10-Q 1 payc-10q_20180331.htm PAYC-10Q_20180331 payc-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One) 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-36393

 

Paycom Software, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0957485

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

7501 W. Memorial Road

Oklahoma City, Oklahoma 73142

(Address of principal executive offices, including zip code)

(405) 722-6900

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes        No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer 

 

Accelerated filer

 

 

 

 

Non-accelerated filer   

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of April 25, 2018, there were 59,063,253 shares of common stock, par value of $0.01 per share, outstanding, including 1,083,408 shares of restricted stock.

 

 


Paycom Software, Inc.

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

 

Financial Statements (Unaudited)

 

3

 

 

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017

 

4

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

5

 

 

 

Notes to the Consolidated Financial Statements

 

6

 

Item 2.

 

 

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

 

18

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

Item 4.

 

 

Controls and Procedures

 

27

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

 

Legal Proceedings

 

28

 

Item 1A.

 

 

Risk Factors

 

28

 

Item 2.

 

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

28

 

Item 6.

 

 

Exhibits

 

29

 

Signatures

 

31

 

 

 

2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Paycom Software, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

December 31, 2017

 

 

 

 

March 31, 2018

 

 

*As Adjusted

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,121

 

 

$

46,077

 

Accounts receivable

 

 

2,350

 

 

 

1,576

 

Prepaid expenses

 

 

7,001

 

 

 

4,982

 

Inventory

 

 

420

 

 

 

979

 

Income tax receivable

 

 

3,034

 

 

 

7,047

 

Derivative asset

 

 

13

 

 

 

 

Deferred contract costs

 

 

28,920

 

 

 

26,403

 

Current assets before funds held for clients

 

 

109,859

 

 

 

87,064

 

Funds held for clients

 

 

1,095,160

 

 

 

1,089,201

 

Total current assets

 

 

1,205,019

 

 

 

1,176,265

 

Property and equipment, net

 

 

159,561

 

 

 

147,705

 

Deposits and other assets

 

 

2,021

 

 

 

1,456

 

Goodwill

 

 

51,889

 

 

 

51,889

 

Intangible assets, net

 

 

905

 

 

 

958

 

Long-term derivative asset

 

 

155

 

 

 

 

Long-term deferred contract costs

 

 

188,580

 

 

 

171,865

 

Total assets

 

$

1,608,130

 

 

$

1,550,138

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,421

 

 

$

6,490

 

Accrued commissions and bonuses

 

 

2,605

 

 

 

9,585

 

Accrued payroll and vacation

 

 

11,322

 

 

 

7,015

 

Deferred revenue

 

 

7,358

 

 

 

6,982

 

Current portion of long-term debt

 

 

1,331

 

 

 

888

 

Accrued expenses and other current liabilities

 

 

20,145

 

 

 

19,991

 

Current liabilities before client funds obligation

 

 

46,182

 

 

 

50,951

 

Client funds obligation

 

 

1,095,160

 

 

 

1,089,201

 

Total current liabilities

 

 

1,141,342

 

 

 

1,140,152

 

Deferred income tax liabilities, net

 

 

53,401

 

 

 

49,129

 

Long-term derivative liability

 

 

 

 

 

554

 

Long-term deferred revenue

 

 

46,419

 

 

 

44,642

 

Net long-term debt, less current portion

 

 

33,935

 

 

 

34,414

 

Total long-term liabilities

 

 

133,755

 

 

 

128,739

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value (100,000,000 shares authorized, 60,446,702 and

   60,149,411 shares issued at March 31, 2018 and December 31, 2017, respectively;

   57,916,718 and 57,788,573 shares outstanding at March 31, 2018 and December 31, 2017,

   respectively)

 

 

604

 

 

 

601

 

Additional paid-in capital

 

 

189,302

 

 

 

161,809

 

Retained earnings

 

 

299,685

 

 

 

258,525

 

Treasury stock, at cost (2,529,984 and 2,360,838 shares at March 31, 2018 and

   December 31, 2017, respectively)

 

 

(156,558

)

 

 

(139,688

)

Total stockholders' equity

 

 

333,033

 

 

 

281,247

 

Total liabilities and stockholders' equity

 

$

1,608,130

 

 

$

1,550,138

 

  * Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Paycom Software, Inc.

Consolidated Statements of Income

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

2018

 

 

*As Adjusted

 

 

Revenues

 

 

 

 

 

 

 

 

 

Recurring

 

$

151,885

 

 

$

117,914

 

 

Implementation and other

 

 

2,031

 

 

 

1,594

 

 

Total revenues

 

 

153,916

 

 

 

119,508

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

20,568

 

 

 

15,086

 

 

Depreciation and amortization

 

 

3,037

 

 

 

2,060

 

 

Total cost of revenues

 

 

23,605

 

 

 

17,146

 

 

Administrative expenses

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

32,352

 

 

 

25,579

 

 

Research and development

 

 

11,250

 

 

 

6,797

 

 

General and administrative

 

 

32,657

 

 

 

15,250

 

 

Depreciation and amortization

 

 

3,032

 

 

 

2,226

 

 

Total administrative expenses

 

 

79,291

 

 

 

49,852

 

 

Total operating expenses

 

 

102,896

 

 

 

66,998

 

 

Operating income

 

 

51,020

 

 

 

52,510

 

 

Interest expense

 

 

 

 

 

(257

)

 

Other income (expense), net

 

 

1,030

 

 

 

95

 

 

Income before income taxes

 

 

52,050

 

 

 

52,348

 

 

Provision for income taxes

 

 

10,890

 

 

 

18,654

 

 

Net income

 

$

41,160

 

 

$

33,694

 

 

Earnings per share, basic

 

$

0.71

 

 

$

0.58

 

 

Earnings per share, diluted

 

$

0.70

 

 

$

0.57

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

57,793,023

 

 

 

57,307,187

 

 

Diluted

 

 

58,738,732

 

 

 

58,525,980

 

 

 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

4


 

Paycom Software, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

2017

 

 

 

 

2018

 

 

*As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

41,160

 

 

$

33,694

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,069

 

 

 

4,286

 

Amortization of debt issuance costs

 

 

6

 

 

 

23

 

Stock-based compensation expense

 

 

23,222

 

 

 

3,343

 

Cash paid for derivative settlement

 

 

(79

)

 

 

 

Gain on derivative

 

 

(738

)

 

 

 

Deferred income taxes, net

 

 

4,272

 

 

 

1,285

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(774

)

 

 

(508

)

Prepaid expenses

 

 

(2,019

)

 

 

(938

)

Inventory

 

 

(193

)

 

 

176

 

Deposits and other assets

 

 

(565

)

 

 

(154

)

Deferred contract costs

 

 

(17,712

)

 

 

(13,563

)

Accounts payable

 

 

(710

)

 

 

(1,349

)

Income taxes, net

 

 

4,013

 

 

 

17,269

 

Accrued commissions and bonuses

 

 

(6,980

)

 

 

(5,277

)

Accrued payroll and vacation

 

 

4,307

 

 

 

2,919

 

Deferred revenue

 

 

2,153

 

 

 

2,455

 

Accrued expenses and other current liabilities

 

 

2,232

 

 

 

(3,436

)

Net cash provided by operating activities

 

 

57,664

 

 

 

40,225

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net change in funds held for clients

 

 

(5,959

)

 

 

(92,736

)

Purchases of property and equipment

 

 

(18,708

)

 

 

(9,136

)

Net cash provided by investing activities

 

 

(24,667

)

 

 

(101,872

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

2,093

 

Repurchases of common stock

 

 

(4,999

)

 

 

 

Withholding taxes paid related to net share settlement

 

 

(11,871

)

 

 

 

Principal payments on long-term debt

 

 

 

 

 

(282

)

Net change in client funds obligation

 

 

5,959

 

 

 

92,736

 

Payment of debt issuance costs

 

 

(42

)

 

 

(143

)

Net cash (used in) provided by financing activities

 

 

(10,953

)

 

 

94,404

 

Increase in cash and cash equivalents

 

 

22,044

 

 

 

32,757

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

46,077

 

 

 

60,158

 

End of period

 

$

68,121

 

 

$

92,915

 

 

 

 

 

 

 

 

 

 

 * Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

5


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries.  

We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial statements that permit reduced disclosure for interim periods.  In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for the fair presentation of our consolidated balance sheets as of March 31, 2018 and December 31, 2017, our consolidated statements of income for the three months ended March 31, 2018 and 2017 and our consolidated statements of cash flows for the three months ended March 31, 2018 and 2017.  Such adjustments are of a normal recurring nature.  The information in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the SEC on February 14, 2018 (the “Form 10-K”).  The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results expected for the full year.

Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, as discussed in Note 2.  All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the “as adjusted” footnote.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in the notes to our audited consolidated financial statements for the year ended December 31, 2017, included in the Form 10-K. 

Recently Adopted New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 also includes Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs – Contracts with Customers” (“ASC 340-40”), which codifies the guidance on other assets and deferred costs relating to contracts with customers.  ASC 340-40 specifies the accounting for costs an entity incurs to obtain and fulfill a contract to provide goods and services to customers.  We adopted the amended standard on January 1, 2018, utilizing the full retrospective method of transition, which required us to recast each prior period presented and included a cumulative adjustment to stockholders’ equity of $103.4 million as of January 1, 2016.  We have also updated our control framework for new internal controls and made changes to existing controls related to the new standard, including certain reconciliation controls, management review controls and contract review controls.

Impacts to Previously Reported Results

The provisions of ASU 2014-19 do not materially impact the timing or amount of revenue we recognize.  The primary impact of adopting the new standard is the manner in which we account for certain costs to obtain new contracts (i.e., selling and commission costs) and costs to fulfill contracts (i.e., costs related to upfront implementation activities performed), which we had previously expensed as incurred.  We also determined that the nonrefundable upfront fee charged to our clients, coupled with the option to renew, represents an implied performance obligation in the form of a material right.  However, as these fees are deferred and recognized

6


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

ratably over the ten-year estimated client life, consistent with our prior accounting policy, there is no change in revenue recognition.  See Note 3 for further details.  

The following table presents a recast of selected unaudited consolidated statement of income line items after giving effect to the adoption of ASU 2014-09 (dollars in thousands, except per share amounts):

 

 

Three Months Ended March 31, 2017

 

 

 

As previously reported

 

 

Adjustments

 

 

As Adjusted

 

Administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

     Sales and marketing

 

$

36,848

 

 

$

(11,269

)

 

$

25,579

 

     General and administrative

 

$

17,826

 

 

$

(2,576

)

 

$

15,250

 

Operating income

 

$

38,665

 

 

$

13,845

 

 

$

52,510

 

Provision for income taxes

 

$

12,889

 

 

$

5,765

 

 

$

18,654

 

Net income

 

$

25,614

 

 

$

8,080

 

 

$

33,694

 

Earnings per share, basic

 

$

0.44

 

 

$

0.14

 

 

$

0.58

 

Earnings per share, diluted

 

$

0.43

 

 

$

0.14

 

 

$

0.57

 

 

The following table presents a recast of selected unaudited consolidated balance sheet line items after giving effect to the adoption of ASU 2014-09 (in thousands):

 

 

December 31, 2017

 

 

 

As previously reported

 

 

Adjustments

 

 

As Adjusted

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Deferred contract costs

 

$

 

 

$

26,403

 

 

$

26,403

 

Deferred income tax assets, net

 

$

3,294

 

 

$

(3,294

)

 

$

 

Long-term deferred contract costs

 

$

 

 

$

171,865

 

 

$

171,865

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities, net

 

$

 

 

$

49,129

 

 

$

49,129

 

Additional paid-in capital

 

$

137,234

 

 

$

24,575

 

 

$

161,809

 

Retained earnings

 

$

137,255

 

 

$

121,270

 

 

$

258,525

 

 

The following table presents a recast of selected unaudited consolidated statement of cash flow line items after giving effect to the adoption of ASU 2014-09 (in thousands):

 

 

Three Months Ended March 31, 2017

 

 

 

As previously reported

 

 

Adjustments

 

 

As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

25,614

 

 

$

8,080

 

 

$

33,694

 

Stock-based compensation expense

 

$

3,625

 

 

$

(282

)

 

$

3,343

 

Deferred income taxes, net

 

$

(4,480

)

 

$

5,765

 

 

$

1,285

 

Deferred contract costs

 

$

 

 

$

(13,563

)

 

$

(13,563

)

Net cash provided by operating activities

 

$

40,225

 

 

$

 

 

$

40,225

 

 

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under the circumstances. As such, actual results could materially differ from these estimates.

7


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

Seasonality

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.  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.

Employee Stock Purchase Plan

An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recorded at the fair value of the award.  Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period.

Funds Held for Clients and Client Funds Obligation

As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities.  Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement.

These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date.  As of March 31, 2018 and December 31, 2017, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit.  These investments are shown in the consolidated balance sheets as funds held for clients and are classified as a current asset because the funds are held solely to satisfy the client funds obligation.  

Stock Repurchase Plan

On February 8, 2017, we announced that our Board of Directors amended and extended our stock repurchase plan originally announced on May 26, 2016, such that we were authorized to purchase (in the aggregate) up to an additional $50.0 million of common stock through January 2019. On October 30, 2017, our Board of Directors again amended and extended our stock repurchase plan, such that we are authorized to purchase (in the aggregate) up to an additional $75 million of common stock over a 24-month period. Our stock repurchase plan will expire on October 30, 2019. On February 13, 2018, we announced that our Board of Directors further amended and extended our stock repurchase plan, such that we are authorized to purchase up to an additional $100.0 million of common stock. Our stock repurchase plan will expire on February 12, 2020.

According to the terms of our stock repurchase plan, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs.  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, the net-downs associated with the vesting of restricted stock and other corporate considerations. During the three months ended March 31, 2018, we repurchased an aggregate of 169,146 shares of our common stock at an average cost of $99.74 per share, including 108,909 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock.

 

Recently Issued Accounting Pronouncements 

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”  The purpose of this new guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. The new guidance is effective for us beginning January 1, 2019.  We are in the process of evaluating and planning for the adoption and implementation of the new standard, including evaluating practical expedient and accounting policy elections and determining the impact to our systems  and processes that we use to account for leases.  We are also still in the process of completing our assessment of the overall impact to our consolidated financial statements; however, we anticipate that most of our operating lease commitments will be subject to the new guidance, resulting in a significant increase in the total assets and liabilities reported on the Company’s consolidated balance sheets.

 

8


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

3.

REVENUE

Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenue is comprised of revenue from contracts with clients. Sales and other applicable taxes are excluded from revenues. The following table, consistent with our Consolidated Statements of Income, disaggregates revenue by recurring and implementation and other revenue which we believe represents the major categories of revenues (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

Recurring

 

$

151,885

 

 

$

117,914

 

Implementation and other

 

 

2,031

 

 

 

1,594

 

Total revenues

 

$

153,916

 

 

$

119,508

 

 

 

 

 

 

 

 

 

 

 

Recurring

Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act (“ACA”) applications.

The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll-period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk.

The contract period for substantially all contracts associated with these revenues is one month due to the fact that both Paycom and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30-day notice of termination. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications.  For clients who purchase multiple applications, due to the short team nature of our contracts, we do not determine it meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application.  Similarly, we do not determine it meaningful to individually determine the standalone selling price for each application.  We consider the total price charged to a client in a given period to be indicative of the standalone selling price as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups.  

Implementation and other

Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations.

Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client.  However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that the total price charged to clients for all other services within the contract are sold at standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees Paycom charges in similar

9


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

contracts that we have with clients, the standalone selling price of the client’s option to renew approximates the dollar amount of the nonrefundable upfront fee.  The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period (i.e. the ten-year estimated client life).

Revenue from the sale of time clocks is recognized when control is transferred to the client upon delivery of the product. We estimated standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks.  

Contract Balances

The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. We have elected to apply the practical expedient not to disclose the value of unsatisfied performance obligations for contracts that are less than one year in length. However, this expedient cannot be applied to initial 30-day contracts with a client that also contain an implied performance obligation in the form of a material right as the material right performance obligation is being recognized over the expected client life which exceeds one year.  For these contracts, we determined that the core, non-material right, performance obligations are generally satisfied in full by the end of each reporting period as most of our contracts with clients start at the beginning of a calendar month.  For the material right performance obligation, as discussed above, we defer the amounts allocated and recognize them ratably over the estimated client life of ten years.  Finally, we have also elected to apply the transition expedient that allows for all reporting periods presented before the date of initial application to exclude disclosure of the amounts of transaction price allocated to the remaining unsatisfied performance obligations.  Accordingly, the table below is only for the three months ended March 31, 2018.

Changes in deferred revenue related to material right performance obligations were as follows (in thousands):  

 

 

Three Months Ended

 

 

 

March 31, 2018

 

Balance, beginning of period

 

$

51,624

 

Deferral of revenue

 

 

3,943

 

Recognition of unearned revenue

 

 

(1,790

)

Balance, end of period

 

$

53,777

 

 

 

 

 

 

 

 

We expect to recognize $5.5 million of the above deferred revenue amount in 2018, $7.4 million in 2019, and $40.9 million thereafter.

Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts

We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We have determined that certain selling and commission costs meet the capitalization criteria under ASC 340-40, which prior to the adoption of ASU 2014-09 we had previously expensed as incurred. We also recognize an asset for the costs to fulfill a contract with a client if they are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40.  These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations.  

The assets related to both costs to obtain and costs to fulfill contracts with clients are capitalized and amortized over the expected period of benefit which we have determined to be the estimated client relationship of ten years.  The expected period of benefit has been judgmentally determined to be the estimated life of the client relationship largely due to the fact that there are no new costs to obtain or costs to fulfill incurred upon renewal after the initial contract unless the client signs on for additional applications in the future, at which time additional fulfillment costs are minimized by our seamless single-database platform.  Furthermore, while changes and development to our technology may periodically occur, enhancements to the platform used to perform the payroll processing and related human resource activities remain fundamentally unchanged.  These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and fulfill a contract are included in the “sales and marketing” and “general and administrative” in the accompanying consolidated statements of operations.

10


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

The following table presents the asset balances and related amortization expense for these contract costs (in thousands):

 

 

 

As of and for the Three Months Ended March 31, 2018

 

 

 

Beginning

 

 

Capitalization

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

of Costs

 

 

Amortization

 

 

Balance

 

Costs to obtain a contract

 

$

126,207

 

 

$

15,122

 

 

$

(4,418

)

 

$

136,911

 

Costs to fulfill a contract

 

$

72,061

 

 

$

11,043

 

 

$

(2,515

)

 

$

80,589

 

 

 

 

4.

PROPERTY AND EQUIPMENT, NET

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Property and equipment

 

 

 

 

 

 

 

 

Buildings

 

$

60,647

 

 

$

60,441

 

Software and capitalized software costs

 

 

49,404

 

 

 

41,996

 

Computer equipment

 

 

30,525

 

 

 

27,928

 

Rental clocks

 

 

13,627

 

 

 

13,131

 

Furniture, fixtures and equipment

 

 

7,776

 

 

 

7,528

 

Leasehold improvements

 

 

779

 

 

 

767

 

Vehicles

 

 

50

 

 

 

 

 

 

 

162,808

 

 

 

151,791

 

Less: accumulated depreciation and amortization

 

 

(59,540

)

 

 

(53,525

)

 

 

 

103,268

 

 

 

98,266

 

Construction in progress

 

 

47,280

 

 

 

40,446

 

Land

 

 

9,013

 

 

 

8,993

 

Property and equipment, net

 

$

159,561

 

 

$

147,705

 

 

We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40.  For the three months ended March 31, 2018 and 2017, respectively, we capitalized $6.6 million and $2.9 million of computer software development costs related to software developed for internal use.  

Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases.  As such, these items are transferred from inventory to property and equipment and depreciated over their estimated useful lives.

Included in the construction in progress balance at March 31, 2018 and December 31, 2017 is $1.6 million and $2.0 million in retainage, respectively.

We capitalize interest incurred for indebtedness related to construction of our principal executive offices.  For the three months ended March 31, 2018, we incurred interest costs of $0.4 million, $0.4 million of which was capitalized.  For the three months ended March 31, 2017, we incurred interest costs of $0.4 million, $0.1 million of which was capitalized.

Depreciation and amortization expense for property and equipment, net was $6.0 million and $3.9 million for the three months ended March 31, 2018 and 2017, respectively.

11


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

5.

GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill represents the excess of cost over our net tangible and identified intangible assets.  As of March 31, 2018 and December 31, 2017, we had goodwill of $51.9 million.  We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2017.  For the three months ended March 31, 2018 and the year ended December 31, 2017, there were no indicators of impairment.

All of our intangible assets other than goodwill are considered to have finite lives and, as such, are subject to amortization. The following tables provide the components of intangible assets:

 

 

 

 

March 31, 2018

 

 

 

Weighted Average Remaining

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Useful Life

 

 

Gross

 

 

Amortization

 

 

Net

 

 

 

(Years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

 

4.3

 

 

 

3,194

 

 

 

(2,289

)

 

 

905

 

Total

 

 

 

 

 

$

3,194

 

 

$

(2,289

)

 

$

905

 

 

 

 

 

December 31, 2017

 

 

 

Weighted Average Remaining

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Useful Life

 

Gross

 

 

Amortization

 

 

Net

 

 

 

(Years)

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

4.5

 

 

3,194

 

 

 

(2,236

)

 

 

958

 

Total

 

 

 

$

3,194

 

 

$

(2,236

)

 

$

958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The weighted average remaining useful life of our intangible assets was 4.3 years as of March 31, 2018.  Amortization of intangible assets for the three months ended March 31, 2018 and 2017 was $0.1 million and $0.4 million, respectively.    

 

 

6.

LONG-TERM DEBT, NET

As of the dates indicated, our long-term debt consisted of the following:

 

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Net term note to bank due September 7, 2025

 

$

35,266

 

 

$

35,302

 

Total long-term debt (including current portion)

 

 

35,266

 

 

 

35,302

 

Less: Current portion

 

 

(1,331

)

 

 

(888

)

Total long-term debt, net

 

$

33,935

 

 

$

34,414

 

 

 

On December 7, 2017, we entered into a senior secured term credit agreement (the “Term Credit Agreement”), pursuant to which JPMorgan Chase Bank N.A., Bank of America, N.A. and Kirkpatrick Bank agreed to make certain term loans to us (the “Term Loans”) in an aggregate principal amount of $60.0 million on or prior to September 7, 2018. As of March 31, 2018, our indebtedness consisted solely of Term Loans made under the Term Credit Agreement.  Unamortized debt issuance costs of $0.2 million as of both March 31, 2018 and December 31, 2017, are presented as a direct deduction from the carrying amount of the debt liability.

After giving effect to the Term Loans made on December 7, 2017, there was $24.5 million of borrowing capacity remaining under the Term Credit Agreement as of March 31, 2018.  Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our headquarters property.  Term Loans made after December 7, 2017 may be used to finance hard and soft costs related to the completion of construction of our fourth headquarters building and any landscaping, groundwork, parking lots and roads reasonably incidental thereto. The Term Loans mature on September 7, 2025. The Term Loans 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%.

12


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

Under the Term Credit Agreement, the Company is subject to two material financial covenants, which require the Company to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of March 31, 2018, the Company was in compliance with these covenants. 

On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provides for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million, which may be increased to up to $100.0 million.  The Facility is scheduled to mature on February 12, 2020. 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%.  The proceeds of the loans and letters of credit under the Facility are to be used only for our general business purposes and working capital.  Letters of credit are to be issued only to support our business operations. As of March 31, 2018, we have not made any draws under the Facility.  

Under the Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Revolving Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company 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 their capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions for a facility of the size and type of the Facility.

As of March 31, 2018 and December 31, 2017, the carrying value of our total long-term debt approximated its fair value as of both dates. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.  

 

7.

DERIVATIVE INSTRUMENTS

In December 2017, the Company entered into a floating-to-fixed interest rate swap agreement to limit the exposure to interest rate risk related to the Term Loans.  The Company does not hold derivative instruments for trading or speculative purposes.  The interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments.  The Company accounts for its derivatives under ASC Topic 815, Derivatives and Hedging, and records all derivative instruments on the consolidated balance sheets at fair value as either short term or long term assets or liabilities based on their anticipated settlement date.  See Note 8, “Fair Value of Financial Instruments”.  The Company has elected not to designate its interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument are being recognized in earnings in the Company’s consolidated statements of income.

The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million.  Under the terms of the interest rate swap agreement, the Company will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate.  The swap agreement has a maturity date of September 7, 2025.  For the three months ended March 31, 2018, the Company recorded a gain of $0.8 million for the change in fair value of the interest rate swap, which is included in Other income, net in the consolidated statements of income.

 

8.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt.  The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client fund obligation approximates fair value because of the short-term nature of the instruments.  See Note 6 for discussion on the fair value of our debt.

As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap.  The interest rate swap is measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs that approximate fair value.  

The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

 

Level 1 – Observable inputs such as quoted prices in active markets

13


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active

 

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

Included in the following table are the Company’s major categories of assets (liabilities) measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (dollars in thousands):

 

 

March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Interest rate swap

 

$

 

 

$

168

 

 

$

 

 

$

168

 

Total

 

$

 

 

$

168

 

 

$

 

 

$

168

 

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Interest rate swap

 

$

 

 

$

(649

)

 

$

 

 

$

(649

)

Total

 

$

 

 

$

(649

)

 

$

 

 

$

(649

)

 

 

9.

EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN

Our employees that are over the age of 18 and have completed ninety (90) days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby we make a matching contribution for our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions amounted to $1.4 million and $1.2 million for the three months ended March 31, 2018 and 2017, respectively.

The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months.  At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum.  Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date.  The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market.  The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2,000,000 shares.  Eligible employees purchased 24,103 and 32,822 shares of the Company’s common stock under the ESPP during the three months ended March 31, 2018 and 2017, respectively.  Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period.  Our compensation expense related to the ESPP was $0.2 million for each of the three months ended March 31, 2018 and 2017.  

 

 

 

10.

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested.

In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings.  Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.  The outstanding shares of restricted stock granted in 2015 are considered participating securities, while all other outstanding shares of restricted stock are not considered participating securities.

14


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

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

 

 

Three Months Ended March 31,

 

 

 

 

 

 

2017

 

 

 

 

2018

 

 

*As Adjusted

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

41,160

 

 

$

33,694

 

Less:  income allocable to participating securities

 

 

(100

)

 

 

(254

)

Income allocable to common shares

 

$

41,060

 

 

$

33,440

 

Add back:  undistributed earnings allocable to participating securities

 

$

100

 

 

$

254

 

Less:  undistributed earnings reallocated to participating securities

 

 

(98

)

 

 

(249

)

Numerator for diluted earnings per share

 

$

41,062

 

 

$

33,445

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

50,315,455

 

 

 

50,315,455

 

Weighted average common shares repurchased

 

 

(2,408,586

)

 

 

(1,122,261

)

Adjustment for vested restricted stock

 

 

9,886,154

 

 

 

8,113,993

 

Shares for calculating basic earnings per share

 

 

57,793,023

 

 

 

57,307,187

 

Dilutive effect of unvested restricted stock

 

 

945,709

 

 

 

1,218,793

 

Shares for calculating diluted earnings per share

 

 

58,738,732

 

 

 

58,525,980

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.71

 

 

$

0.58

 

Diluted

 

$

0.70

 

 

$

0.57

 

 

 * Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

 

 

 

11.

STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

See the Company’s Form 10-K for a detailed description of the Company’s stock-based compensation awards, including information related to vesting terms and service and performance conditions.

The following table summarizes restricted stock awards activity for the three months ended March 31, 2018:

 

 

Time-based

 

 

Market-Based

 

 

Restricted Stock Awards

 

 

Restricted Stock Awards

 

 

Shares

 

 

Weighted Average Grant Date Fair Value

 

 

Shares

 

 

Weighted Average Grant Date Fair Value

 

Unvested shares of restricted stock

  outstanding at December 31, 2017

 

888,680

 

 

$

42.17

 

 

 

 

 

$

 

  Granted

 

227,243

 

 

$

92.94

 

 

 

284,118

 

 

$

82.84

 

  Vested

 

(14,211

)

 

$

0.29

 

 

 

(283,080

)

 

$

82.84

 

  Forfeited

 

(19,726

)