INSPERITY, INC. 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2021 December 31, 2020 Assets Cash and cash equivalents $ 467,921 $ 554,846 Restricted cash 47,813 45,522 Marketable securities 32,697 34,529 Accounts receivable, net 579,503 392,746 Prepaid insurance 19,657 10,164 Other current assets 53,293 39,461 Income taxes receivable 5,584 — Total current assets 1,206,468 1,077,268 Property and equipment, net of accumulated depreciation 212,322 216,256 Right-of-use (“ROU”) leased assets 63,673 60,663 Prepaid health insurance 9,000 9,000 Deposits – health insurance 7,900 7,900 Deposits – workers’ compensation 208,236 186,331 Goodwill and other intangible assets, net 12,707 12,707 Deferred income taxes, net 1,653 9,603 Other assets 12,093 4,548 Total assets $ 1,734,052 $ 1,584,276 Liabilities and stockholders' equity Accounts payable $ 4,250 $ 6,203 Payroll taxes and other payroll deductions payable 232,862 377,960 Accrued worksite employee payroll cost 534,890 334,836 Accrued health insurance costs 40,366 32,685 Accrued workers’ compensation costs 51,368 48,186 Accrued corporate payroll and commissions 69,621 44,277 Other accrued liabilities 70,824 60,777 Total current liabilities 1,004,181 904,924 Accrued workers’ compensation cost, net of current 191,193 195,239 Long-term debt 369,400 369,400 Operating lease liabilities, net of current 65,979 64,289 Other accrued liabilities, net of current 6,293 6,292 Total noncurrent liabilities 632,865 635,220 Commitments and contingencies Common stock 555 555 Additional paid-in capital 104,587 95,528 Treasury stock, at cost ( 645,993 ) ( 626,984 ) Retained earnings 637,857 575,033 Total stockholders’ equity 97,006 44,132 Total liabilities and stockholders’ equity $ 1,734,052 $ 1,584,276 See accompanying notes. Insperity | 2021 Third Quarter Form 10-Q 6 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2021 2020 2021 2020 Revenues (1) $ 1,209,628 $ 1,007,820 $ 3,681,834 $ 3,230,669 Payroll taxes, benefits and workers’ compensation costs 1,011,149 822,787 3,032,356 2,591,365 Gross profit 198,479 185,033 649,478 639,304 Salaries, wages and payroll taxes 89,232 89,429 286,669 266,640 Stock-based compensation 10,362 20,864 35,965 38,110 Commissions 8,724 7,722 24,694 23,657 Advertising 9,507 4,781 23,804 15,334 General and administrative expenses 31,134 25,646 91,981 85,254 Depreciation and amortization 9,917 7,819 27,715 23,329 Total operating expenses 158,876 156,261 490,828 452,324 Operating income 39,603 28,772 158,650 186,980 Other income (expense): Interest income 251 103 2,230 2,351 Interest expense ( 1,963 ) ( 1,731 ) ( 5,537 ) ( 6,312 ) Income before income tax expense 37,891 27,144 155,343 183,019 Income tax expense 10,595 7,135 40,971 49,067 Net income $ 27,296 $ 20,009 $ 114,372 $ 133,952 Less distributed and undistributed earnings allocated to participating securities ( 39 ) ( 104 ) ( 219 ) ( 792 ) Net income allocated to common shares $ 27,257 $ 19,905 $ 114,153 $ 133,160 Net income per share of common stock Basic $ 0.71 $ 0.52 $ 2.97 $ 3.45 Diluted $ 0.70 $ 0.51 $ 2.94 $ 3.43 ____________________________________ (1) Revenues are comprised of gross billings less WSEE payroll costs as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Gross billings $ 7,994,006 $ 6,563,727 $ 23,682,279 $ 20,356,164 Less: WSEE payroll cost 6,784,378 5,555,907 20,000,445 17,125,495 Revenues $ 1,209,628 $ 1,007,820 $ 3,681,834 $ 3,230,669 See accompanying notes. Insperity | 2021 Third Quarter Form 10-Q 7 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) 2021 2020 Cash flows from operating activities Net income $ 114,372 $ 133,952 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,715 23,329 Stock-based compensation 35,965 38,110 Deferred income taxes 7,950 6,757 Changes in operating assets and liabilities: Accounts receivable ( 186,757 ) ( 62,933 ) Prepaid insurance ( 9,493 ) ( 24,341 ) Other current assets ( 13,832 ) 9,721 Other assets and ROU assets 4,153 10,862 Accounts payable ( 1,953 ) 1,451 Payroll taxes and other payroll deductions payable ( 145,098 ) ( 99,196 ) Accrued worksite employee payroll expense 200,054 69,937 Accrued health insurance costs 7,681 23,459 Accrued workers’ compensation costs ( 864 ) ( 2,273 ) Accrued corporate payroll, commissions and other accrued liabilities 22,428 ( 32,238 ) Income taxes payable/receivable ( 7,478 ) 9,977 Total adjustments ( 59,529 ) ( 27,378 ) Net cash provided by operating activities 54,843 106,574 Cash flows from investing activities Marketable securities: Purchases ( 41,413 ) ( 42,007 ) Proceeds from dispositions — 484 Proceeds from maturities 42,600 41,860 Property and equipment: Purchases ( 23,603 ) ( 68,770 ) Net cash used in investing activities ( 22,416 ) ( 68,433 ) Cash flows from financing activities Purchase of treasury stock ( 49,770 ) ( 91,216 ) Dividends paid ( 50,198 ) ( 46,522 ) Borrowings under revolving line of credit — 100,000 Other 4,812 6,302 Net cash used in financing activities ( 95,156 ) ( 31,436 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 62,729 ) 6,705 Cash, cash equivalents and restricted cash beginning of period 786,699 592,550 Cash, cash equivalents and restricted cash end of period $ 723,970 $ 599,255 Insperity | 2021 Third Quarter Form 10-Q 8 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Nine Months Ended September 30, (in thousands) 2021 2020 Supplemental schedule of cash and cash equivalents and restricted cash Cash and cash equivalents $ 554,846 $ 367,342 Restricted cash 45,522 49,295 Deposits – workers’ compensation 186,331 175,913 Cash, cash equivalents and restricted cash beginning of period $ 786,699 $ 592,550 Cash and cash equivalents $ 467,921 $ 372,356 Restricted cash 47,813 45,265 Deposits – workers’ compensation 208,236 181,634 Cash, cash equivalents and restricted cash end of period $ 723,970 $ 599,255 Supplemental operating lease cash flow information: ROU assets obtained in exchange for lease obligations $ 16,275 $ 18,364 See accompanying notes. Insperity | 2021 Third Quarter Form 10-Q 9 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Nine Months Ended September 30, 2021 and 2020 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at December 31, 2020 55,489 $ 555 $ 95,528 $ ( 626,984 ) $ 575,033 $ 44,132 Purchase of treasury stock, at cost — — — ( 49,770 ) — ( 49,770 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 25,112 ) 26,449 ( 1,337 ) — Stock-based compensation expense — — 33,266 2,699 — 35,965 Exercise of stock options — — ( 329 ) 569 — 240 Other — — 1,234 1,044 — 2,278 Dividends paid — — — — ( 50,198 ) ( 50,198 ) Unrealized loss on marketable securities, net of tax — — — — ( 13 ) ( 13 ) Net income — — — — 114,372 114,372 Balance at September 30, 2021 55,489 $ 555 $ 104,587 $ ( 645,993 ) $ 637,857 $ 97,006 Balance at December 31, 2019 55,489 $ 555 $ 48,141 $ ( 544,102 ) $ 499,485 $ 4,079 Purchase of treasury stock, at cost — — — ( 91,216 ) — ( 91,216 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 7,088 ) 7,898 ( 810 ) — Stock-based compensation expense — — 32,893 5,217 — 38,110 Other — — 652 1,565 — 2,217 Dividends paid — — — — ( 46,522 ) ( 46,522 ) Unrealized gain on marketable securities, net of tax — — — — 19 19 Net income — — — — 133,952 133,952 Balance at September 30, 2020 55,489 $ 555 $ 74,598 $ ( 620,638 ) $ 586,124 $ 40,639 Insperity | 2021 Third Quarter Form 10-Q 10 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) For the Three Months Ended September 30, 2021 and 2020 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at June 30, 2021 55,489 $ 555 $ 94,396 $ ( 635,627 ) $ 627,938 $ 87,262 Purchase of treasury stock, at cost — — — ( 11,234 ) — ( 11,234 ) Issuance of equity based incentive awards and dividend equivalents — — ( 27 ) 28 ( 1 ) — Stock-based compensation expense — — 9,827 535 — 10,362 Other — — 391 305 — 696 Dividends paid — — — — ( 17,369 ) ( 17,369 ) Unrealized loss on marketable securities, net of tax — — — — ( 7 ) ( 7 ) Net income — — — — 27,296 27,296 Balance at September 30, 2021 55,489 $ 555 $ 104,587 $ ( 645,993 ) $ 637,857 $ 97,006 Balance at June 30, 2020 55,489 $ 555 $ 54,783 $ ( 592,313 ) $ 581,613 $ 44,638 Purchase of treasury stock, at cost — — — ( 29,986 ) — ( 29,986 ) Stock-based compensation expense — — 19,552 1,312 — 20,864 Other — — 263 349 — 612 Dividends paid — — — — ( 15,448 ) ( 15,448 ) Unrealized loss on marketable securities, net of tax — — — — ( 50 ) ( 50 ) Net income — — — — 20,009 20,009 Balance at September 30, 2020 55,489 $ 555 $ 74,598 $ ( 620,638 ) $ 586,124 $ 40,639 See accompanying notes. Insperity | 2021 Third Quarter Form 10-Q 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our most comprehensive HR services offerings are provided through our professional employer organization (“PEO”) services, known as Workforce Optimization ® and Workforce Synchronization TM solutions (together, our “PEO HR Outsourcing solutions”), which we provide by entering into a co-employment relationship with our clients. Our PEO HR Outsourcing solutions encompass a broad range of HR functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management solution, the Insperity Premier TM platform. In addition to our PEO HR Outsourcing solutions, we 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 Comprehensive Traditional Payroll and Human Capital 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. The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements at and for the year ended December 31, 2020. Our Condensed Consolidated Balance Sheet at December 31, 2020 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements. Our Condensed Consolidated Balance Sheet at September 30, 2021 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2021 and 2020, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2021 and 2020 and our Consolidated Statements of Stockholders’ Equity for the three and nine month periods ended September 30, 2021 and 2020, have been prepared by us without audit. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows have been made, and all such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. 2. Accounting Policies Health Insurance Costs We provide group health insurance coverage to our WSEEs in our PEO HR Outsourcing solutions through a national network of carriers, including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, and Tufts, all of which provide fully insured policies or service contracts. The policy with United provides approximately 87 % of our participants’ health insurance coverage. While the policy with United is a fully-insured plan, as a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Effective January 1, 2020, under the amended agreement with United, we no longer have financial responsibilities for a participant’s annual claim costs that exceed $1 million. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense, which is a component of direct costs, in our Consolidated Statements of Operations. The estimated incurred claims are based upon: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under Insperity | 2021 Third Quarter Form 10-Q 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs, which requires a significant level of judgment. Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Condensed Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Condensed Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $ 9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $ 6.5 million at September 30, 2021, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, 2021, Plan Costs were less than the net premiums paid and owed to United by $ 15.3 million. As this amount is in excess of the agreed-upon $ 9.0 million surplus maintenance level, the $ 6.3 million difference is included in prepaid insurance, a current asset, in our Condensed Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at September 30, 2021 were $ 33.7 million, which is included in accrued health insurance costs, a current liability in our Condensed Consolidated Balance Sheets. Our benefits costs incurred in the first nine months of 2021 included an increase of $ 4.5 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first nine months of 2020 included a reduction of $ 1.9 million for changes in estimated run-off related to prior periods. Workers’ Compensation Costs Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $ 1 million layer of claims per occurrence and, for claims over $ 1 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, we have financial responsibility to Chubb for the first $ 1.5 million layer of claims per occurrence and, for claims over $ 1.5 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1.5 million. Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs’ job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the nine months ended September 30, 2021 and 2020, we reduced accrued workers’ compensation costs by $ 31.4 million and $ 32.4 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in the 2021 period was 0.5 % and in the 2020 period was 0.7 %) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations. Insperity | 2021 Third Quarter Form 10-Q 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table provides the activity and balances related to incurred but not paid workers’ compensation claims: Nine Months Ended September 30, (in thousands) 2021 2020 Beginning balance, January 1, $ 240,761 $ 242,904 Accrued claims 34,349 33,397 Present value discount, net of accretion 476 ( 500 ) Paid claims ( 36,580 ) ( 34,289 ) Ending balance $ 239,006 $ 241,512 Current portion of accrued claims $ 47,813 $ 45,265 Long-term portion of accrued claims 191,193 196,247 Total accrued claims $ 239,006 $ 241,512 The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, 2021 includes $ 3.6 million of workers’ compensation administrative fees. As of September 30, 2021 and 2020, the undiscounted accrued workers’ compensation costs were $ 254.5 million and $ 259.4 million, respectively. At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Condensed Consolidated Balance Sheets. At September 30, 2021, we had restricted cash of $ 47.8 million and deposits – workers’ compensation of $ 208.2 million. Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Condensed Consolidated Balance Sheets. Revenue and Direct Cost Recognition We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally establish pricing for a period of 12 months, and are generally cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms. Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but unbilled of $ 564.6 million and $ 380.8 million at September 30, 2021 and December 31, 2020, respectively, are included in accounts receivable, net on our Condensed Consolidated Balance Sheets. Pursuant to the “practical expedients” provided under Accounting Standards Update No 2014-09, we expense sales commissions when incurred because the terms of our contracts generally are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations. Insperity | 2021 Third Quarter Form 10-Q 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Northeast $ 332,587 $ 278,712 19.3 % $ 1,035,233 $ 896,113 15.5 % Southeast 155,555 121,439 28.1 % 462,625 379,614 21.9 % Central 211,315 182,245 16.0 % 643,100 570,559 12.7 % Southwest 241,473 217,527 11.0 % 736,820 712,185 3.5 % West 253,562 195,412 29.8 % 762,100 634,533 20.1 % 1,194,492 995,335 20.0 % 3,639,878 3,193,004 14.0 % Other revenue 15,136 12,485 21.2 % 41,956 37,665 11.4 % Total revenue $ 1,209,628 $ 1,007,820 20.0 % $ 3,681,834 $ 3,230,669 14.0 % 3. Cash, Cash Equivalents and Marketable Securities The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments: September 30, 2021 December 31, 2020 (in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total Overnight holdings $ 404,564 $ — $ 404,564 $ 503,221 $ — $ 503,221 Investment holdings 49,913 32,697 82,610 47,992 34,529 82,521 Cash in demand accounts 30,377 — 30,377 33,692 — 33,692 Outstanding checks ( 16,933 ) — ( 16,933 ) ( 30,059 ) — ( 30,059 ) Total $ 467,921 $ 32,697 $ 500,618 $ 554,846 $ 34,529 $ 589,375 Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Our cash, cash equivalents and marketable securities at September 30, 2021 and December 31, 2020 included $ 198.4 million and $ 342.0 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $ 74.6 million and $ 35.3 million, respectively, in client prepayments. 4. Fair Value Measurements We account for our financial assets in accordance with Accounting Standard Codification 820, Fair Value Measurement . This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors: • Level 1 - quoted prices in active markets using identical assets • Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs • Level 3 - significant unobservable inputs Insperity | 2021 Third Quarter Form 10-Q 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fair Value of Instruments Measured and Recognized at Fair Value The following table summarizes the levels of fair value measurements of our financial assets: September 30, 2021 December 31, 2020 (in thousands) Total Level 1 Level 2 Total Level 1 Level 2 Money market funds $ 454,477 $ 454,477 $ — $ 551,213 $ 551,213 $ — U.S. Treasury bills 11,074 11,074 — 10,531 10,531 — Municipal bonds 21,623 — 21,623 23,998 — 23,998 Total $ 487,174 $ 465,551 $ 21,623 $ 585,742 $ 561,744 $ 23,998 The municipal bond securities valued as Level 2 are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs. The following is a summary of our available-for-sale marketable securities: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2021 U.S. Treasury bills $ 11,074 $ — $ — $ 11,074 Municipal bonds 21,631 — ( 8 ) 21,623 Total $ 32,705 $ — $ ( 8 ) $ 32,697 December 31, 2020 U.S. Treasury bills $ 10,530 $ 1 $ — $ 10,531 Municipal bonds 23,994 8 ( 4 ) 23,998 Total $ 34,524 $ 9 $ ( 4 ) $ 34,529 As of September 30, 2021, the contractual maturities of our marketable securities were as follows: (in thousands) Amortized Cost Estimated Fair Value Less than one year $ 31,573 $ 31,566 One to five years 1,132 1,131 Total $ 32,705 $ 32,697 Fair Value of Other Financial Instruments The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments. As of September 30, 2021, the carrying value of borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 5, “Long-Term Debt,” for additional information. Insperity | 2021 Third Quarter Form 10-Q 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Long-Term Debt We have a revolving credit facility (the “Facility”) with borrowing capacity of up to $ 500 million. The Facility may be further increased to $ 550 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (as amended, the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Our obligations under the Facility are secured by 65 % of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries other than certain excluded subsidiaries. At September 30, 2021, our outstanding balance on the Facility was $ 369.4 million, and we had an outstanding $ 1.0 million letter of credit issued under the Facility, resulting in an available borrowing capacity of $ 129.6 million. The Facility matures on September 13, 2024. Borrowings under the Facility bear interest at an annual rate equal to an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from 1.50 % to 2.25 % and (2) in the case of alternate base rate loans, from 0.00 % to 0.50 %. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50 % and (3) the 30-day LIBOR rate plus 2.00 %. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25 % per year. The average interest rate for the nine month period ended September 30, 2021 was 1.9 %. Interest expense and unused commitment fees are recorded in other income (expense). Following early opt-in by us or our lenders or such other time as LIBOR rates have permanently or indefinitely ceased to be published by the regulatory supervisory authority of LIBOR, then LIBOR will be replaced by a rate per annum equal to the secured overnight financing rate published by the Federal Reserve Bank of New York or such other benchmark as determined in accordance with the Credit Agreement. The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at September 30, 2021. 6. Stockholders' Equity During the first nine months of 2021, we repurchased or withheld an aggregate of 544,132 shares of our common stock, as described below. Repurchase Program Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases may be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. During the nine months ended September 30, 2021, 253,309 shares were repurchased under the Repurchase Program. As of September 30, 2021, we were authorized to repurchase an additional 874,828 shares under the Repurchase Program. Withheld Shares During the nine months ended September 30, 2021, we withheld 290,823 shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards. Insperity | 2021 Third Quarter Form 10-Q 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Dividends The Board declared quarterly dividends as follows: (amounts per share) 2021 2020 First quarter $ 0.40 $ 0.40 Second quarter 0.45 0.40 Third quarter 0.45 0.40 During the nine months ended September 30, 2021 and 2020, we paid dividends totaling $ 50.2 million and $ 46.5 million, respectively. 7. Net Income Per Share We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of time-vested and performance-based restricted stock units (“RSUs”). The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Net income $ 27,296 $ 20,009 $ 114,372 $ 133,952 Less distributed and undistributed earnings allocated to participating securities ( 39 ) ( 104 ) ( 219 ) ( 792 ) Net income allocated to common shares $ 27,257 $ 19,905 $ 114,153 $ 133,160 Weighted average common shares outstanding 38,524 38,507 38,445 38,625 Incremental shares from assumed time-vested and performance-based RSU awards 357 234 404 193 Adjusted weighted average common shares outstanding 38,881 38,741 38,849 38,818 Insperity | 2021 Third Quarter Form 10-Q 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Commitments and Contingencies Securities Class Action Lawsuit In July 2020, a federal securities class action was filed against us and certain of our officers in the United States District Court for the Southern District of New York. The name of the case is Building Trades Pension Fund of Western Pennsylvania v. Insperity, Inc. et al. , Case No. 1:20-cv-05635-NRB. On October 23, 2020, the court issued an order appointing Oakland County Employees’ Retirement System and Oakland County Voluntary Employees’ Beneficiary Association Trust as lead plaintiff (“Lead Plaintiff”). On December 22, 2020, the Lead Plaintiff filed its consolidated complaint alleging that we made materially false and misleading statements regarding our business and operations in violation of the federal securities laws and seeking unspecified damages, attorneys’ fees, costs, equitable/injunctive relief, and such other relief that may be deemed proper. On April 26, 2021, the defendants moved to dismiss the consolidated complaint with prejudice. The Lead Plaintiff filed its opposition to the motion to dismiss on June 10, 2021, and the defendants filed their reply in support of the motion to dismiss on July 12, 2021. We believe the allegations in the action are without merit, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements. Other Litigation We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations. Insperity | 2021 Third Quarter Form 10-Q 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS