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, 2024, 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. 2025 Highlights First Quarter 2025 Compared to First Quarter 2024 • Average number of WSEEs paid per month increased 1% • Net income and diluted earnings per share (“EPS”) both decreased 35% to $51 million and $1.35, respectively • Adjusted net income and adjusted EPS both decreased 31% to $59 million and $1.57, respectively • Adjusted EBITDA decreased 28% to $102 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 | 2025 First 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 March 31, 2025 2024 % Change Financial data: Revenues $ 1,863 $ 1,802 3 % Gross profit 310 345 (10) % Operating expenses 242 237 2 % Operating income 68 108 (37) % Other income (expense), net 4 3 33 % Net income 51 79 (35) % Diluted EPS 1.35 2.08 (35) % Non-GAAP financial measures (1) : Adjusted net income $ 59 $ 86 (31) % Adjusted EBITDA 102 142 (28) % Adjusted EPS 1.57 2.27 (31) % Average WSEEs paid 306,023 303,904 1 % Statistical data (per WSEE per month) : Revenues (2) $ 2,029 $ 1,977 3 % Gross profit 338 378 (11) % Operating expenses 264 260 2 % Operating income 74 118 (37) % Net income 56 87 (36) % ____________________________________ (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 March 31, (per WSEE per month) 2025 2024 Gross billings $ 13,228 $ 12,595 Less: WSEE payroll cost 11,199 10,618 Revenues $ 2,029 $ 1,977 Insperity | 2025 First 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 Q1 2025, average WSEEs paid increased 1% compared to Q1 2024. The number of WSEEs paid from new client sales and client retention increased compared with Q1 2024, while the net change in our client base decreased compared with Q1 2024. Average WSEEs Paid and Year-over-Year Growth Percentage Insperity | 2025 First 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 | 2025 First 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 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 | 2025 First Quarter Form 10-Q 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue and Year-over-Year Growth Percentage (in millions) First Quarter 2025 Compared to First Quarter 2024 Our revenues for Q1 2025 were $1.9 billion, an increase of 3%, primarily due to the following: • Average WSEEs paid increased 1%. • Revenues per WSEE per month increased 3%, or $52. 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. Insperity | 2025 First Quarter Form 10-Q 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The percentage of total PEO HR Outsourcing Solutions revenue in our significant markets includes the following: Significant Markets We generally define the middle market sector as those companies with approximately 150 to 5,000 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 4% during Q1 2025 compared to Q1 2024, representing approximately 26% and 25% of our total average paid WSEEs in Q1 2025 and Q1 2024, respectively. 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. Our gross profit per WSEE and operating results are significantly impacted 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. Insperity | 2025 First Quarter Form 10-Q 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit and Year-over-Year Growth Percentage (in millions) Gross Profit per WSEE per Month and Year-over-Year Growth Percentage First Quarter 2025 Compared to First Quarter 2024 Gross profit for Q1 2025 decreased 10% to $310 million compared to $345 million in Q1 2024. Gross profit per WSEE per month for Q1 2025 decreased $40 to $338 compared to $378 in Q1 2024 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%. The net increase in direct costs between Q1 2025 and Q1 2024 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $32 million as discussed below. The $92 per WSEE per month increase in direct costs is due primarily to the direct cost component changes as follows: Insperity | 2025 First Quarter Form 10-Q 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Benefits costs • The cost of group health insurance and related employee benefits increased $56 per WSEE per month and increased 8.4% on a cost per covered employee basis driven by an acceleration in inpatient, outpatient, and pharmacy costs and in the frequency of large claim activity in Q1 2025 as compared to Q1 2024. • The percentage of WSEEs covered under our health insurance plans was 64% in both Q1 2025 and Q1 2024. • Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $12 million, or $13 per WSEE per month, in Q1 2025 compared to a decrease in costs of $18 million, or $20 per WSEE per month, in Q1 2024. 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 • Workers’ compensation costs increased 13%, or $2 per WSEE per month, in Q1 2025 compared to Q1 2024. • As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.24% in Q1 2025 compared to 0.22% in Q1 2024. • Our continued discipline around our client selection, workplace safely and claims management has allowed for claims to be closed out at amounts below our original cost estimates, resulting in a reduction in workers’ compensation costs of $7 million, or 0.08% of non-bonus payroll costs in Q1 2025, compared to a reduction of $9 million, or 0.11% of non-bonus payroll costs in Q1 2024. 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 5% on a 6% increase in payroll costs, or $33 per WSEE per month. • Payroll taxes as a percentage of payroll costs were 8% in both Q1 2025 and Q1 2024. 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-based 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 Insperity | 2025 First Quarter Form 10-Q 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ◦ 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. First Quarter 2025 Compared to First Quarter 2024 The following table presents certain information related to our operating expenses: Three Months Ended March 31, per WSEE (in millions, except per WSEE) 2025 2024 % Change 2025 2024 % Change Salaries $ 142 $ 140 1 % $ 155 $ 154 1 % Stock-based compensation 11 10 10 % 12 11 9 % Commissions 11 12 (8) % 12 13 (8) % Advertising 7 7 — 8 8 — General and administrative: Amortization of SaaS implementation costs 2 3 (33) % 2 3 (33) % Workday SaaS licensing and implementation expense 6 4 50 % 7 4 75 % All other general and administrative 52 50 4 % 56 55 2 % Total general and administrative 60 57 5 % 65 62 5 % Depreciation and amortization 11 11 — 12 12 — Total operating expenses $ 242 $ 237 2 % $ 264 $ 260 2 % Operating expenses for Q1 2025 increased 2% to $242 million compared to $237 million in Q1 2024. Operating expenses per WSEE per month for Q1 2025 increased 2% to $264 compared to $260 in Q1 2024. Income Tax Expense Three Months Ended March 31, 2025 2024 Effective income tax rate 29% 29% For the three months ended March 31, 2025, our provision for income taxes differed from the U.S. statutory rate primarily due to state income taxes, non-deductible expenses and vesting of restricted and long-term incentive stock awards. During the first three months of 2025, we recognized additional income tax of $1 million related to the vesting of long-term incentive and restricted stock awards, primarily due to the vesting date price being below the grant date price. Insperity | 2025 First Quarter Form 10-Q 28 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. Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs. Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program. 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 | 2025 First Quarter Form 10-Q 29 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 March 31, 2025 2024 Per WSEE Per WSEE Payroll cost $ 10,281 $ 11,199 $ 9,681 $ 10,618 Less: Bonus payroll cost 2,243 2,444 1,862 2,042 Non-bonus payroll cost $ 8,038 $ 8,755 $ 7,819 $ 8,576 Payroll Cost % change period over period 6 % 5 % — 1 % Non-bonus payroll cost % change period over period 3 % 2 % 2 % 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) March 31, 2025 December 31, 2024 Cash, cash equivalents and marketable securities $ 568 $ 1,055 Less: Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions 404 830 Client prepayments 40 91 Adjusted cash, cash equivalents and marketable securities $ 124 $ 134 Following is a reconciliation of net income (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP): Three Months Ended March 31, (in millions, except per WSEE per month) 2025 2024 Per WSEE Per WSEE Net income $ 51 $ 56 $ 79 $ 87 Income tax expense 21 22 32 35 Interest expense 6 7 7 8 Amortization of SaaS implementation costs 2 2 3 3 Depreciation and amortization 11 12 11 12 EBITDA 91 99 132 145 Stock-based compensation 11 12 10 11 Adjusted EBITDA $ 102 $ 111 $ 142 $ 156 Net income % change period over period (35) % (36) % (17) % (16) % Adjusted EBITDA % change period over period (28) % (29) % (7) % (5) % Insperity | 2025 First Quarter Form 10-Q 30 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 March 31, (in millions) 2025 2024 Net income $ 51 $ 79 Non-GAAP adjustments: Stock-based compensation 11 10 Tax effect (3) (3) Total non-GAAP adjustments, net 8 7 Adjusted net income $ 59 $ 86 Net income % change period over period (35) % (17) % Adjusted net income % change period over period (31) % (17) % Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP): Three Months Ended March 31, (amounts per share) 2025 2024 Diluted EPS $ 1.35 $ 2.08 Non-GAAP adjustments: Stock-based compensation 0.30 0.28 Tax effect (0.08) (0.09) Total non-GAAP adjustments, net 0.22 0.19 Adjusted EPS $ 1.57 $ 2.27 Diluted EPS % change period over period (35) % (15) % Adjusted EPS % change period over period (31) % (15) % 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 $568 million in cash, cash equivalents and marketable securities at March 31, 2025, of which approximately $404 million was payable in April 2025 for withheld federal and state income taxes, employment taxes and other payroll deductions. Approximately $40 million represented client prepayments that were invoiced in April 2025. At March 31, 2025, we had working capital of $188 million compared to $155 million at December 31, 2024. 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 2025. We intend to rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs. As of March 31, 2025, 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. Insperity | 2025 First Quarter Form 10-Q 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash Flows from Operating Activities Net cash used in operating activities in the first three months of 2025 was $443 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 three months ended March 31, 2025, the last business day of the reporting period was a Monday, client prepayments were $40 million and employment taxes and other deductions were $404 million. In the three months ended March 31, 2024, the last business day of the reporting period was a Friday, client prepayments were $34 million and employment taxes and other deductions were $443 million. In addition, $440 million of client employee retention tax credits received on their behalf from the Internal Revenue Service during the fourth quarter of 2024 were distributed to clients in early 2025. • 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 March 31, 2025, Plan Costs were less than the net premiums paid and owed to United by $52 million, which is $43 million in excess of our agreed-upon $9 million surplus maintenance level. The $43 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 March 31, 2025. In addition, the premiums owed to United at March 31, 2025, were $64 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 31% to $59 million in the first three months of 2025, compared to $86 million in the first three months of 2024. Please read “ Results of Operations .” Cash Flows from Investing Activities Net cash flows used in investing activities were $6 million for the three months ended March 31, 2025, primarily due to property and equipment purchases. Cash Flows from Financing Activities Net cash flows used in financing activities were $49 million for the three months ended March 31, 2025. We paid $23 million in dividends and repurchased or withheld $19 million in stock. In addition, client funds liability and other financing activities decreased by $7 million. Insperity | 2025 First Quarter Form 10-Q 32 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES