What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-12 compared with 2020-02-12 · 236 added, 185 removed, 373 unchanged (53% of the section changed)

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In addition to our PEO HR Outsourcing solutions, we offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration TM .

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.

We also offer a number of other business performance solutions, including Comprehensive Traditional Payroll and Human Capital Management, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, 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.

COVID-19 Pandemic

The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant reduction in U.S.

economic activity.

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 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 at corporate facilities.

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 the workplace 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 of 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.

In the fourth quarter of 2020, the average number of paid WSEEs declined 1.8% year-over-year and increased 3.2% sequentially as new client sales and rehires exceeded layoffs and client attrition.

We expect overall reduced employment levels to have a negative impact on our 2021 financial results.

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

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2.4% increase in year-over-year benefits costs per covered employee during the fourth quarter of 2020.

The fourth quarter 2020 increase in benefits costs per covered employee over the preceding third 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.

For the full year 2020, we experienced a 0.5% decrease in year-over-year benefits cost per covered employee.

We currently expect to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures during 2021 that had been deferred in response to COVID-19 governmental requirements or guidance related to shelter in place and similar orders, as well as additional costs related to COVID-19 treatment and COBRA medical claims.

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

The COVID-19 pandemic has not had a material impact on our accrued workers’ compensation cost estimate;

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

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

In addition, during 2020, the COVID-19 pandemic has not had a material impact on our state unemployment tax costs.

However, we anticipate state unemployment tax rates will increase during 2021 and beyond due to the impact of increased unemployment claims.

The majority of states have not provided 2021 unemployment tax rates to employers.

Prior to the receipt of final rate notices, we estimate our expected state unemployment tax rates in those states for which rate notices have not yet been received for purposes of budgeting and pricing.

Some states have indicated their intention to exclude pandemic related claims from employers’ 2021 rates.

However, the determination of which claims qualify for exclusion and the impact of such a determination on the 2021 state unemployment rates has not been clarified

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, including the development and availability of therapeutics and vaccines.

See Part I, Item 1A.

“Risk Factors” for additional information.

2020 Highlights

We ended 2019 averaging 243,715 paid WSEEs, which represents a 9.9% increase over fourth quarter 2018 .

We expect the average number of paid WSEEs per month to be between 238,000 and 240,200 in the first quarter 2020 .

2019 Compared to 2018

Average number of WSEEs paid per month increased 12.6% to 235,547 , driving a 7.5% gross profit increase

Net income and diluted earnings per share (“Diluted EPS”) increased 11.6% and 14.9% to $151.1 million and $3.70 , respectively

• Average number of WSEEs paid per month decreased 0.6% to 234,223, driving a 0.6% revenue decline.

• We ended 2020 averaging 239,232 paid WSEEs in the fourth quarter of 2020, which represents a 1.8% decrease over the fourth quarter of 2019.

We expect the average number of paid WSEEs per month to be between 232,100 and 234,400 in the first quarter 2021, which reflects the termination of a large client representing approximately 6,800 paid WSEEs.

• Approximately 24.4% and 25.7% of our average paid WSEEs were in our middle market sector for the years ended December 31, 2020 and 2019, respectively, which is generally defined as companies with 150 to 5,000 WSEEs.

• Gross profit increased $73.9 million, primarily due to lower healthcare utilization and lower workers’ compensation costs.

• Net income and diluted earnings per share (“Diluted EPS”) decreased 8.5% and 4.3% to $138.2 million and $3.54, respectively.

• Adjusted EBITDA increased 15.4% to $288.6 million.

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• Adjusted EPS increased 11.8% to $4.64.

Approximately 25.7% and 24.6% of our average paid WSEEs were in our middle market sector for the years ended December 31, 2019 and 2018 , respectively, which is generally defined as companies with 150 to 5,000 WSEEs.

Our average gross profit per WSEE per month was $259 in 2019 and $272 in 2018 , due in part to an increase in the number of large individual healthcare claimants.

Operating expenses increased 8.6% in 2019 to $546.3 million .

On a per WSEE per month basis, operating expenses decreased from $201 in 2018 to $193 in 2019 .

• Our average gross profit per WSEE per month was $287 in 2020 and $259 in 2019.

• Operating expenses increased 12.1% in 2020 to $612.2 million, primarily due to increased non-cash stock-based compensation expense and salaries and wages partially offset by lower travel costs.

On a per WSEE per month basis, operating expenses increased from $193 in 2019 to $218 in 2020.

• Our adjusted EBITDA per WSEE per month increased 17.0% from $88 in 2019 to $103 in 2020.

• We ended 2020 with working capital of $172.3 million.

2020 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Adjusted operating expenses increased 10.7% in 2019 to $546.3 million .

On a per WSEE per month basis, adjusted operating expenses decreased from $ 197 in 2018 to $ 193 in 2019 .

Our adjusted EBITDA per WSEE per month decreased 7.4% from $95 in 2018 to $88 in 2019 .

We ended 2019 with working capital of $105.7 million .

During 2019 , we paid $48.6 million in dividends, repurchased 2.1 million shares of our common stock at a cost of $203.0 million , paid $56.3 million on capital expenditures partially offset by borrowings of $125.0 million under our credit facility.

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

• During 2020, we paid $61.9 million in dividends, repurchased 1.4 million shares of our common stock at a cost of $99.4 million, paid $98.2 million on capital expenditures, including $61.0 million for the construction of a new building, partially offset by borrowings of $100.0 million under our credit facility.

We account for our revenues in accordance with Accounting Standards Update (“ASU”) No.

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This markup includes pricing components associated with our estimates of payroll taxes, benefits and workers’ compensation costs, plus a separate component related to our HR services.

We include revenues that have been recognized but not invoiced in unbilled accounts receivable on our Consolidated Balance Sheets.

Revenues that have been recognized but not invoiced represent unbilled accounts receivable included in accounts receivable, net on our Consolidated Balance Sheets.

Our revenues are primarily dependent on the number of clients enrolled, the resulting number of WSEEs paid each period and the number of WSEEs enrolled in our benefit plans.

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

Operating Expenses

• Salaries, wages and payroll taxes – Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional cash incentive compensation.

2020 Form 10-K

1 unchanged sentence

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Expenses

Salaries, wages and payroll taxes – Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional incentive compensation.

Our corporate employees include client services, sales and marketing, benefits, legal, finance, information technology, administrative support personnel and those associated with our other products and services.

Stock-based compensation – Our stock-based compensation relates to the recognition of non-cash compensation expense over the vesting period of restricted stock and long-term incentive plan awards.

Commissions – Commissions expense consists primarily of amounts paid to sales managers and BPAs as well as channel referral fees.

• 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 incentive plan awards.

• Commissions – Commissions expense consists primarily of amounts paid to sales managers and other sales personnel, including 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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• Depreciation and amortization – Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices, software development and technology infrastructure.

Impairment charges and other – Impairment charges and other consist of non-cash expense associated with the decline in fair value of long-lived and intangible assets, including goodwill.

Please read Note 1 “ Accounting Policies ,” to the Consolidated Financial Statements for additional information.

Other Income (Expense)

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Please read “—Liquidity and Capital Resources” for additional information.

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”) was signed into law.

The 2017 Tax Reform Act significantly changes U.S.

corporate income tax laws by, among other things, reducing the U.S.

corporate income tax rate from 35% to 21% beginning in 2018.

As a result, we remeasured our deferred tax assets at the new lower corporate income tax rate and recorded a non-cash tax charge of $2.5 million in 2017.

Our provision for income taxes typically differs from the U.S.

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Please read Note 7 to the Consolidated Financial statements, “Income Taxes,” for additional information.

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP.

The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

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Actual results may differ from these estimates.

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We believe the following accounting policies are critical and/or require significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

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The terms of the arrangement with United require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance.

As of December 31, 2019 , Plan Costs were less than the net premiums paid and owed to United by $2.6 million .

As of December 31, 2020, Plan Costs were more than the net premiums paid and owed to United by $6.0 million.

As this amount is less than the agreed-upon $9.0 million surplus maintenance level, the $15.0 million difference is included in accrued health insurance costs, a current liability, in our Consolidated Balance Sheets.

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We believe that recent claim development patterns are representative of incurred but not reported claims costs during the reporting period.

The estimated completion rate and annual trend used to compute incurred but not reported claims involves a significant level of judgment.

Accordingly, an increase (or decrease) in the completion rate or annual trend used to estimate the incurred claims would result in an increase (or decrease) in benefits costs and net income would decrease (or increase) accordingly.

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table illustrates the sensitivity of changes in the completion rate and annual trend on our estimate of total benefits costs of $1.9 billion in 2019 :

Completion Rate and Annual Trend

The estimated completion rate used to compute incurred but not reported claims involves a significant level of judgment.

Accordingly, an increase (or decrease) in the completion rate used to estimate the incurred claims would result in an increase (or decrease) in benefits costs and net income would decrease (or increase) accordingly.

The following table illustrates the sensitivity of changes in the completion rate on our estimate of total benefits costs of $2.0 billion in 2020:

Completion Rate Change in

Benefits Costs

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(in thousands)

(2.5)% $ (19,572) $ 14,293

(1.0)% (7,829) 5,717

1.0% 7,829 (5,717)

2.5% 19,572 (14,293)

• Workers’ compensation costs – Since 2007, our workers’ compensation coverage has been provided through an arrangement with Chubb.

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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.

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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The following table illustrates the sensitivity of changes in the loss development rate on our estimate of workers’ compensation costs totaling $65.8 million in 2020:

Change in Loss Development Rate

Change in Workers’ Compensation Costs

Change in Loss Development Rate Change in Workers’ Compensation Costs

(in thousands)

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(5.0)% $ (4,165) $ 3,040

(2.5)% (2,082) 1,520

2.5% 2,082 (1,520)

5.0% 4,165 (3,040)

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”).

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We have estimated and accrued $240.8 million in incurred workers’ compensation claim costs as of December 31, 2020.

Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and 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 in our Consolidated Balance Sheets.

Our estimate of incurred claim costs expected to be paid within one year is recorded as accrued workers’ compensation costs and 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 in our Consolidated Balance Sheets.

• Contingent liabilities – We accrue and disclose contingent liabilities in our Consolidated Financial Statements in accordance with ASC 450-10, Contingencies .

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If such evaluation were to determine that a loss was probable and the loss could be reasonably estimated, we would be required to accrue our estimated loss, which would reduce net income in the period that such determination was made.

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to pay their comprehensive service fees.

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To mitigate this risk, we have established very tight credit policies.

We generally require our PEO HR Outsourcing solutions clients to pay their comprehensive service fees no later than one day prior to the applicable payroll date.

We generally require our PEO HR Outsourcing solutions clients to pay their comprehensive service fees no later than the same day as the applicable payroll date.

In addition, we generally maintain the right to terminate the CSA and associated WSEEs or to require prepayment, letters of credit or other collateral if a client’s financial position deteriorates or if the client does not pay the comprehensive service fee.

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Results of Operations

The following table summarized our key financial and statistical information related to our results of operations:

The following table summarizes our key financial and statistical information related to our results of operations:

(in thousands, except per share and statistical data)

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2018 2020 v 2019 2019 v 2018

Financial data:

$ 4,287,004 $ 4,314,804 $ 3,828,549 (0.6) % 12.7 %

Gross profit 806,854 732,934 681,909 10.1 % 7.5 %

Operating expenses 612,165 546,301 502,873 12.1 % 8.6 %

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Other income (expense) (5,419) 3,010 3,324 (280.0) % (9.4) %

Net income 138,237 151,099 135,413 (8.5) % 11.6 %

Diluted EPS 3.54 3.70 3.22 (4.3) % 14.9 %

Non-GAAP financial measures (2) :

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Adjusted EBITDA 288,620 250,006 239,601 15.4 % 4.3 %

Adjusted EPS 4.64 4.15 3.75 11.8 % 10.7 %

Average WSEEs paid

234,223 235,547 209,123 (0.6) % 12.6 %

Statistical data (per WSEE per month) :

$ 1,525 $ 1,527 $ 1,526 (0.1) % 0.1 %

287 259 272 10.8 % (4.8) %

Operating expenses

218 193 201 13.0 % (4.0) %

Operating income

69 66 71 4.5 % (7.0) %

49 53 54 (7.5) % (1.9) %

Adjusted EBITDA (2)

103 88 95 17.0 % (7.4) %

___________________________________

(1) Revenues are comprised of gross billings less WSEE payroll costs as follows:

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(in thousands)

2020 2019 2018

Gross billings

$ 28,168,611 $ 27,212,010 $ 23,830,731

WSEE payroll cost

Adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 in the form of a stock dividend.

23,881,607 22,897,206 20,002,182

$ 4,287,004 $ 4,314,804 $ 3,828,549

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

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WSEE payroll cost

8,497 8,100 7,970

Revenues $ 1,525 $ 1,527 $ 1,526

2020 Form 10-K

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• 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 terminations.

During 2019 , the number of WSEEs paid from new client sales decreased over 2018 .

• During 2020, the average number of WSEEs paid from new client sales decreased 1.5% from 2019.

The net gain (loss) in our client base declined compared to 2019 as we have seen layoffs and furloughs exceeding WSEEs returning to work or otherwise hired.

We have also seen certain clients hire significant numbers of WSEEs, while others have experienced significant layoffs.

Average client retention declined from 85% in 2019 to 82% in 2020.

• During 2019, while the average number of WSEEs paid increased 12.6%, the number of WSEEs paid from new client sales decreased over 2018.

In addition, the net change in existing clients and client retention also decreased compared to 2018.

During 2018 , the number of WSEEs paid from new client sales increased over 2017 .

In addition, the net change in existing clients and client retention improved compared to 2017 .

2020 Compared to 2019

Our revenues for 2019 were $4.3 billion , an increase of 12.7% , primarily due to the following:

Average WSEEs paid increased 12.6%

Revenues per WSEE per month increased 0.1% , or $1

2018 Compared to 2017

Our revenues for 2018 were $3.8 billion , an increase of 16.0% , primarily due to the following:

Our revenues for 2020 were $4.3 billion, a decrease of 0.6%, primarily due to the following:

• Average WSEEs paid decreased 0.6%.

• Revenues per WSEE per month was essentially flat with only a decrease of 0.1%, or $2, as 3.0% higher average pricing was partially offset by $121.3 million, or $43 per WSEE per month, in FICA deferral elections by clients and credits pursuant to the CARES Act and the FFCRA.

These deferral elections also reduced our direct costs and

2020 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

therefore had no net effect on our gross profit.

In addition, during the second quarter of 2020, we reduced revenue by $11.6 million for 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.

2019 Compared to 2018

Our revenues for 2019 were $4.3 billion, an increase of 12.7%, primarily due to the following:

• Average WSEEs paid increased 12.6%

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Significant Markets

In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin.

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

Our gross billings charged to our PEO HR Outsourcing solutions clients are subject to pricing arrangements that are typically renewed annually.

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

In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the

2020 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin.

Our gross billings charged to our PEO HR Outsourcing solutions clients are subject to pricing arrangements that are typically renewed annually.

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

2020 Compared to 2019

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

The net decrease in costs between 2019 and 2018 attributable to changes in cost estimates for benefits and workers’ compensation totaled $9.3 million as discussed below.

Our revenues per WSEE per month decreased $2 due to higher average pricing, which was offset by client FICA deferral elections and tax credits pursuant to the CARES Act and FFCRA in 2020.

Our direct costs per WSEE per month decreased $30 due primarily to changes in our direct costs components as described below.

The net decrease in direct costs between 2020 and 2019 attributable to changes in cost estimates for benefits and workers’ compensation totaled $12.9 million as discussed below.

The primary direct cost components changed as follows:

Benefits costs

The cost of group health insurance and related employee benefits increased $12 per WSEE per month, or 4.0% , on a per covered employee basis due primarily to an increase in the number of large individual healthcare claimants in 2019.

• The cost of group health insurance and related employee benefits increased $11 per WSEE per month, but decreased 0.5% on a per covered employee basis due primarily to a decrease in claims as a result of lower utilization and the deferral of nonessential healthcare procedures in response to COVID-19 governmental requirements or guidance.

• The percentage of WSEEs covered under our health insurance plan was 67.9% in 2020 and 66.5% in 2019.

Reported results include changes in estimated claims run-off related to prior periods and an increase in costs of $2.3 million , or $1 per WSEE per month, in 2019 compared to a decrease in costs of $1.3 million, or $1 per WSEE per month, in 2018 .

• Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $0.2 million, but remained flat on a per WSEE per month basis, in 2020 compared to an increase in costs of $2.3 million, or $1 per WSEE per month, in 2019.

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Please read “—Critical Accounting Policies and Estimates—Benefits Costs” for a discussion of our accounting for health insurance costs.

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• As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $42.1 million, or 0.20% of non-bonus payroll costs, in 2020 compared to a reduction of $31.7 million, or 0.16% of non-bonus payroll costs, in 2019.

The 2019 period costs include the impact of a 1.9%

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

discount rate used to accrue workers’ compensation loss claims, compared to a 2.6% discount rate used in the 2018 period.

The 2020 period costs include the impact of a 0.6% discount rate used to accrue workers’ compensation loss claims, compared to a 1.9% discount rate used in the 2019 period.

Please read “—Critical Accounting Policies and Estimates—Workers’ Compensation Costs” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs

Payroll taxes increased 14.2% , or $8 per WSEE per month, due primarily to a 14.5% increase in payroll costs partially offset by lower unemployment tax rates in 2019.

Payroll taxes as a percentage of payroll cost were 6.7% in both 2019 and 2018 .

• Payroll taxes decreased 6.9%, or $34 per WSEE per month, due primarily to $121.3 million in FICA deferral elections and tax credits by clients pursuant to the CARES Act and FFCRA.

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

These reductions were partially offset by a 4.3% increase in payroll costs.

• Payroll taxes as a percentage of payroll cost were 6.0% in 2020 and 6.7% in 2019.

2019 Compared to 2018

The net decrease in costs between 2018 and 2017 due to changes in cost estimates for benefits and workers compensation totaled $5.0 million as discussed below.

The net decrease in direct costs between 2019 and 2018 attributable to changes in cost estimates for benefits and workers’ compensation totaled $9.3 million as discussed below.

The primary direct cost components changed as follows:

Benefits costs

The cost of group health insurance and related employee benefits increased $6 per WSEE per month, or 2.2% , on a per covered employee basis.

• The cost of group health insurance and related employee benefits increased $12 per WSEE per month, or 4.0%, on a per covered employee basis due primarily to an increase in the number of large individual healthcare claimants in 2019.

• The percentage of WSEEs covered under our health insurance plan was 66.5% in 2019 and 68.0% in 2018.

Reported results include changes in estimated claims run-off related to prior periods and was a decrease in costs of $1.3 million, or $1 per WSEE per month, in 2018 compared to an increase in costs of $1.2 million, or $1 per WSEE per month, in 2017 .

• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $2.3 million, or $1 per WSEE per month, in 2019 compared to a decrease in costs of $1.3 million, or $1 per WSEE per month, in 2018.

Please read “—Critical Accounting Policies and Estimates—Benefits Costs” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs

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 costs estimates.

Workers’ compensation costs increased 6.2% , but decreased $3 on a per WSEE per month basis, in 2018 compared to 2017 .

Our continued discipline around our client selection, safety and claims management contributed to the reduction 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 costs estimates.

• Workers’ compensation costs decreased 4.7%, or $5 per WSEE per month, in 2019 compared to 2018.

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• As a percentage of non-bonus payroll cost, workers’ compensation costs in 2019 were 0.41% compared to 0.49% in 2018.

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Payroll tax costs

Payroll taxes increased 15.8% , or $6 per WSEE per month, due primarily to an 18.5% increase in payroll costs partially offset by lower unemployment tax rates in 2018.

Payroll taxes as a percentage of payroll cost were 6.7% in 2018 compared to 6.9% in 2017 .

• Payroll taxes increased 14.2%, or $8 per WSEE per month, due primarily to a 14.5% increase in payroll costs partially offset by lower unemployment tax rates in 2019.

• Payroll taxes as a percentage of payroll cost were 6.7% in both 2019 and 2018.

Operating Expenses

2020 Compared to 2019

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

Year Ended December 31,

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

Salaries $ 353,273 $ 317,124 11.4 % $ 126 $ 112 12.5 %

Stock-based compensation 60,145 23,993 150.7 % 21 8 162.5 %

Commissions 32,835 31,420 4.5 % 12 11 9.1 %

Advertising 21,556 21,603 (0.2) % 8 8 —

General and administrative 113,167 123,438 (8.3) % 40 44 (9.1) %

Depreciation and amortization 31,189 28,723 8.6 % 11 10 10.0 %

Total operating expenses $ 612,165 $ 546,301 12.1 % $ 218 $ 193 13.0 %

Operating expenses for 2020 increased 12.1% to $612.2 million compared to $546.3 million in 2019.

Operating expenses per WSEE per month for 2020 increased 13.0% to $218 compared to $193 in 2019.

• Salaries of corporate and sales staff increased 11.4% to $353.3 million, or $14 per WSEE per month, compared to 2019.

The increase was primarily due to a 4.1% increase in headcount, including a 9.3% increase in total BPAs in 2020 and higher incentive compensation expense during 2020 related to better than expected 2020 operating results compared to lower than expected 2019 operating results.

• Stock-based compensation increased 150.7% to $60.1 million, or $13 per WSEE per month, compared to 2019.

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 operating results in 2020 compared to lower than expected operating results in 2019.

In addition, 2020 contains the acceleration of stock-based compensation expense for employees who meet the retirement eligibility requirements for continued vesting.

Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the Consolidated Financial Statements for additional information.

• Commissions expense increased 4.5% to $32.8 million, or $1 per WSEE per month, compared to 2019.

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

2020 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Expenses

• Advertising expense was flat compared to 2019, as a decrease in trade shows and events due to COVID-19 was partially offset by an increase in internet and radio advertising.

• General and administrative expenses decreased 8.3% to $113.2 million, or $4 per WSEE per month, compared to 2019.

The decrease was primarily due to reductions in travel and training costs in response to the COVID-19 pandemic, partially offset by an increase in technology licensing costs, corporate insurance and rent expense.

• Depreciation and amortization expense increased 8.6% to $31.2 million, or $1 per WSEE per month, compared to 2019.

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

2019 Compared to 2018

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Year Ended December 31,

(in thousands, except per WSEE)

(in thousands, except per WSEE) 2019 2018 % Change 2019 2018 % Change

Salaries $ 317,124 $ 301,027 5.3 % $ 112 $ 120 (6.7) %

Stock-based compensation 23,993 20,425 17.5 % 8 8 —

Commissions 31,420 28,957 8.5 % 11 12 (8.3) %

Advertising 21,603 18,554 16.4 % 8 7 14.3 %

General and administrative 123,438 111,068 11.1 % 44 45 (2.2) %

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• Commissions expense increased 8.5% to $31.4 million, but decreased $1 on a per WSEE per month basis, compared to 2018.

Commissions are primarily due to commissions associated with the growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during 2019.

Commissions are primarily due to commissions associated with the growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid in 2019.

• Advertising expense increased 16.4% to $21.6 million, or $1 per WSEE per month, compared to 2018.

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

Other Income (Expense)

2020 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2018 Compared to 2017

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

Year Ended December 31,

(in thousands, except per WSEE)

Stock-based compensation

General and administrative

Depreciation and amortization

Total operating expenses

Operating expenses for 2018 increased 13.6% to $502.9 million compared to $442.8 million in 2017 .

Operating expenses per WSEE per month for 2018 decreased 0.5% to $201 compared to $202 in 2017 .

Salaries of corporate and sales staff increased 16.0% to $301.0 million , or $2 per WSEE per month, compared to 2017 .

The increase was primarily due to a $9.3 million charge related to a one-time tax reform bonus paid to corporate employees, a 10.7% increase in headcount, including a 16.2% increase in BPAs in 2018 , and additional incentive compensation expense as a result of stronger operating results.

Stock-based compensation decreased 16.1% to $20.4 million , or $3 per WSEE per month, compared to 2017 .

This decrease was primarily due to the acceleration of restricted stock awards and associated expense into the fourth quarter of 2017 that were originally scheduled to vest in the first quarter of 2018.

Please read Note 1 “ Accounting Policies ” and Note 9 “ Incentive Plans ,” to the Consolidated Financial Statements for additional information.

Commissions expense increased 27.2% to $29.0 million , or $2 per WSEE per month, compared to 2017 .

Commissions are primarily due to commissions associated with the growth in our PEO HR Outsourcing solutions including an increase in the amount of sales channel referral fees paid in 2018.

Advertising expense increased 11.2% to $18.6 million, but decreased $1 on a per WSEE per month basis, compared to 2017 .

The increase was due to additional spending on sponsorships, promotional items and billboard advertising.

General and administrative expenses increased 9.7% to $111.1 million , but decreased $1 on a per WSEE per month basis, compared to 2017 .

The increase was due to increased travel and training expenses associated with the increase in BPAs, professional services, technology costs, rent and office expenses, partially offset by the non-recurrence of charitable contributions made in 2017 related to Hurricane Harvey relief efforts.

Depreciation and amortization expense increased 25.6% to $22.8 million , but remained flat on a per WSEE per month basis, compared to 2017 .

The increase was primarily due to increased capital expenditures related to software development costs.

Other Income (Expense)

Other income (expense), net was income of $3.0 million in 2019 , $3.3 million in 2018 and $0.2 million in 2017 .

Other income (expense), was expense of $5.4 million in 2020, income of $3.0 million in 2019 and income of $3.3 million in 2018.

In 2020, the decrease in other income was due to a decrease in interest income on our marketable securities investments and workers’ compensation deposits and a slight increase in interest expense related to the higher outstanding balance on our credit facility.

In 2019, higher interest income earnings on our investments was offset by higher interest expense on our outstanding debt.

The 2018 increase in other income was primarily due to interest income earned on our investments.

Please read Note 2 to the Consolidated Financial Statements, “Cash, Cash Equivalents and Marketable Securities,” for additional information.

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Our effective income tax rate was 27.0% in 2020, 20.3% in 2019 and 25.7% in 2018.

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During 2020, we incurred federal and state income tax expense of $51.0 million on pre-tax income of $189.3 million.

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Our provision for income taxes differed from the U.S.

statutory rate of 35% primarily due to state income taxes and non-deductible expenses, including a non-cash tax charge of $2.5 million related to the enactment of the 2017 Tax Reform Act offset by $6.8 million of tax benefits associated with equity compensation.

statutory rate of 21% primarily due to state income taxes and non-deductible expenses, offset by $3.9 million of tax benefits associated with equity compensation.

Please read Note 1 “Accounting Policies” and Note 7 “Income Taxes,” to the Consolidated Financial Statements for additional information.

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

Non-GAAP Measure

Benefit of Non-GAAP Measure

Non-bonus payroll cost

Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs.

Non-GAAP Measure Definition Benefit of Non-GAAP Measure

Non-bonus payroll cost Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs.

Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program.

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We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program.

Adjusted cash, cash equivalents and marketable securities

Excludes funds associated with:

Adjusted cash, cash equivalents and marketable securities Excludes funds associated with:

• federal and state income tax withholdings,

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Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments.

Adjusted operating expense

Represents operating expenses excluding the impact of the following:

• costs associated with a one-time tax reform bonus paid to corporate employees, and

• charitable donations to Hurricane Harvey relief efforts.

Represents net income computed in accordance with GAAP, plus:

Adjusted operating expense Represents operating expenses excluding the impact of the following:

• costs associated with a one-time tax reform bonus paid to corporate employees.

EBITDA Represents net income computed in accordance with GAAP, plus:

• interest expense,

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• depreciation and amortization expense.

Adjusted EBITDA

Represents EBITDA plus:

Adjusted EBITDA Represents EBITDA plus:

• non-cash stock based compensation,

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• charitable donations to Hurricane Harvey relief efforts.

Adjusted net income

Represents net income computed in accordance with GAAP, excluding:

Adjusted net income Represents net income computed in accordance with GAAP, excluding:

• non-cash stock based compensation,

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• charitable donations to Hurricane Harvey relief efforts.

Represents diluted net income per share computed in accordance with GAAP, excluding:

Adjusted EPS Represents diluted net income per share computed in accordance with GAAP, excluding:

• non-cash stock based compensation,

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(in thousands, except per WSEE per month)

2020 2019 2018

$ WSEE $ WSEE $ WSEE

Payroll cost $ 23,881,607 $ 8,497 $ 22,897,206 $ 8,100 $ 20,002,182 $ 7,970

Bonus payroll cost 3,238,284 1,152 2,880,680 1,019 2,498,875 996

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% Change year over year

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

3.1 % 3.7 % 14.4 % 1.5 % 17.4 % 2.5 %

Following is a reconciliation of operating expenses (GAAP) to adjusted operating expenses (non-GAAP):

Year Ended December 31,

(in thousands, except per WSEE per month)

2020 2019 2018

$ WSEE $ WSEE $ WSEE

Operating expenses $ 612,165 $ 218 $ 546,301 $ 193 $ 502,873 $ 201

One-time tax reform bonus — — — — 9,306 4

Adjusted operating expenses $ 612,165 $ 218 $ 546,301 $ 193 $ 493,567 $ 197

% Change year over year

12.1 % 13.0 % 10.7 % (2.0) % 12.0 % (2.0) %

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

(in thousands, except per WSEE per month)

Year Ended December 31,

2020 2019 2018 2017 2016

$ WSEE $ WSEE $ WSEE $ WSEE $ WSEE

Net income $ 138,237 $ 49 $ 151,099 $ 53 $ 135,413 $ 54 $ 84,402 $ 38 $ 65,991 $ 33

Income tax expense 51,033 19 38,544 14 46,947 19 45,739 21 39,186 19

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Depreciation and amortization 31,189 11 28,723 10 22,842 9 18,182 9 16,644 9

Impairment charges and other

EBITDA 228,475 82 226,013 80 209,870 84 151,536 69 124,217 62

Stock-based compensation 60,145 21 23,993 8 20,425 8 24,345 11 16,643 8

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Charitable donations to Hurricane Harvey relief efforts — — — — — — 2,000 1 — —

Other — — — — — — (200) — — —

Stockholder advisory expenses — — — — — — — — 323 1

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% Change year over year 15.4 % 17.0 % 4.3 % (7.4) % 34.8 % 17.3 % 25.9 % 14.1 % 28.3 % 12.7 %

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

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

(in thousands) 2020 2019

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Adjusted cash, cash equivalents and marketable securities $ 212,059 $ 107,905

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a reconciliation of operating expenses (GAAP) to adjusted operating expenses (non-GAAP):

Year Ended December 31,

(in thousands, except per WSEE per month)

Operating expenses

One-time tax reform bonus

Charitable donations to Hurricane Harvey relief efforts

Adjusted operating expenses

% Change year over year

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

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(in thousands) 2020 2019 2018 2017 2016

Net income $ 138,237 $ 151,099 $ 135,413 $ 84,402 $ 65,991

Non-GAAP adjustments:

Impairment charges and other (1)

Stock-based compensation 60,145 23,993 20,425 24,345 16,643

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Charitable donations to Hurricane Harvey relief efforts — — — 2,000 —

Other — — — (200) —

Stockholder advisory expenses — — — — 323

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% Change year over year 7.0 % 7.6 % 52.9 % 34.3 % 40.7 %

____________________________________

Includes impairment and other charges of $10.5 million related to the sale of two aircraft in 2015.

2020 Form 10-K

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(amounts per share) 2020 2019 2018 2017 2016

Diluted EPS $ 3.54 $ 3.70 $ 3.22 $ 2.01 $ 1.54

Non-GAAP adjustments:

Impairment charges and other

Stock-based compensation 1.54 0.59 0.49 0.58 0.39

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Charitable donations to Hurricane Harvey relief efforts — — — 0.05 —

Other — — — (0.01) —

Stockholder advisory expenses — — — — 0.01

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Disaster relief tax credit — — — (0.02) —

$ 4.64 $ 4.15 $ 3.75 $ 2.45 $ 1.79

% Change year over year

11.8 % 10.7 % 53.1 % 36.9 % 62.7 %

____________________________________

(1) Per share amounts for the years 2017 and 2016 have been adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 as a stock dividend.

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Longer-term projects, large stock repurchases or significant acquisitions may be financed with debt or equity.

We may seek to raise additional capital or take other steps to increase or manage our liquidity and capital resources.

We have a $500 million credit facility (“Facility”) with a syndicate of financial institutions.

The Facility is available for working capital and general corporate purposes, including acquisitions and stock repurchases.

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 $589.4 million in cash, cash equivalents and marketable securities at December 31, 2020, of which approximately $342.0 million was payable in early January 2021 for withheld federal and state income taxes, employment taxes and other payroll deductions, and $35.3 million were client prepayments that were payable in January 2021.

In 2019 and 2018 , we received $18.8 million and $19.4 million , respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital.

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

At December 31, 2020, we had working capital of $172.3 million compared to $105.7 million at December 31, 2019.

The increase in working capital reflects, in part, cash flow from operations and borrowings under our Facility, offset by share repurchases, dividends and capital expenditures.

We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our credit facility will be adequate to meet our liquidity requirements for 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.

We have a credit facility with a syndicate of financial institutions.

During 2019 , we borrowed $125.0 million under the credit facility, which was used for general corporate purposes.

In September 2019, the credit facility was increased from $350 million to $500 million.

The credit facility, which may be increased to $550 million based on the terms and subject to the conditions set forth in the agreement related to the facility, is available for working capital and general corporate purposes, including acquisitions.

At December 31, 2019 , we had outstanding letters of credit and borrowings totaling $270.4 million under the credit facility.

We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our Facility will be adequate to meet our liquidity requirements for 2021.

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 monitoring in light of the significant uncertainty created by the COVID-19 pandemic.

At December 31, 2020, we had outstanding letters of credit and borrowings totaling $370.4 million under the Facility.

Please read Note 6 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash Flows from Operating Activities

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These include the following:

Timing of client payments / payroll taxes – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to the payment of WSEE payrolls and associated payroll taxes.

2020 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Timing of client payments / payroll taxes – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients no later than the same day as the payment of WSEE payrolls and associated payroll taxes.

Therefore, the last business day of a reporting period has a substantial impact on our reporting of operating cash flows.

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

In the year ended December 31, 2019 , the last business day of the reporting period ended on a Tuesday , client prepayments were $59.6 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $234.6 million .

In the period ended December 31, 2018 , which ended on a Monday , client prepayments were $34.2 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $224.5 million .

In the year ended December 31, 2020, the last business day of the reporting period ended on a Thursday, client prepayments were $35.3 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $342.0 million.

In the period ended December 31, 2019, which ended on a Tuesday, client prepayments were $59.6 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $234.6 million.

• Workers’ compensation plan funding – In 2020 and 2019, we received $28.2 million and $18.8 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital.

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

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

As of December 31, 2019 , Plan Costs were less than the net premiums paid and owed to United by $2.6 million , which is $6.4 million less than our agreed-upon $9.0 million surplus maintenance level.

As of December 31, 2020, Plan Costs were more than the net premiums paid and owed to United by $6.0 million, which is $15.0 million less than our agreed-upon $9.0 million surplus maintenance level.

The $15.0 million difference is therefore reflected as a current liability and $9.0 million is reflected as a long-term asset on our Consolidated Balance Sheets at December 31, 2020.

In addition, the premiums owed to United at December 31, 2020, were $11.7 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.

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

Our net income increased 11.6% to $151.1 million in 2019 from $135.4 million in 2018 .

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

Our adjusted net income increased 7.0% to $181.3 million in 2020 from $169.4 million in 2019.

Please read “Results of Operations.”

Cash Flows from Investing Activities

Our net cash flows used in investing activities were $29.7 million during 2019 , primarily due to $56.3 million in property and equipment purchases offset by $26.6 million in redemptions of marketable securities, net of purchases.

Our net cash flows used in investing activities were $98.6 million during 2020, primarily due to $98.2 million in property and equipment purchases, which included $61.0 million related to our corporate office expansion.

Cash Flows from Financing Activities

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Please read Note 6 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.

2019 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of December 31, 2019 , and the effect they are expected to have on our liquidity and capital resources:

(in thousands)

Non-cancelable operating leases

Purchase obligations (1)

Long-term debt

Other long-term liabilities:

Accrued workers’ compensation claim costs (3)

Total contractual cash obligations

____________________________________

The table includes purchase obligations associated with non-cancelable contracts individually greater than $100,000 and one year.

Includes $56.5 million related to the construction of a new facility on our corporate campus.

For more information please read Item 2.

“Properties—Corporate Facilities.”

Accrued workers’ compensation claim costs include the short and long-term amounts.

For more information, please read, “—Critical Accounting Policies and Estimates—Workers’ Compensation Costs.”

Seasonality, Inflation and Quarterly Fluctuations

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This trend is primarily the result of many WSEEs’ medical plan deductibles being fully met by the fourth quarter, which increases our liability with respect to those claims.

We have also experienced variability on a quarterly basis in medical claims costs based on the unpredictable nature of large claims.

We have also experienced variability on a quarterly basis in medical claims costs based on the unpredictable nature of large claims and the COVID-19 pandemic effect on healthcare utilization patterns.

Payroll taxes and associated billings are computed based on an employee’s annual taxable wage base.

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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-K

Item 7. Management’s Discussion and Analysis