INSPERITY, INC. 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2023 December 31, 2022 Assets Cash and cash equivalents $ 678,588 $ 732,828 Restricted cash 51,263 49,779 Marketable securities 13,837 33,068 Accounts receivable, net 656,695 622,764 Prepaid insurance and related assets 21,260 11,706 Other current assets 56,037 61,728 Total current assets 1,477,680 1,511,873 Property and equipment, net of accumulated depreciation 190,672 199,992 Right-of-use (“ROU”) leased assets 53,949 56,532 Prepaid health insurance 9,000 9,000 Deposits – health insurance 7,900 7,900 Deposits – workers’ compensation 197,466 196,370 Goodwill and other intangible assets, net 12,707 12,707 Deferred income taxes, net 10,066 15,533 Other assets 37,030 29,354 Total assets $ 1,996,470 $ 2,039,261 Liabilities and stockholders' equity Accounts payable $ 7,207 $ 7,732 Payroll taxes and other payroll deductions payable 518,061 556,085 Accrued worksite employee payroll costs 559,931 513,397 Accrued health insurance costs 50,760 53,402 Accrued workers’ compensation costs 55,005 53,485 Accrued corporate payroll and commissions 65,082 89,147 Income taxes payable 428 6,949 Other accrued liabilities 64,883 73,173 Total current liabilities 1,321,357 1,353,370 Accrued workers’ compensation costs, net of current 170,609 179,629 Long-term debt 369,400 369,400 Operating lease liabilities, net of current 51,985 55,587 Total noncurrent liabilities 591,994 604,616 Commitments and contingencies Common stock 555 555 Additional paid-in capital 173,307 151,144 Treasury stock, at cost ( 830,988 ) ( 725,532 ) Retained earnings 740,245 655,108 Total stockholders' equity 83,119 81,275 Total liabilities and stockholders’ equity $ 1,996,470 $ 2,039,261 See accompanying notes. Insperity | 2023 Third Quarter Form 10-Q 6 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2023 2022 2023 2022 Revenues (1) $ 1,550,887 $ 1,439,160 $ 4,905,668 $ 4,449,104 Payroll taxes, benefits and workers’ compensation costs 1,292,956 1,194,607 4,090,952 3,678,909 Gross profit 257,931 244,553 814,716 770,195 Salaries, wages and payroll taxes 113,074 109,525 348,557 323,486 Stock-based compensation 15,210 13,341 41,676 38,818 Commissions 10,773 11,068 33,828 32,121 Advertising 7,240 9,790 29,775 30,812 General and administrative expenses 41,504 38,115 132,699 115,215 Depreciation and amortization 10,666 10,083 31,903 30,367 Total operating expenses 198,467 191,922 618,438 570,819 Operating income 59,464 52,631 196,278 199,376 Other income (expense): Interest income 7,950 2,808 24,693 3,901 Interest expense ( 7,047 ) ( 4,082 ) ( 19,939 ) ( 8,698 ) Income before income tax expense 60,367 51,357 201,032 194,579 Income tax expense 16,035 13,688 49,211 53,427 Net income $ 44,332 $ 37,669 $ 151,821 $ 141,152 Net income per share of common stock Basic $ 1.17 $ 0.99 $ 4.00 $ 3.70 Diluted $ 1.16 $ 0.98 $ 3.94 $ 3.66 ____________________________________ (1) Revenues are comprised of gross billings less WSEE payroll costs as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Gross billings $ 10,067,191 $ 9,528,695 $ 31,762,946 $ 29,111,243 Less: WSEE payroll cost 8,516,304 8,089,535 26,857,278 24,662,139 Revenues $ 1,550,887 $ 1,439,160 $ 4,905,668 $ 4,449,104 See accompanying notes. Insperity | 2023 Third Quarter Form 10-Q 7 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (in thousands) 2023 2022 Cash flows from operating activities Net income $ 151,821 $ 141,152 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,903 30,367 Stock-based compensation 41,676 38,818 Deferred income taxes 5,467 4,144 Changes in operating assets and liabilities: Accounts receivable ( 33,931 ) ( 45,394 ) Prepaid insurance and related assets ( 9,554 ) ( 19,083 ) Other current assets 584 1,839 Other assets and ROU assets 3,740 ( 1,985 ) Accounts payable ( 525 ) ( 946 ) Payroll taxes and other payroll deductions payable ( 38,024 ) ( 115,763 ) Accrued worksite employee payroll costs 46,534 85,333 Accrued health insurance costs ( 2,642 ) 14,857 Accrued workers’ compensation costs ( 7,500 ) ( 11,541 ) Accrued corporate payroll, commissions and other accrued liabilities ( 42,757 ) ( 12,636 ) Income taxes payable/receivable ( 6,521 ) 12,868 Total adjustments ( 11,550 ) ( 19,122 ) Net cash provided by operating activities 140,271 122,030 Cash flows from investing activities Marketable securities: Purchases ( 39,596 ) ( 35,618 ) Proceeds from maturities 32,105 32,215 Proceeds from dispositions 27,735 — Property and equipment purchases ( 22,526 ) ( 16,448 ) Net cash used in investing activities ( 2,282 ) ( 19,851 ) Cash flows from financing activities Purchase of treasury stock ( 131,473 ) ( 63,420 ) Dividends paid ( 62,969 ) ( 56,866 ) Other ( 314 ) ( 3,130 ) Net cash used in financing activities ( 194,756 ) ( 123,416 ) Net decrease in cash, cash equivalents, restricted cash and funds held for clients ( 56,767 ) ( 21,237 ) Cash, cash equivalents, restricted cash and funds held for clients beginning of period 1,013,919 839,500 Cash, cash equivalents, restricted cash and funds held for clients end of period $ 957,152 $ 818,263 Supplemental cash flow information: ROU assets obtained in exchange for lease obligations $ 11,678 $ 4,513 Excise tax liability accrued for common stock repurchases 545 — See accompanying notes. Insperity | 2023 Third Quarter Form 10-Q 8 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Nine Months Ended September 30, 2023 and 2022 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at December 31, 2022 55,489 $ 555 $ 151,144 $ ( 725,532 ) $ 655,108 $ 81,275 Purchase of treasury stock, at cost — — — ( 132,018 ) — ( 132,018 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 21,231 ) 25,024 ( 3,793 ) — Stock-based compensation expense — — 41,360 316 — 41,676 Other — — 2,034 1,222 — 3,256 Dividends paid — — — — ( 62,969 ) ( 62,969 ) Unrealized gain on marketable securities, net of tax — — — — 78 78 Net income — — — — 151,821 151,821 Balance at September 30, 2023 55,489 $ 555 $ 173,307 $ ( 830,988 ) $ 740,245 $ 83,119 Balance at December 31, 2021 55,489 $ 555 $ 109,179 $ ( 665,089 ) $ 553,581 $ ( 1,774 ) Purchase of treasury stock, at cost — — — ( 63,420 ) — ( 63,420 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 9,285 ) 10,443 ( 1,158 ) — Stock-based compensation expense — — 37,866 952 — 38,818 Other — — 1,610 1,068 — 2,678 Dividends paid — — — — ( 56,866 ) ( 56,866 ) Unrealized loss on marketable securities, net of tax — — — — ( 85 ) ( 85 ) Net income — — — — 141,152 141,152 Balance at September 30, 2022 55,489 $ 555 $ 139,370 $ ( 716,046 ) $ 636,624 $ 60,503 Insperity | 2023 Third Quarter Form 10-Q 9 FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) For the Three Months Ended September 30, 2023 and 2022 Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total (in thousands) Shares Amount Balance at June 30, 2023 55,489 $ 555 $ 157,526 $ ( 744,788 ) $ 717,226 $ 130,519 Purchase of treasury stock, at cost — — — ( 86,645 ) — ( 86,645 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 54 ) 62 ( 8 ) — Stock-based compensation expense — — 15,209 1 — 15,210 Other — — 626 382 — 1,008 Dividends paid — — — — ( 21,338 ) ( 21,338 ) Unrealized gain on marketable securities, net of tax — — — — 33 33 Net income — — — — 44,332 44,332 Balance at September 30, 2023 55,489 $ 555 $ 173,307 $ ( 830,988 ) $ 740,245 $ 83,119 Balance at June 30, 2022 55,489 $ 555 $ 125,622 $ ( 709,810 ) $ 618,765 $ 35,132 Purchase of treasury stock, at cost — — — ( 6,615 ) — ( 6,615 ) Issuance of equity-based incentive awards and dividend equivalents — — ( 37 ) 44 ( 7 ) — Stock-based compensation expense — — 13,339 2 — 13,341 Other — — 446 333 — 779 Dividends paid — — — — ( 19,769 ) ( 19,769 ) Unrealized loss on marketable securities, net of tax — — — — ( 34 ) ( 34 ) Net income — — — — 37,669 37,669 Balance at September 30, 2022 55,489 $ 555 $ 139,370 $ ( 716,046 ) $ 636,624 $ 60,503 See accompanying notes. Insperity | 2023 Third Quarter Form 10-Q 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our most comprehensive HR services offerings are provided through our professional employer organization (“PEO”) services, known as our Workforce Optimization ® and Workforce Synchronization TM solutions (together, our “PEO HR Outsourcing Solutions”), which we provide by entering into a co-employment relationship with our clients. Our PEO HR Outsourcing Solutions encompass a broad range of HR functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management solution, the Insperity Premier TM platform. In addition to our PEO HR Outsourcing Solutions, we offer a comprehensive traditional payroll and human capital management solution, known as our Workforce Acceleration TM solution (our “Traditional Payroll Solution”). We also offer a number of other business performance solutions, including Recruiting Services, Employment Screening, Retirement Services, and Insurance Services. These other products or services are offered separately or with our other solutions. The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements at and for the year ended December 31, 2022. Our Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements. Our Condensed Consolidated Balance Sheet at September 30, 2023 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2023 and 2022, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2023 and 2022 and our Consolidated Statements of Stockholders’ Equity for the three and nine month periods ended September 30, 2023 and 2022, have been prepared by us without audit. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows have been made, and all such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. 2. Accounting Policies Revenue and Direct Cost Recognition We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally establish pricing for a period of 12 months and are generally cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Our payment terms typically require payment concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms. Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers . Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but not invoiced represent unbilled accounts receivable of $ 644.4 million and $ 600.4 million at September 30, 2023 and December 31, 2022, and are included in accounts receivable, net on our Condensed Consolidated Balance Sheets. Insperity | 2023 Third Quarter Form 10-Q 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Pursuant to the “practical expedients” provided under ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers , we expense sales commissions when incurred because the terms of our contracts are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations. Our revenue for our PEO HR Outsourcing Solutions by geographic region and for our other products and services offerings are as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 % Change 2023 2022 % Change Northeast $ 415,318 $ 385,541 7.7 % $ 1,333,456 $ 1,224,142 8.9 % Southeast 221,930 197,131 12.6 % 681,866 592,116 15.2 % Central 282,248 256,150 10.2 % 885,960 779,500 13.7 % Southwest 295,142 280,299 5.3 % 942,929 869,073 8.5 % West 320,567 305,465 4.9 % 1,013,669 940,617 7.8 % 1,535,205 1,424,586 7.8 % 4,857,880 4,405,448 10.3 % Other revenue 15,682 14,574 7.6 % 47,788 43,656 9.5 % Total revenue $ 1,550,887 $ 1,439,160 7.8 % $ 4,905,668 $ 4,449,104 10.3 % Health Insurance 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 UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, and Tufts, all of which provide fully insured policies or service contracts. Approximately 87 % of our costs related to health insurance coverage are provided under our policy with United. While the policy with United is a fully insured plan, as a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Effective January 1, 2020, under the amended agreement with United, we no longer have financial responsibilities for a participant’s annual claim costs that exceed $1 million (“Pooling Limit”). Accordingly, we record the cost of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense, which is a component of direct costs, in our Consolidated Statements of Operations. The estimated incurred but not reported claims are based upon: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics, and other factors are incorporated into the benefits costs, which requires a significant level of judgment. Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Condensed Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Condensed Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $ 9.0 million, which is reported as long-term prepaid health insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $ 6.5 million at September 30, 2023, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, 2023, Plan Costs were less than the net premiums paid and owed to United by $ 18.8 million. As this amount is in excess of the agreed-upon $ 9.0 million surplus maintenance level, the $ 9.8 million difference is included in prepaid insurance, a current asset, in our Condensed Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at September 30, 2023 were $ 42.9 million, which is included in accrued health insurance costs, a current liability in our Condensed Consolidated Balance Sheets. Our benefits costs incurred in the first nine months of 2023 included a decrease of $ 13.9 million for changes in estimated run-off related to prior periods, net of Pooling Limit. Our Insperity | 2023 Third Quarter Form 10-Q 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) benefits costs incurred in the first nine months of 2022 included an increase of $ 12.8 million for changes in estimated run-off related to prior periods. Workers’ Compensation Costs Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing Solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $ 1 million layer of claims per occurrence and, for claims over $ 1 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, we have financial responsibility to Chubb for the first $ 1.5 million layer of claims per occurrence and, for claims over $ 1.5 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1.5 million. Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs’ job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the nine months ended September 30, 2023 and 2022, we reduced accrued workers’ compensation costs by $ 26.2 million and $ 35.3 million, respectively, for changes in estimated losses related to prior periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in the 2023 period was 4.2 % and in the 2022 period was 2.5 %) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations. The following table provides the activity and balances related to incurred but not paid workers’ compensation claims: Nine Months Ended September 30, (in thousands) 2023 2022 Beginning balance, January 1, $ 229,408 $ 239,623 Accrued claims 44,292 33,467 Present value discount, net of accretion ( 10,233 ) ( 6,485 ) Paid claims ( 41,595 ) ( 40,112 ) Ending balance $ 221,872 $ 226,493 Current portion of accrued claims $ 51,263 $ 51,829 Long-term portion of accrued claims 170,609 174,664 Total accrued claims $ 221,872 $ 226,493 The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, 2023 includes $ 3.7 million of workers’ compensation administrative fees. The undiscounted accrued workers’ compensation costs were $ 249.5 million as of September 30, 2023 and $ 245.5 million as of September 30, 2022. At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation Insperity | 2023 Third Quarter Form 10-Q 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Condensed Consolidated Balance Sheets. During the first nine months of 2023 , we received $ 43.4 million for the return of excess claim funds related to the workers’ compensation program, which resulted in a decrease to deposits - workers’ compensation. At September 30, 2023, we had restricted cash of $ 51.3 million and deposits – workers’ compensation of $ 197.5 million. Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Condensed Consolidated Balance Sheets. 3. Other Balance Sheet Information Cash, Cash Equivalents and Marketable Securities The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments: September 30, 2023 December 31, 2022 (in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total Overnight holdings $ 577,070 $ — $ 577,070 $ 678,512 $ — $ 678,512 Investment holdings 102,833 13,837 116,670 56,963 33,068 90,031 Total financial assets 679,903 13,837 693,740 735,475 33,068 768,543 Cash in demand accounts 14,523 — 14,523 41,047 — 41,047 Outstanding checks ( 15,838 ) — ( 15,838 ) ( 43,694 ) — ( 43,694 ) Total $ 678,588 $ 13,837 $ 692,425 $ 732,828 $ 33,068 $ 765,896 Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Our cash, cash equivalents and marketable securities at September 30, 2023 and December 31, 2022 included $ 482.7 million and $ 504.8 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes, and other payroll deductions, as well as $ 20.2 million and $ 36.8 million, respectively, in client prepayments. At September 30, 2023, our cash, cash equivalents and marketable securities included $ 149.3 million of funds we received in late September 2023 from the Internal Revenue Service for employee retention tax credits claimed by our PEO clients under the COVID relief programs, that were distributed to clients in early October 2023. Insperity | 2023 Third Quarter Form 10-Q 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash, Cash Equivalents, Restricted Cash and Funds Held for Clients The following table summarizes our cash, cash equivalents, restricted cash and funds held for clients as reported in our Consolidated Statements of Cash Flows: Nine Months Ended September 30, (in thousands) 2023 2022 Supplemental schedule of cash and cash equivalents, restricted cash and funds held for clients Cash and cash equivalents $ 732,828 $ 575,812 Restricted cash 49,779 46,929 Other current assets - funds held for clients (1) 34,942 31,732 Deposits – workers’ compensation 196,370 185,027 Cash, cash equivalents, restricted cash and funds held for clients beginning of period $ 1,013,919 $ 839,500 Cash and cash equivalents $ 678,588 $ 562,143 Restricted cash 51,263 51,829 Other current assets - funds held for clients (1) 29,835 25,277 Deposits – workers’ compensation 197,466 179,014 Cash, cash equivalents, restricted cash and funds held for clients end of period $ 957,152 $ 818,263 ____________________________________ (1) Funds held for clients represent amounts held on behalf of our Traditional Payroll Solution customers that are restricted for the purpose of satisfying obligations to remit funds to clients’ employees and various tax authorities. Please read Note 2. “ Accounting Policies ,” for a discussion of our accounting policies for deposits – workers’ compensation and restricted cash. Payroll Taxes and Other Payroll Deductions Payable As a co-employer, we generally assume responsibility for the withholding and remittance of federal and state payroll taxes and other payroll deductions with respect to wages and salaries paid to our WSEEs. As of September 30, 2023 and December 31, 2022, payroll taxes and other payroll deductions payable were $ 518.1 million and $ 556.1 million, respectively. The balance at September 30, 2023 includes $ 149.3 million of funds we received in late September 2023 from the Internal Revenue Service for employee retention tax credits claimed by our PEO clients under the COVID relief programs, that were distributed to clients in early October 2023. 4. Fair Value Measurements We account for our financial assets in accordance with Accounting Standard Codification 820, Fair Value Measurement . This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors: • Level 1 - quoted prices in active markets using identical assets • Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs • Level 3 - significant unobservable inputs Insperity | 2023 Third Quarter Form 10-Q 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fair Value of Instruments Measured and Recognized at Fair Value The following table summarizes the levels of fair value measurements of our financial assets: September 30, 2023 December 31, 2022 (in thousands) Total Level 1 Level 2 Total Level 1 Level 2 Money market funds $ 679,903 $ 679,903 $ — $ 735,475 $ 735,475 $ — U.S. Treasury bills 13,837 13,837 — 29,703 29,703 — Municipal bonds — — — 3,365 — 3,365 Total financial assets $ 693,740 $ 693,740 $ — $ 768,543 $ 765,178 $ 3,365 The municipal bond securities valued as Level 2 are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs. The following is a summary of our available-for-sale marketable securities: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2023 U.S. Treasury bills $ 13,842 $ 1 $ ( 6 ) $ 13,837 December 31, 2022 U.S. Treasury bills $ 29,782 $ — $ ( 79 ) $ 29,703 Municipal bonds 3,369 — ( 4 ) 3,365 As of September 30, 2023, the contractual maturities of the marketable securities in our portfolio were less than one year. Fair Value of Other Financial Instruments The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments. As of September 30, 2023, the carrying value of borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 5, “ Long-Term Debt ,” for additional information. 5. Long-Term Debt We have a revolving credit facility (the “Facility”) with a borrowing capacity of up to $ 650 million. The Facility may be further increased to $ 700 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (as amended, the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Our obligations under the Facility are secured by 100 % of the stock of our captive insurance subsidiary and are guaranteed by all of our subsidiaries other than our captive insurance subsidiary and certain other excluded subsidiaries. At September 30, 2023, our outstanding balance on the Facility was $ 369.4 million, and we had an outstanding $ 1.0 million letter of credit issued under the Facility, resulting in an available borrowing capacity of $ 279.6 million. The Facility matures on June 30, 2027 . Borrowings under the Facility bear interest at an annual rate equal to an alternate base rate or Adjusted Term SOFR for term SOFR loans, in either case plus an applicable margin. Adjusted Insperity | 2023 Third Quarter Form 10-Q 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Term SOFR is a forward-looking term rate based on the secured overnight financing rate plus a spread adjustment, which ranges from 0.10 % to 0.25 % depending on the interest period and type of loan. Depending on our leverage ratio, the applicable margin varies (1) in the case of SOFR loans, from 1.50 % to 2.25 % and (2) in the case of alternate base rate loans, from 0.00 % to 0.50 %. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50 %; and (3) the Adjusted Term SOFR rate plus 2.00 %. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25 % per year. The average interest rate for the nine month period ended September 30, 2023 was 6.75 %. Interest expense and unused commitment fees are recorded in other income (expense). The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio, and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at September 30, 2023. 6. Stockholders' Equity During the first nine months of 2023 , we repurchased or withheld an aggregate of 1,258,702 shares of our common stock, as described below. Repurchase Program Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases may be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. During the nine months ended September 30, 2023, 1,062,598 shares were repurchased under the Repurchase Program. On August 1, 2023, we announced that our Board authorized an increase of 2,000,000 shares that may be repurchased under the Repurchase Program. As of September 30, 2023, we were authorized to repurchase an additional 1,969,562 shares under the Repurchase Program. The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposes a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. During the nine months ended September 30, 2023, we recorded the applicable excise tax in treasury stock as part of the cost basis of stock repurchased and recorded a corresponding liability for the excise tax payable in other accrued liabilities in our Condensed Consolidated Balance Sheet. Withheld Shares During the nine months ended September 30, 2023, we withheld 196,104 shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards. Dividends The Board declared quarterly dividends as follows: (amounts per share) 2023 2022 First quarter $ 0.52 $ 0.45 Second quarter 0.57 0.52 Third quarter 0.57 0.52 During the nine months ended September 30, 2023 and 2022, we paid dividends totaling $ 63.0 million and $ 56.9 million, respectively. Insperity | 2023 Third Quarter Form 10-Q 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Earnings Per Share Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period, plus the dilutive effect of time-vested and performance-based restricted stock units (“RSUs”). The following table summarizes the net income and the basic and diluted shares used in the earnings per share computations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Net income $ 44,332 $ 37,669 $ 151,821 $ 141,152 Less distributed and undistributed earnings allocated to participating securities — — — ( 27 ) Net income allocated to common shares $ 44,332 $ 37,669 $ 151,821 $ 141,125 Weighted average common shares outstanding 37,758 38,017 37,991 38,177 Incremental shares from assumed time-vested and performance-based RSU awards 438 529 503 431 Adjusted weighted average common shares outstanding 38,196 38,546 38,494 38,608 Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect 14 15 6 13 8. Commitments and Contingencies Litigation We are a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations. Insperity | 2023 Third Quarter Form 10-Q 18 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS