What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-10 compared with 2022-02-11 · 134 added, 141 removed, 414 unchanged (40% of the section changed)

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We often use the average number of WSEEs paid during a period as our unit of measurement in analyzing and discussing our results of operations.

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.

We also offer a number of other business performance solutions, including Comprehensive Traditional Payroll and Human Capital Management, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Retirement Services, and Insurance Services, many of which are offered as a cloud-based software solution.

These other products or services are offered separately or with our other solutions.

COVID-19 Pandemic

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

economic activity.

As the duration of the pandemic and such economic impacts remain uncertain, we have planned for a range of scenarios and have modified certain business and workforce practices.

To conform to government restrictions and best practices, we have taken steps designed to keep our staff safe while continuing to serve clients, including implementing 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, PPP loans, and PPP 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, including vaccine mandates, return to the workplace and workplace safety.

In 2021, the average number of WSEEs paid per month increased 7.1% year-over-year as WSEEs paid at existing clients combined with WSEEs paid from new sales exceeded 2020 levels.

We expect the average number of paid WSEEs per month to increase between 18.0% and 19.0% in the first quarter of 2022 as compared to the first quarter of 2021, which, if achieved, would equate to the average number of paid WSEEs per month growing 2.3% to 3.2% sequentially from the fourth quarter of 2021.

We experienced a 9.8% increase in the year-over-year benefits costs per covered employee during 2021 compared to 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

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Our healthcare claim activity in 2021 reflected a continued variability in claim incurral patterns, combined with incremental costs related to COVID-19 testing, vaccination administration, and treatment, which were driven by further COVID-19 variants.

During 2022 and possibly beyond 2022, 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, vaccination 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.

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;

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

See Part I, Item 1A.

“Risk Factors” for additional information.

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 Recruiting Services, Employment Screening, Retirement Services, and Insurance Services.

These other products or services generally are offered only with our other solutions.

2022 Highlights

• Average number of WSEEs paid per month increased 7.1% to 250,745, on a 16.0% revenue increase and an 8% increase in revenue per WSEE, which reflects a 5% increase in pricing and the non-recurrence of the 2020 FICA deferral credits instituted as part of the CARES Act.

• Average number of WSEEs paid per month increased 17.7% to 295,005.

Revenues increased 19.4% on the 17.7% WSEE growth and a 1.5% increase in revenue per WSEE.

• We ended 2022 averaging 307,506 paid WSEEs in the fourth quarter of 2022, which represents a 14.3% increase over the fourth quarter of 2021.

We expect the average number of paid WSEEs per month to be between 275,100 and 277,500 in the first quarter 2022.

We expect the average number of paid WSEEs per month to be between 317,000 and 326,000 for the full year 2023, an increase of 7.5% to 10.5%.

• Approximately 24.9% and 23.8% of our average paid WSEEs were in our middle market sector for the years ended December 31, 2022 and 2021, respectively, which is generally defined as companies with 150 to 5,000 WSEEs.

• Gross profit increased $13.2 million, primarily due to the 7.1% growth in the average number of WSEEs paid per month driving an increase in revenue, partially offset by a 4.9% decline in gross profit per WSEE.

• Our average gross profit per WSEE per month declined from $287 in 2020 to $273 in 2021, due primarily to a 9.8% increase in benefits costs per covered employee.

• Operating expenses increased 5.7% in 2021 to $646.8 million, primarily due to increased salary and wages partially offset by lower stock-based compensation costs.

On a per WSEE per month basis, operating expenses decreased from $218 in 2020 to $215 in 2021.

• Net income and diluted earnings per share (“Diluted EPS”) both decreased 10.2% to $124.1 million and $3.18, respectively.

• Adjusted EBITDA decreased 11.7% to $254.9 million.

• Adjusted net income decreased 15.1% to $154.0 million.

• Adjusted EPS decreased 14.9% to $3.95.

• Our adjusted EBITDA per WSEE per month decreased 17.5% from $103 in 2020 to $85 in 2021.

• We ended 2021 with working capital of $116.3 million.

• During 2021, we paid $144.2 million in dividends, including our regular quarterly dividend as well as a $2.00 per share special dividend paid in December.

We also repurchased approximately 716,000 shares of our common stock at a cost of $69.7 million and paid $32.9 million in capital expenditures.

• Gross profit increased 23.3% to $1.0 billion, primarily due to the 17.7% growth in the average number of WSEEs paid per month and a 4.8% increase in gross profit per WSEE.

• Our average gross profit per WSEE per month increased from $273 in 2021 to $286 in 2022.

• Operating expenses increased 17.7% in 2022 to $761.0 million, and included increases in salary and wages, marketing, travel and event costs and the implementation of a CRM solution.

On a per WSEE per month basis, operating expenses remained flat at $215 in both 2021 and 2022.

• Net income and diluted earnings per share (“Diluted EPS”) increased 44.5% to $179.4 million and 45.9% to $4.64, respectively.

• Adjusted EBITDA increased 38.2% to $352.3 million.

2022 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

2014-09, Revenue from Contracts with Customers (Topic 606) .

• Adjusted net income increased 40.2% to $215.9 million.

• Adjusted EPS increased 41.5% to $5.59.

• Our adjusted EBITDA per WSEE per month increased 17.6% from $85 in 2021 to $100 in 2022.

• We ended 2022 with working capital of $158.5 million.

• During 2022, we paid $76.6 million in dividends, repurchased approximately 770,000 shares of our common stock at a cost of $73.3 million and paid $30.4 million in capital expenditures.

Please read “ Non-GAAP Financial Measures ” for a reconciliation of adjusted EBITDA, adjusted net income 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”).

COVID-19 Pandemic

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

economic activity and to the workplace in general.

While uncertainties continue regarding the pandemic, including its duration, future variants, and its longer-term impacts we believe we are well-positioned to continue to adjust our business plans and workforce practices as conditions change.

In response to the pandemic’s impact on the workplace, we implemented flexible remote working arrangements for our employees.

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 with the impact of the pandemic include additional benefits support, remote workforce transition, monitoring and educating on regulatory changes, including vaccine mandates, return to the workplace and workplace safety.

We experienced a 1.2% increase in the year-over-year benefits costs per covered employee during 2022 compared to 2021, as the level of COVID-19 related claims decreased substantially.

During 2023 and possibly beyond 2023, benefits costs trends may continue to be affected by the dynamics of the pandemic, including the impact on healthcare utilization and COVID-19 testing, vaccination and treatment costs.

These costs have resulted and may continue to result in a higher or more volatile level of healthcare claims costs than our historical claim cost trends.

We have experienced a reduced frequency in workers’ compensation claims since the beginning of the pandemic, driven by the trend toward hybrid and remote work.

While certain COVID-19 cases are covered under workers’ compensation, they have not had a material impact on our workers’ compensation costs.

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

See Part I, Item 1A.

“Risk Factors” for additional information.

We account for our revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers .

Our PEO HR Outsourcing Solutions gross billings to clients include the payroll cost of each WSEE at the client location and a markup computed as a percentage of each WSEEs payroll cost.

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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.

Because our total markup is computed as a percentage of payroll

2022 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

The primary direct costs associated with revenue-generating activities for our PEO HR Outsourcing Solutions are:

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

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Stock-based compensation — Our stock-based compensation relates to the recognition of non-cash compensation expense over the requisite service period of time-vested and performance-based incentive plan awards.

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◦ employee travel and training expenses

◦ technology and facility costs, including repairs, maintenance and SaaS licensing costs

2022 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦ facility costs, including repairs and maintenance

◦ technology costs, including software-as-a-service (“SaaS”) subscription costs and amortization of SaaS implementation costs

• 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.

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

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Benefits costs – We provide group health insurance coverage to our WSEEs through a national network of carriers including 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.

• Benefits costs — We provide group health insurance coverage under a single-employer plan that covers both our WSEEs in our PEO HR Outsourcing Solutions and our corporate employees and utilizes a national network of carriers including 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 health insurance contract with United provides the majority of our health insurance coverage.

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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 in the Consolidated Statements of Operations.

The estimated incurred claims are based upon:

The estimated incurred but not reported claims are based upon:

(1) the level of claims processed during the quarter;

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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 we would accrue a liability for the excess costs on our Consolidated Balance Sheets.

If the Plan Costs for

2022 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and we would accrue a liability for the excess costs on our 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 Consolidated Balance Sheets.

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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

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury.

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.

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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 was 0.6% in both 2021 and 2020) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate was 2.9% in 2022 and 0.6% in 2021) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.

2022 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our claim trends could be greater than or less than our prior estimates, in which case we would revise our claims estimates and record an adjustment to workers’ compensation costs in the period such determination is made.

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

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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As a result of these efforts, losses related to client nonpayment have historically been low as a percentage of revenues.

However, if our clients’ financial conditions were to deteriorate rapidly, resulting in nonpayment, our accounts receivable balances could grow and we could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.

New Accounting Pronouncements

We believe that we have implemented the accounting pronouncements with a material impact on our financial statements and do not believe there are any new or pending pronouncements that will materially impact our financial position or results of operations.

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

However, if our clients’ financial conditions were to deteriorate rapidly, resulting in

2022 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

nonpayment, our accounts receivable balances could grow and we could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.

New Accounting Pronouncements

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

Results of Operations

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

2022 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Year Ended December 31,

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Revenues $ 1,678 $ 1,653 $ 1,525

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Key Operating Metrics

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• During 2022, the average number of WSEEs paid from new client sales increased 16.4% from 2021.

Average client retention improved from 82% in 2021 to 85% in 2022, while the net gain in our client base continued, although at lower levels than 2021, a period when many clients were rehiring employees as the pandemic conditions improved.

• During 2021, the average number of WSEEs paid from new client sales increased 8.8% from 2020.

The net gain (loss) in our client base also improved compared to 2020.

Average client retention remained flat at 82% in both 2020 and 2021.

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

The net gain (loss) in our client base declined compared to 2019.

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

2022 Compared to 2021

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• Average WSEEs paid increased 17.7%.

• Revenues per WSEE per month increased 8.4%, or $128, primarily due to 5.1% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of $121.3 million, or $43 per WSEE per month, and the 2020 comprehensive service fee credits of $11.6 million, or $4 per WSEE per month.

• Revenues per WSEE per month increased 1.5%, or $25.

2022 Form 10-K

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2021 Compared to 2020

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

• Average WSEEs paid decreased 0.6%.

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

These deferral elections also reduced our direct costs and therefore had no net effect on our gross profit.

In addition, during the second quarter of 2020, we reduced revenue by $11.6 million, or $4 per WSEE per month, for client comprehensive service fee credits applied generally on a WSEE basis across our active client base to assist clients in addressing the unprecedented economic impact of the COVID-19 pandemic in 2020.

Our revenues for 2021 were $5.0 billion, an increase of 16.0%, primarily due to the following:

• Average WSEEs paid increased 7.1%.

We provide our PEO HR Outsourcing Solutions to small and medium-sized businesses throughout the United States.

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

Gross Profit and

Year-over-Year Growth Percentage

(in thousands)

Gross Profit per WSEE per Month and

Year-over-Year Growth Percentage

2022 Compared to 2021

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 $128 due to non-recurrence of the 2020 FICA deferral credits, comprehensive service fee credits, and higher average pricing.

Our revenues per WSEE per month increased $25 due to higher average pricing.

Our direct costs per WSEE per month increased $12 due primarily to changes in our direct costs components as described below.

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Benefits costs

• The cost of group health insurance and related employee benefits increased $58 per WSEE per month, or 9.8% on a per covered employee basis due primarily to an increase in claims in 2021 compared to 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.

Our healthcare claim activity in 2021 included a continued variability in claim incurral patterns, combined with incremental costs related to COVID-19 testing, vaccination administration, and treatment costs, which were driven by further COVID-19 variants.

• The cost of group health insurance and related employee benefits decreased $9 per WSEE per month, but increased 1.2% on a per covered employee basis.

• The percentage of WSEEs covered under our health insurance plan was 65.4% in 2022 and 67.0% in 2021.

• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $12.1 million, or $3 per WSEE per month, in 2022 compared to an increase in costs of $4.9 million, or $2 per WSEE per month, in 2021.

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

2022 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $4.9 million, or $2 per WSEE per month, in 2021 compared to a decrease in costs of $0.2 million, but remained flat on a per WSEE per month basis, in 2020.

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

Workers’ compensation costs

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

• Workers’ compensation costs increased 4.7%, but remained flat on a per WSEE per month basis, in 2021 compared to 2020.

• Workers’ compensation costs decreased 4.1%, or $4 per WSEE per month, in 2022 compared to 2021.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in 2022 were 0.23% compared to 0.29% in 2021.

• As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $42.2 million, or 0.14% of non-bonus payroll costs, in 2022 compared to a reduction of $41.7 million, or 0.18% of non-bonus payroll costs, in 2021.

Both the 2021 and 2020 periods costs include the impact of a 0.6% discount rate used to accrue workers’ compensation loss claims.

The 2022 period costs include the impact of a 2.9% discount rate used to accrue workers’ compensation loss claims, compared to a 0.6% discount rate used in the 2021 period.

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

Payroll tax costs

• Payroll taxes increased 24.9% on an 18.7% increase in payroll costs, or $84 per WSEE per month, due primarily to the non-recurrence of $121.3 million in client FICA deferral elections and tax credits pursuant to the CARES Act and FFCRA in 2020, partially offset by the 2021 collection of $16.8 million in federal payroll tax refunds related to prior years.

• Payroll taxes increased 23.0% on a 20.6% increase in payroll costs, or $27 per WSEE per month.

• Payroll taxes as a percentage of payroll cost increased to 6.4% in 2022 compared to 6.3% in 2021.

2021 Compared to 2020

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

The net increase in direct costs between 2021 and 2020 attributable to changes in cost estimates for benefits and workers’ compensation totaled $5.5 million as discussed below.

The primary direct cost components changed as follows:

Benefits costs

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

• The cost of group health insurance and related employee benefits increased $58 per WSEE per month, or 9.8% on a per covered employee basis, due primarily to an increase in claims in 2021 compared to 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 plan was 67.0% in 2021 and 67.9% in 2020.

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

• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $4.9 million, or $2 per WSEE per month, in 2021 compared to a decrease in costs of $0.2 million, while remaining flat on a per WSEE per month basis, in 2020.

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

Workers’ compensation costs

• Workers’ compensation costs increased 4.7%, but remained flat on a per WSEE per month basis, in 2021 compared to 2020.

2022 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Workers’ compensation costs

• Workers’ compensation costs decreased 19.7%, or $6 per WSEE per month, in 2020 compared to 2019.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in 2021 were 0.29% compared to 0.32% in 2020.

• As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $41.7 million, or 0.18% of non-bonus payroll costs, in 2021 compared to a reduction of $42.1 million, or 0.20% of non-bonus payroll costs, in 2020.

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

Both the 2021 and 2020 periods costs include the impact of a 0.6% discount rate used to accrue workers’ compensation loss claims.

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

Payroll tax costs

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

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

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

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

• Payroll taxes as a percentage of payroll cost increased to 6.3% in 2021 compared to 6.0% in 2020.

Operating Expenses

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Operating expenses for 2022 increased 17.7% to $761.0 million compared to $646.8 million in 2021.

Operating expenses per WSEE per month for 2021 decreased 1.4% to $215 compared to $218 in 2020.

• Salaries of corporate and sales staff increased 7.3% to $379.2 million, but remained flat on a per WSEE per month basis, compared to 2020.

The increase was primarily due to higher incentive compensation expense.

• Stock-based compensation decreased 32.5% to $40.6 million, or $7 per WSEE per month, compared to 2020.

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

Operating expenses remained flat on a per WSEE per month basis compared to 2021.

• Salaries of corporate and sales staff increased 13.7% to $430.9 million, but decreased $4 on a per WSEE per month basis, compared to 2021 on a 17.7% increase in WSEEs paid per month.

The increase was primarily due to a 7.9% increase in corporate headcount, as well as higher incentive compensation accruals in 2022.

• Stock-based compensation increased 23.3% to $50.1 million, but remained flat on a per WSEE per month basis, compared to 2021.

The increase was primarily due to awards issued under our long-term incentive and restricted stock programs.

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

• Commissions expense increased 30.8% to $45.7 million, or $1 per WSEE per month, compared to 2021.

The increase was primarily due to commissions associated with our PEO HR Outsourcing Solutions, including a new incentive program for our BPAs and sales managers, as well as an increase in the amount of sales channel referral fees paid during 2022.

• Advertising expense increased 28.9% to $37.5 million, or $1 per WSEE per month, compared to 2021.

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

2022 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• Commissions expense increased 6.4% to $34.9 million, but remained flat on a per WSEE per month basis, compared to 2020.

Commissions are primarily due to commissions associated with our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during 2021.

• Advertising expense increased 35.0% to $29.1 million, or $2 per WSEE per month, compared to 2020.

The increase was 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, radio and digital advertising and sponsorship costs.

• General and administrative expenses increased 9.9% to $124.4 million, but remained flat on a per WSEE per month basis, compared to 2020.

The increase was primarily due to technology SaaS licensing costs and professional services related to the implementation of a CRM solution, partially offset by decreases in travel costs.

• Depreciation and amortization expense increased 23.6% to $38.5 million, or $2 per WSEE per month, compared to 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.

• General and administrative expenses increased 25.5% to $156.1 million, or $4 per WSEE per month, compared to 2021.

The increase was primarily due to increased travel, event and software licensing costs.

• Depreciation and amortization expense increased 5.5% to $40.7 million, but decreased $2 on a per WSEE per month basis, compared to 2021.

The increase was primarily due to the completion of a new facility on our corporate campus during 2021 and increased capital expenditures related to software development costs.

2021 Compared to 2020

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Operating expenses for 2021 increased 5.7% to $646.8 million compared to $612.2 million in 2020.

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

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

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

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

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

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

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

Operating expenses per WSEE per month for 2021 decreased 1.4% to $215 compared to $218 in 2020.

• Salaries of corporate and sales staff increased 7.3% to $379.2 million, but remained flat on a per WSEE per month basis, compared to 2020.

The increase was primarily due to higher incentive compensation expense.

• Stock-based compensation decreased 32.5% to $40.6 million, or $7 per WSEE per month, compared to 2020.

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

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

• Commissions expense increased 6.4% to $34.9 million, but remained flat on a per WSEE per month basis, compared to 2020.

Commissions are primarily due to commissions associated with our PEO HR Outsourcing Solutions, including an increase in the amount of sales channel referral fees paid during 2021.

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

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

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

• Advertising expense increased 35.0% to $29.1 million, or $2 per WSEE per month, compared to 2020.

• General and administrative expenses increased 9.9% to $124.4 million, but remained flat on a per WSEE per month basis, compared to 2020.

The increase was primarily due to technology SaaS licensing costs and professional services related to the implementation of a CRM solution, partially offset by decreases in travel costs.

• Depreciation and amortization expense increased 23.6% to $38.5 million, or $2 per WSEE per month, compared to 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.

2022 Form 10-K

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Other Income (Expense)

Other income (expense), was expense of $5.0 million in 2021, expense of $5.4 million in 2020 and income of $3.0 million in 2019.

Other income (expense) was a net expense of $4.8 million, $5.0 million, and $5.4 million in 2022, 2021 and 2020, respectively.

In 2022, the increase in other income was due to an increase in interest income on our marketable securities investments and workers’ compensation deposits, which was offset by an increase in interest expense related to higher average interest rates on borrowings under our credit facility.

In 2021, the decrease in interest expense was due to a decrease in the average interest rate.

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

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

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

Please read Note 2 to the Consolidated Financial Statements, “ Other Balance Sheet Information ,” for additional information.

Income Tax Expense

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

2021 Form 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Non-GAAP Financial Measures

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• interest expense,

• income tax expense, and

• depreciation and amortization expense.

• income tax expense,

• depreciation and amortization expense, and

• amortization of SaaS implementation costs.

Adjusted EBITDA Represents EBITDA plus:

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

(in thousands, except per WSEE per month)

Year Ended December 31,

(in thousands, except per WSEE per month) Year Ended December 31,

2022 2021 2020

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Interest expense 14,207 4 7,458 2 8,016 3

Amortization of SaaS implementation costs 1,923 1 — — — —

Depreciation and amortization 40,660 11 38,547 13 31,189 11

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At December 31, 2022, we had working capital of $158.5 million compared to $116.3 million at December 31, 2021.

The reduction in working capital reflects, in part, cash flow from operations, share repurchases, dividends and capital expenditures.

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

We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our Facility will be adequate to meet our liquidity requirements for 2023.

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In the year ended December 31, 2022, the last business day of the reporting period ended on a Friday, client prepayments were $36.8 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $504.8 million.

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

In the year ended December 31, 2021, which ended on a Friday, client prepayments were $20.1 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $424.8 million.

• Workers’ compensation plan funding — In 2022 and 2021, we received $30.2 million and $35.1 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital.

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

Our adjusted net income decreased 15.1% to $154.0 million in 2021 from $181.3 million in 2020.

Our adjusted net income increased 40.2% to $215.9 million in 2022 from $154.0 million in 2021.

Please read “Results of Operations.”

3 unchanged sentences

Our net cash flows used in financing activities were $141.2 million during 2022.

We repurchased $69.7 million in stock and paid $144.2 million in dividends, including a special cash dividend of $76.7 million paid in the fourth quarter.

We repurchased $73.3 million in stock and paid $76.6 million in dividends.

Seasonality, Inflation and Quarterly Fluctuations

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

We have also experienced variability on a quarterly basis in medical claims costs based on the unpredictable nature of large claims and the COVID-19 pandemic effect on health care utilization patterns, as well as incremental costs related to COVID-19 testing, vaccination administration and treatment, which were driven by further COVID-19 variants.

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

The annual payroll tax wage bases are frequently met in the first two quarters of each year depending on the employee’s compensation levels.

As a result, the gross profit contribution from payroll taxes is typically higher in the first two quarters and declines in the latter half of

As a result, the gross profit contribution from payroll taxes is typically higher in the first two quarters and declines in the latter

2022 Form 10-K

1 unchanged sentence

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

half of each year.

These historical trends may change and other seasonal trends may develop in the future.

4 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis