INSPERITY, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, as well as our Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q. Executive Summary Overview Insperity, Inc. (“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. 2023 Highlights Second Quarter 2023 Compared to Second Quarter 2022 • Average number of WSEEs paid per month increased 7.2% • Net income and diluted earnings per share (“diluted EPS”) decreased 61.6% and 62.1% to $12.9 million and $0.33, respectively • Adjusted EPS decreased 44.8% to $0.64 • Adjusted EBITDA decreased 32.2% to $50.9 million First Six Months 2023 Compared to First Six Months 2022 • Average number of WSEEs paid per month increased 8.6% • Net income and diluted EPS increased 3.9% and 3.7% to $107.5 million and $2.78, respectively • Adjusted EPS increased 4.8% to $3.30 • Adjusted EBITDA increased 5.0% to $203.3 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 | 2023 Second Quarter Form 10-Q 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Key Financial and Statistical Data (in thousands, except per share, WSEE and statistical data) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 % Change 2023 2022 % Change Financial data: Revenues $ 1,585,129 $ 1,432,107 10.7 % $ 3,354,781 $ 3,009,944 11.5 % Gross profit 224,639 239,868 (6.3) % 556,785 525,642 5.9 % Operating expenses 208,832 191,518 9.0 % 419,971 378,897 10.8 % Operating income 15,807 48,350 (67.3) % 136,814 146,745 (6.8) % Other income (expense), net 1,279 (1,746) 173.3 % 3,851 (3,523) 209.3 % Net income 12,894 33,599 (61.6) % 107,489 103,483 3.9 % Diluted EPS 0.33 0.87 (62.1) % 2.78 2.68 3.7 % Non-GAAP financial measures (1) : Adjusted net income $ 24,614 $ 44,885 (45.2) % $ 127,713 $ 121,891 4.8 % Adjusted EBITDA 50,894 75,026 (32.2) % 203,307 193,599 5.0 % Adjusted EPS 0.64 1.16 (44.8) % 3.30 3.15 4.8 % Average WSEEs paid 311,304 290,507 7.2 % 308,998 284,583 8.6 % Statistical data (per WSEE per month) : Revenues (2) $ 1,697 $ 1,643 3.3 % $ 1,809 $ 1,763 2.6 % Gross profit 241 275 (12.4) % 300 308 (2.6) % Operating expenses 224 220 1.8 % 226 222 1.8 % Operating income 17 55 (69.1) % 74 86 (14.0) % Net income 14 39 (64.1) % 58 61 (4.9) % ____________________________________ (1) Please read “ Non-GAAP Financial Measures ” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP. (2) Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows: Three Months Ended June 30, Six Months Ended June 30, (per WSEE per month) 2023 2022 2023 2022 Gross billings $ 10,969 $ 10,585 $ 11,702 $ 11,469 Less: WSEE payroll cost 9,272 8,942 9,893 9,706 Revenues $ 1,697 $ 1,643 $ 1,809 $ 1,763 Insperity | 2023 Second Quarter Form 10-Q 20 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Key Operating Metrics We monitor certain key metrics to measure our performance, including: • WSEEs • Adjusted EBITDA • Adjusted EPS Our growth in the number of WSEEs paid is affected by three primary sources: new client sales, client retention and the net change in WSEEs paid at existing clients through new hires and layoffs. • During Q2 2023, WSEEs paid increased 7.2% compared to Q2 2022. The number of WSEEs paid from new client sales declined when compared to Q2 2022, the net gain in our client base continued, but at lower levels than Q2 2022, while client retention remained consistent compared to Q2 2022. • During the first six months of 2023 (“YTD 2023”), WSEEs paid increased 8.6% compared to the first six months of 2022 (“YTD 2022”). The number of WSEEs paid from new client sales declined when compared to YTD 2022, the net gain in our client base continued, but at lower levels than YTD 2022, while client retention remained consistent compared to YTD 2022. Average WSEEs Paid and Year-over-Year Growth Percentage Insperity | 2023 Second Quarter Form 10-Q 21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Adjusted EBITDA and Year-over-Year Growth Percentage (in thousands) Adjusted EPS and Year-over-Year Growth Percentage (amounts per share) Revenues Our PEO HR Outsourcing Solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs and (2) a monthly markup component. Our revenues are primarily dependent on the number of clients enrolled, the resulting number of WSEEs paid each period and the number of WSEEs enrolled in our benefit plans. Because our 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 | 2023 Second Quarter Form 10-Q 22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue and Year-over-Year Growth Percentage (in thousands) Second Quarter 2023 Compared to Second Quarter 2022 Our revenues for Q2 2023 were $1.6 billion, an increase of 10.7%, primarily due to the following: • Average WSEEs paid increased 7.2%. • Revenues per WSEE per month increased 3.3%, or $54. First Six Months 2023 Compared to First Six Months 2022 Our revenues for YTD 2023 were $3.4 billion, an increase of 11.5%, primarily due to the following: • Average WSEEs paid increased 8.6%. • Revenues per WSEE per month increased 2.6%, or $46. Insperity | 2023 Second Quarter Form 10-Q 23 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. Our PEO HR Outsourcing Solutions revenue distribution by region follows: PEO HR Outsourcing Solutions Revenue by Region (in thousands) ________________________________________________________ (1) The Southwest region includes Texas. The percentage of total PEO HR Outsourcing Solutions revenue in our significant markets includes the following: Significant Markets 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 16.7% during YTD 2023 compared to YTD 2022, representing approximately 26.1% and 24.3% of our total average paid WSEEs during YTD 2023 and YTD 2022, respectively. Insperity | 2023 Second Quarter Form 10-Q 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit 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. As a result, our operating results are significantly impacted by our ability to accurately estimate our direct costs relative to the revenues derived from the markup component of our gross billings. Our gross profit per WSEE is primarily determined by our ability to accurately estimate direct costs and our ability to incorporate changes in these costs into the gross billings charged to PEO HR Outsourcing Solutions clients, which are subject to pricing arrangements that are typically renewed annually. 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 Insperity | 2023 Second Quarter Form 10-Q 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Second Quarter 2023 Compared to Second Quarter 2022 Gross profit for Q2 2023 decreased 6.3% to $224.6 million compared to $239.9 million in Q2 2022. Gross profit per WSEE per month for Q2 2023 decreased $34 to $241 compared to $275 in Q2 2022 due primarily to higher direct costs, offset in part by higher average pricing, as discussed below. Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. Our revenues per WSEE per month increased $54 due to higher average pricing of 3.3%. The net increase in direct costs between Q2 2023 and Q2 2022 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $13.1 million as discussed below. The $88 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 increased $65 per WSEE per month and increased 9.7% on a cost per covered employee basis in Q2 2023 as compared to Q2 2022, due primarily to an increase in the number and severity of large claims up to our $1 million per person insurance claim limit. Large claim activity accounted for approximately 75% of the higher costs, with claims over $750,000 being the primary driver of this increase. The remaining approximately 25% related to higher-than-expected pharmacy costs, in which we experienced a significant step-up in the use of diabetes and weight loss drugs and behavioral health drugs. • The percentage of WSEEs covered under our health insurance plans was 64.9% in Q2 2023 compared to 65.4% in Q2 2022. • Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $1.3 million, or $1 per WSEE per month, in Q2 2023 compared to a decrease in costs of $7.2 million, or $8 per WSEE per month, in Q2 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. Workers’ compensation costs 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 $2 per WSEE per month in Q2 2023 compared to Q2 2022 on a 10.1% increase in non-bonus payroll costs. • As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.23% in Q2 2023 and 0.21% in Q2 2022. • We recorded a reduction in workers’ compensation costs of $8.2 million, or 0.10% of non-bonus payroll costs in Q2 2023, as a result of closing out claims at lower than expected costs. In Q2 2022, we recorded a reduction of $12.8 million, or 0.18% 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. Payroll tax costs • Payroll taxes increased 11.1% on an 11.1% increase in payroll costs, or $22 per WSEE per month. • Payroll taxes as a percentage of payroll costs were 6.7% in both Q2 2023 and Q2 2022. Insperity | 2023 Second Quarter Form 10-Q 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Six Months 2023 Compared to First Six Months 2022 Gross profit for YTD 2023 increased 5.9% to $556.8 million compared to $525.6 million in YTD 2022. Gross profit per WSEE per month for YTD 2023 decreased $8 to $300 compared to $308 in YTD 2022 due primarily to higher direct costs, offset in part by higher average pricing, as discussed below. Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. Our revenues per WSEE per month increased $46 due to higher average pricing of 2.7%. The net decrease in direct costs between YTD 2023 and YTD 2022 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $8.2 million as discussed below. The $54 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 increased $35 per WSEE per month and increased 6.0% on a cost per covered employee basis, due primarily to an increase in the number and severity of large claims up to our $1 million per person insurance claim limit. Large claim activity accounted for approximately 75% of the higher costs, with claims over $750,000 being the primary driver of this increase. The remaining approximately 25% related to higher-than-expected pharmacy costs, in which we experienced a significant step-up in the use of diabetes and weight loss drugs and behavioral health drugs. • The percentage of WSEEs covered under our health insurance plans was 65.2% in YTD 2023 compared to 65.9% in YTD 2022. • Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $9.8 million, or $5 per WSEE per month, in YTD 2023 compared to an increase in costs of $10.2 million, or $6 per WSEE per month, in YTD 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. 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 increased 30.0%, or $3 per WSEE per month, in YTD 2023 compared to YTD 2022. • As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2023 were 0.24% compared to 0.21% in YTD 2022. • We recorded a reduction in workers’ compensation costs of $15.0 million, or 0.10% of non-bonus payroll costs, in YTD 2023 compared to a reduction of $26.8 million, or 0.19% of non-bonus payroll costs, in YTD 2022, 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 11.2% on a 10.7% increase in payroll costs, or $16 per WSEE per month. • Payroll taxes as a percentage of payroll costs increased to 7.2% in YTD 2023 compared to 7.1% in YTD 2022. Insperity | 2023 Second Quarter Form 10-Q 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Expenses • Salaries, wages and payroll taxes — Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any incentive compensation. • 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 awards. • Commissions — Commissions expense consists primarily of amounts paid to sales managers and other sales personnel, including business performance advisors (“BPAs”), as well as channel referral fees. Commissions are based on new accounts sold and a percentage of revenue generated by such personnel. • Advertising — Advertising expense primarily consists of media advertising and other business promotions in our current and anticipated sales markets. • General and administrative expenses — Our general and administrative expenses primarily include: ◦ rent expenses related to our service centers and sales offices ◦ outside professional service fees related to legal, consulting and accounting services ◦ administrative costs, such as postage, printing and supplies ◦ employee travel and training expenses ◦ 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. Second Quarter 2023 Compared to Second Quarter 2022 The following table presents certain information related to our operating expenses: Three Months Ended June 30, per WSEE (in thousands, except per WSEE) 2023 2022 % Change 2023 2022 % Change Salaries $ 110,942 $ 106,522 4.1 % $ 119 $ 123 (3.3) % Stock-based compensation 15,356 15,631 (1.8) % 16 18 (11.1) % Commissions 12,038 10,743 12.1 % 13 12 8.3 % Advertising 16,595 12,427 33.5 % 18 14 28.6 % General and administrative 43,161 36,095 19.6 % 46 41 12.2 % Depreciation and amortization 10,740 10,100 6.3 % 12 12 — Total operating expenses $ 208,832 $ 191,518 9.0 % $ 224 $ 220 1.8 % • Operating expenses for Q2 2023 increased 9.0% to $208.8 million compared to $191.5 million in Q2 2022. Operating expenses per WSEE per month for Q2 2023 increased 1.8% to $224 compared to $220 in Q2 2022. • Salaries of corporate and sales staff for Q2 2023 increased 4.1% to $110.9 million, but decreased $4 on a per WSEE per month basis, compared to Q2 2022. This increase was primarily due to an increase in service, support and BPA headcount, which was partially offset by lower incentive compensation expense in Q2 2023 compared to Q2 2022. Insperity | 2023 Second Quarter Form 10-Q 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • Stock-based compensation expense for Q2 2023 decreased 1.8% to $15.4 million, or $2 per WSEE per month, compared to Q2 2022. The decrease was primarily due to a decrease in the number of stock awards anticipated to be earned related to performance-based awards granted under our long-term incentive plans based on our lower than expected year-to-date operating results in Q2 2023, partially offset by awards issued under our restricted stock program. • Commissions expense for Q2 2023 increased 12.1% to $12.0 million, or $1 per WSEE per month, compared to Q2 2022. The increase was primarily due to commissions associated with our PEO HR Outsourcing Solutions and sales managers, as well as an increase in the amount of sales channel referral fees paid during Q2 2023. • Advertising expense for Q2 2023 increased 33.5% to $16.6 million, or $4 per WSEE per month, compared to Q2 2022. This increase was primarily due to a change in timing associated with advertising. • General and administrative expenses for Q2 2023 increased 19.6% to $43.2 million, or $5 per WSEE per month, compared to Q2 2022. The increase was primarily due to increased travel and event costs, software licensing and maintenance costs, and amortization of SaaS implementation costs. First Six Months 2023 Compared to First Six Months 2022 The following table presents certain information related to our operating expenses: Six Months Ended June 30, per WSEE (in thousands, except per WSEE) 2023 2022 % Change 2023 2022 % Change Salaries $ 235,483 $ 213,961 10.1 % $ 127 $ 126 0.8 % Stock-based compensation 26,466 25,477 3.9 % 14 15 (6.7) % Commissions 23,055 21,053 9.5 % 12 12 — Advertising 22,535 21,022 7.2 % 12 12 — General and administrative 91,195 77,100 18.3 % 50 45 11.1 % Depreciation and amortization 21,237 20,284 4.7 % 11 12 (8.3) % Total operating expenses $ 419,971 $ 378,897 10.8 % $ 226 $ 222 1.8 % Operating expenses for YTD 2023 increased 10.8% to $420.0 million compared to $378.9 million in YTD 2022. Operating expenses per WSEE per month for YTD 2023 increased 1.8% to $226 compared to $222 in YTD 2022. • Salaries of corporate and sales staff for YTD 2023 increased 10.1% to $235.5 million, or $1 per WSEE per month, compared to YTD 2022. This increase was primarily due to an increase in service, support and BPA headcount, which was partially offset by lower incentive compensation expense in YTD 2023 compared to YTD 2022. • Stock-based compensation expense for YTD 2023 increased 3.9% to $26.5 million, but decreased $1 on a per WSEE per month basis, compared to YTD 2022. The increase was primarily due to awards issued under our restricted stock program, partially offset by a decrease in the number of stock awards anticipated to be earned related to performance-based awards granted under our long-term incentive plans based on our lower than expected year-to-date operating results in YTD 2023. • Commissions expense for YTD 2023 increased 9.5% to $23.1 million, but remained flat on a per WSEE per month basis, compared to YTD 2022. The increase was primarily due to commissions associated with our PEO HR Outsourcing Solutions and sales managers, as well as an increase in the amount of sales channel referral fees paid during YTD 2023. • Advertising expense for YTD 2023 increased 7.2% to $22.5 million, but remained flat on a per WSEE per month basis, compared to YTD 2022. This increase was primarily due to increases in print and digital advertising and sponsorship costs. Insperity | 2023 Second Quarter Form 10-Q 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • General and administrative expenses for YTD 2023 increased 18.3% to $91.2 million, or $5 per WSEE per month, compared to YTD 2022. The increase was primarily due to increased travel and event costs, software licensing and maintenance costs, and amortization of SaaS implementation costs. Other Income (Expense) Interest income increased $15.7 million in YTD 2023 compared to YTD 2022 due to increases in interest rates earned on investments in overnight funds, marketable securities and workers’ compensation deposits. Interest expense increased $8.3 million in YTD 2023 compared to YTD 2022 due to increases in interest rates charged on borrowings under our credit facility. Income Tax Expense Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Effective income tax rate 24.5% 27.9% 23.6% 27.7% For the six months ended June 30, 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 six months of 2023 and 2022, we recognized an income tax benefit of $4.9 million and $0.2 million, respectively, related to the vesting of long-term incentive and restricted stock awards. Insperity | 2023 Second Quarter Form 10-Q 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-GAAP Financial Measures Non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the tables below. 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. Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program. Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs. 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: • federal and state income tax withholdings, • employment taxes, • other payroll deductions, and • client prepayments. We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior periods, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because they allow investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments. EBITDA Represents net income computed in accordance with GAAP, plus: • interest expense, • income tax expense, • depreciation and amortization expense, and • amortization of SaaS implementation costs. Adjusted EBITDA Represents EBITDA plus: • non-cash stock based compensation. Adjusted net income Represents net income computed in accordance with GAAP, excluding: • non-cash stock-based compensation. Adjusted EPS Represents diluted net income per share computed in accordance with GAAP, excluding: • non-cash stock based-compensation. Following is a reconciliation of payroll cost (GAAP) to non-bonus payroll costs (non-GAAP): (in thousands, except per WSEE per month) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Per WSEE Per WSEE Per WSEE Per WSEE Payroll cost $ 8,659,364 $ 9,272 $ 7,792,536 $ 8,942 $ 18,340,974 $ 9,893 $ 16,572,604 $ 9,706 Less: Bonus payroll cost 813,157 871 668,503 767 2,815,200 1,519 2,652,356 1,553 Non-bonus payroll cost $ 7,846,207 $ 8,401 $ 7,124,033 $ 8,175 $ 15,525,774 $ 8,374 $ 13,920,248 $ 8,153 % Change period over period 10.1 % 2.8 % 25.9 % 5.5 % 11.5 % 2.7 % 26.6 % 6.0 % Insperity | 2023 Second Quarter Form 10-Q 31 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) June 30, 2023 December 31, 2022 Cash, cash equivalents and marketable securities $ 616,091 $ 765,896 Less: Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions 365,935 504,817 Client prepayments 31,259 36,800 Adjusted cash, cash equivalents and marketable securities $ 218,897 $ 224,279 Following is a reconciliation of net income (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP): Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per WSEE per month) 2023 2022 2023 2022 Per WSEE Per WSEE Per WSEE Per WSEE Net income $ 12,894 $ 14 $ 33,599 $ 39 $ 107,489 $ 58 $ 103,483 $ 61 Income tax expense 4,192 4 13,005 14 33,176 19 39,739 22 Interest expense 6,687 7 2,691 3 12,892 7 4,616 3 Amortization of SaaS implementation costs 1,025 1 — — 2,047 1 — — Depreciation and amortization 10,740 12 10,100 12 21,237 11 20,284 12 EBITDA 35,538 38 59,395 68 176,841 96 168,122 98 Stock-based compensation 15,356 16 15,631 18 26,466 14 25,477 15 Adjusted EBITDA $ 50,894 $ 54 $ 75,026 $ 86 $ 203,307 $ 110 $ 193,599 $ 113 % Change period over period (32.2 %) (37.2 %) 24.6 % 4.9 % 5.0 % (2.7) % 17.7 % (1.7) % Following is a reconciliation of net income (GAAP) to adjusted net income (non-GAAP): Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Net income $ 12,894 $ 33,599 $ 107,489 $ 103,483 Non-GAAP adjustments: Stock-based compensation 15,356 15,631 26,466 25,477 Tax effect (3,636) (4,345) (6,242) (7,069) Total non-GAAP adjustments, net 11,720 11,286 20,224 18,408 Adjusted net income $ 24,614 $ 44,885 $ 127,713 $ 121,891 % Change period over period (45.2 %) 27.2 % 4.8 % 14.9 % Insperity | 2023 Second Quarter Form 10-Q 32 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 June 30, Six Months Ended June 30, (amounts per share) 2023 2022 2023 2022 Diluted EPS $ 0.33 $ 0.87 $ 2.78 $ 2.68 Non-GAAP adjustments: Stock-based compensation 0.40 0.41 0.69 0.66 Tax effect (0.09) (0.12) (0.17) (0.19) Total non-GAAP adjustments, net 0.31 0.29 0.52 0.47 Adjusted EPS $ 0.64 $ 1.16 $ 3.30 $ 3.15 % Change period over period (44.8 %) 27.5 % 4.8 % 15.8 % Liquidity and Capital Resources We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, our expansion plans, stock repurchases, potential acquisitions, debt service requirements and other operating cash needs. To meet short-term liquidity requirements, which are primarily the payment of direct costs and operating expenses, we rely primarily on cash from operations. Longer-term projects, large stock repurchases or significant acquisitions may be financed with public or private debt or equity. We have a revolving credit facility (“Facility”) with a syndicate of financial institutions with a borrowing capacity of $650 million. The Facility is available for working capital and general corporate purposes, including acquisitions and stock repurchases. 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 $616.1 million in cash, cash equivalents and marketable securities at June 30, 2023, of which approximately $365.9 million was payable in early July 2023 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $31.3 million represented client prepayments that were payable in July 2023. At June 30, 2023, we had working capital of $228.0 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. As of June 30, 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. Cash Flows from Operating Activities Net cash used in operating activities in the first six months of 2023 was $69.6 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients. Our cash and cash equivalents, and thus our reported cash flows from operating activities, are significantly impacted by various external and internal factors, which are reflected in part by the changes in our balance sheet accounts. These include the following: • Timing of client payments / payroll taxes — We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients no later than the same day as the payment of WSEE payrolls and associated payroll taxes. Therefore, the last business day of a reporting period has a substantial impact on our reporting of operating cash flows. For example, many WSEEs are paid on Fridays; therefore, operating cash flows decrease in the reporting periods that end on a Friday or a Monday. In the period ended June 30, 2023, the last business day of the reporting period was a Friday, client prepayments were $31.3 million and employment taxes and other deductions were $365.9 million. In the period ended June 30, 2022, the last business day of the reporting period was a Thursday, client prepayments were $116.6 million and employment taxes and other deductions were $258.2 million. Insperity | 2023 Second Quarter Form 10-Q 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • Workers’ compensation plan funding — During YTD 2023, we received $43.4 million for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital. • 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. Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. As of June 30, 2023, Plan Costs were more than the net premiums paid and owed to United by $6.5 million, which is $15.5 million less than our agreed-upon $9.0 million surplus maintenance level. The $15.5 million difference is reflected as a current liability and $9.0 million is reflected as a long-term asset on our Condensed Consolidated Balance Sheets. The premiums, including an additional quarterly premium, owed to United at June 30, 2023 were $10.8 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 4.8% to $127.7 million in the six months ended June 30, 2023, compared to $121.9 million in the six months ended June 30, 2022. Please read “ Results of Operations .” Cash Flows from Investing Activities Net cash flows used in investing activities were $16.3 million for the six months ended June 30, 2023, primarily due to property and equipment purchases of $14.0 million. Cash Flows from Financing Activities Net cash flows used in financing activities were $85.0 million for the six months ended June 30, 2023. We paid $41.6 million in dividends and repurchased or withheld $45.4 million in stock. Insperity | 2023 Second Quarter Form 10-Q 34 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES