INSPERITY, INC. 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) June 30, 2020 December 31, 2019 Assets Cash and cash equivalents $ 459,399 $ 367,342 Restricted cash 45,216 49,295 Marketable securities 31,952 34,728 Accounts receivable, net 473,935 465,779 Prepaid insurance 23,494 10,418 Other current assets 34,651 43,493 Income taxes receivable — 3,691 Total current assets 1,068,647 974,746 Property and equipment, net of accumulated depreciation 177,762 147,706 Right-of-use leased assets 57,421 56,886 Prepaid health insurance 9,000 9,000 Deposits – health insurance 8,100 8,100 Deposits – workers’ compensation 177,944 175,913 Goodwill and other intangible assets, net 12,708 12,714 Deferred income taxes, net — 3,956 Other assets 6,151 5,975 Total assets $ 1,517,733 $ 1,394,996 Liabilities and stockholders' equity Accounts payable $ 2,885 $ 4,565 Payroll taxes and other payroll deductions payable 219,492 277,248 Accrued worksite employee payroll cost 409,068 401,859 Accrued health insurance costs 29,714 21,180 Accrued workers’ compensation costs 48,618 52,868 Accrued corporate payroll and commissions 41,507 52,612 Other accrued liabilities 60,742 58,713 Income taxes payable 28,537 — Total current liabilities 840,563 869,045 Accrued workers’ compensation cost, net of current 197,501 193,609 Long-term debt 369,400 269,400 Operating lease liabilities, net of current 60,815 58,863 Deferred income taxes, net 712 — Other accrued liabilities, net of current 4,104 — Total noncurrent liabilities 632,532 521,872 Commitments and contingencies — — Common stock 555 555 Additional paid-in capital 54,783 48,141 Treasury stock, at cost ( 592,313 ) ( 544,102 ) Retained earnings 581,613 499,485 Total stockholders’ equity 44,638 4,079 Total liabilities and stockholders’ equity $ 1,517,733 $ 1,394,996 See accompanying notes. Insperity | 2020 Second Quarter Form 10-Q 4 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2020 2019 2020 2019 Revenues (1) $ 993,366 $ 1,043,316 $ 2,222,849 $ 2,196,326 Payroll taxes, benefits and workers’ compensation costs 773,117 869,581 1,768,578 1,795,874 Gross profit 220,249 173,735 454,271 400,452 Salaries, wages and payroll taxes 90,710 74,696 177,211 158,076 Stock-based compensation 10,694 8,256 17,246 14,296 Commissions 7,475 7,741 15,935 14,693 Advertising 5,720 7,548 10,553 12,579 General and administrative expenses 24,755 29,866 59,608 63,028 Depreciation and amortization 7,908 6,908 15,510 13,599 Total operating expenses 147,262 135,015 296,063 276,271 Operating income 72,987 38,720 158,208 124,181 Other income (expense): Interest income 369 2,802 2,248 6,047 Interest expense ( 2,219 ) ( 1,639 ) ( 4,581 ) ( 3,320 ) Income before income tax expense 71,137 39,883 155,875 126,908 Income tax expense 19,286 11,327 41,932 22,063 Net income $ 51,851 $ 28,556 $ 113,943 $ 104,845 Less distributed and undistributed earnings allocated to participating securities ( 276 ) ( 309 ) ( 724 ) ( 1,183 ) Net income allocated to common shares $ 51,575 $ 28,247 $ 113,219 $ 103,662 Net income per share of common stock Basic $ 1.34 $ 0.69 $ 2.93 $ 2.55 Diluted $ 1.33 $ 0.69 $ 2.91 $ 2.54 ____________________________________ (1) Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2020 2019 2020 2019 Gross billings $ 6,355,683 $ 6,377,014 $ 13,792,437 $ 13,248,684 Less: WSEE payroll cost 5,362,317 5,333,698 11,569,588 11,052,358 Revenues $ 993,366 $ 1,043,316 $ 2,222,849 $ 2,196,326 See accompanying notes. Insperity | 2020 Second Quarter Form 10-Q 5 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (in thousands) 2020 2019 Cash flows from operating activities Net income $ 113,943 $ 104,845 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,510 13,599 Stock-based compensation 17,246 14,296 Deferred income taxes 4,668 8,260 Changes in operating assets and liabilities: Accounts receivable ( 8,156 ) ( 23,512 ) Prepaid insurance ( 13,076 ) ( 16,058 ) Other current assets 8,842 ( 2,073 ) Other assets and ROU assets 6,979 ( 2,033 ) Accounts payable ( 1,680 ) ( 4,074 ) Payroll taxes and other payroll deductions payable ( 57,756 ) ( 16,472 ) Accrued worksite employee payroll expense 7,209 43,553 Accrued health insurance costs 8,534 ( 14,777 ) Accrued workers’ compensation costs ( 357 ) 2,133 Accrued corporate payroll, commissions and other accrued liabilities ( 19,273 ) ( 22,878 ) Income taxes payable/receivable 32,228 ( 12,381 ) Total adjustments 918 ( 32,417 ) Net cash provided by operating activities 114,861 72,428 Cash flows from investing activities Marketable securities: Purchases ( 25,438 ) ( 60,609 ) Proceeds from dispositions 484 5,499 Proceeds from maturities 27,625 55,110 Property and equipment: Purchases ( 39,466 ) ( 17,207 ) Net cash used in investing activities ( 36,795 ) ( 17,207 ) Cash flows from financing activities Purchase of treasury stock ( 61,230 ) ( 38,796 ) Dividends paid ( 31,074 ) ( 24,740 ) Borrowings under revolving line of credit 100,000 25,000 Other 4,247 3,763 Net cash provided by (used in) financing activities 11,943 ( 34,773 ) Net increase in cash, cash equivalents and restricted cash 90,009 20,448 Cash, cash equivalents and restricted cash beginning of period 592,550 535,474 Cash, cash equivalents and restricted cash end of period $ 682,559 $ 555,922 Insperity | 2020 Second Quarter Form 10-Q 6 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Six Months Ended June 30, (in thousands) 2020 2019 Supplemental schedule of cash and cash equivalents and restricted cash Cash and cash equivalents $ 367,342 $ 326,773 Restricted cash 49,295 42,227 Deposits – workers’ compensation 175,913 166,474 Cash, cash equivalents and restricted cash beginning of period $ 592,550 $ 535,474 Cash and cash equivalents $ 459,399 $ 324,926 Restricted cash 45,216 43,268 Deposits – workers’ compensation 177,944 187,728 Cash, cash equivalents and restricted cash end of period $ 682,559 $ 555,922 Supplemental operating lease cash flow information: ROU assets obtained in exchange for lease obligations $ 10,196 $ 11,894 See accompanying notes. Insperity | 2020 Second Quarter Form 10-Q 7 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Six Months Ended June 30, 2020 and 2019 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at December 31, 2019 55,489 $ 555 $ 48,141 $ ( 544,102 ) $ 499,485 $ 4,079 Purchase of treasury stock, at cost — — — ( 61,230 ) — ( 61,230 ) Issuance of long-term incentive awards and dividend equivalents — — ( 7,088 ) 7,898 ( 810 ) — Stock-based compensation expense — — 13,341 3,905 — 17,246 Other — — 389 1,216 — 1,605 Dividends paid — — — — ( 31,074 ) ( 31,074 ) Unrealized gain on marketable securities, net of tax — — — — 69 69 Net income — — — — 113,943 113,943 Balance at June 30, 2020 55,489 $ 555 $ 54,783 $ ( 592,313 ) $ 581,613 $ 44,638 Balance at December 31, 2018 55,489 $ 555 $ 36,752 $ ( 357,569 ) $ 397,938 $ 77,676 Purchase of treasury stock, at cost — — — ( 38,796 ) — ( 38,796 ) Issuance of long-term incentive awards and dividend equivalents — — ( 7,695 ) 8,646 ( 951 ) — Stock-based compensation expense — — 10,776 3,520 — 14,296 Other — — 1,176 369 — 1,545 Dividends paid — — — — ( 24,740 ) ( 24,740 ) Unrealized gain on marketable securities, net of tax — — — — 63 63 Net income — — — — 104,845 104,845 Balance at June 30, 2019 55,489 $ 555 $ 41,009 $ ( 383,830 ) $ 477,155 $ 134,889 Insperity | 2020 Second Quarter Form 10-Q 8 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) For the Three Months Ended June 30, 2020 and 2019 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at March 31, 2020 55,489 $ 555 $ 46,327 $ ( 595,487 ) $ 545,295 $ ( 3,310 ) Purchase of treasury stock, at cost — — — ( 27 ) — ( 27 ) Stock-based compensation expense — — 8,448 2,246 — 10,694 Other — — 8 955 — 963 Dividends paid — — — — ( 15,517 ) ( 15,517 ) Unrealized loss on marketable securities, net of tax — — — — ( 16 ) ( 16 ) Net income — — — — 51,851 51,851 Balance at June 30, 2020 55,489 $ 555 $ 54,783 $ ( 592,313 ) $ 581,613 $ 44,638 Balance at March 31, 2019 55,489 $ 555 $ 33,833 $ ( 376,097 ) $ 460,903 $ 119,194 Purchase of treasury stock, at cost — — — ( 9,759 ) — ( 9,759 ) Stock-based compensation expense — — 6,436 1,820 — 8,256 Other — — 740 206 — 946 Dividends paid — — — — ( 12,354 ) ( 12,354 ) Unrealized gain on marketable securities, net of tax — — — — 50 50 Net income — — — — 28,556 28,556 Balance at June 30, 2019 55,489 $ 555 $ 41,009 $ ( 383,830 ) $ 477,155 $ 134,889 See accompanying notes. Insperity | 2020 Second Quarter Form 10-Q 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our most comprehensive HR services offerings are provided through our professional employer organization (“PEO”) services, known as Workforce Optimization ® and Workforce Synchronization TM solutions (together, our “PEO HR Outsourcing solutions”), which encompass a broad range of HR functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management solution, the Insperity Premier TM platform. In addition to our PEO HR Outsourcing solutions, we also offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration. We also offer a number of other business performance solutions, including Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management Services, Retirement Services and Insurance Services, many of which are offered as a cloud-based software solution. These other products or services are offered separately or with our other solutions. The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements at and for the year ended December 31, 2019. Our Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements. Our Condensed Consolidated Balance Sheet at June 30, 2020 and our Consolidated Statements of Operations for the three and six month periods ended June 30, 2020 and 2019, our Consolidated Statements of Cash Flows for the six month periods ended June 30, 2020 and 2019 and our Consolidated Statements of Stockholders’ Equity for the six month periods ended June 30, 2020 and 2019, have been prepared by us without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. 2. Accounting Policies Health Insurance Costs We provide group health insurance coverage to our WSEEs in our PEO HR Outsourcing solutions through a national network of carriers, including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, and Tufts, all of which provide fully insured policies or service contracts. The policy with United provides approximately 87 % of our health insurance coverage. While the policy with United is a fully-insured plan, as a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Effective January 1, 2020, under the amended agreement with United, we no longer have financial responsibilities for a participant’s annual claim costs that exceed $1 million. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense, which is a component of direct costs, in our Consolidated Statements of Operations. The estimated incurred claims are based upon: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant Insperity | 2020 Second Quarter Form 10-Q 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) demographics and other factors are incorporated into the benefits costs, which requires a significant level of judgment. Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Condensed Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Condensed Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $ 9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $ 6.5 million at June 30, 2020, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of June 30, 2020, Plan Costs were less than the net premiums paid and owed to United by $ 19.5 million. As this amount is in excess of the agreed-upon $ 9.0 million surplus maintenance level, the $ 10.5 million difference is included in prepaid insurance, a current asset, in our Condensed Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at June 30, 2020 were $ 23.4 million, which is included in accrued health insurance costs, a current liability in our Condensed Consolidated Balance Sheets. Our benefits costs incurred in the first six months of 2020 included a reduction of $ 3.0 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first six months of 2019 included a charge of $ 3.5 million for changes in estimated run-off related to prior periods. Workers’ Compensation Costs Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $ 1 million layer of claims per occurrence and, for claims over $ 1 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, we have financial responsibility to Chubb for the first $ 1.5 million layer of claims per occurrence and, for claims over $ 1.5 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1.5 million. Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the six months ended June 30, 2020 and 2019, we reduced accrued workers’ compensation costs by $ 22.2 million and $ 19.0 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in the 2020 period was 0.8 % and in the 2019 period was 2.3 %) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations. Insperity | 2020 Second Quarter Form 10-Q 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table provides the activity and balances related to incurred but not paid workers’ compensation claims: Six Months Ended June 30, (in thousands) 2020 2019 Beginning balance, January 1, $ 242,904 $ 229,639 Accrued claims 21,888 27,299 Present value discount, net of accretion 223 ( 2,703 ) Paid claims ( 22,298 ) ( 22,727 ) Ending balance $ 242,717 $ 231,508 Current portion of accrued claims $ 45,216 $ 43,267 Long-term portion of accrued claims 197,501 188,241 Total accrued claims $ 242,717 $ 231,508 The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at June 30, 2020 includes $ 3.4 million of workers’ compensation administrative fees. As of June 30, 2020 and 2019, the undiscounted accrued workers’ compensation costs were $ 261.4 million and $ 250.9 million, respectively. At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Condensed Consolidated Balance Sheets. During the first six months of 2020, we received $ 24.8 million for the return of excess claim funds related to the workers’ compensation program, which resulted in a net decrease to deposits – workers’ compensation. During the first six months of 2019, we funded a collateral deposit of $6.4 million for policy years prior to 2017, which increased deposits – workers’ compensation. At June 30, 2020, we had restricted cash of $ 45.2 million and deposits – workers’ compensation of $ 177.9 million. Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Condensed Consolidated Balance Sheets. Revenue and Direct Cost Recognition We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally have a term of 12 months, but are cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms. Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but unbilled of $ 463.1 million and $ 448.1 million at June 30, 2020 and December 31, 2019, respectively, are included in accounts receivable, net on our Condensed Consolidated Balance Sheets. Pursuant to the “practical expedients” provided under Accounting Standards Update (“ASU”) No 2014-09, we expense sales commissions when incurred because the terms of our contracts generally are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations. Insperity | 2020 Second Quarter Form 10-Q 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2020 2019 % Change 2020 2019 % Change Northeast $ 273,543 $ 270,475 1.1 % $ 617,401 $ 581,422 6.2 % Southeast 117,013 120,148 (2.6) % 258,175 250,054 3.2 % Central 177,022 179,443 (1.3) % 388,314 375,196 3.5 % Southwest 222,734 244,462 (8.9) % 494,658 514,294 (3.8) % West 192,310 215,639 (10.8) % 439,121 448,842 (2.2) % 982,622 1,030,167 (4.6) % 2,197,669 2,169,808 1.3 % Other revenue 10,744 13,149 (18.3) % 25,180 26,518 (5.0) % Total revenue $ 993,366 $ 1,043,316 (4.8) % $ 2,222,849 $ 2,196,326 1.2 % Recently Adopted Accounting Standards We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) effective January 1, 2020 with no material impact. Under this standard, we estimate our reserves using information about past events, current conditions and risk characteristics of our customer when assessing risk associated with the collectability of accounts receivables, including unbilled accounts receivables. We require clients to pay invoices for service fees not later than the same day as the applicable payroll date. As such, we generally do not require collateral. As of June 30, 2020, allowance for bad debts was immaterial. 3. Cash, Cash Equivalents and Marketable Securities The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments: June 30, 2020 December 31, 2019 (in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total Overnight holdings $ 398,668 $ — $ 398,668 $ 349,857 $ — $ 349,857 Investment holdings 43,278 31,952 75,230 13,218 34,728 47,946 Cash in demand accounts 29,378 — 29,378 36,521 — 36,521 Outstanding checks ( 11,925 ) — ( 11,925 ) ( 32,254 ) — ( 32,254 ) Total $ 459,399 $ 31,952 $ 491,351 $ 367,342 $ 34,728 $ 402,070 Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Our cash, cash equivalents and marketable securities at June 30, 2020 and December 31, 2019 included $ 190.9 million and $ 234.6 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $ 31.5 million and $ 59.6 million, respectively, in client prepayments. 4. Fair Value Measurements We account for our financial assets in accordance with Accounting Standard Codification 820, Fair Value Measurement . This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors: Insperity | 2020 Second Quarter Form 10-Q 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) • Level 1 - quoted prices in active markets using identical assets • Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs • Level 3 - significant unobservable inputs Fair Value of Instruments Measured and Recognized at Fair Value The following table summarizes the levels of fair value measurements of our financial assets: June 30, 2020 December 31, 2019 (in thousands) Total Level 1 Level 2 Total Level 1 Level 2 Money market funds $ 439,496 $ 439,496 $ — $ 363,075 $ 363,075 $ — U.S. Treasury bills 11,197 11,197 — 34,728 34,728 — Municipal bonds 23,205 — 23,205 — — — Total $ 473,898 $ 450,693 $ 23,205 $ 397,803 $ 397,803 $ — The municipal bond securities valued as Level 2 are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs. The following is a summary of our available-for-sale marketable securities: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2020 U.S. Treasury bills $ 11,170 $ 27 $ — $ 11,197 Municipal bonds 20,700 56 ( 1 ) 20,755 Total $ 31,870 $ 83 $ ( 1 ) $ 31,952 December 31, 2019 U.S. Treasury bills $ 34,716 $ 13 $ ( 1 ) $ 34,728 Total $ 34,716 $ 13 $ ( 1 ) $ 34,728 As of June 30, 2020, the contractual maturities of our marketable securities were as follows: (in thousands) Amortized Cost Estimated Fair Value Less than one year $ 31,870 $ 31,952 One to five years — — Total $ 31,870 $ 31,952 Fair Value of Other Financial Instruments The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments. Insperity | 2020 Second Quarter Form 10-Q 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of June 30, 2020, the carrying value of borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 5, “Long-Term Debt,” for additional information. 5. Long-Term Debt We have a revolving credit facility (the “Facility”) with borrowing capacity of up to $ 500 million. The Facility may be further increased to $ 550 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Our obligations under the Facility are secured by 65 % of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. At June 30, 2020, our outstanding balance on the Facility was $ 369.4 million, and we had an outstanding $ 1.0 million letter of credit issued under the Facility, resulting in an available borrowing capacity of $ 129.6 million. The Facility matures on September 13, 2024. Borrowings under the Facility bear interest at an annual rate equal to an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from 1.50 % to 2.25 % and (2) in the case of alternate base rate loans, from 0.00 % to 0.50 %. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50 % and (3) the 30-day LIBOR rate plus 2.00 %. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25 % per year. The average interest rate for the six month period ended June 30, 2020 was 2.82 %. Interest expense and unused commitment fees are recorded in other income (expense). Upon the discontinuation of LIBOR, the Facility provides that we and the agent will negotiate in good faith to amend the agreement to address such discontinuation and to place the parties in substantially the same economic position. The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at June 30, 2020. 6. Stockholders' Equity During the first six months of 2020, we repurchased or withheld an aggregate of 878,884 shares of our common stock, as described below. Repurchase Program Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. During the six months ended June 30, 2020, 728,000 shares were repurchased under the Repurchase Program. As of June 30, 2020, we were authorized to repurchase an additional 685,833 shares under the Repurchase Program. Withheld Shares During the six months ended June 30, 2020, we withheld 150,884 shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards. Dividends The Board declared quarterly dividends as follows: (amounts per share) 2020 2019 First quarter $ 0.40 $ 0.30 Second quarter 0.40 0.30 Insperity | 2020 Second Quarter Form 10-Q 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the six months ended June 30, 2020 and 2019, we paid dividends totaling $ 31.1 million and $ 24.7 million, respectively. Rights Plan On May 21, 2020, the Board declared a dividend of one right (“Right”) for each outstanding share of common stock to common stockholders of record at the close of business on June 1, 2020 (the “Rights Plan”). Each Right entitles the registered holder to purchase from us a unit consisting of one one-hundredth of a share (a “Fractional Share”) of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $ 255.00 per Fractional Share, subject to adjustment. Initially, the Rights are attached to all outstanding shares of our common stock. The Rights will be separate from our common stock and a “Distribution Date” will occur, with certain exceptions, upon the earlier of (i) ten days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 10% (or 20% in the case of a “13G Investor,” as defined in the Rights Plan) or more of the outstanding shares of our common stock, or (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person’s becoming an Acquiring Person. The Rights are not exercisable until the Distribution Date and will expire at the close of business on May 20, 2021, unless earlier redeemed or exchanged by us. If the rights become exercisable, each holder other than the Acquiring Person (and certain related parties) will be entitled to acquire shares of our common stock at a 50% discount or we may exchange each right held by such holders for one share of common stock. 7. Incentive Plans The Insperity, Inc. 2001 Incentive Plan, as amended, and the 2012 Incentive Plan, as amended (collectively, the “Incentive Plans”) provide for options and other stock-based awards that have been and may be granted to our eligible employees and non-employee directors. The 2012 Incentive Plan is currently the only plan under which new stock-based awards may be granted. Beginning with stock-based awards granted in 2020, employees who attain a minimum of age 62 and have provided 15 years or more of continuous service may continue to vest in awards following a qualifying retirement as defined under the 2012 Incentive Plan, as though he or she were still an employee, provided the grant date of the award is six months or more before the employees last day of employment. For a termination following a qualifying retirement, time-vested awards will continue to vest in the normal course. For a termination following a qualifying retirement, performance-based awards with completed or in-process performance periods are adjusted for achievement of the performance criteria, prorated through the date of termination and paid in the normal course, while performance-based awards for performance periods that have not started are forfeited. Stock-based compensation expense related to time-vested and performance-based awards is accelerated for employees who meet the requirements for continued vesting. 8. Net Income Per Share We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options. Insperity | 2020 Second Quarter Form 10-Q 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations: 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 Less distributed and undistributed earnings allocated to participating securities ( 276 ) ( 309 ) ( 724 ) ( 1,183 ) Net income allocated to common shares $ 51,575 $ 28,247 $ 113,219 $ 103,662 Weighted average common shares outstanding 38,567 40,771 38,684 40,640 Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options 79 145 173 140 Adjusted weighted average common shares outstanding 38,646 40,916 38,857 40,780 9. Commitments and Contingencies Worksite Employee 401(k) Retirement Plan Class Action Litigation In December 2015, a class action lawsuit was filed against us and a third-party who served as the discretionary trustee of the Insperity 401(k) retirement plan that is available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division, on behalf of Plan participants. The suit generally alleges the third-party discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries, and by making imprudent investment choices. The court certified a class defined as “all participants and beneficiaries of the Insperity 401(k) Plan from December 22, 2009 through September 30, 2017.” The court dismissed the breach of fiduciary duty claims relating to the selection of an Insperity subsidiary to serve as the recordkeeper of the Plan. On March 28, 2019, the court partially granted Insperity’s motion for summary judgment, resulting in the dismissal of the claims concerning allegations of excessive recordkeeping fees. The court denied plaintiffs’ request for a jury trial and set a bench trial, which was held from March 2, 2020 to March 13, 2020. At trial, plaintiffs alleged damages up to approximately $ 146 million against all defendants. All parties filed proposed findings of fact and conclusions of law on June 15, 2020, and we are now awaiting judgment from the court. We believe we presented meritorious defenses, and we intend to continue to vigorously defend this litigation in the post-trial proceedings. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements. Securities Class Action Lawsuit In July 2020, the Building Trades Pension Fund of Western Pennsylvania, individually and on behalf of all others similarly situated, filed a federal securities class action against us and certain officers in the United States District Court for the Southern District of New York. The complaint alleges that we made materially false and misleading statements regarding our business and operations in violation of the federal securities laws and seeks unspecified damages, the payment of reasonable attorneys’ fees, expert fees and other costs, and such other relief that may be deemed proper. We believe these allegations are without merit, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements. Other Litigation We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations. Insperity | 2020 Second Quarter Form 10-Q 17 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS