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 Third Quarter 2023 Compared to Third Quarter 2022 • Average number of WSEEs paid per month increased 4.0% • Net income and diluted earnings per share (“diluted EPS”) increased 17.7% and 18.4% to $44.3 million and $1.16, respectively • Adjusted EPS increased 18.7% to $1.46 • Adjusted EBITDA increased 18.2% to $94.3 million First Nine Months 2023 Compared to First Nine Months 2022 • Average number of WSEEs paid per month increased 7.0% • Net income and diluted EPS increased 7.6% and 7.7% to $151.8 million and $3.94, respectively • Adjusted EPS increased 8.7% to $4.76 • Adjusted EBITDA increased 8.9% to $297.6 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 Third 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 September 30, Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change Financial data: Revenues $ 1,550,887 $ 1,439,160 7.8 % $ 4,905,668 $ 4,449,104 10.3 % Gross profit 257,931 244,553 5.5 % 814,716 770,195 5.8 % Operating expenses 198,467 191,922 3.4 % 618,438 570,819 8.3 % Operating income 59,464 52,631 13.0 % 196,278 199,376 (1.6) % Other income (expense), net 903 (1,274) 170.9 % 4,754 (4,797) 199.1 % Net income 44,332 37,669 17.7 % 151,821 141,152 7.6 % Diluted EPS 1.16 0.98 18.4 % 3.94 3.66 7.7 % Non-GAAP financial measures (1) : Adjusted net income $ 55,582 $ 47,420 17.2 % $ 183,295 $ 169,311 8.3 % Adjusted EBITDA 94,315 79,811 18.2 % 297,622 273,410 8.9 % Adjusted EPS 1.46 1.23 18.7 % 4.76 4.38 8.7 % Average WSEEs paid 315,340 303,347 4.0 % 311,112 290,838 7.0 % Statistical data (per WSEE per month) : Revenues (2) $ 1,639 $ 1,581 3.7 % $ 1,752 $ 1,700 3.1 % Gross profit 273 269 1.5 % 291 294 (1.0) % Operating expenses 210 211 (0.5) % 221 218 1.4 % Operating income 63 58 8.6 % 70 76 (7.9) % Net income 47 41 14.6 % 54 54 — ____________________________________ (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 September 30, Nine Months Ended September 30, (per WSEE per month) 2023 2022 2023 2022 Gross billings $ 10,642 $ 10,470 $ 11,344 $ 11,122 Less: WSEE payroll cost 9,003 8,889 9,592 9,422 Revenues $ 1,639 $ 1,581 $ 1,752 $ 1,700 Insperity | 2023 Third 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 employee terminations. • During Q3 2023, WSEEs paid increased 4.0% compared to Q3 2022. The net gain in our client base declined when compared to Q3 2022, while client retention and the number of WSEEs paid from new client sales remained consistent compared to Q3 2022. • During the first nine months of 2023 (“YTD 2023”), WSEEs paid increased 7.0% compared to the first nine months of 2022 (“YTD 2022”). The number of WSEEs paid from new client sales slightly declined and the net gain in our client base significantly declined when compared to YTD 2022, while client retention remained consistent compared to YTD 2022. Average WSEEs Paid and Year-over-Year Growth Percentage Insperity | 2023 Third 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 Third 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) Third Quarter 2023 Compared to Third Quarter 2022 Our revenues for Q3 2023 were $1.6 billion, an increase of 7.8%, primarily due to the following: • Average WSEEs paid increased 4.0%. • Revenues per WSEE per month increased 3.7%, or $58. First Nine Months 2023 Compared to First Nine Months 2022 Our revenues for YTD 2023 were $4.9 billion, an increase of 10.3%, primarily due to the following: • Average WSEEs paid increased 7.0%. • Revenues per WSEE per month increased 3.1%, or $52. Insperity | 2023 Third 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 has 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 13.4% during YTD 2023 compared to YTD 2022, representing approximately 26.1% and 24.6% of our total average paid WSEEs during YTD 2023 and YTD 2022, respectively. Insperity | 2023 Third 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 Third Quarter Form 10-Q 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter 2023 Compared to Third Quarter 2022 Gross profit for Q3 2023 increased 5.5% to $257.9 million compared to $244.6 million in Q3 2022. Gross profit per WSEE per month for Q3 2023 increased $4 to $273 compared to $269 in Q3 2022 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 $58 due to higher average pricing of 3.7%. The net decrease in direct costs between Q3 2023 and Q3 2022 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $7.6 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 $39 per WSEE per month and increased 5.4% on a cost per covered employee basis in Q3 2023 as compared to Q3 2022. • The percentage of WSEEs covered under our health insurance plans was 64.6% in Q3 2023 compared to 64.7% in Q3 2022. • Reported results include changes in estimated claims run-off related to prior periods, which was a reduction in costs of $23.0 million, or $24 per WSEE per month, in Q3 2023 compared to a decrease in costs of $16.6 million, or $18 per WSEE per month, in Q3 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 decreased $3 per WSEE per month in Q3 2023 compared to Q3 2022 on a 6.4% increase in non-bonus payroll costs. • As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.21% in Q3 2023 and 0.25% in Q3 2022. • We recorded a reduction in workers’ compensation costs of $10.6 million, or 0.13% of non-bonus payroll costs in Q3 2023, as a result of closing out claims at lower than expected costs. In Q3 2022, we recorded a reduction of $9.4 million, or 0.12% 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 7.1% on a 5.3% increase in payroll costs, or $17 per WSEE per month. • Payroll taxes as a percentage of payroll costs were 6.2% in Q3 2023 and 6.1% in Q3 2022. First Nine Months 2023 Compared to First Nine Months 2022 Gross profit for YTD 2023 increased 5.8% to $814.7 million compared to $770.2 million in YTD 2022. Gross profit per WSEE per month for YTD 2023 decreased $3 to $291 compared to $294 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 $52 due to higher average pricing of 3.1%. Insperity | 2023 Third Quarter Form 10-Q 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $17.6 million as discussed below. The $55 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 $37 per WSEE per month and increased 5.8% on a cost per covered employee basis. • The percentage of WSEEs covered under our health insurance plans was 65.0% in YTD 2023 compared to 65.5% in YTD 2022. • Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $13.9 million, or $5 per WSEE per month, in YTD 2023 compared to an increase in costs of $12.8 million, or $5 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 14.3%, or $1 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 0.23% compared to 0.22% in YTD 2022. • We recorded a reduction in workers’ compensation costs of $26.2 million, or 0.11% of non-bonus payroll costs, in YTD 2023 compared to a reduction of $35.3 million, or 0.16% 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 10.0% on an 8.9% increase in payroll costs, or $18 per WSEE per month. • Payroll taxes as a percentage of payroll costs increased to 6.9% in YTD 2023 compared to 6.8% in YTD 2022. 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 Insperity | 2023 Third Quarter Form 10-Q 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ◦ 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. Third Quarter 2023 Compared to Third Quarter 2022 The following table presents certain information related to our operating expenses: Three Months Ended September 30, per WSEE (in thousands, except per WSEE) 2023 2022 % Change 2023 2022 % Change Salaries $ 113,074 $ 109,525 3.2 % $ 120 $ 120 — Stock-based compensation 15,210 13,341 14.0 % 16 15 6.7 % Commissions 10,773 11,068 (2.7) % 11 12 (8.3) % Advertising 7,240 9,790 (26.0) % 8 11 (27.3) % General and administrative 41,504 38,115 8.9 % 44 42 4.8 % Depreciation and amortization 10,666 10,083 5.8 % 11 11 — Total operating expenses $ 198,467 $ 191,922 3.4 % $ 210 $ 211 (0.5) % • Operating expenses for Q3 2023 increased 3.4% to $198.5 million compared to $191.9 million in Q3 2022. Operating expenses per WSEE per month for Q3 2023 decreased 0.5% to $210 compared to $211 in Q3 2022. • Salaries of corporate and sales staff for Q3 2023 increased 3.2% to $113.1 million, but remained flat on a per WSEE per month basis, compared to Q3 2022. The increase was primarily due to an increase in BPA, service and support headcount in Q3 2023 compared to Q3 2022, which was partially offset by lower incentive compensation accruals in Q3 2023. • Stock-based compensation expense for Q3 2023 increased 14.0% to $15.2 million, or $1 per WSEE per month, compared to Q3 2022. The increase was primarily due to an increase in 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 Q3 2023. • Advertising expense for Q3 2023 decreased 26.0% to $7.2 million, or $3 per WSEE per month, compared to Q3 2022. This decrease was primarily due to a change in timing associated with advertising. • General and administrative expenses for Q3 2023 increased 8.9% to $41.5 million, or $2 per WSEE per month, compared to Q3 2022. The increase was primarily due to increased software licensing, maintenance costs and professional services fees. Insperity | 2023 Third Quarter Form 10-Q 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months 2023 Compared to First Nine Months 2022 The following table presents certain information related to our operating expenses: Nine Months Ended September 30, per WSEE (in thousands, except per WSEE) 2023 2022 % Change 2023 2022 % Change Salaries $ 348,557 $ 323,486 7.8 % $ 124 $ 123 0.8 % Stock-based compensation 41,676 38,818 7.4 % 15 15 — Commissions 33,828 32,121 5.3 % 12 12 — Advertising 29,775 30,812 (3.4) % 11 12 (8.3) % General and administrative 132,699 115,215 15.2 % 48 44 9.1 % Depreciation and amortization 31,903 30,367 5.1 % 11 12 (8.3) % Total operating expenses $ 618,438 $ 570,819 8.3 % $ 221 $ 218 1.4 % Operating expenses for YTD 2023 increased 8.3% to $618.4 million compared to $570.8 million in YTD 2022. Operating expenses per WSEE per month for YTD 2023 increased 1.4% to $221 compared to $218 in YTD 2022. • Salaries of corporate and sales staff for YTD 2023 increased 7.8% to $348.6 million, or $1 per WSEE per month, compared to YTD 2022. The increase was primarily due to an increase in BPA, service and support 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 7.4% to $41.7 million, but remained flat 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 5.3% to $33.8 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, as well as an increase in the amount of sales channel referral fees paid during YTD 2023. • Advertising expense for YTD 2023 decreased 3.4% to $29.8 million, or $1 per WSEE per month, compared to YTD 2022. This decrease was primarily due to a change in timing associated with advertising. • General and administrative expenses for YTD 2023 increased 15.2% to $132.7 million, or $4 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 $20.8 million in YTD 2023 compared to YTD 2022 due to interest rate increases on overnight, investment and deposit holdings. Interest expense increased $11.2 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Effective income tax rate 26.6% 26.7% 24.5% 27.5% Insperity | 2023 Third Quarter Form 10-Q 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the nine months ended September 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 nine 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. 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. Insperity | 2023 Third Quarter Form 10-Q 30 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, 2023 2022 2023 2022 Per WSEE Per WSEE Per WSEE Per WSEE Payroll cost $ 8,516,304 $ 9,003 $ 8,089,535 $ 8,889 $ 26,857,278 $ 9,592 $ 24,662,139 $ 9,422 Less: Bonus payroll cost 529,456 560 583,703 641 3,344,656 1,195 3,236,059 1,236 Non-bonus payroll cost $ 7,986,848 $ 8,443 $ 7,505,832 $ 8,248 $ 23,512,622 $ 8,397 $ 21,426,080 $ 8,186 % Change period over period 6.4 % 2.4 % 23.9 % 5.2 % 9.7 % 2.6 % 25.6 % 5.7 % 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, 2023 December 31, 2022 Cash, cash equivalents and marketable securities $ 692,425 $ 765,896 Less: Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions 482,654 504,817 Client prepayments 20,172 36,800 Adjusted cash, cash equivalents and marketable securities $ 189,599 $ 224,279 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, (in thousands, except per WSEE per month) 2023 2022 2023 2022 Per WSEE Per WSEE Per WSEE Per WSEE Net income $ 44,332 $ 47 $ 37,669 $ 41 $ 151,821 $ 54 $ 141,152 $ 54 Income tax expense 16,035 18 13,688 16 49,211 18 53,427 20 Interest expense 7,047 7 4,082 4 19,939 7 8,698 3 Amortization of SaaS implementation costs 1,025 1 948 1 3,072 1 948 — Depreciation and amortization 10,666 11 10,083 11 31,903 11 30,367 12 EBITDA 79,105 84 66,470 73 255,946 91 234,592 89 Stock-based compensation 15,210 16 13,341 15 41,676 15 38,818 15 Adjusted EBITDA $ 94,315 $ 100 $ 79,811 $ 88 $ 297,622 $ 106 $ 273,410 $ 104 % Change period over period 18.2 % 13.6 % 32.7 % 12.8 % 8.9 % 1.9 % 21.8 % 2.0 % Insperity | 2023 Third Quarter Form 10-Q 31 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, (in thousands) 2023 2022 2023 2022 Net income $ 44,332 $ 37,669 $ 151,821 $ 141,152 Non-GAAP adjustments: Stock-based compensation 15,210 13,341 41,676 38,818 Tax effect (3,960) (3,590) (10,202) (10,659) Total non-GAAP adjustments, net 11,250 9,751 31,474 28,159 Adjusted net income $ 55,582 $ 47,420 $ 183,295 $ 169,311 % Change period over period 17.2 % 36.3 % 8.3 % 20.2 % Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP): Three Months Ended September 30, Nine Months Ended September 30, (amounts per share) 2023 2022 2023 2022 Diluted EPS $ 1.16 $ 0.98 $ 3.94 $ 3.66 Non-GAAP adjustments: Stock-based compensation 0.40 0.35 1.08 1.01 Tax effect (0.10) (0.10) (0.26) (0.29) Total non-GAAP adjustments, net 0.30 0.25 0.82 0.72 Adjusted EPS $ 1.46 $ 1.23 $ 4.76 $ 4.38 % Change period over period 18.7 % 38.2 % 8.7 % 21.0 % 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 current 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 $692.4 million in cash, cash equivalents and marketable securities at September 30, 2023, of which approximately $482.7 million was payable in early November 2023 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $20.2 million represented client prepayments that were payable in November 2023. At September 30, 2023, we had working capital of $156.3 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 September 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. Insperity | 2023 Third Quarter Form 10-Q 32 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 2023 was $140.3 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 September 30, 2023, the last business day of the reporting period was a Friday, client prepayments were $20.2 million and employment taxes and other deductions were $482.7 million, which 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. 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. • 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 September 30, 2023, Plan Costs were less than the net premiums paid and owed to United by $18.8 million, which is $9.8 million in excess of our agreed-upon $9.0 million surplus maintenance level. The $9.8 million difference is reflected as a current asset 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 September 30, 2023 were $42.9 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 8.3% to $183.3 million in the nine months ended September 30, 2023, compared to $169.3 million in the nine months ended September 30, 2022. Please read “ Results of Operations .” Cash Flows from Investing Activities Net cash flows used in investing activities were $2.3 million for the nine months ended September 30, 2023, primarily due to property and equipment purchases of $22.5 million, partially offset by $20.2 million of marketable securities maturities and dispositions, net of purchases. Cash Flows from Financing Activities Net cash flows used in financing activities were $194.8 million for the nine months ended September 30, 2023. We paid $63.0 million in dividends and repurchased or withheld $131.5 million in stock. Insperity | 2023 Third Quarter Form 10-Q 33 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES