What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-31 · 84 added, 181 removed, 232 unchanged (53% of the section changed)

6 unchanged sentences

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.

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 that we are 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 impacts 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.

In the third quarter of 2022 (“Q3 2022”), the average number of WSEEs paid per month increased 17.8% year-over-year as the Q3 2022 increase in WSEEs paid from new sales and client retention exceeded the third quarter of 2021 (“Q3 2021”) levels.

The net gain in our client base declined from Q3 2021, a period in which many clients were rehiring employees as the pandemic conditions improved.

We expect the average number of paid WSEEs per month to increase between 14.5% and 15.5% in the fourth quarter of 2022 as compared to the fourth quarter of 2021, which, if achieved, would equate to the average number of paid WSEEs per month growing 1.5% to 2.4% sequentially from the third quarter of 2022.

We experienced a 1.8% increase in the year-over-year benefits costs per covered employee during Q3 2022 as compared to Q3 2021.

During Q3 2021, we experienced a 6.0% increase in the year-over-year benefits costs per covered employee as compared to Q3 2020.

During the remainder of 2022 and possibly beyond 2022, benefits costs trends are expected to continue to be affected by the dynamics of the pandemic, including the impact on healthcare utilization and COVID-19 testing, vaccination and treatment costs.

This has 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.

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

“Risk Factors” included in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021.

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2023 Highlights

Third Quarter 2022 Compared to Third Quarter 2021

First Quarter 2023 Compared to First Quarter 2022

• Average number of WSEEs paid per month increased 10.1%

2 unchanged sentences

• Adjusted EBITDA increased 28.5% to $152.4 million

First Nine Months 2022 Compared to First Nine Months 2021

• Average number of WSEEs paid per month increased 18.9%

• Net income and diluted EPS increased 23.4% and 24.5% to $141.2 million and $3.66, respectively

• Adjusted EPS increased 21.0% to $4.38

• Adjusted EBITDA increased 21.8% to $273.4 million

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

Insperity | 2022 Third Quarter Form 10-Q

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

2 unchanged sentences

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

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

2022 2021 % Change 2022 2021 % Change

Three Months Ended March 31,

2023 2022 % Change

Financial data:

3 unchanged sentences

Operating income 121,007 98,395 23.0 %

Other expense (1,274) (1,712) 25.6 % (4,797) (3,307) (45.1) %

Other income (expense), net 2,572 (1,777) —

Net income 94,595 69,884 35.4 %

16 unchanged sentences

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

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

Three Months Ended

(per WSEE per month) 2023 2022

2 unchanged sentences

Revenues $ 1,923 $ 1,887

Insperity | 2022 Third Quarter Form 10-Q

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

8 unchanged sentences

• During Q1 2023, WSEEs paid increased 10.1% compared to Q1 2022.

The number of WSEEs paid from new client sales and client retention improved compared to Q3 2021, while the net gain in our client base continued, although at lower levels than Q3 2021, a period when many clients were rehiring employees as the pandemic conditions improved.

• During the first nine months of 2022 (“YTD 2022”), WSEEs paid increased 18.9% compared to the first nine months of 2021 (“YTD 2021”).

The number of WSEEs paid from new client sales, the net gain in our client base and client retention all improved compared to YTD 2021.

The number of WSEEs paid from new client sales remained consistent when compared to Q1 2022, while the net gain in our client base and client retention declined compared to Q1 2022.

Average WSEEs Paid and

Year-over-Year Growth Percentage

Insperity | 2022 Third Quarter Form 10-Q

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

9 unchanged sentences

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

Insperity | 2022 Third Quarter Form 10-Q

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

2 unchanged sentences

(in thousands)

Third Quarter 2022 Compared to Third Quarter 2021

First Quarter 2023 Compared to First Quarter 2022

Our revenues for Q1 2023 were $1.8 billion, an increase of 12.2%, primarily due to the following:

1 unchanged sentence

• Revenues per WSEE per month increased 1.9%, or $36.

First Nine Months 2022 Compared to First Nine Months 2021

Our revenues for YTD 2022 were $4.4 billion, an increase of 20.8%, primarily due to the following:

• Average WSEEs paid increased 18.9%.

• Revenues per WSEE per month increased 1.7%, or $28.

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

4 unchanged sentences

(1) The Southwest region includes Texas.

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Significant Markets

We believe the middle market sector, which we generally define as those companies with approximately 150 to 5,000 WSEEs, has historically been under-served by the PEO industry.

The middle market sector, which we generally define as those companies with approximately 150 to 5,000 WSEEs, includes smaller clients whose number of WSEEs have grown to approximately 150 or more WSEEs.

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

Our average number of WSEEs per month in our middle market sector increased 23.3% during YTD 2022 compared to YTD 2021, representing approximately 24.6% and 23.7% of our total average paid WSEEs during YTD 2022 and YTD 2021, respectively.

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our average number of WSEEs per month in our middle market sector increased 19.7% during Q1 2023 compared to Q1 2022, representing approximately 26.1% and 24.0% of our total average paid WSEEs during Q1 2023 and Q1 2022, respectively.

In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin.

2 unchanged sentences

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

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

First Quarter 2023 Compared to First Quarter 2022

Gross Profit and

3 unchanged sentences

Year-over-Year Growth Percentage

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter 2022 Compared to Third Quarter 2021

Gross profit for Q1 2023 increased 16.2% to $332.1 million compared to $285.8 million in Q1 2022.

4 unchanged sentences

The $17 per WSEE per month increase in direct costs is due primarily to the direct cost components changes as follows:

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Benefits costs

• The cost of group health insurance and related employee benefits decreased $6 per WSEE per month and increased 1.8% on a cost per covered employee basis in Q3 2022 as compared to Q3 2021.

• The cost of group health insurance and related employee benefits increased $5 per WSEE per month and increased 2.1% on a cost per covered employee basis in Q1 2023 as compared to Q1 2022.

• The percentage of WSEEs covered under our health insurance plans was 65.4% in Q1 2023 compared to 66.3% in Q1 2022.

• Reported results include changes in estimated claims run-off related to prior periods, which was a reduction in costs of $16.6 million, or $18 per WSEE per month, in Q3 2022 compared to a decrease in costs of $3.7 million, or $5 per WSEE per month, in Q3 2021.

• Reported results include changes in estimated claims run-off related to prior periods, which was a reduction in costs of $9.0 million, or $10 per WSEE per month, in Q1 2023 compared to an increase in costs of $0.8 million, or $1 per WSEE per month, in Q1 2022.

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

1 unchanged sentence

Our continued discipline around our client selection, workplace safety and claims management has allowed for claims within our policy periods to be closed out at amounts below our original cost estimates.

• Workers’ compensation costs increased 0.4%, but decreased $4 on a per WSEE per month basis, in Q3 2022 compared to Q3 2021 on a 23.9% increase in non-bonus payroll costs.

• As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.25% in Q3 2022 and 0.30% Q3 2021.

• We recorded a reduction in workers’ compensation costs of $9.4 million, or 0.12% of non-bonus payroll costs, in Q3 2022 compared to a reduction of $9.3 million, or 0.15% of non-bonus payroll costs, in Q3 2021, primarily as a result of closing out claims at lower than expected costs.

• Workers’ compensation costs increased $5 per WSEE per month in Q1 2023 compared to Q1 2022 on a 13.0% increase in non-bonus payroll costs.

• As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.25% in Q1 2023 and 0.20% in Q1 2022.

• We recorded a reduction in workers’ compensation costs of $7.6 million, or 0.10% of non-bonus payroll costs in Q1 2023, as a result of closing out claims at lower than expected costs.

In Q1 2022, we recorded a reduction of $14.9 million, or 0.22% of non-bonus payroll costs.

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

2 unchanged sentences

• Payroll taxes as a percentage of payroll costs increased to 7.6% in Q1 2023 compared to 7.5% in Q1 2022.

First Nine Months 2022 Compared to First Nine Months 2021

Gross profit for YTD 2022 increased 18.6% to $770.2 million compared to $649.5 million in YTD 2021.

Gross profit per WSEE per month for YTD 2022 decreased $1 to $294 compared to $295 in YTD 2021 due primarily to higher average pricing, offset in part by higher direct costs, as discussed below.

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

Our revenues per WSEE per month increased $28 due to higher average pricing.

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The net increase in direct costs between YTD 2022 and YTD 2021 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $4.4 million as discussed below.

The $29 per WSEE per month increase in direct costs is due primarily to the direct cost components changes as follows:

Benefits costs

• The cost of group health insurance and related employee benefits remained flat on a per WSEE per month basis and increased 2.6% on a cost per covered employee basis.

• The percentage of WSEEs covered under our health insurance plans was 65.5% in YTD 2022 compared to 67.2% in YTD 2021.

• Reported results include changes in estimated claims run-off related to prior periods which was an increase in costs of $12.8 million, or $5 per WSEE per month, in YTD 2022 compared to an increase in costs of $4.5 million, or $2 per WSEE per month, in YTD 2021.

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

Workers’ compensation costs

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

• Workers’ compensation costs decreased 4.9%, or $5 per WSEE per month, in YTD 2022 compared to YTD 2021.

• As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2022 were 0.22% compared to 0.29% in YTD 2021.

• We recorded a reduction in workers’ compensation costs of $35.3 million, or 0.16% of non-bonus payroll costs, in YTD 2022 compared to a reduction of $31.4 million, or 0.18% of non-bonus payroll costs, in YTD 2021, primarily as a result of closing out claims at lower than expected costs.

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

Payroll tax costs

• Payroll taxes increased 25.8% on a 23.3% increase in payroll costs, or $35 per WSEE per month, due to the non-recurrence of the YTD 2021 collection of $16.8 million in federal payroll tax refunds related to prior years.

• Payroll taxes as a percentage of payroll costs increased to 6.8% in YTD 2022 compared to 6.7% in YTD 2021.

Operating Expenses

5 unchanged sentences

• General and administrative expenses — Our general and administrative expenses primarily include:

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦ rent expenses related to our service centers and sales offices

1 unchanged sentence

◦ administrative costs, such as postage, printing and supplies

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦ employee travel and training expenses

2 unchanged sentences

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

Third Quarter 2022 Compared to Third Quarter 2021

First Quarter 2023 Compared to First Quarter 2022

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

Three Months Ended September 30,

Three Months Ended March 31,

(in thousands, except per WSEE) 2023 2022 % Change 2023 2022 % Change

8 unchanged sentences

Operating expenses per WSEE per month for Q1 2023 increased 2.2% to $229 compared to $224 in Q1 2022.

• Salaries of corporate and sales staff for Q3 2022 increased 22.7% to $109.5 million, or $5 per WSEE per month, compared to Q3 2021 on the 17.8% increase in WSEEs paid per month.

This increase was primarily due to a 10.6% increase in corporate headcount in Q3 2022 compared to Q3 2021, as well as higher incentive compensation accruals in Q3 2022.

• Stock-based compensation expense for Q3 2022 increased 28.7% to $13.3 million, or $2 per WSEE per month, compared to Q3 2021.

• Salaries of corporate and sales staff for Q1 2023 increased 15.9% to $124.5 million, or $6 per WSEE per month, compared to Q1 2022, primarily due to an increase in the number of service and support personnel as well as in the number of Business Performance Advisors.

• Stock-based compensation expense for Q1 2023 increased 12.8% to $11.1 million, but remained flat on a per WSEE per month basis, compared to Q1 2022.

The increase was primarily due to awards issued under our restricted stock program.

• Commissions expense for Q3 2022 increased 26.9% to $11.1 million, or $1 per WSEE per month, compared to Q3 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.

• General and administrative expenses for Q3 2022 increased 22.4% to $38.1 million, but remained flat on a per WSEE per month basis, compared to Q3 2021.

The increase was primarily due to increased travel and event costs, SaaS subscription costs and amortization of SaaS implementation costs.

Insperity | 2022 Third Quarter Form 10-Q

• Commissions expense for Q1 2023 increased 6.9% to $11.0 million, but remained flat on a per WSEE per month basis, compared to Q1 2022.

• Advertising expense for Q1 2023 decreased 30.9% to $5.9 million, or $4 per WSEE per month, compared to Q1 2022.

This decrease was primarily due to a change in the timing associated with advertising.

• General and administrative expenses for Q1 2023 increased 17.1% to $48.0 million, or $4 per WSEE per month, compared to Q1 2022.

The increase was primarily due to increased travel and event costs, software licensing costs, and amortization of SaaS implementation costs.

Other Income (Expense)

Interest income increased $8.6 million in Q1 2023 compared to Q1 2022 due to increases in interest rates earned on investments in marketable securities and workers’ compensation deposits.

Interest expense increased $4.3 million in Q1 2023 compared to Q1 2022 due to increases in interest rates charged on borrowings under our credit facility.

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

First Nine Months 2022 Compared to First Nine Months 2021

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

Nine Months Ended September 30,

(in thousands, except per WSEE) 2022 2021 % Change 2022 2021 % Change

Salaries $ 323,486 $ 286,669 12.8 % $ 123 $ 130 (5.4) %

Stock-based compensation 38,818 35,965 7.9 % 15 16 (6.3) %

Commissions 32,121 24,694 30.1 % 12 11 9.1 %

Advertising 30,812 23,804 29.4 % 12 11 9.1 %

General and administrative 115,215 91,981 25.3 % 44 42 4.8 %

Depreciation and amortization 30,367 27,715 9.6 % 12 13 (7.7) %

Total operating expenses $ 570,819 $ 490,828 16.3 % $ 218 $ 223 (2.2) %

Operating expenses for YTD 2022 increased 16.3% to $570.8 million compared to $490.8 million in YTD 2021.

Operating expenses per WSEE per month for YTD 2022 decreased 2.2% to $218 compared to $223 in YTD 2021.

• Salaries of corporate and sales staff for YTD 2022 increased 12.8% to $323.5 million, but decreased $7 on a per WSEE per month basis, compared to YTD 2021 on a 18.9% increase in WSEEs paid per month.

This increase was primarily due to a 5.9% increase in corporate headcount, as well as higher incentive compensation accruals in YTD 2022.

• Stock-based compensation expense for YTD 2022 increased 7.9% to $38.8 million, but decreased $1 on a per WSEE per month basis, compared to YTD 2021.

The increase was primarily due to awards issued under our restricted stock program.

• Commissions expense for YTD 2022 increased 30.1% to $32.1 million, or $1 per WSEE per month, compared to YTD 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 YTD 2022.

• Advertising expense for YTD 2022 increased 29.4% to $30.8 million, or $1 per WSEE per month, compared to YTD 2021.

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

• General and administrative expenses for YTD 2022 increased 25.3% to $115.2 million, or $2 per WSEE per month, compared to YTD 2021.

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

• Depreciation and amortization expense for YTD 2022 increased 9.6% to $30.4 million, but decreased $1 on a per WSEE per month basis, compared to YTD 2021.

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.

Other Income (Expense)

Other Income (expense) for Q3 2022 was net expense of $1.3 million compared to net expense of $1.7 million in Q3 2021, and for YTD 2022 was net expense of $4.8 million compared to net expense of $3.3 million in YTD 2021.

Income Tax Expense

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

2022 2021 2022 2021

Three months ended March 31,

Effective income tax rate 23.5% 27.7%

For the nine months ended September 30, 2022, our provision for income taxes differed from the U.S.

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

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During the first nine months of 2022 and 2021, we recognized an income tax benefit of $0.2 million and $2.2 million, respectively, related to the vesting of short-term, long-term incentive, and restricted stock awards.

For the three months ended March 31, 2023, our provision for income taxes differed from the U.S.

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

During the first three months of 2023 and 2022, we recognized an income tax benefit of $4.9 million and $0.5 million, respectively, related to the vesting of short-term, long-term incentive, and restricted stock awards.

Non-GAAP Financial Measures

3 unchanged sentences

Non-GAAP Measure Definition Benefit of Non-GAAP Measure

Non-bonus payroll cost

Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs.

Non-bonus payroll cost Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs.

Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program.

1 unchanged sentence

We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program.

Adjusted cash, cash equivalents and marketable securities

Excludes funds associated with:

Adjusted cash, cash equivalents and marketable securities Excludes funds associated with:

• federal and state income tax withholdings,

5 unchanged sentences

Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments.

Represents net income computed in accordance with GAAP, plus:

EBITDA Represents net income computed in accordance with GAAP, plus:

• interest expense,

2 unchanged sentences

• amortization of SaaS implementation costs.

Adjusted EBITDA

Represents EBITDA plus:

Adjusted EBITDA Represents EBITDA plus:

• non-cash stock based compensation.

1 unchanged sentence

• non-cash stock-based compensation.

Represents diluted net income per share computed in accordance with GAAP, excluding:

Adjusted EPS Represents diluted net income per share computed in accordance with GAAP, excluding:

• non-cash stock based-compensation.

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

2022 2021 2022 2021

Per WSEE Per WSEE Per WSEE Per WSEE

(in thousands, except per WSEE per month) Three Months Ended March 31,

Per WSEE Per WSEE

Payroll cost $ 9,681,610 $ 10,523 $ 8,780,068 $ 10,503

5 unchanged sentences

13.0 % 2.7 % 27.2 % 6.4 %

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Cash, cash equivalents and marketable securities $ 732,123 $ 765,896

5 unchanged sentences

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

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

Three Months Ended March 31,

(in thousands, except per WSEE per month) 2023 2022

Per WSEE Per WSEE Per WSEE Per WSEE

Per WSEE Per WSEE

Net income $ 94,595 $ 103 $ 69,884 $ 84

10 unchanged sentences

28.5 % 16.9 % 13.8 % (4.7 %)

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Three Months Ended

(in thousands) 2023 2022

2 unchanged sentences

Stock-based compensation 11,110 9,846

Total non-GAAP adjustments 13,341 10,362 38,818 35,965

Tax effect (2,606) (2,724)

2 unchanged sentences

% Change period over period 33.9 % 8.8 %

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Three Months Ended

(amounts per share) 2023 2022

2 unchanged sentences

Stock-based compensation 0.29 0.25

Total non-GAAP adjustments 0.35 0.27 1.01 0.92

Tax effect (0.07) (0.06)

2 unchanged sentences

% Change period over period

38.2 % (2.2) % 21.0 % (12.8) %

Liquidity and Capital Resources

5 unchanged sentences

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

We had $596.6 million in cash, cash equivalents and marketable securities at September 30, 2022, of which approximately $321.9 million was payable in early October 2022 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $35.8 million represented client prepayments that were payable in October 2022.

At September 30, 2022, we had working capital of $167.8 million compared to $116.3 million at December 31, 2021.

We had $732.1 million in cash, cash equivalents and marketable securities at March 31, 2023, of which approximately $457.8 million was payable in early April 2023 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $42.9 million represented client prepayments that were payable in April 2023.

At March 31, 2023, we had working capital of $215.1 million compared to $158.5 million at December 31, 2022.

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

We intend to rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs, which we continually monitor in light of our strategic goals and the uncertainty related to the ongoing impacts of the COVID-19 pandemic.

As of September 30, 2022, we had an outstanding letter of credit and borrowings totaling $370.4 million under the Facility.

We intend to rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs.

As of March 31, 2023, we had an outstanding letter of credit and borrowings totaling $370.4 million under the Facility.

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

Insperity | 2023 First Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash Flows from Operating Activities

Net cash provided by operating activities in the first nine months of 2022 was $122.0 million.

Net cash provided by operating activities in the first three months of 2023 was $39.4 million.

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

5 unchanged sentences

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

In the period ended September 30, 2022, the last business day of the reporting period was a Friday, client prepayments were $35.8 million and employment taxes and other deductions were $321.9 million.

In the period ended September 30, 2021, the

Insperity | 2022 Third Quarter Form 10-Q

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

• Workers’ compensation plan funding – During YTD 2022, we received $30.2 million for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital.

In the period ended March 31, 2023, the last business day of the reporting period was a Friday, client prepayments were $42.9 million and employment taxes and other deductions were $457.8 million.

In the period ended March 31, 2022, the last business day of the reporting period was a Thursday, client prepayments were $117.8 million and employment taxes and other deductions were $338.3 million.

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

1 unchanged sentence

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

As of September 30, 2022, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $25.2 million surplus, $16.2 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at September 30, 2022, were $57.6 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

As of March 31, 2023, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $41.5 million surplus, $32.5 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets.

The premiums, including an additional quarterly premium, owed to United at March 31, 2023 were $71.1 million, which is included in accrued health insurance costs, a current liability in our Condensed Consolidated Balance Sheets.

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

Our adjusted net income increased 20.2% to $169.3 million in the first nine months ended September 30, 2022, compared to $140.9 million in the first nine months ended September 30, 2021.

Please read “Results of Operations – First Nine Months 2022 Compared to First Nine Months 2021.”

Our adjusted net income increased 33.9% to $103.1 million in the three months ended March 31, 2023, compared to $77.0 million in the three months ended March 31, 2022.

Please read “ Results of Operations – First Quarter 2023 Compared to First Q uarter 2022 .”

Cash Flows from Investing Activities

Net cash flows used in investing activities were $19.9 million for the nine months ended September 30, 2022, primarily due to property and equipment purchases of $16.4 million.

Net cash flows used in investing activities were $8.9 million for the three months ended March 31, 2023, primarily due to property and equipment purchases of $6.8 million.

Cash Flows from Financing Activities

Net cash flows used in financing activities were $123.4 million for the nine months ended September 30, 2022.

Net cash flows used in financing activities were $46.8 million for the three months ended March 31, 2023.

We paid $19.9 million in dividends and repurchased or withheld $34.6 million in stock.

Insperity | 2022 Third Quarter Form 10-Q

Insperity | 2023 First Quarter Form 10-Q

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis