What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-02 · 92 added, 171 removed, 253 unchanged (51% of the section changed)

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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.

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

economic activity.

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

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

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

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

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

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

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

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

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

We currently expect to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures during the remainder of 2020 and possibly into 2021 that had been deferred in response to COVID-19 governmental requirements or guidance related to shelter in place and similar orders.

In the first quarter of 2021, the average number of WSEEs paid per month declined 2.0% year-over-year and 2.5% sequentially as year-end client attrition exceeded new sales.

We expect the average number of paid WSEEs per month to increase between 5% and 6% in the second quarter of 2021 as compared to the second quarter of 2020, which equates to the average number of paid worksite employees per month growing 2.6% to 3.6% sequentially from the first quarter of 2021.

We experienced a 1.8% increase in the year-over-year benefits costs per covered employee during the first quarter of 2021.

We currently expect to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures during the remainder of 2021 and possibly beyond 2021 that had been deferred in response to COVID-19 governmental requirements or guidance related to shelter in place and similar orders.

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

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

Further, the American Rescue Plan Act, which was enacted in March 2021, provides subsidies to qualifying individuals to cover the cost of healthcare benefits for up to six months under the COBRA program.

At this time, we are unable to determine the impact, if any, that these COBRA subsidies, and the potential costs of claims by individuals electing such subsidized coverages, will have on our claim costs.

While the COVID-19 pandemic has resulted in a reduced frequency in workers’ compensation claims, we have experienced an increase in the number of COVID-19 workers’ compensation claims.

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

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

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

Insperity | 2020 Third Quarter Form 10-Q 19

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

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

and the speed and effectiveness of responses to combat

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

the virus, including the development and availability of therapeutics and vaccines.

See Part II, Item 1A.

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2021 Highlights

Third Quarter 2020 Compared to Third Quarter 2019

• Average number of WSEEs paid per month decreased 3.8%

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

• Adjusted EPS increased 21.3% to $0.91

• Adjusted EBITDA increased 12.5% to $57.6 million

First Nine Months 2020 Compared to First Nine Months 2019

First Quarter 2021 Compared to First Quarter 2020

• Average number of WSEEs paid per month decreased 2.0%

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

• Net income decreased 0.3% and diluted earnings per share (“diluted EPS”) increased 0.6%, to $61.9 million and $1.59, respectively

• Adjusted EPS increased 7.1% to $1.82

• Adjusted EBITDA increased 2.9% to $104.2 million

Please read “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA and adjusted EPS to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Insperity | 2020 Third Quarter Form 10-Q 20

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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

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

2020 2019 % Change 2020 2019 % Change

Three Months Ended March 31,

2021 2020 % Change

Financial data:

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

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

Three Months Ended March 31,

(per WSEE per month) 2021 2020

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

Insperity | 2020 Third Quarter Form 10-Q 21

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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

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

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

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

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

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

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

Average client retention declined slightly compared to YTD 2019.

• During the first quarter of 2021 (“Q1 2021”), WSEEs paid declined 2.0% compared to the first quarter of 2020 (“Q1 2020”).

The number of WSEEs paid from new client sales in Q1 2021 was 93% of the 2020 period.

Client attrition, as a percentage of the beginning of the year paid WSEE count, increased from 11% in Q1 2020 to 12% in Q1 2021, primarily due to the recent loss of a large enterprise client with 6,800 WSEEs.

Net gains in our client base improved over the Q1 2020 period as clients continue to recover from the effects of the pandemic.

Average WSEEs Paid and

Year-over-Year Growth Percentage

Insperity | 2020 Third Quarter Form 10-Q 22

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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

Insperity | 2020 Third Quarter Form 10-Q 23

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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(in thousands)

Third Quarter 2020 Compared to Third Quarter 2019

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

• Average WSEEs paid decreased 3.8%.

• Revenues per WSEE per month increased 0.4%, or $6, primarily due to higher average pricing partially offset by $40.2 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit.

First Nine Months 2020 Compared to First Nine Months 2019

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

First Quarter 2021 Compared to First Quarter 2020

Our revenues for Q1 2021 were $1.3 billion, an increase of 4.7%, primarily due to the following:

• Revenues per WSEE per month increased 6.9%, or $118, primarily due to higher average pricing.

• Average WSEEs paid decreased 2.0%.

• Revenues per WSEE per month decreased 0.1%, or $2, primarily due to higher average pricing, which was partially offset by $85.0 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit.

In addition, during the second quarter of 2020, we accrued $11.6 million of client comprehensive service fee credits applied generally on a WSEE basis across our active client base to assist clients in addressing the unprecedented economic impact of the COVID-19 pandemic.

Insperity | 2020 Third Quarter Form 10-Q 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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(in thousands)

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Our gross profit per WSEE is primarily determined by our ability to accurately estimate and control direct costs and our ability to incorporate changes in these costs into the gross billings charged to PEO HR Outsourcing solutions

Insperity | 2020 Third Quarter Form 10-Q 25

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

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Gross Profit and

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Year-over-Year Growth Percentage

Third Quarter 2020 Compared to Third Quarter 2019

First Quarter 2021 Compared to First Quarter 2020

Gross profit for Q1 2021 increased 7.4% to $251.4 million compared to $234.0 million in Q1 2020.

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

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

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

Our revenues and direct costs per WSEE per month increased $118 and $87, respectively, due to higher average pricing and changes in the primary direct cost components, respectively.

The net increase in costs between Q1 2021 and Q1 2020 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $3.9 million as discussed below.

The primary direct cost components changed as follows:

Benefits costs

Insperity | 2020 Third Quarter Form 10-Q 26

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Benefits costs

• The cost of group health insurance and related employee benefits increased $22 per WSEE per month and increased 1.8% on a cost per covered employee basis.

• The percentage of WSEEs covered under our health insurance plans was 67.8% in Q1 2021 compared to 66.9% in Q1 2020.

• Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $7.7 million, or $11 per WSEE per month, in Q3 2020 compared to an increase in costs of $7.0 million, or $10 per WSEE per month, in Q3 2019.

• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $5.5 million, or $8 per WSEE per month, in Q1 2021 compared to a decrease in costs of $1.5 million, or $2 per WSEE per month, in Q1 2020.

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

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Payroll tax costs

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

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

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

First Nine Months 2020 Compared to First Nine Months 2019

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

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

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

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

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

The primary direct cost components changed as follows:

Benefits costs

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

Insperity | 2020 Third Quarter Form 10-Q 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• The percentage of WSEEs covered under our health insurance plans was 68.0% in YTD 2020 compared to 66.6% in YTD 2019.

• Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $1.9 million, or $1 per WSEE per month, in YTD 2020 compared to an increase in costs of $2.9 million, or $2 per WSEE per month, in YTD 2019.

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

Workers’ compensation costs

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

• Workers’ compensation costs decreased 15.4%, or $4 on a per WSEE per month basis, in YTD 2020 compared to YTD 2019.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2020 were 0.33% compared to 0.40% in YTD 2019.

• We recorded a reduction in workers’ compensation costs of $32.4 million, or 0.21% of non-bonus payroll costs, in YTD 2020 compared to a reduction of $26.0 million, or 0.18% of non-bonus payroll costs, in YTD 2019, primarily as a result of closing out claims at lower than expected costs.

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

Payroll tax costs

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

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

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

• Payroll taxes increased 8.2% on an 9.0% increase in payroll costs, or $71 per WSEE per month, as well as an increase in state unemployment tax rates, offset by the collection of a $5.5 million federal payroll tax refund related to a prior year.

• Payroll taxes as a percentage of payroll costs remained flat at 7.8% in both Q1 2021 and Q1 2020.

• In certain states, including Texas, we have experienced delays in the receipt of final 2021 state unemployment tax rates.

As a result, we have estimated the 2021 rate for each of the outstanding states.

Operating Expenses

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◦ rent expenses related to our service centers and sales offices

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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◦ employee travel and training expenses

Insperity | 2020 Third Quarter Form 10-Q 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦ technology and facility repairs and maintenance costs

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

Third Quarter 2020 Compared to Third Quarter 2019

First Quarter 2021 Compared to First Quarter 2020

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

Three Months Ended September 30,

Three Months Ended March 31,

(in thousands, except per WSEE) 2021 2020 % Change 2021 2020 % Change

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• Salaries of corporate and sales staff for Q1 2021 increased 19.2% to $103.1 million, or $26 per WSEE per month, compared to Q1 2020.

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

This increase was primarily due to a 2.5% increase in corporate headcount, including a 7.3% increase in total BPAs in Q1 2021 compared to Q1 2020 and higher incentive compensation accruals in Q1 2021 related to better than expected operating results.

• Stock based compensation expense for Q1 2021 increased 80.4% to $11.8 million, or $8 per WSEE per month, compared to Q1 2020.

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

In addition, Q3 2020 contains the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting.

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

• Commissions expense for Q3 2020 decreased 3.9% to $7.7 million, but remained flat on a per WSEE per month basis, compared to Q3 2019.

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

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

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

The increase was primarily due to awards issued under our incentive plan and the increase in the number of stock awards anticipated to be earned related to our long-term incentive plans based on our higher than expected operating results in 2021.

• Commissions expense for Q1 2021 decreased 8.8% to $7.7 million, or $1 per WSEE per month, compared to Q1 2020, due primarily to lower sales management commissions.

• Advertising expense for Q1 2021 increased 10.1% to $5.3 million, or $1 per WSEE per month, compared to Q1 2020.

The increase was primarily due to increases in television and digital advertising and sponsorships, partially offset by reductions in radio advertising and trade shows and events.

• General and administrative expenses for Q1 2021 decreased 9.2% to $31.6 million, or $3 per WSEE per month, compared to Q1 2020.

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

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

• Depreciation and amortization expense for Q1 2021 increased 5.9% to $8.0 million, or $1 per WSEE per month, compared to Q1 2020.

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

Insperity | 2020 Third Quarter Form 10-Q 29

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

First Nine Months 2020 Compared to First Nine Months 2019

Nine Months Ended September 30,

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

Salaries $ 266,640 $ 237,340 12.3 % $ 127 $ 113 12.4 %

Stock-based compensation 38,110 20,813 83.1 % 18 10 80.0 %

Commissions 23,657 22,727 4.1 % 11 11 —

Advertising 15,334 17,474 (12.2) % 7 8 (12.5) %

General and administrative 85,254 92,801 (8.1) % 42 45 (6.7) %

Depreciation and amortization 23,329 20,929 11.5 % 11 10 10.0 %

Total operating expenses $ 452,324 $ 412,084 9.8 % $ 216 $ 197 9.6 %

Operating expenses for YTD 2020 increased 9.8% to $452.3 million compared to $412.1 million in YTD 2019.

Operating expenses per WSEE per month for YTD 2020 increased 9.6% to $216 compared to $197 in YTD 2019.

• Salaries of corporate and sales staff for YTD 2020 increased 12.3% to $266.6 million, or $14 per WSEE per month, compared to YTD 2019.

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

• Stock based compensation expense for YTD 2020 increased 83.1% to $38.1 million or $8 per WSEE per month, compared to YTD 2019.

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

In addition, YTD 2020 contains the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting.

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

• Commissions expense for YTD 2020 increased 4.1% to $23.7 million, but remained flat on a per WSEE per month basis, compared to YTD 2019.

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

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

• Advertising expense for YTD 2020 decreased 12.2% to $15.3 million, or $1 per WSEE per month, compared to YTD 2019.

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

• General and administrative expenses for YTD 2020 decreased 8.1% to $85.3 million, or $3 per WSEE per month, compared to YTD 2019.

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

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

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

Other Income (Expense)

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

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

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

Insperity | 2020 Third Quarter Form 10-Q 30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Income (expense) for Q1 2021 was net expense of $1.1 million compared to net expense of $0.5 million in Q1 2020.

The increase in expense was primarily due to decreased interest income on our cash, cash equivalents and marketable securities investments.

Income Tax Expense

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

2020 2019 2020 2019

Three Months Ended March 31,

Effective income tax rate 25.2% 26.7%

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

For the three months ended March 31, 2021, our provision for income taxes differed from the U.S.

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

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

During the first three months of 2021 and 2020, we recognized an income tax benefit of $2.2 million and $2.0 million, respectively, related to the vesting of short-term, long-term incentive and restricted stock awards.

Non-GAAP Financial Measures

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• non-cash stock-based compensation.

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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• non-cash stock-based compensation.

Insperity | 2020 Third Quarter Form 10-Q 31

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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(in thousands, except per WSEE per month)

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

2020 2019 2020 2019

$ WSEE $ WSEE $ WSEE $ WSEE

Three Months Ended March 31,

$ WSEE $ WSEE

Payroll cost $ 6,763,587 $ 9,669 $ 6,207,271 $ 8,693

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

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

(in thousands) March 31, 2021 December 31, 2020

Cash, cash equivalents and marketable securities $ 529,069 $ 589,375

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

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

Three Months Ended March 31,

(in thousands, except per WSEE per month)

2020 2019 2020 2019

$ WSEE $ WSEE $ WSEE $ WSEE

$ WSEE $ WSEE

Net income $ 61,922 $ 89 $ 62,092 $ 87

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2.9 % 4.9 % (0.2) % (5.3) %

Insperity | 2020 Third Quarter Form 10-Q 32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Three Months Ended March 31,

(in thousands) 2021 2020

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% Change period over period 5.8 % (18.0) %

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Three Months Ended March 31,

(amounts per share) 2021 2020

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

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

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

At September 30, 2020, we had working capital of $207.8 million compared to $105.7 million at December 31, 2019.

We had $529.1 million in cash, cash equivalents and marketable securities at March 31, 2021, of which approximately $273.5 million was payable in early April 2021 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $58.9 million represented client prepayments that were payable in April 2021.

At March 31, 2021, we had working capital of $207.2 million compared to $172.3 million at December 31, 2020.

We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under the Facility will be adequate to meet our liquidity requirements for the remainder of 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 carefully monitoring in light of the significant uncertainty created by the COVID-19 pandemic.

Insperity | 2020 Third Quarter Form 10-Q 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

As of March 31, 2021, we had an outstanding letter of credit and borrowings totaling $370.4 million under the Facility.

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

Cash Flows from Operating Activities

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

Net cash provided by operating activities in the first three months of 2021 was $2.0 million.

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

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

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

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

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

In the period ended March 31, 2021, the last business day of the reporting period was a Wednesday, client prepayments were $58.9 million and employment taxes and other deductions were $273.5 million.

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

Insperity | 2021 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

As of September 30, 2020, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $32.8 million surplus, $23.8 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at September 30, 2020, were $38.3 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

As of March 31, 2021, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $51.4 million surplus, $42.4 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at March 31, 2021, were $66.0 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

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

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

Our adjusted net income increased 5.8% to $70.8 million in the first three months ended March 31, 2021, compared to $66.9 million in the first three months ended March 31, 2020.

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

Cash Flows from Investing Activities

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

Net cash flows used in investing activities were $12.1 million for the three months ended March 31, 2021, primarily due to property and equipment purchases of $12.1 million.

Cash Flows from Financing Activities

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

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

Insperity | 2020 Third Quarter Form 10-Q 34

Net cash flows used in financing activities were $42.4 million for the three months ended March 31, 2021.

We paid $15.5 million in dividends and repurchased or withheld $29.7 million in stock.

Insperity | 2021 First Quarter Form 10-Q

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis