What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-08-04 · 111 added, 104 removed, 313 unchanged (41% of the section changed)

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economic activity.

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 safety measures 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, 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.

As the duration of the pandemic and such economic impacts remain uncertain, we have planned for a range of scenarios and have modified certain business and workforce practices.

To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients with obtaining government provided tax credits, tax deferrals, loans and loan forgiveness and to provide guidance to assist clients with 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, 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.

However, towards the end of the first quarter, clients began layoffs and temporary leaves of absence of worksite employees (“WSEEs”), and this trend continued into the second quarter and resulted in a 1.8% decline in year-over-year average number of paid WSEEs per month in the second quarter.

In the third quarter of 2020, the number of WSEEs returning to work as well as new hires exceeded layoffs, resulting in a 1.7% sequential increase and a 3.8% year-over-year decline in the average number of paid WSEEs per month.

We expect the average number of paid WSEEs per month to decline between 2.1% and 3.0% in the fourth quarter of 2020 as compared to the fourth quarter of 2019, which equates to the average number of paid worksite employees per month growing 2% to 3% sequentially from the third 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.

We experienced a 10.7% decrease in the year-over-year benefits costs per covered employee during the second quarter of 2020 and a 1.1% increase in the year-over-year benefits costs per covered employee during the third quarter of 2020.

The third quarter 2020 increase in benefits costs per covered employee over the preceding second quarter of 2020 was due primarily to an increase in non-essential claims as a result of higher utilization and fewer deferrals or cancellations associated with the COVID-19 pandemic.

We currently expect to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures during the remainder of 2020 and possibly into 2021 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 cost trends.

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

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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.

Insperity | 2020 Third Quarter Form 10-Q 19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

and the speed and effectiveness of responses to combat the virus, including the development and availability of therapeutics and vaccines.

See Part II, Item 1A.

“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

Second Quarter 2020 Compared to Second Quarter 2019

Third Quarter 2020 Compared to Third Quarter 2019

• Average number of WSEEs paid per month decreased 3.8%

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

• Net income and diluted earnings per share (“diluted EPS”) decreased 22.6% and 19.0%, to $20.0 million and $0.51, respectively

• Adjusted EPS increased 21.3% to $0.91

• Adjusted EBITDA increased 12.5% to $57.6 million

First Six Months 2020 Compared to First Six Months 2019

• Average number of WSEEs paid per month increased 1.8%

First Nine Months 2020 Compared to First Nine Months 2019

• Average number of WSEEs paid per month decreased 0.1%

• Net income and diluted EPS increased 2.5% and 7.9% to $134.0 million and $3.43, respectively

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• Adjusted EBITDA increased 19.8% to $250.8 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

Insperity | 2020 Third Quarter Form 10-Q 20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 % Change 2020 2019 % Change

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(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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(per WSEE per month) 2020 2019 2020 2019

1 unchanged sentence

WSEE payroll cost 7,991 7,626 8,182 7,905

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

Revenues $ 1,450 $ 1,444 $ 1,544 $ 1,546

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We monitor certain key metrics to measure our performance, including:

• Adjusted EBITDA

• Adjusted EPS

Insperity | 2020 Second Quarter Form 10-Q 20

Insperity | 2020 Third Quarter Form 10-Q 21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Adjusted EBITDA

• Adjusted EPS

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 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.

• During the third quarter of 2020 (“Q3 2020”), WSEEs paid declined 3.8% compared to the third quarter of 2019 (“Q3 2019”).

The net gain (loss) in our client base improved over Q3 2019.

In addition, the number of WSEEs paid from new client sales was 92% of Q3 2019 paid from new client sales and client retention averaged 99% in 2020 and 2019.

• During the first nine months of 2020 (“YTD 2020”), WSEEs paid declined 0.1% compared to the first nine months of 2019 (“YTD 2019”).

The number of WSEEs paid from new client sales was 96% of YTD 2019.

While the net gain (loss) in our client base declined compared to YTD 2019, due primarily to layoffs and furloughs of WSEEs by our clients resulting from the effect of the on-going COVID-19 pandemic, we have seen certain clients make significant hiring of worksite employees while other clients have experienced significant layoffs.

Average client retention declined slightly compared to YTD 2019.

Average WSEEs Paid and

Year-over-Year Growth Percentage

Insperity | 2020 Second Quarter Form 10-Q 21

Insperity | 2020 Third Quarter Form 10-Q 22

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 Second Quarter Form 10-Q 22

Insperity | 2020 Third Quarter Form 10-Q 23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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(in thousands)

Second Quarter 2020 Compared to Second Quarter 2019

Third Quarter 2020 Compared to Third Quarter 2019

Our revenues for Q3 2020 were $1.0 billion, a decrease of 3.4%, primarily due to the following:

• Average WSEEs paid decreased 3.8%.

• 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 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

• Revenues per WSEE per month increased 0.4%, or $6, primarily due to higher average pricing partially offset by $40.2 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.

First Nine Months 2020 Compared to First Nine Months 2019

Our revenues for YTD 2020 were $3.2 billion, a decrease of 0.3%, primarily due to the following:

• Average WSEEs paid decreased 0.1%.

• Revenues per WSEE per month decreased 0.1%, or $2, primarily due to higher average pricing, which was partially offset by $85.0 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, during the second quarter of 2020, we accrued $11.6 million of client 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.

Insperity | 2020 Third Quarter Form 10-Q 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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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

Insperity | 2020 Second Quarter Form 10-Q 24

Insperity | 2020 Third Quarter Form 10-Q 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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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 and

Year-over-Year Growth Percentage

(in thousands)

Gross Profit per WSEE per Month and

Year-over-Year Growth Percentage

Second Quarter 2020 Compared to Second Quarter 2019

Third Quarter 2020 Compared to Third Quarter 2019

Gross profit for Q3 2020 increased 8.5% to $185.0 million compared to $170.5 million in Q3 2019.

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

Gross profit per WSEE per month for Q3 2020 increased $30 to $266 compared to $236 in Q3 2019 due primarily to the relative changes in higher pricing and lower direct costs as discussed below.

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 $46 and $118, respectively, due in part to FICA deferral elections by clients pursuant to the CARES Act in Q2 2020.

Our revenues and direct costs per WSEE per month increased $6 and decreased $24, respectively, due to higher average pricing, which was partially offset by client FICA deferral elections pursuant to the CARES Act in Q3 2020 and changes in the primary direct cost components, respectively.

The net decrease in costs between Q3 2020 and Q3 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $18.6 million as discussed below.

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Benefits costs

• 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

Insperity | 2020 Third Quarter Form 10-Q 26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

• The cost of group health insurance and related employee benefits increased $27 per WSEE per month and increased 1.1% on a cost per covered employee basis.

• The percentage of WSEEs covered under our health insurance plans was 67.9% in Q3 2020 compared to 66.0% in Q3 2019.

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Payroll tax costs

• 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

• Payroll taxes decreased 12.7% on an 0.8% increase in payroll costs, or $44 per WSEE per month, primarily due to $40.2 million of FICA deferral elections by clients pursuant to the CARES Act.

In addition, Internal Revenue Service tax reporting changes in 2020 eliminated PEO reporting of payroll taxes for self-employed owners.

• Payroll taxes as a percentage of payroll costs decreased to 5.4% in Q3 2020 compared to 6.2% in Q3 2019.

First Nine Months 2020 Compared to First Nine Months 2019

Gross profit for YTD 2020 increased 12.0% to $639.3 million compared to $571.0 million in YTD 2019.

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

Gross profit per WSEE per month for YTD 2020 increased $33 to $305 compared to $272 in YTD 2019 due primarily to the relative changes in higher pricing and lower direct costs as discussed below.

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.

Our revenues and direct costs per WSEE per month decreased $2 and $35, respectively, due to higher average pricing, which was offset by client FICA deferral elections pursuant to the CARES Act in YTD 2020 and changes in the primary direct cost components, respectively.

The net decrease in costs between YTD 2020 and YTD 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $11.2 million as discussed below.

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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

• The cost of group health insurance and related employee benefits increased $3 per WSEE per month and decreased 1.5% on a cost per covered employee basis due primarily to a decrease in claims as a result of lower utilization and the deferral of nonessential healthcare procedures, primarily in the second quarter of 2020, in response to COVID-19 government requirements or guidance.

Insperity | 2020 Third Quarter Form 10-Q 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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

• Workers’ compensation costs decreased 15.4%, or $4 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 0.33% compared to 0.40% in YTD 2019.

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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.

• Payroll taxes decreased 6.3% on a 3.4% increase in payroll costs, or $35 per WSEE per month, primarily due to $85.0 million of FICA deferral elections by clients pursuant to the CARES Act.

In addition, Internal Revenue Service tax reporting changes in 2020 eliminated PEO reporting of payroll taxes for self-employed owners.

• Payroll taxes as a percentage of payroll costs decreased to 6.4% in YTD 2020 compared to 7.1% in YTD 2019.

Operating Expenses

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• Stock-based compensation — Our stock-based compensation relates to the recognition of non-cash compensation expense over the requisite service period of time-vested and performance-based awards.

• Commissions — Commissions expense consists primarily of amounts paid to sales managers and business performance advisors (“BPAs”) as well as channel referral fees.

• Commissions — Commissions expense consists primarily of amounts paid to sales managers and other sales personnel, including business performance advisors (“BPAs”), as well as, channel referral fees.

Commissions are based on new accounts sold and a percentage of revenue generated by such personnel.

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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

◦ employee travel and training expenses

Insperity | 2020 Third Quarter Form 10-Q 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦ technology and facility repairs and maintenance costs

• 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.

Second Quarter 2020 Compared to Second Quarter 2019

Third Quarter 2020 Compared to Third Quarter 2019

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

Three Months Ended June 30,

Three Months Ended September 30,

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

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• Salaries of corporate and sales staff for Q3 2020 increased 12.8% to $89.4 million, or $19 per WSEE per month, compared to Q3 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.

This increase was primarily due to a 2.3% increase in corporate headcount, including a 6.8% increase in total BPAs in Q3 2020 compared to Q3 2019 and higher incentive compensation accruals in Q3 2020 related to better than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results in Q3 2019.

• Stock based compensation expense for Q3 2020 increased 220.1% to $20.9 million, or $21 per WSEE per month, compared to Q3 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.

The increase was primarily due to an increase in the number of stock awards anticipated to be earned related to performance-based awards granted under our short-term and long-term incentive plans based on our higher than expected year-to-date operating results in Q3 2020 compared to lower than expected year-to-date results in Q3 2019.

In addition, Q3 2020 contains 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 Q3 2020 decreased 3.9% to $7.7 million, but remained flat on a per WSEE per month basis, compared to Q3 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.

The decrease was primarily due to reductions in commissions associated with PEO HR Outsourcing solutions and our other business performance solutions offerings, partially offset by an increase in the amount of sales channel referral fees paid during Q3 2020.

• Advertising expense for Q3 2020 decreased 2.3% to $4.8 million, but remained flat on a per WSEE per month basis, compared to Q3 2019.

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

• General and administrative expenses for Q3 2020 decreased 13.9% to $25.6 million, or $4 per WSEE per month, compared to Q3 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.

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, corporate insurance and rent.

• Depreciation and amortization expense for Q3 2020 increased 6.7% to $7.8 million, or $1 per WSEE per month, compared to Q3 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

Insperity | 2020 Third Quarter Form 10-Q 29

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,

First Nine Months 2020 Compared to First Nine Months 2019

Nine Months Ended September 30,

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

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• Salaries of corporate and sales staff for YTD 2020 increased 12.3% to $266.6 million, or $14 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.

This increase was primarily due to a 5.0% increase in corporate headcount, including an 10.7% increase in total BPAs in YTD 2020 compared to YTD 2019 and higher incentive compensation accruals in YTD 2020 related to better than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results in Q3 2019.

• Stock based compensation expense for YTD 2020 increased 83.1% to $38.1 million or $8 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.

The increase was primarily due to an increase in the number of stock awards anticipated to be earned related to performance-based awards granted under our short-term and long-term incentive plans based on our higher than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results.

In addition, YTD 2020 contains 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.

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• General and administrative expenses for YTD 2020 decreased 8.1% to $85.3 million, or $3 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 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, corporate insurance and rent.

• Depreciation and amortization expense for YTD 2020 increased 11.5% to $23.3 million, or $1 per WSEE per month, compared to YTD 2019.

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

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Other Income (expense) for Q3 2020 was an expense of $1.6 million compared to income of $0.5 million in Q3 2019, and an expense of $4.0 million in YTD 2020 compared to income of $3.2 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.

The net decrease was primarily due to decreased interest income on our marketable securities investments and workers’ compensation deposit 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 Second Quarter Form 10-Q 29

Insperity | 2020 Third Quarter Form 10-Q 30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Income Tax Expense

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Effective income tax rate 26.3% 26.5% 26.8% 19.4%

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

For the nine months ended September 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 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.

During the first nine 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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• non-cash stock-based compensation.

Insperity | 2020 Second Quarter Form 10-Q 30

Insperity | 2020 Third Quarter Form 10-Q 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

1 unchanged sentence

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

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

(in thousands, except per WSEE per month)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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

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

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

Cash, cash equivalents and marketable securities $ 406,350 $ 402,070

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

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

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands, except per WSEE per month)

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12.5 % 16.9 % (16.9) % (25.3) % 19.8 % 20.0 % 9.0 % (3.8) %

Insperity | 2020 Second Quarter Form 10-Q 31

Insperity | 2020 Third Quarter Form 10-Q 32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

1 unchanged sentence

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

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

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 2019

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

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

Three Months Ended September 30, Nine Months Ended September 30,

(amounts per share) 2020 2019 2020 2019

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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 $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.

We had $406.4 million in cash, cash equivalents and marketable securities at September 30, 2020, of which approximately $147.1 million was payable in early October 2020 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $46.5 million represented client prepayments that were payable in October 2020.

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

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

At September 30, 2020, we had working capital of $207.8 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 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

Insperity | 2020 Third Quarter Form 10-Q 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of September 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.

Cash Flows from Operating Activities

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

Net cash provided by operating activities in the first nine months of 2020 was $106.6 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 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.

In the period ended September 30, 2020, the last business day of the reporting period was a Wednesday, client prepayments were $46.5 million and employment taxes and other deductions were $147.1 million.

In the period ended September 30, 2019, the last business day of the reporting period was a Monday, client prepayments were $19.7 million and employment taxes and other deductions were $153.8 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.

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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 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.

As of September 30, 2020, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $32.8 million surplus, $23.8 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 September 30, 2020, were $38.3 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 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.”

Our adjusted net income increased 10.4% to $161.9 million in the first nine months ended September 30, 2020, compared to $146.7 million in the first nine months ended September 30, 2019.

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

Cash Flows from Investing Activities

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.

Net cash flows used in investing activities were $68.4 million for the nine months ended September 30, 2020, primarily due to property and equipment purchases of $68.8 million.

Cash Flows from Financing Activities

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

Net cash flows used in financing activities were $31.4 million for the nine months ended September 30, 2020.

We borrowed $100.0 million under the Facility for general corporate purposes, repurchased or withheld $91.2 million in stock and paid $46.5 million in dividends.

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

Insperity | 2020 Third Quarter Form 10-Q 34

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