarily the result of adding new clients, productivity gains in mature sales offices, and selling additional applications to existing clients. Higher interest rates on funds held for clients also contributed positively[127] - Sales and marketing expenses for the nine months of 2022 increased by $53.3 million YoY due to higher employee-related costs ($41.1M) and increased advertising spend ($12.2M)[132] Liquidity and Capital Resources Liquidity is strong, supported by operating cash flow, a new credit facility, and a $1.1 billion stock repurchase authorization - Principal liquidity sources are operating cash flow, cash equivalents, and a new credit agreement from July 2022 providing a $650M revolving credit facility and a $750M delayed draw term loan facility[143][150] - In August 2022, the Board authorized a new stock repurchase plan for up to $1.1 billion. As of September 30, 2022, the full $1.1 billion was available for repurchases[156] - For the nine months ended September 30, 2022, the company repurchased 364,200 shares at an average cost of $273.67 per share[157] Non-GAAP Financial Measures Adjusted EBITDA and Non-GAAP Net Income show strong growth, reflecting core business performance for Q3 and 9-month periods Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Period | Net Income | Adjusted EBITDA | % Change (YoY) | | :--- | :--- | :--- | :--- | | Q3 2022 | $52,153 | $126,026 | 40.5% | | Q3 2021 | $30,379 | $89,703 | N/A | | Nine Months 2022 | $201,438 | $415,774 | 34.2% | | Nine Months 2021 | $147,273 | $309,715 | N/A | Reconciliation of Net Income to Non-GAAP Net Income (in thousands) | Period | Net Income | Non-GAAP Net Income | % Change (YoY) | | :--- | :--- | :--- | :--- | | Q3 2022 | $52,153 | $73,431 | 37.0% | | Q3 2021 | $30,379 | $53,586 | N/A | | Nine Months 2022 | $201,438 | $257,073 | 31.2% | | Nine Months 2021 | $147,273 | $195,976 | N/A | Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate sensitivity on cash and variable-rate debt; a 100 basis point change is not material - Primary market risk is interest rate sensitivity on cash equivalents ($317.2M) and variable-rate debt ($29.0M)[178][181] - The company terminated its floating-to-fixed interest rate swap agreement on August 24, 2022[180] - A hypothetical 100 basis point change in interest rates is not expected to have a material effect on operating results or financial condition[181] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2022, with no material internal control changes - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[182] - There were no material changes in the company's internal control over financial reporting during the quarter ended September 30, 2022[184] PART II – OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings not expected to materially affect financial condition or operations - The company states that pending legal matters arise in the ordinary course of business and are not expected to have a material adverse effect on its business or financials[187] Risk Factors No material changes to risk factors previously disclosed in the Form 10-K filed on February 17, 2022 - There have been no material changes from the risk factors disclosed in the Form 10-K filed on February 17, 2022[188] Unregistered Sales of Equity Securities and Use of Proceeds Details Q3 2022 common stock repurchases of 631 shares and the $1.1 billion stock repurchase plan authorization Share Repurchases (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1 - 31, 2022 | 30 | $330.49 | | August 1 - 31, 2022 | 193 | $367.62 | | September 1 - 30, 2022 | 408 | $351.58 | | Total | 631 | N/A | - On August 15, 2022, the Board of Directors increased the availability under the stock repurchase plan to $1.1 billion and extended its expiration to August 15, 2024[191] Other Information Amended bylaws adopted October 31, 2022, update procedures for stockholder meetings and director nominations, aligning with new rules - On October 31, 2022, the company's Board of Directors adopted amended and restated bylaws[191] - Key changes include updated procedures for stockholder meetings, director nominations, and enhanced disclosure requirements for stockholders submitting proposals, including an undertaking to comply with Rule 14a-19[191][193] Exhibits Lists filed exhibits, including amended bylaws, the July 2022 Credit Agreement, and CEO/CFO certifications - Lists filed exhibits, including the Amended and Restated Bylaws (Exhibit 3.2), the July 2022 Credit Agreement (Exhibit 10.1), and CEO/CFO certifications (Exhibits 31.1, 31.2, 32.1)[194]