INSPERITY, INC. 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2022 December 31, 2021 Assets Cash and cash equivalents $ 562,143 $ 575,812 Restricted cash 51,829 46,929 Marketable securities 34,493 31,791 Accounts receivable, net 558,700 513,306 Prepaid insurance 30,368 11,285 Other current assets 51,473 53,312 Income taxes receivable — 12,413 Total current assets 1,289,006 1,244,848 Property and equipment, net of accumulated depreciation 196,601 210,723 Right-of-use (“ROU”) leased assets 56,626 62,830 Prepaid health insurance 9,000 9,000 Deposits – health insurance 7,900 7,900 Deposits – workers’ compensation 179,014 185,027 Goodwill and other intangible assets, net 12,707 12,707 Deferred income taxes, net 748 4,892 Other assets 29,904 15,158 Total assets $ 1,781,506 $ 1,753,085 Liabilities and stockholders' equity Accounts payable $ 5,466 $ 6,412 Payroll taxes and other payroll deductions payable 352,129 467,892 Accrued worksite employee payroll cost 494,986 409,653 Accrued health insurance costs 64,858 50,001 Accrued workers’ compensation costs 57,023 50,534 Accrued corporate payroll and commissions 81,278 74,778 Other accrued liabilities 65,053 69,303 Income taxes payable 455 — Total current liabilities 1,121,248 1,128,573 Accrued workers’ compensation costs, net of current 174,664 192,694 Long-term debt 369,400 369,400 Operating lease liabilities, net of current 55,691 64,192 Total noncurrent liabilities 599,755 626,286 Commitments and contingencies Common stock 555 555 Additional paid-in capital 139,370 109,179 Treasury stock, at cost ( 716,046 ) ( 665,089 ) Retained earnings 636,624 553,581 Total stockholders’ equity (deficit) 60,503 ( 1,774 ) Total liabilities and stockholders’ equity $ 1,781,506 $ 1,753,085 See accompanying notes. Insperity | 2022 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) 2022 2021 2022 2021 Revenues (1) $ 1,439,160 $ 1,209,628 $ 4,449,104 $ 3,681,834 Payroll taxes, benefits and workers’ compensation costs 1,194,607 1,011,149 3,678,909 3,032,356 Gross profit 244,553 198,479 770,195 649,478 Salaries, wages and payroll taxes 109,525 89,232 323,486 286,669 Stock-based compensation 13,341 10,362 38,818 35,965 Commissions 11,068 8,724 32,121 24,694 Advertising 9,790 9,507 30,812 23,804 General and administrative expenses 38,115 31,134 115,215 91,981 Depreciation and amortization 10,083 9,917 30,367 27,715 Total operating expenses 191,922 158,876 570,819 490,828 Operating income 52,631 39,603 199,376 158,650 Other income (expense): Interest income 2,808 251 3,901 2,230 Interest expense ( 4,082 ) ( 1,963 ) ( 8,698 ) ( 5,537 ) Income before income tax expense 51,357 37,891 194,579 155,343 Income tax expense 13,688 10,595 53,427 40,971 Net income $ 37,669 $ 27,296 $ 141,152 $ 114,372 Less distributed and undistributed earnings allocated to participating securities — ( 39 ) ( 27 ) ( 219 ) Net income allocated to common shares $ 37,669 $ 27,257 $ 141,125 $ 114,153 Net income per share of common stock Basic $ 0.99 $ 0.71 $ 3.70 $ 2.97 Diluted $ 0.98 $ 0.70 $ 3.66 $ 2.94 ____________________________________ (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) 2022 2021 2022 2021 Gross billings $ 9,528,695 $ 7,994,006 $ 29,111,243 $ 23,682,279 Less: WSEE payroll cost 8,089,535 6,784,378 24,662,139 20,000,445 Revenues $ 1,439,160 $ 1,209,628 $ 4,449,104 $ 3,681,834 See accompanying notes. Insperity | 2022 Third Quarter Form 10-Q 7 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) 2022 2021 Cash flows from operating activities Net income $ 141,152 $ 114,372 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,367 27,715 Stock-based compensation 38,818 35,965 Deferred income taxes 4,144 7,950 Changes in operating assets and liabilities: Accounts receivable ( 45,394 ) ( 186,757 ) Prepaid insurance ( 19,083 ) ( 9,493 ) Other current assets 1,839 ( 13,832 ) Other assets and ROU assets ( 1,985 ) 4,153 Accounts payable ( 946 ) ( 1,953 ) Payroll taxes and other payroll deductions payable ( 115,763 ) ( 145,098 ) Accrued worksite employee payroll costs 85,333 200,054 Accrued health insurance costs 14,857 7,681 Accrued workers’ compensation costs ( 11,541 ) ( 864 ) Accrued corporate payroll, commissions and other accrued liabilities ( 12,636 ) 22,428 Income taxes payable/receivable 12,868 ( 7,478 ) Total adjustments ( 19,122 ) ( 59,529 ) Net cash provided by operating activities 122,030 54,843 Cash flows from investing activities Marketable securities: Purchases ( 35,618 ) ( 41,413 ) Proceeds from maturities 32,215 42,600 Property and equipment: Purchases ( 16,448 ) ( 23,603 ) Net cash used in investing activities ( 19,851 ) ( 22,416 ) Cash flows from financing activities Purchase of treasury stock ( 63,420 ) ( 49,770 ) Dividends paid ( 56,866 ) ( 50,198 ) Other ( 3,130 ) 4,812 Net cash used in financing activities ( 123,416 ) ( 95,156 ) Net decrease in cash, cash equivalents, restricted cash and funds held for clients ( 21,237 ) ( 62,729 ) Cash, cash equivalents, restricted cash and funds held for clients beginning of period 839,500 786,699 Cash, cash equivalents, restricted cash and funds held for clients end of period $ 818,263 $ 723,970 Supplemental operating lease cash flow information: ROU assets obtained in exchange for lease obligations $ 4,513 $ 16,275 See accompanying notes. Insperity | 2022 Third Quarter Form 10-Q 8 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Nine Months Ended September 30, 2022 and 2021 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at December 31, 2021 55,489 $ 555 $ 109,179 $ ( 665,089 ) $ 553,581 $ ( 1,774 ) Purchase of treasury stock, at cost — — — ( 63,420 ) — ( 63,420 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 9,285 ) 10,443 ( 1,158 ) — Stock-based compensation expense — — 37,866 952 — 38,818 Other — — 1,610 1,068 — 2,678 Dividends paid — — — — ( 56,866 ) ( 56,866 ) Unrealized loss on marketable securities, net of tax — — — — ( 85 ) ( 85 ) Net income — — — — 141,152 141,152 Balance at September 30, 2022 55,489 $ 555 $ 139,370 $ ( 716,046 ) $ 636,624 $ 60,503 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 Insperity | 2022 Third Quarter Form 10-Q 9 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) For the Three Months Ended September 30, 2022 and 2021 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at June 30, 2022 55,489 $ 555 $ 125,622 $ ( 709,810 ) $ 618,765 $ 35,132 Purchase of treasury stock, at cost — — — ( 6,615 ) — ( 6,615 ) Issuance of equity based incentive awards and dividend equivalents — — ( 37 ) 44 ( 7 ) — Stock-based compensation expense — — 13,339 2 — 13,341 Other — — 446 333 — 779 Dividends paid — — — — ( 19,769 ) ( 19,769 ) Unrealized loss on marketable securities, net of tax — — — — ( 34 ) ( 34 ) Net income — — — — 37,669 37,669 Balance at September 30, 2022 55,489 $ 555 $ 139,370 $ ( 716,046 ) $ 636,624 $ 60,503 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 long-term 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 See accompanying notes. Insperity | 2022 Third Quarter Form 10-Q 10 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 our 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 our Workforce Acceleration TM solution (our “Traditional Payroll Solution”). We also offer a number of other business performance solutions, including Organizational Planning, Recruiting Services, Employment Screening, Retirement Services, and Insurance Services. 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, 2021. Our Condensed Consolidated Balance Sheet at December 31, 2021 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, 2022 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2022 and 2021, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2022 and 2021 and our Consolidated Statements of Stockholders’ Equity for the three and nine month periods ended September 30, 2022 and 2021, 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 under a single-employer plan that covers both our WSEEs and our corporate employees and utilizes 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 the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting Insperity | 2022 Third Quarter Form 10-Q 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, 2022, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, 2022, Plan Costs were less than the net premiums paid and owed to United by $ 25.2 million. As this amount is in excess of the agreed-upon $ 9.0 million surplus maintenance level, the $ 16.2 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, 2022 were $ 57.6 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 2022 included an increase of $ 12.8 million for changes in estimated run-off related to prior periods. 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. Workers’ Compensation Costs Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing Solutions is provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”). 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, 2022 and 2021, we reduced accrued workers’ compensation costs by $ 35.3 million and $ 31.4 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 2022 period was 2.5 % and in the 2021 period was 0.5 %) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations. Insperity | 2022 Third Quarter Form 10-Q 12 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) 2022 2021 Beginning balance, January 1, $ 239,623 $ 240,761 Accrued claims 33,467 34,349 Present value discount, net of accretion ( 6,485 ) 476 Paid claims ( 40,112 ) ( 36,580 ) Ending balance $ 226,493 $ 239,006 Current portion of accrued claims $ 51,829 $ 47,813 Long-term portion of accrued claims 174,664 191,193 Total accrued claims $ 226,493 $ 239,006 The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, 2022 includes $ 5.2 million of workers’ compensation administrative fees. As of September 30, 2022 and 2021, the undiscounted accrued workers’ compensation costs were $ 245.5 million and $ 254.5 million, respectively. At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Condensed Consolidated Balance Sheets. During the first nine months of 2022, we received $ 30.2 million for the return of excess claim funds related to the workers’ compensation program, which resulted in a decrease to deposits - workers’ compensation. At September 30, 2022, we had restricted cash of $ 51.8 million and deposits – workers’ compensation of $ 179.0 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 $ 547.6 million and $ 490.5 million at September 30, 2022 and December 31, 2021, respectively, are included in accounts receivable, net on our Condensed Consolidated Balance Sheets. Pursuant to the “practical expedients” provided under Accounting Standards Codification 606, Revenues from Contracts with Customers , 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 | 2022 Third Quarter Form 10-Q 13 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) 2022 2021 % Change 2022 2021 % Change Northeast $ 385,541 $ 332,587 15.9 % $ 1,224,142 $ 1,035,233 18.2 % Southeast 197,131 155,555 26.7 % 592,116 462,625 28.0 % Central 256,150 211,315 21.2 % 779,500 643,100 21.2 % Southwest 280,299 241,473 16.1 % 869,073 736,820 17.9 % West 305,465 253,562 20.5 % 940,617 762,100 23.4 % 1,424,586 1,194,492 19.3 % 4,405,448 3,639,878 21.0 % Other revenue 14,574 15,136 (3.7) % 43,656 41,956 4.1 % Total revenue $ 1,439,160 $ 1,209,628 19.0 % $ 4,449,104 $ 3,681,834 20.8 % 3. Other Balance Sheet Information 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, 2022 December 31, 2021 (in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total Overnight holdings $ 503,228 $ — $ 503,228 $ 490,154 $ — $ 490,154 Investment holdings 43,489 34,493 77,982 88,951 31,791 120,742 Cash in demand accounts 31,111 — 31,111 47,331 — 47,331 Outstanding checks ( 15,685 ) — ( 15,685 ) ( 50,624 ) — ( 50,624 ) Total $ 562,143 $ 34,493 $ 596,636 $ 575,812 $ 31,791 $ 607,603 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, 2022 and December 31, 2021 included $ 321.9 million and $ 424.8 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes, and other payroll deductions, as well as $ 35.8 million and $ 20.1 million, respectively, in client prepayments. Insperity | 2022 Third Quarter Form 10-Q 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash, Cash Equivalents, Restricted Cash and Funds Held for Clients The following table summarized our cash, cash equivalents, restricted cash and funds held for clients as reported in our Consolidated Statements of Cash Flows: Nine Months Ended September 30, (in thousands) 2022 2021 Supplemental schedule of cash and cash equivalents, restricted cash and funds held for clients Cash and cash equivalents $ 575,812 $ 554,846 Restricted cash 46,929 45,522 Other current assets - funds held for clients (1) 31,732 (2) — (2) Deposits – workers’ compensation 185,027 186,331 Cash, cash equivalents, restricted cash and funds held for clients beginning of period $ 839,500 $ 786,699 Cash and cash equivalents $ 562,143 $ 467,921 Restricted cash 51,829 47,813 Other current assets - funds held for clients (1) 25,277 (2) — (2) Deposits – workers’ compensation 179,014 208,236 Cash, cash equivalents, restricted cash and funds held for clients end of period $ 818,263 $ 723,970 ____________________________________ (1) Funds held for clients represent amounts held on behalf of our Traditional Payroll solution customers that are restricted for the purpose of satisfying obligations to remit funds to client’s employees and various tax authorities. (2) Beginning in the third quarter of 2022, we adjusted the presentation of our Consolidated Statements of Cash Flows to include changes in funds held for clients as a financing activity and to include funds held for clients in both the beginning and ending period amounts in our totals of cash, cash equivalents, restricted cash and funds held for clients. Prior period amounts have not been adjusted to this presentation as the amounts are immaterial to our consolidated financial statements. Previously, the changes in funds held for clients and the related client fund liabilities were presented within operating activities in our Consolidated Statements of Cash Flows. Funds held for clients are held in a trust separate from our company funds and we do not use these funds held for clients for any corporate activity . Please read Note 2. “Accounting Policies,” for a discussion of our accounting policies for deposits – workers’ compensation and restricted cash. 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 | 2022 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, 2022 December 31, 2021 (in thousands) Total Level 1 Level 2 Total Level 1 Level 2 Money market funds $ 546,717 $ 546,717 $ — $ 579,105 $ 579,105 $ — U.S. Treasury bills 23,929 23,929 — 5,782 5,782 — Municipal bonds 10,564 — 10,564 26,009 — 26,009 Total $ 581,210 $ 570,646 $ 10,564 $ 610,896 $ 584,887 $ 26,009 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, 2022 U.S. Treasury bills $ 23,991 $ — $ ( 62 ) $ 23,929 Municipal bonds 10,596 — ( 32 ) 10,564 December 31, 2021 U.S. Treasury bills $ 5,783 $ — $ ( 1 ) $ 5,782 Municipal bonds 26,017 — ( 8 ) 26,009 As of September 30, 2022, the contractual maturities of the marketable securities in our portfolio were less than one year. 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, 2022, 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. 5. Long-Term Debt We have a revolving credit facility (the “Facility”) with a borrowing capacity of up to $ 650 million. The Facility may be further increased to $ 700 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, 2022, 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 $ 279.6 million. Insperity | 2022 Third Quarter Form 10-Q 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Facility matures on June 30, 2027. Borrowings under the Facility bear interest at an annual rate equal to, at our option, an alternate base rate for alternate base rate loans or Adjusted Term SOFR for term SOFR loans, in either case plus an applicable margin. Adjusted Term SOFR is a forward-looking term rate based on the secured overnight financing rate plus a spread adjustment, which ranges from 0.10 % to 0.25 % depending on the interest period and type of loan. Depending on our leverage ratio, the applicable margin varies (1) in the case of term SOFR 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 Adjusted Term SOFR 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, 2022 was 2.8 %. Interest expense and unused commitment fees are recorded in other income (expense). 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, 2022. 6. Stockholders' Equity During the first nine months of 2022, we repurchased or withheld an aggregate of 679,129 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, 2022, 580,183 shares were repurchased under the Repurchase Program. As of September 30, 2022, we were authorized to repurchase an additional 1,123,445 shares under the Repurchase Program. Withheld Shares During the nine months ended September 30, 2022, we withheld 98,946 shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards. Dividends The Board declared quarterly dividends as follows: (amounts per share) 2022 2021 First quarter $ 0.45 $ 0.40 Second quarter 0.52 0.45 Third quarter 0.52 0.45 During the nine months ended September 30, 2022 and 2021, we paid dividends totaling $ 56.9 million and $ 50.2 million, respectively. Insperity | 2022 Third Quarter Form 10-Q 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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) 2022 2021 2022 2021 Net income $ 37,669 $ 27,296 $ 141,152 $ 114,372 Less distributed and undistributed earnings allocated to participating securities — ( 39 ) ( 27 ) ( 219 ) Net income allocated to common shares $ 37,669 $ 27,257 $ 141,125 $ 114,153 Weighted average common shares outstanding 38,017 38,524 38,177 38,445 Incremental shares from assumed time-vested and performance-based RSU awards 529 357 431 404 Adjusted weighted average common shares outstanding 38,546 38,881 38,608 38,849 Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect 15 — 13 — 8. Commitments and Contingencies Litigation We are a defendant in various 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 | 2022 Third Quarter Form 10-Q 18 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS