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, 2023, 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. 2024 Highlights Third Quarter 2024 Compared to Third Quarter 2023 • Average number of WSEEs paid per month decreased 2% • Net income and diluted earnings per share (“EPS”) decreased 93% and 94% to $3 million and $0.07, respectively • Adjusted net income and adjusted EPS both decreased 73% to $15 million and $0.39, respectively • Adjusted EBITDA decreased 59% to $39 million First Nine Months 2024 Compared to First Nine Months 2023 • Average number of WSEEs paid per month decreased 1% • Net income and diluted EPS decreased 34% and 33% to $100 million and $2.63, respectively • Adjusted net income and adjusted EPS decreased 27% and 26% to $134 million and $3.53, respectively • Adjusted EBITDA decreased 17% to $247 million Please read “ Non-GAAP Financial Measures ” for a reconciliation of adjusted EBITDA, adjusted net income, and adjusted EPS to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Insperity | 2024 Third Quarter Form 10-Q 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Key Financial and Statistical Data (in millions, except per share, WSEE and statistical data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 % Change 2024 2023 % Change Financial data: Revenues $ 1,561 $ 1,551 1 % $ 4,968 $ 4,906 1 % Gross profit 229 258 (11) % 834 815 2 % Operating expenses 228 199 15 % 702 619 13 % Operating income 1 59 (98) % 132 196 (33) % Other income (expense), net 2 2 — 7 5 40 % Net income 3 45 (93) % 100 152 (34) % Diluted EPS 0.07 1.16 (94) % 2.63 3.94 (33) % Non-GAAP financial measures (1) : Adjusted net income $ 15 $ 55 (73) % $ 134 $ 183 (27) % Adjusted EBITDA 39 95 (59) % 247 298 (17) % Adjusted EPS 0.39 1.46 (73) % 3.53 4.76 (26) % Average WSEEs paid 309,088 315,340 (2) % 306,650 311,112 (1) % Statistical data (per WSEE per month) : Revenues (2) $ 1,683 $ 1,639 3 % $ 1,800 $ 1,752 3 % Gross profit 247 273 (10) % 302 291 4 % Operating expenses 246 210 17 % 254 221 15 % Operating income 1 63 (98) % 48 70 (31) % Net income 3 47 (94) % 36 54 (33) % ____________________________________ (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) 2024 2023 2024 2023 Gross billings $ 11,098 $ 10,642 $ 11,644 $ 11,344 Less: WSEE payroll cost 9,415 9,003 9,844 9,592 Revenues $ 1,683 $ 1,639 $ 1,800 $ 1,752 Insperity | 2024 Third Quarter Form 10-Q 20 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 2024, average WSEEs paid decreased 2% compared to Q3 2023. The number of WSEEs paid from new client sales declined compared with Q3 2023, while client retention and the net change in our client base remained consistent with Q3 2023. • During the first nine months of 2024 (“YTD 2024”), average WSEEs paid decreased 1% compared to the first nine months of 2023 (“YTD 2023”). The number of WSEEs paid from new client sales, the net change in our client base, and client retention declined when compared to YTD 2023. Average WSEEs Paid and Year-over-Year Growth Percentage Insperity | 2024 Third Quarter Form 10-Q 21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Income and Year-over-Year Growth Percentage (in millions) Adjusted EBITDA and Year-over-Year Growth Percentage (in millions) Insperity | 2024 Third Quarter Form 10-Q 22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EPS and Year-over-Year Growth Percentage (amounts per share) 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 Insperity | 2024 Third Quarter Form 10-Q 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Revenue and Year-over-Year Growth Percentage (in millions) Third Quarter 2024 Compared to Third Quarter 2023 Our revenues for Q3 2024 were $1.6 billion, an increase of 1%, primarily due to the following: • Revenues per WSEE per month increased 3%, or $44, partially offset by a 2% decrease in average WSEEs paid. First Nine Months 2024 Compared to First Nine Months 2023 Our revenues for YTD 2024 were $5.0 billion, an increase of 1%, primarily due to the following: • Revenues per WSEE per month increased 3%, or $48, partially offset by a 1% decrease in average WSEEs paid. Insperity | 2024 Third Quarter Form 10-Q 24 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 millions) ________________________________________________________ (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 decreased 4% during YTD 2024 compared to YTD 2023, representing approximately 26% of our total average paid WSEEs in both YTD 2024 and YTD 2023. Insperity | 2024 Third Quarter Form 10-Q 25 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 millions) Insperity | 2024 Third Quarter Form 10-Q 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit per WSEE per Month and Year-over-Year Growth Percentage Third Quarter 2024 Compared to Third Quarter 2023 Gross profit for Q3 2024 decreased 11% to $229 million compared to $258 million in Q3 2023. Gross profit per WSEE per month for Q3 2024 decreased $26 to $247 compared to $273 in Q3 2023 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 $44 due to higher average pricing of 3%. The net increase in direct costs between Q3 2024 and Q3 2023 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $14 million as discussed below. The $70 per WSEE per month increase in direct costs is due primarily to the direct cost component changes as follows: Benefits costs • The cost of group health insurance and related employee benefits increased $45 per WSEE per month and increased 7.7% on a cost per covered employee basis in Q3 2024 as compared to Q3 2023. • The percentage of WSEEs covered under our health insurance plans was 63% in Q3 2024 compared to 65% in Q3 2023. • Reported results include changes in estimated claims run-off related to prior periods, which was a reduction in costs of $12 million, or $13 per WSEE per month, in Q3 2024 compared to a decrease in costs of $23 million, or $24 per WSEE per month, in Q3 2023. 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 increase 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 $4 per WSEE per month in Q3 2024 compared to Q3 2023 while non-bonus payroll costs remained flat. Insperity | 2024 Third Quarter Form 10-Q 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.25% in Q3 2024 compared to 0.21% in Q3 2023. • We recorded a reduction in workers’ compensation costs of $8 million, or 0.09% of non-bonus payroll costs in Q3 2024, as a result of closing out claims at lower than expected costs. In Q3 2023, we recorded a reduction of $11 million, or 0.13% 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 2% on a 3% increase in payroll costs, or $20 per WSEE per month. • Payroll taxes as a percentage of payroll costs were 6% in both Q3 2024 and Q3 2023. First Nine Months 2024 Compared to First Nine Months 2023 Gross profit for YTD 2024 increased 2% to $834 million compared to $815 million in YTD 2023. Gross profit per WSEE per month for YTD 2024 increased $11 to $302 compared to $291 in YTD 2023 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 $48 due to higher average pricing of 3%. The net decrease in direct costs between YTD 2024 and YTD 2023 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $17 million as discussed below. The $37 per WSEE per month increase in direct costs is due primarily to the direct cost component changes as follows: Benefits costs • The cost of group health insurance and related employee benefits increased $16 per WSEE per month, or 3.9% on a cost per covered employee basis. • The percentage of WSEEs covered under our health insurance plans was 64% in YTD 2024 compared to 65% in YTD 2023. • Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $32 million, or $12 per WSEE per month, in YTD 2024 compared to a decrease in costs of $14 million, or $5 per WSEE per month, in YTD 2023. 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%, or $1 per WSEE per month, in YTD 2024 compared to YTD 2023. • As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.23% in both YTD 2024 and YTD 2023. • We recorded a reduction in workers’ compensation costs of $25 million, or 0.11% of non-bonus payroll costs, in YTD 2024 compared to a reduction of $26 million, or 0.11% of non-bonus payroll costs, in YTD 2023, 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 health insurance costs. Insperity | 2024 Third Quarter Form 10-Q 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payroll tax costs • Payroll taxes increased 2% on a 1% increase in payroll costs, or $20 per WSEE per month. • Payroll taxes as a percentage of payroll costs was 7% in both YTD 2024 and YTD 2023. 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 additional cash 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, amortization of SaaS implementation costs and costs related to our strategic partnership with Workday, Inc. • 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. Insperity | 2024 Third Quarter Form 10-Q 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter 2024 Compared to Third Quarter 2023 The following table presents certain information related to our operating expenses: Three Months Ended September 30, per WSEE (in millions, except per WSEE) 2024 2023 % Change 2024 2023 % Change Salaries $ 127 $ 114 11 % $ 137 $ 120 14 % Stock-based compensation 17 16 6 % 18 16 13 % Commissions 11 11 — 12 11 9 % Advertising 9 7 29 % 10 8 25 % General and administrative: Amortization of SaaS implementation costs 1 — — 1 — — Workday SaaS licensing and implementation expense 9 — — 10 — — All other general and administrative 43 40 8 % 46 44 5 % Total general and administrative 53 40 33 % 57 44 30 % Depreciation and amortization 11 11 — 12 11 9 % Total operating expenses $ 228 $ 199 15 % $ 246 $ 210 17 % Operating expenses for Q3 2024 increased 15% to $228 million compared to $199 million in Q3 2023. Operating expenses per WSEE per month for Q3 2024 increased 17% to $246 compared to $210 in Q3 2023. • Salaries of corporate and sales staff for Q3 2024 increased 11% to $127 million, or $17 per WSEE per month, compared to Q3 2023. The increase was primarily due to a 6% increase in BPA, service and support headcount in Q3 2024 compared to Q3 2023. • Stock-based compensation expense for Q3 2024 increased 6% to $17 million, or $2 per WSEE per month, compared to Q3 2023. The increase was primarily due to time-vested restricted stock unit awards issued under our incentive plan, partially offset by a decrease in the stock awards anticipated to be earned related to performance-based awards granted under our long-term incentive plans in Q3 2024. • Advertising expense for Q3 2024 increased 29% to $9 million, or $2 per WSEE per month, compared to Q3 2023 primarily due to an increase in internet and radio advertising. • General and administrative expenses for Q3 2024 increased 33% to $53 million, or $13 per WSEE per month, compared to Q3 2023. The increase was primarily due to increased professional services fees, which includes expenses related to the implementation of our Workday strategic partnership, software licensing and maintenance costs, and amortization of SaaS implementation costs. Insperity | 2024 Third Quarter Form 10-Q 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months 2024 Compared to First Nine Months 2023 The following table presents certain information related to our operating expenses: Nine Months Ended September 30, per WSEE (in millions, except per WSEE) 2024 2023 % Change 2024 2023 % Change Salaries $ 393 $ 349 13 % $ 142 $ 124 15 % Stock-based compensation 47 42 12 % 17 15 13 % Commissions 34 34 — 12 12 — Advertising 28 30 (7) % 10 11 (9) % General and administrative: Amortization of SaaS implementation costs 7 3 133 % 3 1 200 % Workday SaaS licensing and implementation expense 21 — — 8 — — All other general and administrative 139 129 8 % 50 47 6 % Total general and administrative 167 132 27 % 61 48 27 % Depreciation and amortization 33 32 3 % 12 11 9 % Total operating expenses 702 619 13 % $ 254 $ 221 15 % Operating expenses for YTD 2024 increased 13% to $702 million compared to $619 million in YTD 2023. Operating expenses per WSEE per month for YTD 2024 increased 15% to $254 compared to $221 in YTD 2023. • Salaries of corporate and sales staff for YTD 2024 increased 13% to $393 million, or $18 per WSEE per month, compared to YTD 2023. The increase was primarily due to a 6% increase in BPA, service and support headcount and staff compensation levels in YTD 2024 compared to YTD 2023. • Stock-based compensation expense for YTD 2024 increased 12% to $47 million, or $2 per WSEE per month, compared to YTD 2023. The increase was primarily due to time-vested restricted stock unit awards issued under our incentive plan. • Advertising expense for YTD 2024 decreased 7% to $28 million, or $1 per WSEE per month, compared to YTD 2023 due to a change in timing of advertising spend. • General and administrative expenses for YTD 2024 increased 27% to $167 million, or $13 per WSEE per month, compared to YTD 2023. The increase was primarily due to increased professional services fees, which includes expenses related to the implementation of our Workday strategic partnership, software licensing and maintenance costs, and amortization of SaaS implementation costs. Income Tax Expense Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Effective income tax rate — 26% 28% 24% For the nine months ended September 30, 2024, 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 2024 we did not recognize an income tax benefit as compared to an income tax benefit of $5 million for the first nine months of 2023, related to the vesting of long-term incentive and restricted stock awards. During Q3 2024, we recognized a $1 million, or $0.02 per share, tax benefit related to research and development activities pertaining to the 2023 tax year. Insperity | 2024 Third Quarter Form 10-Q 31 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. Insperity | 2024 Third Quarter Form 10-Q 32 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 millions, except per WSEE per month) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Per WSEE Per WSEE Per WSEE Per WSEE Payroll cost $ 8,730 $ 9,415 $ 8,516 $ 9,003 $ 27,167 $ 9,844 $ 26,857 $ 9,592 Less: Bonus payroll cost 704 759 529 560 3,411 1,236 3,344 1,195 Non-bonus payroll cost $ 8,026 $ 8,656 $ 7,987 $ 8,443 $ 23,756 $ 8,608 $ 23,513 $ 8,397 Payroll cost % change period over period 3 % 5 % 5 % 1 % 1 % 3 % 9 % 2 % Non-bonus payroll cost % change period over period — 3 % 6 % 2 % 1 % 3 % 10 % 3 % Following is a reconciliation of cash, cash equivalents and marketable securities (GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP): (in millions) September 30, 2024 December 31, 2023 Cash, cash equivalents and marketable securities $ 486 $ 709 Less: Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions 255 510 Client prepayments 19 28 Adjusted cash, cash equivalents and marketable securities $ 212 $ 171 Insperity | 2024 Third Quarter Form 10-Q 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 millions, except per WSEE per month) 2024 2023 2024 2023 Per WSEE Per WSEE Per WSEE Per WSEE Net income $ 3 $ 3 $ 45 $ 47 $ 100 $ 36 $ 152 $ 54 Income tax expense — — 16 19 39 13 49 18 Interest expense 7 8 7 7 21 8 20 7 Amortization of SaaS implementation costs 1 1 — — 7 3 3 1 Depreciation and amortization 11 12 11 11 33 12 32 11 EBITDA 22 24 79 84 200 72 256 91 Stock-based compensation 17 18 16 16 47 17 42 15 Adjusted EBITDA $ 39 $ 42 $ 95 $ 100 $ 247 $ 89 $ 298 $ 106 Net income % change period over period (93) % (94) % 18 % 15 % (34) % (33) % 8 % — Adjusted EBITDA % change period over period (59) % (58) % 18 % 14 % (17) % (16) % 9 % 2 % 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 millions) 2024 2023 2024 2023 Net income $ 3 $ 45 $ 100 $ 152 Non-GAAP adjustments: Stock-based compensation 17 16 47 42 Tax effect (5) (6) (13) (11) Total non-GAAP adjustments, net 12 10 34 31 Adjusted net income $ 15 $ 55 $ 134 $ 183 Net income % change period over period (93) % 18 % (34) % 8 % Adjusted net income % change period over period (73) % 17 % (27) % 8 % Insperity | 2024 Third Quarter Form 10-Q 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP): Three Months Ended September 30, Nine Months Ended September 30, (amounts per share) 2024 2023 2024 2023 Diluted EPS $ 0.07 $ 1.16 $ 2.63 $ 3.94 Non-GAAP adjustments: Stock-based compensation 0.45 0.40 1.24 1.08 Tax effect (0.13) (0.10) (0.34) (0.26) Total non-GAAP adjustments, net 0.32 0.30 0.90 0.82 Adjusted EPS $ 0.39 $ 1.46 $ 3.53 $ 4.76 Diluted EPS % change period over period (94) % 18 % (33) % 8 % Adjusted EPS % change period over period (73) % 19 % (26) % 9 % 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 $486 million in cash, cash equivalents and marketable securities at September 30, 2024, of which approximately $255 million was payable in early October 2024 for withheld federal and state income taxes, employment taxes and other payroll deductions, approximately $19 million represented client prepayments that were payable in October 2024. At September 30, 2024, we had working capital of $200 million compared to $159 million at December 31, 2023. 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 2024. 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, 2024, we had outstanding letters of credit and borrowings totaling $370 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 nine months of 2024 was $99 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 nine months ended September 30, 2024, the last business day of the reporting period was a Monday, client prepayments were $19 million and employment taxes and other deductions were $255 million. In the nine months ended September 30, 2023, the last business day of the reporting period was a Friday, client prepayments were $20 million and employment taxes and other deductions were $483 million, which included $149 million of funds related to client employee retention tax credits received on their behalf from the Internal Revenue Service that were distributed to clients in early October 2023. Insperity | 2024 Third Quarter Form 10-Q 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • Workers’ compensation plan funding — During YTD 2024, we received $38 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, 2024, Plan Costs were less than the net premiums paid and owed to United by $28 million, which is $19 million in excess of our agreed-upon $9 million surplus maintenance level. The $19 million difference is therefore reflected as a current asset and $9 million is reflected as a long-term asset on our Condensed Consolidated Balance Sheet at September 30, 2024. In addition, the premiums owed to United at September 30, 2024, were $39 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheet. • Operating results — Our adjusted net income has a significant impact on our operating cash flows. Our adjusted net income decreased 27% to $134 million in the first nine months of 2024, compared to $183 million in the first nine months of 2023. Please read “ Results of Operations .” Cash Flows from Investing Activities Net cash flows used in investing activities were $25 million for the nine months ended September 30, 2024, primarily due to property and equipment purchases. Cash Flows from Financing Activities Net cash flows used in financing activities were $163 million for the nine months ended September 30, 2024. We paid $67 million in dividends and repurchased or withheld $52 million in stock. In addition, client funds liability and other financing activities decreased by $44 million. Insperity | 2024 Third Quarter Form 10-Q 36 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES