What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-05 · 211 added, 102 removed, 206 unchanged (60% of the section changed)

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As the duration of which remains uncertain, we have planned for a range of scenarios and have modified certain business and workforce practices.

To conform to government restrictions and best practices, we have taken steps designed to keep our staff safe while continuing to serve clients, including implementing remote working for all non-essential employees and providing extra sanitation of corporate facilities.

To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients to obtain government provided tax credits, tax deferrals and loans as well as to provide guidance to assist clients addressing the challenges faced by employers as a result of the pandemic.

To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients to obtain government provided tax credits, tax deferrals, loans and loan forgiveness as well as to provide guidance to assist clients addressing the challenges faced by employers as a result of the pandemic.

These service offerings and guidance to assist clients during the pandemic included additional benefits support, remote workforce transition, monitoring and educating on regulatory changes, return to workforce and workplace safety.

The COVID-19 pandemic did not have a significant impact to our first quarter 2020 financial results due to the increased spread of, and related government and business responses to, the COVID-19 pandemic not occurring until late in the quarter.

However, towards the end of the first quarter, we began to see clients deciding to begin layoffs and temporary leaves of absence, which would result in a decline in the number of worksite employees (“WSEEs”) starting in the second quarter of 2020.

We paid 230,500 WSEEs in April 2020, which represents a 3.3% decline from our March 2020 paid WSEEs.

Based on actions taken by our clients in April 2020, we expect this trend to continue at least into May 2020.

As a result, we expect these reduced employment levels to have a negative impact on our financial results for the remainder of 2020.

While healthcare costs were not impacted significantly in the first quarter of 2020 by the COVID-19 pandemic, we expect for the remainder of 2020 to incur increased costs for the testing and treatment of participants affected by the COVID-19 virus.

We currently expect that we may also experience lower costs related to certain non-essential elective healthcare procedures that have been deferred or cancelled in response to governmental requirements or guidance related to shelter in place and similar orders, which would result in healthcare claim costs that are not reflective of our historical quarterly claim trends.

The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the scope, duration and magnitude of the pandemic as well as additional actions by businesses and governments in response to the pandemic;

However, towards the end of the first quarter, clients began layoffs and temporary leaves of absence, which resulted in a 1.8% year-over-year decline in the average number of paid WSEEs in the second quarter of 2020.

We expect the average number of paid WSEEs per month to decline between 4.5% and 5.6% in the third quarter of 2020 as compared to the third quarter of 2019, which equates to the average number of paid worksite employees per month staying flat to growing 1% sequentially from the second quarter of 2020.

We expect overall reduced employment levels to have a negative impact on our financial results for at least the remainder of 2020 as compared to 2019.

We experienced a 10.7% decrease in benefits cost per covered employee due primarily to a decrease in non-essential claims as a result of the lower utilization and deferral or cancellations associated with the COVID-19 pandemic during the second quarter of 2020.

We currently expect, however, to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures in the second half of 2020 that had been deferred in response to COVID-19 governmental requirements or guidance related to shelter in place and similar orders.

As a result, we expect that our healthcare claim costs will not be reflective of our historical quarterly claim trends.

In addition, the COVID-19 pandemic has not had a material impact on our workers’ compensation cost estimate;

however, the ultimate impact of COVID-19 on our workers’ compensation program remains uncertain.

As the impact of the COVID-19 pandemic emerges, such impact, if any, on our workers’ compensation program will be reflected in future reporting periods.

The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the scope, duration and magnitude of the pandemic, actions by businesses and governments in response to the pandemic, including programs designed to assist small and medium-sized businesses with the economic impact of the pandemic;

and the speed and effectiveness of responses to combat the virus.

See Part II, Item 1A.

“Risk Factors – The COVID-19 pandemic is adversely impacting our business.

The impact of the COVID-19 pandemic may have, and a future outbreak of other highly infectious or contagious diseases could have, a material and adverse impact on our business, results of operations, financial condition and cash flows.

“Risk Factors” for additional information.

Insperity | 2020 Second Quarter Form 10-Q 18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2020 Highlights

First Quarter 2020 Compared to First Quarter 2019

Second Quarter 2020 Compared to Second Quarter 2019

• Average number of WSEEs paid per month decreased 1.8%

• Net income and diluted earnings per share (“diluted EPS”) increased 81.6% and 92.8%, to $51.9 million and $1.33, respectively

• Adjusted EPS increased 85.5% to $1.54

• Adjusted EBITDA increased 62.2% to $92.0 million

First Six Months 2020 Compared to First Six Months 2019

• Average number of WSEEs paid per month increased 1.8%

Net income and diluted earnings per share (“diluted EPS”) decreased 18.6% and 14.6% , to $62.1 million and $1.58 , respectively

Insperity | 2020 First Quarter Form 10-Q

• Net income and diluted EPS increased 8.7% and 14.6% to $113.9 million and $2.91, respectively

• Adjusted EPS increased 15.3% to $3.24

• Adjusted EBITDA increased 22.2% to $193.2 million

Please read “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA and adjusted EPS to their most directly comparable financial measures calculated and presented in accordance with GAAP.

Insperity | 2020 Second Quarter Form 10-Q 19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Adjusted EPS decreased 14.1% to $1.70

Adjusted EBITDA decreased 0.2% to $101.3 million

Key Financial and Statistical Data

(in thousands, except per share, WSEE and statistical data)

Three Months Ended

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 % Change 2020 2019 % Change

Financial data:

$ 993,366 $ 1,043,316 (4.8) % $ 2,222,849 $ 2,196,326 1.2 %

Gross profit 220,249 173,735 26.8 % 454,271 400,452 13.4 %

Operating expenses 147,262 135,015 9.1 % 296,063 276,271 7.2 %

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Other income (expense) (1,850) 1,163 (259.1) % (2,333) 2,727 (185.6) %

Net income 51,851 28,556 81.6 % 113,943 104,845 8.7 %

1.33 0.69 92.8 % 2.91 2.54 14.6 %

Non-GAAP financial measures (1) :

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Adjusted EBITDA 91,958 56,686 62.2 % 193,212 158,123 22.2 %

1.54 0.83 85.5 % 3.24 2.81 15.3 %

Average WSEEs paid 227,894 232,010 (1.8) % 232,954 228,768 1.8 %

Statistical data (per WSEE per month):

$ 1,453 $ 1,499 (3.1) % $ 1,590 $ 1,600 (0.6) %

Gross profit 322 250 28.8 % 325 292 11.3 %

Operating expenses

215 194 10.8 % 212 201 5.5 %

Operating income

107 56 91.1 % 113 90 25.6 %

Net income 76 41 85.4 % 82 76 7.9 %

____________________________________

(1) Please read “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP.

(2) Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows:

Three Months Ended

Three Months Ended June 30, Six Months Ended June 30,

(per WSEE per month) 2020 2019 2020 2019

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WSEE payroll cost

7,843 7,663 8,278 8,052

Revenues $ 1,453 $ 1,499 $ 1,590 $ 1,600

New Accounting Pronouncements

Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies – Recently Adopted Accounting Standards," for new accounting pronouncements information.

Insperity | 2020 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

2 unchanged sentences

• Adjusted EBITDA

• Adjusted EPS

Insperity | 2020 Second Quarter Form 10-Q 20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our growth in the number of WSEEs paid is affected by three primary sources:

new client sales, client retention and the net change in existing clients through WSEE new hires and layoffs.

During the first quarter of 2020 (“ Q1 2020 ”), the number of WSEEs paid from new client sales increased over the first quarter of 2019 (“ Q1 2019 ”).

However, n et gains in our client base and client retention declined during Q1 2020 compared to Q1 2019 .

• During the second quarter of 2020 (“Q2 2020”), the number of WSEEs paid from new client sales and net gain (loss) in our client base declined over the second quarter of 2019 (“Q2 2019”), due primarily to layoffs and furloughs of WSEEs by our clients resulting from the effects of the on-going COVID-19 pandemic.

However, client retention remained consistent compared to Q2 2019.

• During the first six months of 2020 (“YTD 2020”), the number of WSEEs paid from new client sales and net gain (loss) in our client base declined over the first six months of 2019 (“YTD 2019”), due primarily to layoffs and furloughs of WSEEs by our clients resulting from the effects of the on-going COVID-19 pandemic.

Client retention also declined compared to YTD 2019.

Average WSEEs Paid and

Year-over-Year Growth Percentage

Insperity | 2020 First Quarter Form 10-Q

Insperity | 2020 Second Quarter Form 10-Q 21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Because our total markup is computed as a percentage of payroll cost, certain revenues are also affected by the payroll cost of WSEEs, which may fluctuate based on the composition of the WSEE base, inflationary effects on wage levels and differences in the local economies of our markets.

Insperity | 2020 First Quarter Form 10-Q

Insperity | 2020 Second Quarter Form 10-Q 22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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(in thousands)

First Quarter 2020 Compared to First Quarter 2019

Our revenues for Q1 2020 were $1.2 billion , an increase of 6.6% , primarily due to the following:

Second Quarter 2020 Compared to Second Quarter 2019

Our revenues for Q2 2020 were $1.0 billion, a decrease of 4.8%, primarily due to the following:

• Average WSEEs paid decreased 1.8%.

• Revenues per WSEE per month decreased 3.1%, or $46, primarily due to $44.8 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit.

In addition, we provided clients with $11.6 million of comprehensive service fee credits applied generally on a WSEE basis across our active client base to assist clients in addressing the unprecedented economic impact of the COVID-19 pandemic.

First Six Months 2020 Compared to First Six Months 2019

Our revenues for YTD 2020 were $2.2 billion, an increase of 1.2%, primarily due to the following:

• Average WSEEs paid increased 1.8%.

Revenues per WSEE per month increased 1.1% , or $18 .

• Revenues per WSEE per month decreased 0.6%, or $10 primarily due to $44.8 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit.

Insperity | 2020 Second Quarter Form 10-Q 23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We provide our PEO HR Outsourcing solutions to small and medium-sized businesses in strategically selected markets throughout the United States.

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(in thousands)

Insperity | 2020 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The percentage of total PEO HR Outsourcing solutions revenue in our significant markets includes the following:

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As a result, our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings.

Our gross profit per WSEE is primarily determined by our ability to accurately estimate and control direct costs and our ability to incorporate changes in these costs into the gross billings charged to PEO HR Outsourcing solutions clients, which are subject to pricing arrangements that are typically renewed annually.

We use gross profit per WSEE per month as our principal measurement of relative performance at the gross profit level.

Insperity | 2020 First Quarter Form 10-Q

Insperity | 2020 Second Quarter Form 10-Q 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gross Profit and

Year-over-Year Growth Percentage

(in thousands)

clients, which are subject to pricing arrangements that are typically renewed annually.

We use gross profit per WSEE per month as our principal measurement of relative performance at the gross profit level.

Gross Profit and Year-over-Year Growth Percentage (in thousands)

Gross Profit per WSEE per Month and

Year-over-Year Growth Percentage

First Quarter 2020 Compared to First Quarter 2019

Second Quarter 2020 Compared to Second Quarter 2019

Gross profit for Q2 2020 increased 26.8% to $220.2 million compared to $173.7 million in Q2 2019.

Gross profit per WSEE per month for Q1 2020 decreased $7 to $328 compared to $335 in Q1 2019 .

Gross profit per WSEE per month for Q2 2020 increased $72 to $322 compared to $250 in Q2 2019.

Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses.

Our revenues and direct costs per WSEE per month increased $18 and $25 , respectively.

Our revenues and direct costs per WSEE per month decreased $46 and $118, respectively, due in part to FICA deferral elections by clients pursuant to the CARES Act in Q2 2020.

The net decrease in costs between Q2 2020 and Q2 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $19.8 million as discussed below.

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Benefits costs

Th e cost of group health insurance and related employee benefits increased $32 per WSEE per month and increased 5.8% on a cost per covered employee basis due primarily to an increase in the number of large individual healthcare claimants in Q1 2020 over the low level in Q1 2019, in addition to our historical healthcare trends.

The percentage of WSEEs covered under our health insurance plans was 66.9% in Q1 2020 compared to 67.4% in Q1 2019 .

Insperity | 2020 First Quarter Form 10-Q

• The cost of group health insurance and related employee benefits decreased $48 per WSEE per month and decreased 10.7% on a cost per covered employee basis due primarily to a decrease in claims as a result of the

Insperity | 2020 Second Quarter Form 10-Q 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $1.5 million, or $2 per WSEE per month, in Q1 2020 compared to a decrease in costs of $0.3 million, or flat on per WSEE per month basis, in Q1 2019 .

lower utilization and deferral of non-essential healthcare procedures in response to COVID-19 governmental requirements or guidance.

• The percentage of WSEEs covered under our health insurance plans was 69.3% in Q2 2020 compared to 66.6% in Q2 2019.

• Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $10.4 million, or $15 per WSEE per month, in Q2 2020 compared to an increase in costs of $7.3 million, or $10 per WSEE per month, in Q2 2019.

Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.

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Our continued discipline around our client selection, safety and claims management contributed to the decrease in our cost per WSEE and, as a result, has allowed for claims within our policy periods to be closed out at amounts below our original cost estimates.

Workers’ compensation costs increased 2.1% , but decreased $1 on a per WSEE per month basis, in Q1 2020 compared to Q1 2019 .

• Workers’ compensation costs decreased 15.7%, or $3 per WSEE per month, in Q2 2020 compared to Q2 2019.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in Q2 2020 were 0.29% compared to 0.34% in Q2 2019.

As a result of closing out claims at lower than expected costs, we recorded a reduction in workers’ compensation costs of $10.1 million , or 0.20% of non-bonus payroll costs, in Q1 2020 compared to a reduction of $7.8 million , or 0.17% of non-bonus payroll costs, in Q1 2019 .

• We recorded a reduction in workers’ compensation costs of $13.9 million, or 0.28% of non-bonus payroll costs, in Q2 2020 compared to a reduction of $11.8 million, or 0.24% of non-bonus payroll costs, in Q2 2019, primarily as a result of closing out claims at lower than expected costs.

Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs

Payroll taxes increased 4.5% on an 8.5% increase in payroll costs, but decreased $7 on a per WSEE per month basis primarily due to lower FICA as a result of Internal Revenue Service self-employed owner tax reporting changes for PEOs and lower unemployment tax rates in 2020.

Payroll taxes as a percentage of payroll costs were 7.8% in Q1 2020 and 8.1% in Q1 2019 .

• Payroll taxes decreased 14.0% on a 0.5% increase in payroll costs, or $66 per WSEE per month, primarily due to $44.8 million of FICA deferral elections by clients pursuant to the CARES Act and Internal Revenue Service self-employed owner tax reporting changes for PEOs in 2020.

• Payroll taxes as a percentage of payroll costs decreased to 5.9% in Q2 2020 compared to 6.9% in Q2 2019, primarily due to $44.8 million of FICA deferral elections by clients pursuant to the CARES Act and Internal Revenue Service self-employed owner tax reporting changes for PEOs in 2020.

First Six Months 2020 Compared to First Six Months 2019

Gross profit for YTD 2020 increased 13.4% to $454.3 million compared to $400.5 million in YTD 2019.

Gross profit per WSEE per month for YTD 2020 increased $33 to $325 compared to $292 in YTD 2019.

Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses.

Our revenues and direct costs per WSEE per month decreased $10 and $43, respectively, due primarily to FICA deferral elections by clients pursuant to the CARES Act in YTD 2020.

The net decrease in costs between YTD 2020 and YTD 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $9.7 million as discussed below.

The primary direct cost components changed as follows:

Benefits costs

• The cost of group health insurance and related employee benefits decreased $8 per WSEE per month and decreased 2.8% on a cost per covered employee basis due primarily to a decrease in claims as a result of lower utilization and the deferral of non-essential healthcare procedures in response to COVID-19 governmental requirements or guidance.

Insperity | 2020 Second Quarter Form 10-Q 26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• The percentage of WSEEs covered under our health insurance plans was 68.1% in YTD 2020 compared to 67.0% in YTD 2019.

• Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $3.0 million, or $2 per WSEE per month, in YTD 2020 compared to an increase in costs of $3.5 million, or $3 per WSEE per month, in YTD 2019.

Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs

• Workers’ compensation costs decrease 6.0%, or $2 on a per WSEE per month basis, in YTD 2020 compared to YTD 2019.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2020 were 0.34% compared to 0.38% in YTD 2019.

• We recorded a reduction in workers’ compensation costs of $22.2 million, or 0.22% of non-bonus payroll costs, in YTD 2020 compared to a reduction of $19.0 million, or 0.20% of non-bonus payroll costs, in YTD 2019, primarily as a result of closing out claims at lower than expected costs.

Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs

• Payroll taxes decreased 3.7% on a 4.7% increase in payroll costs, or $33 per WSEE per month, primarily due to $44.8 million of FICA deferral elections by clients pursuant to the CARES Act and Internal Revenue Service self-employed owner tax reporting changes for PEOs in 2020.

• Payroll taxes as a percentage of payroll costs decreased to 6.9% in YTD 2020 compared to 7.5% in YTD 2019, primarily due to $44.8 million of FICA deferral elections by clients pursuant to the CARES Act and Internal Revenue Service self-employed owner tax reporting changes for PEOs in 2020.

Operating Expenses

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◦ outside professional service fees related to legal, consulting and accounting services

Insperity | 2020 Second Quarter Form 10-Q 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦ administrative costs, such as postage, printing and supplies

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◦ technology and facility repairs and maintenance costs

Insperity | 2020 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Depreciation and amortization — Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices and technology infrastructure.

First Quarter 2020 Compared to First Quarter 2019

Second Quarter 2020 Compared to Second Quarter 2019

The following table presents certain information related to our operating expenses:

Three Months Ended March 31,

(in thousands, except per WSEE)

Three Months Ended June 30,

(in thousands, except per WSEE) 2020 2019 % Change 2020 2019 % Change

Salaries $ 90,710 $ 74,696 21.4 % $ 133 $ 107 24.3 %

Stock-based compensation 10,694 8,256 29.5 % 16 11 45.5 %

Commissions 7,475 7,741 (3.4) % 11 11 —

Advertising 5,720 7,548 (24.2) % 8 11 (27.3) %

General and administrative 24,755 29,866 (17.1) % 35 43 (18.6) %

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Operating expenses for Q2 2020 increased 9.1% to $147.3 million compared to $135.0 million in Q2 2019.

Operating expenses per WSEE per month for Q1 2020 decreased 0.5% to $208 compared to $209 in Q1 2019 .

Salaries of corporate and sales staff for Q1 2020 increased 3.7% to $86.5 million , but decreased $2 on a per WSEE per month basis, compared to Q1 2019 .

This increase was primarily due to a 6.7% increase in corporate headcount, including an 11.2% increase in total BPAs in Q1 2020 compared to Q1 2019 , partially offset by lower incentive compensation expense in Q1 2020 .

Stock based compensation expense for Q1 2020 increased 8.5% to $6.6 million , but remained flat on a per WSEE per month basis, compared to Q1 2019 .

The increase was primarily due to awards issued under our incentive plan and the acceleration of expense for employees who meet the requirements for continued vesting.

Operating expenses per WSEE per month for Q2 2020 increased 10.8% to $215 compared to $194 in Q2 2019.

• Salaries of corporate and sales staff for Q2 2020 increased 21.4% to $90.7 million, or $26 per WSEE per month, compared to Q2 2019.

This increase was primarily due to a 6.2% increase in corporate headcount, including a 14.4% increase in total BPAs in Q2 2020 compared to Q2 2019, and included an acceleration in the timing of a portion of incentive compensation into the second quarter and paid-time off accruals associated with higher than normal unused vacation hours.

• Stock based compensation expense for Q2 2020 increased 29.5% to $10.7 million, or $5 per WSEE per month, compared to Q2 2019.

The increase was primarily due to awards issued under our incentive plan and the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting.

Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.

Commissions expense for Q1 2020 increased 21.7% to $8.5 million , or $2 per WSEE per month, compared to Q1 2019 .

The increase was primarily due to commissions associated with growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during Q1 2020.

Additionally, as a result of the extension of our fall campaign into Q1 2020, the bonuses paid to sales managers increased in Q1 2020 compared to Q1 2019.

Advertising expense for Q1 2020 decreased 3.9% to $4.8 million , but remained flat on a per WSEE per month basis, compared to Q1 2019 .

The decrease was primarily due to decreases in sponsorships and television advertising, which was partially offset by an increase in internet advertising.

General and administrative expenses for Q1 2020 increased 5.1% to $34.9 million , but decreased $2 on a per WSEE per month basis, compared to Q1 2019 .

The increase was primarily due to increased rent, technology licensing costs, printing and professional services.

Travel and training costs were essentially flat compared to prior year due to our decision to restrict travel across the organization in the second half of March in response to the COVID-19 pandemic.

We expect a reduction in travel and training costs for the remainder of 2020.

• Commissions expense for Q2 2020 decreased 3.4% to $7.5 million, but remained flat on a per WSEE per month basis, compared to Q2 2019.

The decrease was primarily due to reductions in commissions associated with our other business performance solutions offerings and PEO HR Outsourcing solutions, partially offset by an increase in the amount of sales channel referral fees paid during Q2 2020.

• Advertising expense for Q2 2020 decreased 24.2% to $5.7 million, or $3 per WSEE per month, compared to Q2 2019.

The decrease was primarily due to the cancellation of the 2020 Insperity Invitational and decreases in trade shows and events due to COVID-19, partially offset by an increase in internet advertising.

• General and administrative expenses for Q2 2020 decreased 17.1% to $24.8 million, or $8 per WSEE per month, compared to Q2 2019.

The decrease was primarily due to reductions in travel and training costs in response to the COVID-19 pandemic, partially offset by increases in technology licensing costs, rent and professional services.

• Depreciation and amortization expense for Q2 2020 increased 14.5% to $7.9 million, or $1 per WSEE per month, compared to Q2 2019.

The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

Insperity | 2020 Second Quarter Form 10-Q 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

First Six Months 2020 Compared to First Six Months 2019

Six Months Ended June 30,

(in thousands, except per WSEE) 2020 2019 % Change 2020 2019 % Change

Salaries $ 177,211 $ 158,076 12.1 % $ 127 $ 115 10.4 %

Stock-based compensation 17,246 14,296 20.6 % 12 10 20.0 %

Commissions 15,935 14,693 8.5 % 11 11 —

Advertising 10,553 12,579 (16.1) % 8 9 (11.1) %

General and administrative 59,608 63,028 (5.4) % 43 45 (4.4) %

Depreciation and amortization 15,510 13,599 14.1 % 11 11 —

Total operating expenses $ 296,063 $ 276,271 7.2 % $ 212 $ 201 5.5 %

Operating expenses for YTD 2020 increased 7.2% to $296.1 million compared to $276.3 million in YTD 2019.

Operating expenses per WSEE per month for YTD 2020 increased 5.5% to $212 compared to $201 in YTD 2019.

• Salaries of corporate and sales staff for YTD 2020 increased 12.1% to $177.2 million, or $12 per WSEE per month, compared to YTD 2019.

This increase was primarily due to a 6.4% increase in corporate headcount, including a 12.8% increase in total BPAs in YTD 2020 compared to YTD 2019 and an acceleration in the timing of a portion of incentive compensation into the second quarter and paid-time off accruals associated with higher than normal unused vacation hours.

• Stock based compensation expense for YTD 2020 increased 20.6% to $17.2 million or $2 per WSEE per month, compared to YTD 2019.

The increase was primarily due to awards issued under our incentive plan and the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting.

Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.

• Commissions expense for YTD 2020 increased 8.5% to $15.9 million, but remained flat on a per WSEE per month basis, compared to YTD 2019.

The increase was primarily due to commissions associated with growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during 2020.

Additionally, as a result of the extension of our fall campaign into Q1 2020, the bonuses paid to sales managers increased in YTD 2020 compared to YTD 2019.

• Advertising expense for YTD 2020 decreased 16.1% to $10.6 million, or $1 per WSEE per month, compared to YTD 2019.

The decrease was primarily due to the cancellation of the 2020 Insperity Invitational and decreases in trade shows and events due to COVID-19, partially offset by an increase in internet advertising.

• General and administrative expenses for YTD 2020 decreased 5.4% to $59.6 million, or $2 per WSEE per month, compared to YTD 2019.

The decrease was primarily due to decreased travel and training expenses in response to the COVID-19 pandemic, partially offset by increases in technology licensing costs, rent and professional services.

• Depreciation and amortization expense for YTD 2020 increased 14.1% to $15.5 million, but remained flat on a per WSEE per month basis, compared to YTD 2019.

The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

Other Income (Expense)

Other Income (expense) for Q1 2020 was net expense of $0.5 million compared to net income of $1.6 million in Q1 2019 , the net decrease was primarily due to decreased interest income on our marketable securities investments and increased interest expense related to the higher outstanding balance on our credit facility.

Other Income (expense) for Q2 2020 was an expense of $1.9 million compared to income of $1.2 million in Q2 2019, and an expense of $2.3 million in YTD 2020 compared to income of $2.7 million in YTD 2019.

The net decrease was primarily due to decreased interest income on our marketable securities investments and increased interest expense related to the higher outstanding balance on our credit facility.

Please read Note 5 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.

Insperity | 2020 First Quarter Form 10-Q

Insperity | 2020 Second Quarter Form 10-Q 29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Income Tax Expense

Three Months Ended

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Effective income tax rate 27.1% 28.4% 26.9% 17.4%

For the three months ended March 31, 2020 , our provision for income taxes differed from the U.S.

For the six months ended June 30, 2020, our provision for income taxes differed from the U.S.

statutory rate primarily due to state income taxes, non-deductible expenses and vesting of restricted and long-term incentive stock awards.

During the first three months of 2020 and 2019 , we recognized an income tax benefit of $2.0 million and $14.5 million, respectively, related to the vesting of long-term incentive and restricted stock awards in both periods.

During the first six months of 2020 and 2019, we recognized an income tax benefit of $2.0 million and $14.5 million, respectively, related to the vesting of long-term incentive and restricted stock awards.

Non-GAAP Financial Measures

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Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the tables below.

Non-GAAP Measure

Benefit of Non-GAAP Measure

Non-GAAP Measure Definition Benefit of Non-GAAP Measure

Non-bonus payroll cost

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• non-cash stock-based compensation.

Insperity | 2020 First Quarter Form 10-Q

Insperity | 2020 Second Quarter Form 10-Q 30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Following is a reconciliation of payroll cost (GAAP) to non-bonus payroll costs (non-GAAP):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except per WSEE per month)

2020 2019 2020 2019

$ WSEE $ WSEE $ WSEE $ WSEE

Payroll cost $ 5,362,317 $ 7,843 $ 5,333,698 $ 7,663 $ 11,569,588 $ 8,278 $ 11,052,358 $ 8,052

Bonus payroll cost

453,121 662 451,828 649 1,504,089 1,076 1,442,406 1,051

Non-bonus payroll cost

$ 4,909,196 $ 7,181 $ 4,881,870 $ 7,014 $ 10,065,499 $ 7,202 $ 9,609,952 $ 7,001

% Change period over period

0.6 % 2.4 % 14.7 % 0.8 % 4.7 % 2.9 % 15.3 % 0.7 %

Following is a reconciliation of cash, cash equivalents and marketable securities (GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP):

(in thousands)

March 31, 2020

December 31, 2019

(in thousands) June 30, 2020 December 31, 2019

Cash, cash equivalents and marketable securities $ 491,351 $ 402,070

Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions

190,909 234,553

Client prepayments

31,470 59,612

Adjusted cash, cash equivalents and marketable securities $ 268,972 $ 107,905

Following is a reconciliation of net income (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except per WSEE per month)

2020 2019 2020 2019

$ WSEE $ WSEE $ WSEE $ WSEE

Net income $ 51,851 $ 76 $ 28,556 $ 41 $ 113,943 $ 82 $ 104,845 $ 76

Income tax expense 19,286 28 11,327 16 41,932 30 22,063 16

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Depreciation and amortization

7,908 12 6,908 11 15,510 11 13,599 11

EBITDA 81,264 119 48,430 70 175,966 126 143,827 105

Stock-based compensation

10,694 16 8,256 11 17,246 12 14,296 10

Adjusted EBITDA $ 91,958 $ 135 $ 56,686 $ 81 $ 193,212 $ 138 $ 158,123 $ 115

% Change period over period

62.2 % 66.7 % 21.6 % 6.6 % 22.2 % 20.0 % 21.2 % 5.5 %

Insperity | 2020 Second Quarter Form 10-Q 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a reconciliation of net income (GAAP) to adjusted net income (non-GAAP):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2020 2019 2020 2019

Net income $ 51,851 $ 28,556 $ 113,943 $ 104,845

Non-GAAP adjustments:

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Total non-GAAP adjustments 10,694 8,256 17,246 14,296

Tax effect (2,899) (2,345) (4,650) (3,090)

Adjusted net income $ 59,646 $ 34,467 $ 126,539 $ 116,051

% Change period over period 73.1 % 20.2 % 9.0 % 31.5 %

Insperity | 2020 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(amounts per share) 2020 2019 2020 2019

Diluted EPS $ 1.33 $ 0.69 $ 2.91 $ 2.54

Non-GAAP adjustments:

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Total non-GAAP adjustments 0.27 0.20 0.44 0.35

Tax effect (0.06) (0.06) (0.11) (0.08)

Adjusted EPS $ 1.54 $ 0.83 $ 3.24 $ 2.81

% Change period over period

85.5 % 22.1 % 15.3 % 34.4 %

Liquidity and Capital Resources

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We have in the past sought, and may in the future seek, to raise additional capital or take other steps to increase or manage our liquidity and capital resources.

We had $424.2 million in cash, cash equivalents and marketable securities at March 31, 2020 , of which approximately $235.2 million was payable in early April 2020 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $22.1 million represented client prepayments that were payable in April 2020 .

We had $491.4 million in cash, cash equivalents and marketable securities at June 30, 2020, of which approximately $190.9 million was payable in early July 2020 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $31.5 million represented client prepayments that were payable in July 2020.

In March 2020, we borrowed $100.0 million under the Facility, which increased working capital.

At March 31, 2020 , we had working capital of $190.8 million compared to $105.7 million at December 31, 2019 .

At June 30, 2020, we had working capital of $228.1 million compared to $105.7 million at December 31, 2019.

We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under the Facility will be adequate to meet our liquidity requirements for the remainder of 2020.

We intend to rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs, which we are carefully monitoring in light of the significant uncertainty created by the COVID-19 pandemic.

As of March 31, 2020 , we had an outstanding letter of credit and borrowings totaling $370.4 million under the Facility.

As of June 30, 2020, we had an outstanding letter of credit and borrowings totaling $370.4 million under the Facility.

Please read Note 5 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.

Insperity | 2020 Second Quarter Form 10-Q 32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash Flows from Operating Activities

Net cash provided by operating activities in the first three months of 2020 was $23.8 million .

Net cash provided by operating activities in the first six months of 2020 was $114.9 million.

Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients.

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therefore, operating cash flows decrease in the reporting periods that end on a Friday or a Monday.

In the period ended March 31, 2020 , the last business day of the reporting period was a Tuesday , client prepayments were $22.1 million and employment taxes and other deductions were $235.2 million .

In the period ended March 31, 2019, the last business day of the reporting period was a Friday, client prepayments were $32.4 million and employment taxes and other deductions were $279.6 million.

Insperity | 2020 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the period ended June 30, 2020, the last business day of the reporting period was a Tuesday, client prepayments were $31.5 million and employment taxes and other deductions were $190.9 million.

In the period ended June 30, 2019, the last business day of the reporting period was a Friday, client prepayments were $37.4 million and employment taxes and other deductions were $218.0 million.

• Workers’ compensation plan funding – During YTD 2020, we received $24.8 million for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital.

• Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter.

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In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows.

As of March 31, 2020 , premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $36.8 million surplus, $27.8 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at March 31, 2020 , were $40.7 million , which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

As of June 30, 2020, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $19.5 million surplus, $10.5 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at June 30, 2020, were $23.4 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

• Operating results – Our net income has a significant impact on our operating cash flows.

Our adjusted net income decreased 18.0% to $66.9 million in the first three months ended March 31, 2020 , compared to $81.6 million in the first three months ended March 31, 2019 .

Please read “Results of Operations – First Quarter 2020 Compared to First Quarter 2019 .”

Our adjusted net income increased 9.0% to $126.5 million in the first six months ended June 30, 2020, compared to $116.1 million in the first six months ended June 30, 2019.

Please read “Results of Operations – First Six Months 2020 Compared to First Six Months 2019.”

Cash Flows from Investing Activities

Net cash flows used in investing activities were $0.3 million for the three months ended March 31, 2020 , primarily due to property and equipment purchases of $15.6 million offset by $15.3 million of marketable securities maturities, net of purchases.

Net cash flows used in investing activities were $36.8 million for the six months ended June 30, 2020, primarily due to property and equipment purchases of $39.5 million partially offset by $2.7 million of marketable securities maturities, net of purchases.

Cash Flows from Financing Activities

Net cash flows provided by financing activities were $25.6 million for the three months ended March 31, 2020 .

Net cash flows provided by financing activities were $11.9 million for the six months ended June 30, 2020.

We borrowed $100.0 million under the Facility for general corporate purposes, repurchased or withheld $61.2 million in stock and paid $31.1 million in dividends.

Insperity | 2020 First Quarter Form 10-Q

During Q2 2020, we elected not to repurchase any shares in light of the economic uncertainties created by the COVID-19 pandemic.

Insperity | 2020 Second Quarter Form 10-Q 33

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES

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