INSPERITY, INC. 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2020 December 31, 2019 Assets Cash and cash equivalents $ 372,356 $ 367,342 Restricted cash 45,265 49,295 Marketable securities 33,994 34,728 Accounts receivable, net 528,712 465,779 Prepaid insurance 34,759 10,418 Other current assets 33,772 43,493 Income taxes receivable — 3,691 Total current assets 1,048,858 974,746 Property and equipment, net of accumulated depreciation 196,210 147,706 Right-of-use (“ROU”) leased assets 60,682 56,886 Prepaid health insurance 9,000 9,000 Deposits – health insurance 7,900 8,100 Deposits – workers’ compensation 181,634 175,913 Goodwill and other intangible assets, net 12,707 12,714 Deferred income taxes, net — 3,956 Other assets 6,291 5,975 Total assets $ 1,523,282 $ 1,394,996 Liabilities and stockholders' equity Accounts payable $ 6,016 $ 4,565 Payroll taxes and other payroll deductions payable 178,052 277,248 Accrued worksite employee payroll cost 471,796 401,859 Accrued health insurance costs 44,639 21,180 Accrued workers’ compensation costs 47,956 52,868 Accrued corporate payroll and commissions 39,925 52,612 Other accrued liabilities 46,400 58,713 Income taxes payable 6,286 — Total current liabilities 841,070 869,045 Accrued workers’ compensation cost, net of current 196,247 193,609 Long-term debt 369,400 269,400 Operating lease liabilities, net of current 64,436 58,863 Deferred income taxes, net 2,801 — Other accrued liabilities, net of current 8,689 — Total noncurrent liabilities 641,573 521,872 Commitments and contingencies Common stock 555 555 Additional paid-in capital 74,598 48,141 Treasury stock, at cost ( 620,638 ) ( 544,102 ) Retained earnings 586,124 499,485 Total stockholders’ equity 40,639 4,079 Total liabilities and stockholders’ equity $ 1,523,282 $ 1,394,996 See accompanying notes. Insperity | 2020 Third Quarter Form 10-Q 4 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2020 2019 2020 2019 Revenues (1) $ 1,007,820 $ 1,043,388 $ 3,230,669 $ 3,239,714 Payroll taxes, benefits and workers’ compensation costs 822,787 872,842 2,591,365 2,668,716 Gross profit 185,033 170,546 639,304 570,998 Salaries, wages and payroll taxes 89,429 79,264 266,640 237,340 Stock-based compensation 20,864 6,517 38,110 20,813 Commissions 7,722 8,034 23,657 22,727 Advertising 4,781 4,895 15,334 17,474 General and administrative expenses 25,646 29,773 85,254 92,801 Depreciation and amortization 7,819 7,330 23,329 20,929 Total operating expenses 156,261 135,813 452,324 412,084 Operating income 28,772 34,733 186,980 158,914 Other income (expense): Interest income 103 2,574 2,351 8,621 Interest expense ( 1,731 ) ( 2,122 ) ( 6,312 ) ( 5,442 ) Income before income tax expense 27,144 35,185 183,019 162,093 Income tax expense 7,135 9,326 49,067 31,389 Net income $ 20,009 $ 25,859 $ 133,952 $ 130,704 Less distributed and undistributed earnings allocated to participating securities ( 104 ) ( 284 ) ( 792 ) ( 1,546 ) Net income allocated to common shares $ 19,905 $ 25,575 $ 133,160 $ 129,158 Net income per share of common stock Basic $ 0.52 $ 0.64 $ 3.45 $ 3.19 Diluted $ 0.51 $ 0.63 $ 3.43 $ 3.18 ____________________________________ (1) Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Gross billings $ 6,563,727 $ 6,555,865 $ 20,356,164 $ 19,804,549 Less: WSEE payroll cost $ 5,555,907 $ 5,512,477 $ 17,125,495 $ 16,564,835 Revenues $ 1,007,820 $ 1,043,388 $ 3,230,669 $ 3,239,714 See accompanying notes. Insperity | 2020 Third Quarter Form 10-Q 5 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) 2020 2019 Cash flows from operating activities Net income $ 133,952 $ 130,704 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,329 20,929 Stock-based compensation 38,110 20,813 Deferred income taxes 6,757 8,659 Changes in operating assets and liabilities: Accounts receivable ( 62,933 ) ( 83,267 ) Prepaid insurance ( 24,341 ) ( 13,750 ) Other current assets 9,721 1,283 Other assets and ROU assets 10,862 ( 2,709 ) Accounts payable 1,451 ( 5,249 ) Payroll taxes and other payroll deductions payable ( 99,196 ) ( 80,549 ) Accrued worksite employee payroll expense 69,937 81,478 Accrued health insurance costs 23,459 ( 1,914 ) Accrued workers’ compensation costs ( 2,273 ) 6,087 Accrued corporate payroll, commissions and other accrued liabilities ( 32,238 ) ( 22,830 ) Income taxes payable/receivable 9,977 ( 12,609 ) Total adjustments ( 27,378 ) ( 83,628 ) Net cash provided by operating activities 106,574 47,076 Cash flows from investing activities Marketable securities: Purchases ( 42,007 ) ( 90,909 ) Proceeds from dispositions 484 5,799 Proceeds from maturities 41,860 85,480 Property and equipment: Purchases ( 68,770 ) ( 35,968 ) Net cash used in investing activities ( 68,433 ) ( 35,598 ) Cash flows from financing activities Purchase of treasury stock ( 91,216 ) ( 153,668 ) Dividends paid ( 46,522 ) ( 36,777 ) Borrowings under revolving line of credit 100,000 95,000 Other 6,302 7,215 Net cash used in financing activities ( 31,436 ) ( 88,230 ) Net increase (decrease) in cash, cash equivalents and restricted cash 6,705 ( 76,752 ) Cash, cash equivalents and restricted cash beginning of period 592,550 535,474 Cash, cash equivalents and restricted cash end of period $ 599,255 $ 458,722 Insperity | 2020 Third Quarter Form 10-Q 6 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Nine Months Ended September 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 $ 372,356 $ 243,439 Restricted cash 45,265 45,251 Deposits – workers’ compensation 181,634 170,032 Cash, cash equivalents and restricted cash end of period $ 599,255 $ 458,722 Supplemental operating lease cash flow information: ROU assets obtained in exchange for lease obligations $ 18,364 $ 21,980 See accompanying notes. Insperity | 2020 Third Quarter Form 10-Q 7 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Nine Months Ended September 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 — — — ( 91,216 ) — ( 91,216 ) Issuance of long-term incentive awards and dividend equivalents — — ( 7,088 ) 7,898 ( 810 ) — Stock-based compensation expense — — 32,893 5,217 — 38,110 Other — — 652 1,565 — 2,217 Dividends paid — — — — ( 46,522 ) ( 46,522 ) Unrealized gain on marketable securities, net of tax — — — — 19 19 Net income — — — — 133,952 133,952 Balance at September 30, 2020 55,489 $ 555 $ 74,598 $ ( 620,638 ) $ 586,124 $ 40,639 Balance at December 31, 2018 55,489 $ 555 $ 36,752 $ ( 357,569 ) $ 397,938 $ 77,676 Purchase of treasury stock, at cost — — — ( 153,668 ) — ( 153,668 ) Issuance of long-term incentive awards and dividend equivalents — — ( 7,695 ) 8,646 ( 951 ) — Stock-based compensation expense — — 15,656 5,157 — 20,813 Other — — 1,688 517 — 2,205 Dividends paid — — — — ( 36,777 ) ( 36,777 ) Unrealized gain on marketable securities, net of tax — — — — 35 35 Net income — — — — 130,704 130,704 Balance at September 30, 2019 55,489 $ 555 $ 46,401 $ ( 496,917 ) $ 490,949 $ 40,988 Insperity | 2020 Third Quarter Form 10-Q 8 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) For the Three Months Ended September 30, 2020 and 2019 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at June 30, 2020 55,489 $ 555 $ 54,783 $ ( 592,313 ) $ 581,613 $ 44,638 Purchase of treasury stock, at cost — — — ( 29,986 ) — ( 29,986 ) Stock-based compensation expense — — 19,552 1,312 — 20,864 Other — — 263 349 — 612 Dividends paid — — — — ( 15,448 ) ( 15,448 ) Unrealized loss on marketable securities, net of tax — — — — ( 50 ) ( 50 ) Net income — — — — 20,009 20,009 Balance at September 30, 2020 55,489 $ 555 $ 74,598 $ ( 620,638 ) $ 586,124 $ 40,639 Balance at June 30, 2019 55,489 $ 555 $ 41,009 $ ( 383,830 ) $ 477,155 $ 134,889 Purchase of treasury stock, at cost — — — ( 114,872 ) — ( 114,872 ) Stock-based compensation expense — — 4,880 1,637 — 6,517 Other — — 512 148 — 660 Dividends paid — — — — ( 12,037 ) ( 12,037 ) Unrealized loss on marketable securities, net of tax — — — — ( 28 ) ( 28 ) Net income — — — — 25,859 25,859 Balance at September 30, 2019 55,489 $ 555 $ 46,401 $ ( 496,917 ) $ 490,949 $ 40,988 See accompanying notes. Insperity | 2020 Third 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 September 30, 2020 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2020 and 2019, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2020 and 2019 and our Consolidated Statements of Stockholders’ Equity for the nine month periods ended September 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 Third 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 September 30, 2020, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, 2020, Plan Costs were less than the net premiums paid and owed to United by $ 32.8 million. As this amount is in excess of the agreed-upon $ 9.0 million surplus maintenance level, the $ 23.8 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 September 30, 2020 were $ 38.3 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 nine months of 2020 included a reduction of $ 1.9 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first nine months of 2019 included a charge of $ 2.9 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 nine months ended September 30, 2020 and 2019, we reduced accrued workers’ compensation costs by $ 32.4 million and $ 26.0 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 0.7% and in the 2019 period was 2.0%) 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 Third 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: Nine Months Ended September 30, (in thousands) 2020 2019 Beginning balance, January 1, $ 242,904 $ 229,639 Accrued claims 33,397 44,334 Present value discount, net of accretion ( 500 ) ( 3,664 ) Paid claims ( 34,289 ) ( 34,669 ) Ending balance $ 241,512 $ 235,640 Current portion of accrued claims $ 45,265 $ 45,250 Long-term portion of accrued claims 196,247 190,390 Total accrued claims $ 241,512 $ 235,640 The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, 2020 includes $ 2.7 million of workers’ compensation administrative fees. As of September 30, 2020 and 2019, the undiscounted accrued workers’ compensation costs were $ 259.4 million and $ 255.3 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 nine months of 2020 and 2019, we received $ 24.8 million and $ 16.7 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in a decrease to deposits – workers’ compensation. At September 30, 2020, we had restricted cash of $ 45.3 million and deposits – workers’ compensation of $ 181.6 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 $ 520.9 million and $ 448.1 million at September 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 Third 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 September 30, Nine Months Ended September 30, (in thousands) 2020 2019 % Change 2020 2019 % Change Northeast $ 278,712 $ 271,839 2.5 % $ 896,113 $ 853,263 5.0 % Southeast 121,439 122,992 (1.3) % 379,614 373,044 1.8 % Central 182,245 180,602 0.9 % 570,559 555,797 2.7 % Southwest 217,527 242,200 (10.2) % 712,185 756,495 (5.9) % West 195,412 212,618 (8.1) % 634,533 661,460 (4.1) % 995,335 1,030,251 (3.4) % 3,193,004 3,200,059 (0.2) % Other revenue 12,485 13,137 (5.0) % 37,665 39,655 (5.0) % Total revenue $ 1,007,820 $ 1,043,388 (3.4) % $ 3,230,669 $ 3,239,714 (0.3) % 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 September 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: September 30, 2020 December 31, 2019 (in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total Overnight holdings $ 314,952 $ — $ 314,952 $ 349,857 $ — $ 349,857 Investment holdings 38,867 33,994 72,861 13,218 34,728 47,946 Cash in demand accounts 28,259 — 28,259 36,521 — 36,521 Outstanding checks ( 9,722 ) — ( 9,722 ) ( 32,254 ) — ( 32,254 ) Total $ 372,356 $ 33,994 $ 406,350 $ 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 September 30, 2020 and December 31, 2019 included $ 147.1 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 $ 46.5 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: • Level 1 - quoted prices in active markets using identical assets Insperity | 2020 Third Quarter Form 10-Q 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) • 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: September 30, 2020 December 31, 2019 (in thousands) Total Level 1 Level 2 Total Level 1 Level 2 Money market funds $ 353,819 $ 353,819 $ — $ 363,075 $ 363,075 $ — U.S. Treasury bills 10,411 10,411 — 34,728 34,728 — Municipal bonds 23,583 — 23,583 — — — Total $ 387,813 $ 364,230 $ 23,583 $ 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 September 30, 2020 U.S. Treasury bills $ 10,410 $ 1 $ — $ 10,411 Municipal bonds 23,554 29 — 23,583 Total $ 33,964 $ 30 $ — $ 33,994 December 31, 2019 U.S. Treasury bills $ 34,716 $ 13 $ ( 1 ) $ 34,728 Total $ 34,716 $ 13 $ ( 1 ) $ 34,728 As of September 30, 2020, the contractual maturities of our marketable securities were as follows: (in thousands) Amortized Cost Estimated Fair Value Less than one year $ 33,964 $ 33,994 One to five years — — Total $ 33,964 $ 33,994 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. As of September 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. Insperity | 2020 Third Quarter Form 10-Q 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 September 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 nine month period ended September 30, 2020 was 2.52 %. 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 September 30, 2020. 6. Stockholders' Equity During the first nine months of 2020, we repurchased or withheld an aggregate of 1,336,884 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 nine months ended September 30, 2020, 1,186,000 shares were repurchased under the Repurchase Program. As of September 30, 2020, we were authorized to repurchase an additional 227,833 shares under the Repurchase Program. Withheld Shares During the nine months ended September 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 Third quarter 0.40 0.30 Insperity | 2020 Third Quarter Form 10-Q 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the nine months ended September 30, 2020 and 2019, we paid dividends totaling $ 46.5 million and $ 36.8 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, if and when it becomes exercisable, entitles the registered holder to purchase from us one unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share. Initially, the Rights are attached to all outstanding shares of our common stock. The Rights are not currently exercisable and the Rights Plan will expire at the close of business on May 20, 2021 , unless the Rights are earlier redeemed or exchanged by us. 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 Third 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 September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Net income $ 20,009 $ 25,859 $ 133,952 $ 130,704 Less distributed and undistributed earnings allocated to participating securities ( 104 ) ( 284 ) ( 792 ) ( 1,546 ) Net income allocated to common shares $ 19,905 $ 25,575 $ 133,160 $ 129,158 Weighted average common shares outstanding 38,507 40,168 38,625 40,481 Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options 234 149 193 143 Adjusted weighted average common shares outstanding 38,741 40,317 38,818 40,624 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 (the “Co-Defendant”) 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 the plaintiffs’ request for a jury trial and set a bench trial, which was held from March 2, 2020 to March 13, 2020. At trial, the 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. On September 18, 2020, the plaintiffs and Co-Defendant informed the court that they reached an agreement in principle to settle the entire case, including a full and final release of all claims against Insperity. Insperity did not participate in the settlement discussions and will make no financial contribution to the settlement. In connection with the settlement, the plaintiffs and Co-Defendant filed a motion to extend the class period to March 31, 2019, which the court granted. The court has also granted preliminary approval of the settlement and has set the final approval hearing on March 5, 2021. As a result of the uncertainty regarding the outcome of this matter and the subsequent settlement agreement that, if approved by the court, will end the case with no financial contribution from Insperity, no provision has been made in the accompanying Consolidated Financial Statements. Securities Class Action Lawsuit In July 2020, a federal securities class action was filed against us and certain of our officers in the United States District Court for the Southern District of New York. The name of the case is Building Trades Pension Fund of Western Pennsylvania v. Insperity, Inc., et al., Case No. 1:20-cv-05635-NRB. On October 23, 2020, the court issued an order appointing Oakland County Employees’ Retirement System and Oakland County Voluntary Employees’ Beneficiary Association Trust as lead plaintiff. 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 the allegations in the action 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. Insperity | 2020 Third Quarter Form 10-Q 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Third Quarter Form 10-Q 18 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS