Paycom Software Inc. (NYSE:PAYC)

Provision for current income taxes

The current income tax expense exhibited an overall increasing trend from 2018 to 2022. It started at $16.569 million in 2018, rising to $24.5 million in 2019, then slightly decreased to $21.102 million in 2020 before climbing again to $27.096 million in 2021. A significant increase occurred in 2022 when the amount reached $111.399 million, representing a substantial spike compared to previous years.

Provision for deferred income taxes

The deferred income tax provision remained relatively stable around the $21 million range from 2018 through 2020, fluctuating marginally between $21.011 million and $21.381 million. In 2021, however, it increased considerably to $32.906 million. Contrary to previous years, in 2022, the provision turned negative to -$3.210 million, indicating a reversal or release of deferred tax liabilities or the recognition of deferred tax assets.

Provision for income taxes (total)

Total income tax expense, combining current and deferred amounts, also showed an upward trajectory for the majority of the observed period. Starting at $37.646 million in 2018, it increased yearly until 2021, reaching $60.002 million. Similar to the current tax expense pattern, there was a notable escalation in 2022, with the total provision rising sharply to $108.189 million. The significant rise in total tax expense in 2022 is primarily driven by the marked increase in current tax expense despite the offset effect of the negative deferred tax provision.

Overall insights

The financial data indicate moderate increases in tax expenses from 2018 to 2021, with a strong surge in 2022 driven mainly by current income tax expense. The sharp decrease and negative value in deferred income taxes in 2022 may suggest changes in tax planning strategies, timing differences, or adjustments in deferred tax assets and liabilities. The patterns reflect volatile tax expense components and highlight the importance of analyzing the underlying factors contributing to these fluctuations for a comprehensive understanding.

Federal statutory tax rate

The federal statutory tax rate remained constant at 21% throughout the five-year period from 2018 to 2022.

State income taxes, net of Federal income tax benefit

State income taxes as a percentage fluctuated somewhat, starting at 6% in 2018 and 2019, increasing to 8% in 2020 and 2021, before decreasing back to 6% in 2022.

Nondeductible expenses

Nondeductible expenses showed a general upward trend from 1% in 2018 to a peak of 6% in 2020 and 2021, followed by a decline to 4% in 2022.

Research credit, Federal benefit

The federal research credit benefit remained relatively stable with slight fluctuations, ranging between -2% and -3% throughout the period, with -2% in 2018 and 2022 and -3% in the intervening years.

Stock-based compensation

Stock-based compensation as a percentage experienced significant volatility. It increased in impact from -4% in 2018 to a peak negative impact of -9% in 2020, then decreased to -7% in 2021 and significantly lessened to -1% in 2022.

Remeasurement of state deferred tax liabilities

This item only appeared in 2021, showing a negative 2% adjustment, with no recorded values in other years.

Effective income tax rate

The effective income tax rate showed some variability, starting at 22% in 2018, dipping to 20% in 2019, then rising to 23% in both 2020 and 2021, and increasing further to 28% in 2022, indicating a notable rise in the tax burden in the most recent year.

Stock-based compensation

The stock-based compensation expense demonstrates a fluctuating but overall increasing trend during the analyzed period. It starts at $1,529 thousand in 2018, declines to $994 thousand in 2019, then rises progressively to $1,219 thousand in 2020 and $1,541 thousand in 2021, before experiencing a significant surge to $4,425 thousand in 2022. This sharp increase in the final year may indicate expanded equity incentives or changes in compensation policies.

Investment in Paycom Payroll Holdings, LLC

This investment item shows a continuous and substantial increase in negative balance (interpreted likely as investment amount or equity method adjustments). Beginning at -$73,020 thousand in 2018, it declines further to -$92,743 thousand in 2019, -$114,514 thousand in 2020, reaching -$147,659 thousand in 2021, and slightly improving to -$146,907 thousand in 2022. The consistent growth in the negative figure signifies increasing capital deployment or equity stakes in the subsidiary, with a minor reversal in 2022 possibly indicating stabilization or slight divestment.

Net operating losses

Net operating losses decrease over the period, from $935 thousand in 2018 to $189 thousand in 2022. The values fluctuate moderately between 2019 and 2021 but display an overall downward trajectory, indicating a reduction in cumulative operating losses, which might reflect improving operational performance or changes in loss recognition.

Federal tax credits

Federal tax credits are acknowledged only in 2018 at $350 thousand, with no recorded values for subsequent years. This absence might imply exhaustion of available credits or a change in tax credit policies or eligibility.

Noncurrent deferred income tax assets (liabilities), net

The net noncurrent deferred income tax asset/liability shows a consistently negative and increasing in magnitude position across the years. Starting from -$70,206 thousand in 2018, it worsens to -$91,217 thousand in 2019, -$112,598 thousand in 2020, reaching -$145,504 thousand in 2021 before slightly improving to -$141,033 thousand in 2022. This trend suggests an increasing deferred tax liability or reduced deferred tax assets, which could be related to temporary differences or tax strategy impacts aligned with the investment growth and operating loss patterns.

Mark-to-market investments, OCI

There is a single recorded value of $1,260 thousand in 2022, with no data in prior years. This suggests either a newly adopted accounting item or an initiation of investments subject to mark-to-market valuation during this period.

Deferred Income Tax Liabilities, Net

The net deferred income tax liabilities exhibited a consistent upward trend over the observed five-year period. Starting at approximately $70.2 million at the end of 2018, the figure increased steadily each year until reaching a peak of about $145.5 million in 2021. In the final year, 2022, there was a slight decline to around $141.0 million. Despite this marginal decrease, the overall trajectory indicates that the company's deferred tax liabilities more than doubled within the timeframe, reflecting possibly increasing differences between accounting and tax treatments or changes in the company's tax position.

The financial data exhibits several notable trends related to liabilities, stockholders' equity, and net income over the five-year period from 2018 to 2022. Both reported and adjusted figures are provided, showing the effects of accounting for deferred income tax adjustments.

Total Liabilities

The reported total liabilities increased steadily from approximately $1.19 billion in 2018 to nearly $2.72 billion in 2022. This represents a cumulative growth of roughly 129% over the period. The adjusted total liabilities follow a similar upward trend but are consistently slightly lower than the reported figures, reflecting the impact of deferred income tax adjustments. The increase appears somewhat linear, with a notable jump between 2018 and 2019 and continued steady growth thereafter.

Stockholders’ Equity

Stockholders’ equity showed a strong increasing trend during the same interval. Reported equity rose from approximately $335 million in 2018 to about $1.18 billion in 2022, an overall increase exceeding 250%. Adjusted equity values are higher than reported values each year, indicating that adjustments for deferred income tax have a positive effect on equity. The growth in equity accelerates over time, particularly after 2020, suggesting improved profitability or capital retention.

Net Income

Reported net income increased from $137 million in 2018 to $281 million in 2022, more than doubling within five years. However, there is a decline noted in 2020, where net income decreased compared to 2019 before resuming an upward trend. Adjusted net income figures are consistently higher than reported ones and mirror the same trend of a dip in 2020, followed by recovery and growth. The adjusted net income growth between 2021 and 2022 is more modest compared to previous years, suggesting possible margin pressures or higher costs.

General Insights

The company shows robust growth in both its liabilities and equity, which may indicate expanding operations funded through a mix of debt and equity financing. The consistent premium of adjusted values over reported figures underscores the significance of deferred income tax adjustments in assessing the company’s financial position and performance. The dip in net income during 2020, aligned across reported and adjusted figures, aligns with external economic conditions impacting profitability. The subsequent recovery suggests resilience and effective management response.

The analysis of the financial data over the five-year period reveals several notable trends in profitability, leverage, and returns for the company.

Net Profit Margin

The reported net profit margin demonstrates a general decline from 24.2% in 2018 to a low of 17.05% in 2020, followed by a gradual recovery to 20.46% in 2022. The adjusted net profit margin follows a similar pattern but starts higher at 27.92% in 2018 and decreases more sharply to 19.59% in 2020, then partially recovers before settling at 20.23% in 2022. This suggests that while profitability decreased significantly by 2020, some improvement was achieved in subsequent years, although margins have not fully returned to earlier levels.

Financial Leverage

Both reported and adjusted financial leverage ratios show a consistent downward trend after peaking in 2019. Reported financial leverage decreases steadily from 4.72 in 2019 to 3.3 by 2022. Adjusted financial leverage mirrors this trend, declining from 4.03 in 2019 to 2.95 in 2022. Reduced leverage indicates a decreasing reliance on debt, which may reflect a strategic shift towards lower financial risk or improved equity financing over this period.

Return on Equity (ROE)

Reported ROE declines sharply from 40.95% in 2018 to 21.88% in 2020 and remains relatively stable thereafter, ending at 23.79% in 2022. Adjusted ROE shows a comparable downward shift from 39.05% in 2018 to 21.46% in 2020, with little variation through 2022, where it stands at 21.02%. The halving of ROE indicates a significant reduction in the company’s ability to generate returns on shareholders’ equity during the examined timeframe.

Return on Assets (ROA)

Reported ROA decreases from 9.01% in 2018 to 5.5% in 2020 but shows a gradual improvement thereafter, reaching 7.21% in 2022. The adjusted ROA follows a similar trajectory, starting higher at 10.39% in 2018, dipping to 6.32% in 2020, and stabilizing around 7.13% by 2022. This rebound in ROA suggests improved efficiency in asset utilization in recent years despite the earlier decline.

Overall, the data conveys a period of declining profitability and returns culminating around 2020, accompanied by a decrease in financial leverage. Subsequent years indicate some recovery in profitability and asset efficiency but a sustained lower level of return on equity compared to the beginning of the period. These patterns may reflect operational challenges followed by strategic adjustments impacting capital structure and profitability metrics.

The financial data reveals several key trends in the company's earnings and profitability over the five-year period ending December 31, 2022. Both reported and adjusted net incomes show fluctuations but generally an upward trajectory, with some variability in growth rates.

Net Income Trends

Reported net income increased from 137,065 thousand US dollars in 2018 to 281,389 thousand US dollars in 2022, more than doubling over the period. The growth was not entirely steady, as there was a notable dip in 2020 to 143,453 thousand US dollars from 180,576 thousand in 2019, followed by a strong recovery in the subsequent years.

Adjusted net income, which accounts for deferred income tax impacts, followed a similar pattern, starting at 158,142 thousand US dollars in 2018 and reaching 278,179 thousand in 2022. This measure also experienced a decline in 2020 to 164,834 thousand from 201,587 thousand in 2019, then rebounded significantly in the following years, peaking close to the 2022 reported net income figure.

Net Profit Margin Patterns

The reported net profit margin demonstrates a decreasing trend from 24.2% in 2018, dipping significantly to 17.05% in 2020, before partially recovering to 20.46% by 2022. This indicates that while the company’s profitability relative to revenue declined during the middle of the period, it improved afterward, though it did not return to early period levels.

The adjusted net profit margin exhibits a higher starting point at 27.92% in 2018, also declining to 19.59% in 2020. There was a modest recovery to 21.68% in 2021 but then a slight decrease to 20.23% in 2022. The trend mirrors the reported margin, with an initial downward pressure on profitability ratios, followed by some rebound, yet overall margin compression relative to 2018.

Comparative Insights

Adjusted figures consistently show higher net income and profit margins than reported figures, reflecting the effects of deferred income tax adjustments which positively impact these financial measures.

The decline in both net income and profit margins in 2020 may indicate external or operational challenges during that period, followed by corrective or growth measures in subsequent years enabling recovery and expansion.

The discrepancy between reported and adjusted margins narrows by 2022, suggesting possible changes in tax strategy or deferred tax asset/liability management affecting the adjustments.

In summary, the company experienced growth in net income over the five years, interrupted by a contraction in 2020. Profitability as measured by net profit margin declined mid-period but showed signs of stabilization and moderate recovery. Adjustments for deferred income taxes consistently enhanced profitability metrics but have diminished somewhat over time, implying evolving tax-related financial impacts.

Stockholders’ Equity Trends

Both reported and adjusted stockholders’ equity show a consistent upward trend over the five-year period. Reported equity increased from approximately 335 million US dollars at the end of 2018 to about 1.18 billion US dollars by the end of 2022. Adjusted equity, which incorporates deferred income tax adjustments, also rose steadily from approximately 405 million US dollars in 2018 to around 1.32 billion US dollars in 2022. The adjusted values remain consistently higher than the reported figures, suggesting that deferred income tax adjustments have a positive impact on equity valuations.

Financial Leverage Trends

Both reported and adjusted financial leverage ratios exhibit a declining trend over the analysis period. Reported financial leverage decreased from 4.55 in 2018 to 3.3 in 2022, indicating a gradual reduction in the proportion of debt relative to equity. The adjusted financial leverage, which accounts for deferred income tax effects, also declined from 3.76 in 2018 to 2.95 in 2022. Throughout the period, adjusted financial leverage remains consistently lower than reported financial leverage, reflecting the adjustment's effect in reducing perceived leverage risk.

Insights

The consistent increase in both reported and adjusted stockholders’ equity signals strong capital growth and retained earnings expansion. The simultaneous decline in financial leverage ratios demonstrates an improvement in the company’s financial structure, with a relative decrease in debt financing or an increase in equity supporting the capital base. The deferred tax adjustments enhance the equity base and reduce leverage ratios, indicating that the deferred income tax component positively affects the company's financial stability indicators.

The financial data reveals notable trends over the five-year period from 2018 to 2022, with distinctions between reported and adjusted figures for income and equity, as well as related return metrics.

Net Income

Reported net income demonstrates a fluctuating but generally upward pattern. It increased significantly from 137,065 thousand US dollars in 2018 to 180,576 in 2019, then dropped to 143,453 in 2020 before rising again to 195,960 in 2021 and reaching a peak of 281,389 in 2022. Adjusted net income exhibits a similar trajectory but remains consistently higher than reported figures each year, suggesting deferred tax adjustments or other non-recurring items elevating the adjusted results. Starting at 158,142 thousand US dollars in 2018, it rises to 201,587 in 2019, dips to 164,834 in 2020, then increases to 228,866 and slightly decreases to 278,179 in the last year.

Stockholders’ Equity

Reported stockholders’ equity shows a robust growth trend across all five years. It grows from 334,753 thousand US dollars in 2018 to 1,182,607 thousand US dollars in 2022, reflecting more than a threefold increase. The adjusted stockholders’ equity figures run consistently above the reported values, indicating upward adjustments that may include tax effects or other comprehensive income components. It increases steadily from 404,959 thousand US dollars in 2018 to 1,323,640 thousand US dollars in 2022, supporting a pattern of solid capital build-up over time.

Return on Equity (ROE)

The reported ROE percentage starts very high at 40.95% in 2018, then declines notably over the next years, dropping to 34.29% in 2019, 21.88% in 2020, and maintaining around 22% in 2021. There is a slight uptick to 23.79% in 2022, indicating a modest recovery in profitability relative to equity. Adjusted ROE follows a comparable downward trajectory but remains slightly lower than reported ROE throughout the period, beginning at 39.05% in 2018 and declining gradually to 21.02% in 2022. This decline in ROE metrics suggests that equity growth outpaces net income increases, reducing overall profitability ratios despite absolute profit gains.

Overall, the data indicates strong absolute growth in net income and equity base, with adjusted figures consistently exceeding reported ones, which may reflect prudent accounting adjustments related to income taxes. Despite this, returns on equity show a declining trend, implying that increased equity capital is absorbing income gains, thereby tempering profitability ratios on an equity basis. This suggests a capital-intensive growth phase with expanding equity that dilutes return percentages, even as the company’s absolute earnings and capital supply improve substantially.

Net Income Trends

The reported net income displays overall growth over the observed five-year period, starting at $137,065 thousand in 2018 and culminating at $281,389 thousand in 2022. There is a notable increase in 2019, followed by a decline in 2020, then a recovery and significant surge in 2022.

The adjusted net income follows a similar trajectory, consistently higher than the reported net income, indicating the impact of adjustments mainly related to deferred income taxes. Adjusted net income increases from $158,142 thousand in 2018 to $278,179 thousand in 2022, with a similar dip in 2020 and recovery thereafter.

Return on Assets (ROA) Patterns

Reported ROA decreases from 9.01% in 2018 to a low of 5.5% in 2020, indicating reduced profitability relative to asset base. It then gradually improves to 7.21% by 2022, though it does not reach the 2018 level within this timeframe.

Adjusted ROA mirrors the reported ROA trend but remains consistently higher. It declines from 10.39% in 2018 to 6.32% in 2020 before improving to 7.13% by 2022, suggesting that adjustments enhance the apparent operational efficiency and profitability.

Insights and Implications

The divergence between reported and adjusted figures highlights the impact of deferred income tax adjustments on the company’s financial performance. Adjusted net income and ROA values provide a more favorable view of profitability and asset utilization.

The dip in 2020 across all metrics suggests a period of operational or market challenges, after which the company resumed growth and improved returns. The increase in reported net income in 2022, nearly doubling since 2018, indicates substantial earnings growth despite more moderate improvements in ROA.