What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 93 added, 97 removed, 311 unchanged (38% of the section changed)

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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 conform to government restrictions and best practices, we have taken steps designed to keep our staff safe while continuing to serve clients, including implementing flexible remote working arrangements for our 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.

In the second quarter of 2021 (“Q2 2021”), the average number of WSEEs paid per month increased 6.7% year-over-year as the Q2 2021 increase in WSEEs paid at existing clients combined with WSEEs paid from new sales exceeded the second quarter of 2020 (“Q2 2020”) levels.

We expect the average number of paid WSEEs per month to increase between 9.5% and 10.5% in the third quarter of 2021 as compared to the third quarter of 2020, which, if achieved, would equate to the average number of paid WSEEs per month growing 4.3% to 5.3% sequentially from the second quarter of 2021.

We experienced a 12.4% increase in the year-over-year benefits costs per covered employee during the first half of 2021 as compared to the first half of 2020.

return to the workplace and workplace safety.

In the third quarter of 2021 (“Q3 2021”), the average number of WSEEs paid per month increased 11.1% year-over-year as the Q3 2021 increase in WSEEs paid at existing clients combined with WSEEs paid from new sales exceeded the third quarter of 2020 (“Q3 2020”) levels.

We expect the average number of paid WSEEs per month to increase between 11.0% and 12.0% in the fourth quarter of 2021 as compared to the fourth quarter of 2020, which, if achieved, would equate to the average number of paid WSEEs per month growing 3.1% to 4.1% sequentially from the third quarter of 2021.

We experienced a 10.3% increase in the year-over-year benefits costs per covered employee during the first nine months of 2021 as compared to the first nine months of 2020, which had substantially lower costs primarily due to the significant decrease in benefits utilization that we experienced during the second quarter of 2020.

During the second quarter of 2020, we experienced a 10.7% decrease in benefits costs per covered employee due primarily to lower utilization of medical services by plan participants as a result of the COVID-19 pandemic, including in response to COVID-19 governmental requirements or guidance related to the deferral of non-essential medical procedures and shelter-in-place and similar orders.

During the remainder of 2021 and possibly beyond 2021, we currently expect to experience higher benefits costs as utilization continues to normalize and deferred procedures and treatments are rescheduled.

As a result, we expect that our health care claim costs will be higher than our historical claim cost trends during this period of normalization.

While we have experienced a reduced frequency in workers’ compensation claims during the COVID-19 pandemic, we have also 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;

During the remainder of 2021 and possibly beyond 2021, benefits costs are expected to continue to be affected by the dynamics of the pandemic, including the impact on healthcare utilization and incremental COVID-19 testing, vaccine and treatment costs.

This may result in a higher level of healthcare claims costs than our historical claim cost trends.

While we have experienced a reduced frequency in workers’ compensation claims during the COVID-19 pandemic, 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.

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, impacts of changes in or variants of the COVID-19 virus, 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;

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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2021 Highlights

Second Quarter 2021 Compared to Second Quarter 2020

Third Quarter 2021 Compared to Third Quarter 2020

• Average number of WSEEs paid per month increased 11.1%

• Net income and diluted earnings per share (“diluted EPS”) decreased 51.5% and 51.1% to $25.2 million and $0.65, respectively

• Net income and diluted earnings per share (“diluted EPS”) increased 36.4% and 37.3% to $27.3 million and $0.70, respectively

• Adjusted EPS decreased 2.2% to $0.89

• Adjusted EBITDA decreased 34.5% to $60.2 million

First Six Months 2021 Compared to First Six Months 2020

• Adjusted EBITDA increased 4.5% to $60.1 million

First Nine Months 2021 Compared to First Nine Months 2020

• Average number of WSEEs paid per month increased 5.2%

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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 | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

2 unchanged sentences

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

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

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

2021 2020 % Change 2021 2020 % Change

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

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

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

(per WSEE per month) 2021 2020 2021 2020

2 unchanged sentences

Revenues $ 1,565 $ 1,450 $ 1,672 $ 1,544

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

8 unchanged sentences

• During Q3 2021, WSEEs paid increased 11.1% compared to Q3 2020.

The number of WSEEs paid from new client sales improved compared to Q2 2020 and the net gain (loss) in our client base improved compared to Q2 2020 as clients continue to recover from the effects of the pandemic.

Client retention remained consistent compared to Q2 2020.

• During the first six months of 2021 (“YTD 2021”), WSEEs paid increased 2.3% compared to the first six months of 2020 (“YTD 2020”).

The number of WSEEs paid from new client sales and client retention improved compared to Q3 2020 and the net gain (loss) in our client base improved compared to Q3 2020 as clients continue to recover from the effects of the pandemic.

• During the first nine months of 2021 (“YTD 2021”), WSEEs paid increased 5.2% compared to the first nine months of 2020 (“YTD 2020”).

The number of WSEEs paid from new client sales improved compared to YTD 2020 and the net gain (loss) in our client base improved compared to YTD 2020 as clients continue to recover from the effects of the pandemic.

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Year-over-Year Growth Percentage

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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(amounts per share)

Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs and (2) a markup computed as a percentage of the payroll cost.

Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs and (2) a monthly markup component .

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.

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 | 2021 Second Quarter Form 10-Q

Because our monthly markup is computed in part 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 | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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(in thousands)

Second Quarter 2021 Compared to Second Quarter 2020

Third Quarter 2021 Compared to Third Quarter 2020

Our revenues for Q3 2021 were $1.2 billion, an increase of 20.0%, primarily due to the following:

• Revenues per WSEE per month increased 11.8%, or $171, on 5.8% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of $44.8 million and $11.6 million of comprehensive service fee credits.

• Average WSEEs paid increased 11.1%.

First Six Months 2021 Compared to First Six Months 2020

• Revenues per WSEE per month increased 7.9%, or $115, on 3.9% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of $40.2 million.

First Nine Months 2021 Compared to First Nine Months 2020

Our revenues for YTD 2021 were $3.7 billion, an increase of 14.0%, primarily due to the following:

• Revenues per WSEE per month increased 8.8%, or $140, on 6.1% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of $44.8 million and $11.6 million of comprehensive service fee credits.

• Average WSEEs paid increased 5.2%.

Insperity | 2021 Second Quarter Form 10-Q

• Revenues per WSEE per month increased 8.3%, or $128, on 5.2% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of $85.0 million and $11.6 million of comprehensive service fee credits.

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Currently, we have a dedicated sales management, service personnel, and consulting staff who concentrate solely on the middle market sector.

Our average number of WSEEs per month in our middle market sector decreased 2.0% during YTD 2021 compared to YTD 2020, representing approximately 23.6% and 24.6% of our total average paid WSEEs during YTD 2021 and YTD 2020, respectively.

Insperity | 2021 Second Quarter Form 10-Q

Our average number of WSEEs per month in our middle market sector increased 2.4% during YTD 2021 compared to YTD 2020, representing approximately 23.7% and 24.4% of our total average paid WSEEs during YTD 2021 and YTD 2020, respectively.

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Year-over-Year Growth Percentage

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Second Quarter 2021 Compared to Second Quarter 2020

Gross profit for Q2 2021 decreased 9.4% to $199.6 million compared to $220.2 million in Q2 2020.

Third Quarter 2021 Compared to Third Quarter 2020

Gross profit for Q3 2021 increased 7.3% to $198.5 million compared to $185.0 million in Q3 2020.

Gross profit per WSEE per month for Q3 2021 decreased $9 to $257 compared to $266 in Q3 2020 due primarily to higher direct costs, offset in part by higher average pricing, 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 per WSEE per month increased $171 due to higher average pricing, as well as the non-recurrence of the 2020 FICA deferral elections by clients and the 2020 comprehensive service fee credits.

Our revenues per WSEE per month increased $115 due to higher average pricing, as well as the non-recurrence of the 2020 FICA deferral elections by clients pursuant to the CARES Act.

The net increase in direct costs between Q3 2021 and Q3 2020 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $6.1 million as discussed below.

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Benefits costs

• The cost of group health insurance and related employee benefits increased $129 per WSEE per month and increased 23.9% on a cost per covered employee basis due primarily to an increase in claims in Q2 2021 compared to Q2 2020, which had significantly lower claims as a result of lower utilization and deferral of non-essential elective health care procedures in response to COVID-19 pandemic and related governmental requirements or guidance.

• The cost of group health insurance and related employee benefits increased $27 per WSEE per month and increased 6.0% on a cost per covered employee basis.

In Q3 2021, benefits costs continued to reflect the dynamics of the pandemic, including increased utilization of our health plan and COVID-19 related vaccination, testing and treatment costs.

• The percentage of WSEEs covered under our health insurance plans was 66.4% in Q3 2021 compared to 67.9% in Q3 2020.

• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $15.3 million, or $21 per WSEE per month, in Q2 2021 compared to a reduction in costs of $10.4 million, or $15 per WSEE per month, in Q2 2020.

• Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $3.7 million, or $5 per WSEE per month, in Q3 2021 compared to a reduction in costs of $7.7 million, or $11 per WSEE per month, in Q3 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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Our continued discipline around our client selection, safety and claims management has allowed for claims within our policy periods to be closed out at amounts below our original cost estimates.

• Workers’ compensation costs increased 22.6%, or $3 per WSEE per month, in Q2 2021 compared to Q2 2020 on a 15.2% increase in non-bonus payroll costs.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in Q2 2021 were 0.30% compared to 0.29% in Q2 2020.

• Workers’ compensation costs increased 20.5%, or $2 per WSEE per month, in Q3 2021 compared to Q3 2020 on an 18.2% increase in non-bonus payroll costs.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in Q3 2021 were 0.30% in both Q3 2021 and Q3 2020.

• We recorded a reduction in workers’ compensation costs of $9.3 million, or 0.15% of non-bonus payroll costs, in Q3 2021 compared to a reduction of $11.4 million, or 0.22% of non-bonus payroll costs, in Q3 2020, primarily as a result of closing out claims at lower than expected costs.

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Payroll tax costs

• Payroll taxes increased 26.7% on a 20.3% increase in payroll costs, or $87 per WSEE per month, due primarily to the non-recurrence of the $44.8 million of the 2020 FICA deferral elections by clients pursuant to the CARES Act, partially offset by an $11.2 million reduction related to final 2021 state unemployment taxes and the Q2 2021 collection of $11.3 million in federal payroll tax refunds related to prior years.

• Payroll taxes as a percentage of payroll costs increased to 6.2% in Q2 2021 compared to 5.9% in Q2 2020 due primarily to the non-recurrence of the $44.8 million of the 2020 FICA deferral elections by clients pursuant to the CARES Act.

Insperity | 2021 Second Quarter Form 10-Q

• Payroll taxes increased 35.8% on a 22.1% increase in payroll costs, or $96 per WSEE per month, due primarily to the non-recurrence of $40.2 million of the 2020 FICA deferral elections by clients pursuant to the CARES Act.

• Payroll taxes as a percentage of payroll costs increased to 6.0% in Q3 2021 compared to 5.4% Q3 2020, primarily due to the non-recurrence of the 2020 FICA deferral elections by clients pursuant to the CARES Act.

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

First Six Months 2021 Compared to First Six Months 2020

Gross profit for YTD 2021 decreased 0.7% to $451.0 million compared to $454.3 million in YTD 2020.

First Nine Months 2021 Compared to First Nine Months 2020

Gross profit for YTD 2021 increased 1.6% to $649.5 million compared to $639.3 million in YTD 2020.

Gross profit per WSEE per month for YTD 2021 decreased $10 to $295 compared to $305 in YTD 2020 due primarily to higher direct costs, offset in part by higher average pricing, 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 per WSEE per month increased $140 due to higher average pricing, as well as the non-recurrence of the 2020 FICA deferral elections and the 2020 comprehensive service fee credits.

Our revenues per WSEE per month increased $128 due to higher average pricing as well as the non-recurrence of the 2020 FICA deferral elections pursuant to the CARES Act and the comprehensive service fee credits.

The net increase in direct costs between YTD 2021 and YTD 2020 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $7.4 million as discussed below.

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Benefits costs

• The cost of group health insurance and related employee benefits increased $76 per WSEE per month and increased 12.4% on a cost per covered employee basis due primarily to an increase in claims in YTD 2021 compared to YTD 2020, which had lower claims as a result of lower utilization and the deferral of non-essential health care procedures, primarily in Q2 2020, in connection with the COVID-19 pandemic and related government requirements or guidance.

• The cost of group health insurance and related employee benefits increased $60 per WSEE per month and increased 10.3% on a cost per covered employee basis due primarily to an increase in claims in YTD 2021 compared to YTD 2020, which had lower claims as a result of lower utilization and the deferral of non-essential health care procedures, primarily in the second quarter of 2020, in connection with the COVID-19 pandemic and related government requirements or guidance.

• The percentage of WSEEs covered under our health insurance plans was 67.2% in YTD 2021 compared to 68.0% in YTD 2020.

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

• Workers’ compensation costs decreased 8.5%, or $3 on a per WSEE per month basis, in YTD 2021 compared to YTD 2020.

• Workers’ compensation costs increased 0.5%, but decreased $1 on a per WSEE per month basis, in YTD 2021 compared to YTD 2020.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2021 were 0.29% compared to 0.33% in YTD 2020.

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Payroll tax costs

• Payroll taxes increased 15.5% on a 14.2% increase in payroll costs, or $74 per WSEE per month, due primarily to the non-recurrence of the $44.8 million of the 2020 FICA deferral elections by clients pursuant to the CARES Act, offset by the YTD 2021 collection of $16.8 million in federal payroll tax refunds related to prior years.

• Payroll taxes increased 21.0% on a 16.8% increase in payroll costs, or $79 per WSEE per month, due primarily to the non-recurrence of $85.0 million of client FICA deferral elections pursuant to the CARES Act in YTD 2020, partially offset by the YTD 2021 collection of $16.8 million in federal payroll tax refunds related to prior years.

• Payroll taxes as a percentage of payroll costs increased to 6.7% in YTD 2021 compared to 6.4% in YTD 2020.

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

13 unchanged sentences

• 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.

Second Quarter 2021 Compared to Second Quarter 2020

Third Quarter 2021 Compared to Third Quarter 2020

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

Three Months Ended June 30,

Three Months Ended September 30,

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

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Operating expenses for Q3 2021 increased 1.7% to $158.9 million compared to $156.3 million in Q3 2020.

Operating expenses per WSEE per month for Q2 2021 increased 4.7% to $225 compared to $215 in Q2 2020.

• Salaries of corporate and sales staff for Q2 2021 increased 4.0% to $94.4 million, but decreased $4 on a per WSEE per month basis, compared to Q2 2020.

The increase was primarily due to higher incentive compensation accruals in Q2 2021 related to better than expected operating results.

• Stock based compensation expense for Q2 2021 increased 28.9% to $13.8 million, or $3 per WSEE per month, compared to Q2 2020.

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.

Insperity | 2021 Second Quarter Form 10-Q

Operating expenses per WSEE per month for Q3 2021 decreased 8.4% to $206 compared to $225 in Q3 2020.

• Salaries of corporate and sales staff for Q3 2021 decreased 0.2% to $89.2 million, or $14 per WSEE per month, compared to Q3 2020.

The decrease was primarily due to lower incentive compensation accruals in Q3 2021.

• Stock-based compensation expense for Q3 2021 decreased 50.3% to $10.4 million, or $17 per WSEE per month, compared to Q3 2020.

The decrease was primarily due to the non-recurrence of stock-based compensation expense related to our 2020 short-term performance based awards.

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Commissions expense for Q2 2021 increased 10.4% to $8.3 million, but remained flat on a per WSEE per month basis, compared to Q2 2020.

The increase was primarily due to higher sales management commissions and an increase in the amount of sales channel referral fees paid during 2021.

• Advertising expense for Q3 2021 increased 98.8% to $9.5 million, or $5 per WSEE per month, compared to Q3 2020.

The increase was primarily due to the resumption of the Insperity Invitational in 2021, which was canceled in 2020 due to the COVID-19 pandemic, and increases in television, radio and digital advertising and sponsorships.

The increase was primarily due to increases in television, radio, print and digital advertising and sponsorship costs.

• General and administrative expenses for Q3 2021 increased 21.4% to $31.1 million, or $5 per WSEE per month, compared to Q3 2020.

The increase was primarily due to technology SaaS licensing costs and professional services related to implementation of a CRM solution, as well as increased travel costs as the COVID-19 pandemic travel restrictions have eased.

The increase was primarily due to technology SaaS licensing costs, as well as increased travel costs as the COVID-19 pandemic travel restrictions have eased.

• Depreciation and amortization expense for Q3 2021 increased 26.8% to $9.9 million, or $2 per WSEE per month, compared to Q3 2020.

The increase was primarily due to the completion of a new facility on our corporate campus and increased capital expenditures related to software development costs.

First Six Months 2021 Compared to First Six Months 2020

Six Months Ended June 30,

First Nine Months 2021 Compared to First Nine Months 2020

Nine Months Ended September 30,

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

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This increase was primarily due to higher incentive compensation accruals in YTD 2021 related to better than expected YTD 2021 operating results, as well as a 1.0% increase in corporate headcount, including a 1.4% increase in total BPAs in YTD 2021 compared to YTD 2020.

• Stock based compensation expense for YTD 2021 increased 48.5% to $25.6 million or $6 per WSEE per month, compared to YTD 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 long-term incentive plans based on our higher than expected YTD 2021 operating results.

• Stock-based compensation expense for YTD 2021 decreased 5.6% to $36.0 million or $2 per WSEE per month, compared to YTD 2020.

The decrease was primarily due to the non-recurrence of stock-based compensation expense related to our 2020 short-term performance based awards.

• Advertising expense for YTD 2021 increased 55.2% to $23.8 million, or $4 per WSEE per month, compared to YTD 2020.

The increase was primarily due to the resumption of the Insperity Invitational in 2021, which was canceled in 2020 due to the COVID-19 pandemic, as well as increases in television and digital advertising and sponsorships.

• General and administrative expenses for YTD 2021 increased 7.9% to $92.0 million, but remained flat on a per WSEE per month basis, compared to YTD 2020.

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• Depreciation and amortization expense for YTD 2021 increased 18.8% to $27.7 million, or $2 per WSEE per month, compared to YTD 2020.

The increase was primarily due to the completion of a new facility on our

Insperity | 2021 Second Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

corporate campus and increased capital expenditures related to software development costs and sales office expansions.

The increase was primarily due to the completion of a new facility on our corporate campus and increased capital expenditures related to software development costs and sales office expansions.

Other Income (Expense)

Other Income (expense) for Q3 2021 was net expense of $1.7 million compared to net expense of $1.6 million in Q3 2020, and for YTD 2021 was net expense of $3.3 million compared to net expense of $4.0 million in YTD 2020.

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income Tax Expense

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

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

2021 2020 2021 2020

Effective income tax rate 28.0% 26.3% 26.4% 26.8%

For the six months ended June 30, 2021, our provision for income taxes differed from the U.S.

For the nine months ended September 30, 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 six 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.

During the first nine 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.

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

1 unchanged sentence

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

(in thousands, except per WSEE per month) Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except per WSEE per month) Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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

(in thousands) June 30, 2021 December 31, 2020

(in thousands) September 30, 2021 December 31, 2020

Cash, cash equivalents and marketable securities $ 500,618 $ 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 June 30, Six Months Ended June 30,

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

(in thousands, except per WSEE per month) 2021 2020 2021 2020

11 unchanged sentences

4.5 % (6.0) % 12.5 % 16.9 % (10.5) % (15.0) % 19.8 % 20.0 %

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

1 unchanged sentence

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

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

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

(in thousands) 2021 2020 2021 2020

7 unchanged sentences

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

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

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

(amounts per share) 2021 2020 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 $490.0 million in cash, cash equivalents and marketable securities at June 30, 2021, of which approximately $226.7 million was payable in early July 2021 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $50.4 million represented client prepayments that were payable in July 2021.

At June 30, 2021, we had working capital of $198.6 million compared to $172.3 million at December 31, 2020.

We had $500.6 million in cash, cash equivalents and marketable securities at September 30, 2021, of which approximately $198.4 million was payable in early October 2021 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $74.6 million represented client prepayments that were payable in October 2021.

At September 30, 2021, we had working capital of $202.3 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 continually monitor in light of our strategic goals and the significant uncertainty created by the COVID-19 pandemic.

As of June 30, 2021, we had an outstanding letter of credit and borrowings totaling $370.4 million under the Facility.

As of September 30, 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.

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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Cash Flows from Operating Activities

Net cash provided by operating activities in the first six months of 2021 was $7.0 million.

Net cash provided by operating activities in the first nine months of 2021 was $54.8 million.

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

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

In the period ended June 30, 2021, the last business day of the reporting period was a Wednesday, client prepayments were $50.4 million and employment taxes and other deductions were $226.7 million.

In the period ended June 30, 2020, the last business day of the reporting period was a Tuesday, client prepayments were $31.5 million and employment taxes and other deductions were $190.9 million.

In the period ended September 30, 2021, the last business day of the reporting period was a Thursday, client prepayments were $74.6 million and employment taxes and other deductions were $198.4 million.

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

• 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 June 30, 2021, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $0.6 million surplus, $8.4 million of which is reflected as a current liability, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at June 30, 2021, were $14.5 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

As of September 30, 2021, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $15.3 million surplus, $6.3 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, 2021, were $33.7 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 decreased 16.2% to $106.1 million in the first six months ended June 30, 2021, compared to $126.5 million in the first six months ended June 30, 2020.

Please read “Results of Operations – First Six Months 2021 Compared to First Six Months 2020.”

Our adjusted net income decreased 13.0% to $140.9 million in the first nine months ended September 30, 2021, compared to $161.9 million in the first nine months ended September 30, 2020.

Please read “Results of Operations – First Nine Months 2021 Compared to First Nine Months 2020.”

Cash Flows from Investing Activities

Net cash flows used in investing activities were $21.2 million for the six months ended June 30, 2021, primarily due to property and equipment purchases of $20.7 million.

Net cash flows used in investing activities were $22.4 million for the nine months ended September 30, 2021, primarily due to property and equipment purchases of $23.6 million.

Cash Flows from Financing Activities

Net cash flows used in financing activities were $67.3 million for the six months ended June 30, 2021.

Net cash flows used in financing activities were $95.2 million for the nine months ended September 30, 2021.

We paid $50.2 million in dividends and repurchased or withheld $49.8 million in stock.

Insperity | 2021 Second Quarter Form 10-Q

Insperity | 2021 Third Quarter Form 10-Q

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES

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What changed 10-Q

Item 2. Management’s Discussion and Analysis