UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



	For the quarterly period ended	September 30, ~~2019~~2020
	or
☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from _______________ to _______________

Commission File No. 1-13998

Insperity, Inc.

(Exact name of registrant as specified in its charter)



Delaware						76-0479645
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)



19001 Crescent Springs Drive
Kingwood,	Texas	77339
(Address of principal executive offices)

(Registrant’s Telephone Number, Including Area Code): (~~281~~) (281) 358-8986



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	NSP	New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred Stock	NSP	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”,

~~“non-accelerated~~ “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Emerging growth company	☐
Smaller reporting company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of October ~~28, 2019, 39,997,882~~26, 2020, 38,354,147 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.



TABLE OF CONTENTS


				Page

			~~Page~~

Part I, Item 1.	Financial Statements		~~Financial Statements~~		4
		Condensed Consolidated Balance Sheets		4
		Consolidated Statements of Operations		5
		Consolidated Statements of Cash Flows		6
		Consolidated Statements of Stockholders’ Equity		8
		Notes to Consolidated Financial Statements		10
Part I, Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Part I, Item 3.		Quantitative and Qualitative Disclosures about Market Risk		3635
Part I, Item 4.		Controls and Procedures		3635
Part II, Item 1.		Legal Proceedings		3736
Part II, Item 1A.		Risk Factors		3736
Part II, Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		3837
Part II, Item 6.		Exhibits		3938



FINANCIAL STATEMENTS (Unaudited)

PART I

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)	September 30, 2019			December 31, 2018			(in thousands)	September 30, 2020		December 31, 2019

Assets							Assets
Cash and cash equivalents	$	243,439		$	326,773		Cash and cash equivalents	$	372,356	$	367,342
Restricted cash	45,251			42,227			Restricted cash	45,265		49,295
Marketable securities	60,880			60,781			Marketable securities	33,994		34,728
Accounts receivable, net	483,890			400,623			Accounts receivable, net	528,712		465,779
Prepaid insurance	22,161			8,411			Prepaid insurance	34,759		10,418
Other current assets	26,438			27,721			Other current assets	33,772		43,493
Income taxes receivable	11,684			—			Income taxes receivable	0		3,691
Total current assets	893,743			866,536			Total current assets	1,048,858		974,746
Property and equipment, net of accumulated depreciation	134,956			117,213			Property and equipment, net of accumulated depreciation	196,210		147,706
Right-of-use leased assets	58,185			—
Right-of-use (“ROU”) leased assets							Right-of-use (“ROU”) leased assets	60,682		56,886
Prepaid health insurance	9,000			9,000			Prepaid health insurance	9,000		9,000
Deposits – health insurance	6,600			6,200			Deposits – health insurance	7,900		8,100
Deposits – workers’ compensation	170,032			166,474			Deposits – workers’ compensation	181,634		175,913
Goodwill and other intangible assets, net	12,717			12,726			Goodwill and other intangible assets, net	12,707		12,714
Deferred income taxes, net	157			8,816			Deferred income taxes, net	0		3,956
Other assets	6,732			4,851			Other assets	6,291		5,975
Total assets	$	1,292,122		$	1,191,816		Total assets	$	1,523,282	$	1,394,996

Liabilities and stockholders’ equity
Liabilities and stockholders' equity							Liabilities and stockholders' equity
Accounts payable	$	5,373		$	10,622		Accounts payable	$	6,016	$	4,565
Payroll taxes and other payroll deductions payable	180,617			261,166			Payroll taxes and other payroll deductions payable	178,052		277,248
Accrued worksite employee payroll cost	411,457			329,979			Accrued worksite employee payroll cost	471,796		401,859
Accrued health insurance costs	33,239			35,153			Accrued health insurance costs	44,639		21,180
Accrued workers’ compensation costs	48,927			45,818			Accrued workers’ compensation costs	47,956		52,868
Accrued corporate payroll and commissions	39,414			60,704			Accrued corporate payroll and commissions	39,925		52,612
Other accrued liabilities	42,185			28,890			Other accrued liabilities	46,400		58,713
Income taxes payable							Income taxes payable	6,286		0
Total current liabilities	761,212			772,332			Total current liabilities	841,070		869,045
Accrued workers’ compensation cost, net of current	190,390			187,412			Accrued workers’ compensation cost, net of current	196,247		193,609
Long-term debt	239,400			144,400			Long-term debt	369,400		269,400
Operating lease liabilities, net of current	60,132			—			Operating lease liabilities, net of current	64,436		58,863
Deferred income taxes, net							Deferred income taxes, net	2,801		0
Other accrued liabilities, net of current	—			9,996			Other accrued liabilities, net of current	8,689		0
Total noncurrent liabilities	489,922			341,808			Total noncurrent liabilities	641,573		521,872
Commitments and contingencies							Commitments and contingencies
Common stock	555			555			Common stock	555		555
Additional paid-in capital	46,401			36,752			Additional paid-in capital	74,598		48,141
Treasury stock, at cost	(496,917		)	(357,569		)	Treasury stock, at cost	(620,638)		(544,102)
Retained earnings	490,949			397,938			Retained earnings	586,124		499,485
Total stockholders’ equity	40,988			77,676			Total stockholders’ equity	40,639		4,079
Total liabilities and stockholders’ equity	$	1,292,122		$	1,191,816		Total liabilities and stockholders’ equity	$	1,523,282	$	1,394,996

See accompanying notes.


Insperity \| 2020 Third Quarter Form 10-Q			4


~~Insperity \| 2019 Third Quarter Form 10-Q~~			4FINANCIAL STATEMENTS (Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2020		2019		2020		2019

Revenues(1)	$	1,007,820	$	1,043,388	$	3,230,669	$	3,239,714
Payroll taxes, benefits and workers’ compensation costs	822,787		872,842		2,591,365		2,668,716
Gross profit	185,033		170,546		639,304		570,998
Salaries, wages and payroll taxes	89,429		79,264		266,640		237,340
Stock-based compensation	20,864		6,517		38,110		20,813
Commissions	7,722		8,034		23,657		22,727
Advertising	4,781		4,895		15,334		17,474
General and administrative expenses	25,646		29,773		85,254		92,801
Depreciation and amortization	7,819		7,330		23,329		20,929
Total operating expenses	156,261		135,813		452,324		412,084
Operating income	28,772		34,733		186,980		158,914
Other income (expense):
Interest income	103		2,574		2,351		8,621
Interest expense	(1,731)		(2,122)		(6,312)		(5,442)
Income before income tax expense	27,144		35,185		183,019		162,093
Income tax expense	7,135		9,326		49,067		31,389
Net income	$	20,009	$	25,859	$	133,952	$	130,704
Less distributed and undistributed earnings allocated to participating securities	(104)		(284)		(792)		(1,546)
Net income allocated to common shares	$	19,905	$	25,575	$	133,160	$	129,158

Net income per share of common stock
Basic	$	0.52	$	0.64	$	3.45	$	3.19
Diluted	$	0.51	$	0.63	$	3.43	$	3.18

____________________________________

(1)Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
(in thousands)	2020	2019	2020	2019

Gross billings	$6,563,727	$6,555,865	$20,356,164	$19,804,549
Less: WSEE payroll cost	$5,555,907	$5,512,477	$17,125,495	$16,564,835
Revenues	$1,007,820	$1,043,388	$3,230,669	$3,239,714

See accompanying notes.

~~FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands, except per share amounts) 2019 2018 2019 2018

Revenues⁽¹⁾
$ 1,043,388
$ 925,126
$ 3,239,714
$ 2,861,793
Payroll taxes, benefits and workers’ compensation costs 872,842
759,072
2,668,716
2,341,475
Gross profit 170,546
166,054
570,998
520,318
Salaries, wages and payroll taxes 79,264
70,552
237,340
226,486
Stock-based compensation 6,517
5,769
20,813
14,656
Commissions 8,034
6,818
22,727
19,863
Advertising 4,895
3,846
17,474
13,996
General and administrative expenses 29,773
25,294
92,801
82,565
Depreciation and amortization 7,330
5,642
20,929
16,335
Total operating expenses 135,813
117,921
412,084
373,901
Operating income 34,733
48,133
158,914
146,417
Other income (expense):

Interest income 2,574
2,028
8,621
5,291
Interest expense (2,122 ) (1,174 ) (5,442 ) (3,352 )
Income before income tax expense 35,185
48,987
162,093
148,356
Income tax expense 9,326
12,780
31,389
37,598
Net income $ 25,859
$ 36,207
$ 130,704
$ 110,758
Less distributed and undistributed earnings allocated to participating securities (284 ) (503 ) (1,546 ) (1,546 )
Net income allocated to common shares $ 25,575
$ 35,704
$ 129,158
$ 109,212

Net income per share of common stock
Basic $ 0.64
$ 0.86
$ 3.19
$ 2.64
Diluted $ 0.63
$ 0.86
$ 3.18
$ 2.63

~~____________________________________~~


⁽¹⁾Insperity \| 2020 Third Quarter Form 10-Q			~~Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows:~~5

Three Months Ended
September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018

Gross billings $ 6,555,865
$ 5,810,779
$ 19,804,549
$ 17,284,477
Less: WSEE payroll cost 5,512,477
4,885,653
16,564,835
14,422,684
Revenues $ 1,043,388
$ 925,126
$ 3,239,714
$ 2,861,793

~~See accompanying notes.~~



~~Insperity \| 2019 Third Quarter Form 10-Q~~			5FINANCIAL STATEMENTS (Unaudited)

~~FINANCIAL STATEMENTS~~

~~(Unaudited)~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,
(in thousands) 2019 2018

Cash flows from operating activities
Net income $ 130,704
$ 110,758
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 20,929
16,335
Stock-based compensation 20,813
14,656
Deferred income taxes 8,659
(591 )
Changes in operating assets and liabilities:
Accounts receivable (83,267 ) (66,020 )
Prepaid insurance (13,750 ) (2,973 )
Other current assets 1,283
2,717
Other assets (2,709 ) (1,760 )
Accounts payable (5,249 ) (1,131 )
Payroll taxes and other payroll deductions payable (80,549 ) (99,161 )
Accrued worksite employee payroll expense 81,478
72,713
Accrued health insurance costs (1,914 ) 7,383
Accrued workers’ compensation costs 6,087
19,405
Accrued corporate payroll, commissions and other accrued liabilities (22,830 ) (11,887 )
Income taxes payable/receivable (12,609 ) 9,885
Total adjustments (83,628 ) (40,429 )
Net cash provided by operating activities 47,076
70,329

Cash flows from investing activities

Marketable securities:

Purchases (90,909 ) (54,754 )
Proceeds from dispositions 5,799
16,299
Proceeds from maturities 85,480
2,650
Property and equipment:
Purchases (35,968 ) (21,519 )
Net cash used in investing activities (35,598 ) (57,324 )

Cash flows from financing activities
Purchase of treasury stock (153,668 ) (16,236 )
Dividends paid (36,777 ) (25,170 )
Borrowings under revolving line of credit 95,000
—
Other 7,215
1,613
Net cash used in financing activities (88,230 ) (39,793 )
Net decrease in cash, cash equivalents and restricted cash (76,752 ) (26,788 )
Cash, cash equivalents and restricted cash beginning of period 535,474
549,612
Cash, cash equivalents and restricted cash end of period $ 458,722
$ 522,824


	Nine Months Ended September 30,
(in thousands)	2020		2019

Cash flows from operating activities
Net income	$	133,952	$	130,704
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	23,329		20,929
Stock-based compensation	38,110		20,813
Deferred income taxes	6,757		8,659
Changes in operating assets and liabilities:
Accounts receivable	(62,933)		(83,267)
Prepaid insurance	(24,341)		(13,750)
Other current assets	9,721		1,283
Other assets and ROU assets	10,862		(2,709)
Accounts payable	1,451		(5,249)
Payroll taxes and other payroll deductions payable	(99,196)		(80,549)
Accrued worksite employee payroll expense	69,937		81,478
Accrued health insurance costs	23,459		(1,914)
Accrued workers’ compensation costs	(2,273)		6,087
Accrued corporate payroll, commissions and other accrued liabilities	(32,238)		(22,830)
Income taxes payable/receivable	9,977		(12,609)
Total adjustments	(27,378)		(83,628)
Net cash provided by operating activities	106,574		47,076

Cash flows from investing activities
Marketable securities:
Purchases	(42,007)		(90,909)
Proceeds from dispositions	484		5,799
Proceeds from maturities	41,860		85,480
Property and equipment:
Purchases	(68,770)		(35,968)
Net cash used in investing activities	(68,433)		(35,598)

Cash flows from financing activities
Purchase of treasury stock	(91,216)		(153,668)
Dividends paid	(46,522)		(36,777)
Borrowings under revolving line of credit	100,000		95,000
Other	6,302		7,215
Net cash used in financing activities	(31,436)		(88,230)
Net increase (decrease) in cash, cash equivalents and restricted cash	6,705		(76,752)
Cash, cash equivalents and restricted cash beginning of period	592,550		535,474
Cash, cash equivalents and restricted cash end of period	$	599,255	$	458,722


Insperity \| 2020 Third Quarter Form 10-Q			6


~~Insperity \| 2019 Third Quarter Form 10-Q~~			6FINANCIAL STATEMENTS (Unaudited)

~~FINANCIAL STATEMENTS~~

~~(Unaudited)~~

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


	Nine Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2019		2018		(in thousands)	2020		2019

Supplemental schedule of cash and cash equivalents and restricted cash					Supplemental schedule of cash and cash equivalents and restricted cash
Cash and cash equivalents	$	326,773	$	354,260	Cash and cash equivalents	$	367,342	$	326,773
Restricted cash	42,227		41,137		Restricted cash	49,295		42,227
Deposits – workers’ compensation	166,474		154,215		Deposits – workers’ compensation	175,913		166,474
Cash, cash equivalents and restricted cash beginning of period	$	535,474	$	549,612	Cash, cash equivalents and restricted cash beginning of period	$	592,550	$	535,474

Cash and cash equivalents	$	243,439	$	328,299	Cash and cash equivalents	$	372,356	$	243,439
Restricted cash	45,251		42,257		Restricted cash	45,265		45,251
Deposits – workers’ compensation	170,032		152,268		Deposits – workers’ compensation	181,634		170,032
Cash, cash equivalents and restricted cash end of period	$	458,722	$	522,824	Cash, cash equivalents and restricted cash end of period	$	599,255	$	458,722

Supplemental operating lease cash flow information:					Supplemental operating lease cash flow information:
ROU assets obtained in exchange for lease obligations	$	21,980	$	—	ROU assets obtained in exchange for lease obligations	$	18,364	$	21,980

See accompanying notes.


Insperity \| 2020 Third Quarter Form 10-Q			7


~~Insperity \| 2019 Third Quarter Form 10-Q~~			7FINANCIAL STATEMENTS (Unaudited)

~~FINANCIAL STATEMENTS~~

~~(Unaudited)~~

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

Common Stock Issued Additional Paid-In Capital Treasury Stock Retained Earnings and AOCI Total
(in thousands) Shares Amount

Balance at December 31, 2018 55,489
$ 555
$ 36,752
$ (357,569 ) $ 397,938
$ 77,676
Purchase of treasury stock, at cost —
—
—
(153,668 ) —
(153,668 )
Issuance of long-term incentive awards and dividend equivalents —
—
(7,695 ) 8,646
(951 ) —
Stock-based compensation expense —
—
15,656
5,157
—
20,813
Other —
—
1,688
517
—
2,205
Dividends paid —
—
—
—
(36,777 ) (36,777 )
Unrealized gain on marketable securities, net of tax —
—
—
—
35
35
Net income —
—
—
—
130,704
130,704
Balance at September 30, 2019 55,489
$ 555
$ 46,401
$ (496,917 ) $ 490,949
$ 40,988

Balance at December 31, 2017 55,489
$ 555
$ 25,337
$ (256,363 ) $ 296,792
$ 66,321
Purchase of treasury stock, at cost —
—
—
(16,236 ) —
(16,236 )
Issuance of long-term incentive awards and dividend equivalents —
—
(5,764 ) 6,619
(855 ) —
Stock-based compensation expense —
—
11,293
3,363
—
14,656
Other —
—
1,181
430
—
1,611
Dividends paid —
—
—
—
(25,170 ) (25,170 )
Unrealized loss on marketable securities, net of tax —
—
—
—
(20 ) (20 )
Net income —
—
—
—
110,758
110,758
Balance at September 30, 2018 55,489
$ 555
$ 32,047
$ (262,187 ) $ 381,505
$ 151,920


	Common Stock Issued			Additional Paid-In Capital		Treasury Stock		Retained Earnings and AOCI		Total
(in thousands)	Shares	Amount

Balance at December 31, 2019	55,489	$	555	$	48,141	$	(544,102)	$	499,485	$	4,079
Purchase of treasury stock, at cost	—	0		0		(91,216)		0		(91,216)
Issuance of long-term incentive awards and dividend equivalents	—	0		(7,088)		7,898		(810)		0
Stock-based compensation expense	—	0		32,893		5,217		0		38,110
Other	—	0		652		1,565		0		2,217
Dividends paid	—	0		0		0		(46,522)		(46,522)
Unrealized gain on marketable securities, net of tax	—	0		0		0		19		19
Net income	—	0		0		0		133,952		133,952
Balance at September 30, 2020	55,489	$	555	$	74,598	$	(620,638)	$	586,124	$	40,639

Balance at December 31, 2018	55,489	$	555	$	36,752	$	(357,569)	$	397,938	$	77,676
Purchase of treasury stock, at cost	—	0		0		(153,668)		0		(153,668)
Issuance of long-term incentive awards and dividend equivalents	—	0		(7,695)		8,646		(951)		0
Stock-based compensation expense	—	0		15,656		5,157		0		20,813
Other	—	0		1,688		517		0		2,205
Dividends paid	—	0		0		0		(36,777)		(36,777)
Unrealized gain on marketable securities, net of tax	—	0		0		0		35		35
Net income	—	0		0		0		130,704		130,704
Balance at September 30, 2019	55,489	$	555	$	46,401	$	(496,917)	$	490,949	$	40,988


Insperity \| 2020 Third Quarter Form 10-Q			8


~~Insperity \| 2019 Third Quarter Form 10-Q~~			8FINANCIAL STATEMENTS (Unaudited)

~~FINANCIAL STATEMENTS~~

~~(Unaudited)~~

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

For the Three Months Ended September 30, ~~2019~~2020 and ~~2018~~2019


	Common Stock Issued			Additional Paid-In Capital		Treasury Stock			Retained Earnings and AOCI			Total				Common Stock Issued			Additional Paid-In Capital		Treasury Stock		Retained Earnings and AOCI		Total
(in thousands)	Shares	Amount													(in thousands)	Shares	Amount

Balance at June 30, 2020															Balance at June 30, 2020	55,489	$	555	$	54,783	$	(592,313)	$	581,613	$	44,638
Purchase of treasury stock, at cost															Purchase of treasury stock, at cost	—	0		0		(29,986)		0		(29,986)

Stock-based compensation expense															Stock-based compensation expense	—	0		19,552		1,312		0		20,864
Other															Other	—	0		263		349		0		612
Dividends paid															Dividends paid	—	0		0		0		(15,448)		(15,448)
Unrealized loss on marketable securities, net of tax															Unrealized loss on marketable securities, net of tax	—	0		0		0		(50)		(50)
Net income															Net income	—	0		0		0		20,009		20,009
Balance at September 30, 2020															Balance at September 30, 2020	55,489	$	555	$	74,598	$	(620,638)	$	586,124	$	40,639

Balance at June 30, 2019	55,489	$	555	$	41,009	$	(383,830	)	$	477,155		$	134,889		Balance at June 30, 2019	55,489	$	555	$	41,009	$	(383,830)	$	477,155	$	134,889
Purchase of treasury stock, at cost	—	—		—		(114,872		)	—			(114,872		)	Purchase of treasury stock, at cost	—	0		0		(114,872)		0		(114,872)

Stock-based compensation expense	—	—		4,880		1,637			—			6,517			Stock-based compensation expense	—	0		4,880		1,637		0		6,517
Other	—	—		512		148			—			660			Other	—	0		512		148		0		660
Dividends paid	—	—		—		—			(12,037		)	(12,037		)	Dividends paid	—	0		0		0		(12,037)		(12,037)
Unrealized loss on marketable securities, net of tax	—	—		—		—			(28		)	(28		)	Unrealized loss on marketable securities, net of tax	—	0		0		0		(28)		(28)
Net income	—	—		—		—			25,859			25,859			Net income	—	0		0		0		25,859		25,859
Balance at September 30, 2019	55,489	$	555	$	46,401	$	(496,917	)	$	490,949		$	40,988		Balance at September 30, 2019	55,489	$	555	$	46,401	$	(496,917)	$	490,949	$	40,988

Balance at June 30, 2018	55,489	$	555	$	27,363	$	(263,764	)	$	353,706		$	117,860
Purchase of treasury stock, at cost	—	—		—		(9		)	—			(9		)
Stock-based compensation expense	—	—		4,288		1,481			—			5,769
Other	—	—		396		105			—			501
Dividends paid	—	—		—		—			(8,384		)	(8,384		)
Unrealized loss on marketable securities, net of tax	—	—		—		—			(24		)	(24		)
Net income	—	—		—		—			36,207			36,207
Balance at September 30, 2018	55,489	$	555	$	32,047	$	(262,187	)	$	381,505		$	151,920

See accompanying notes.


Insperity \| 2020 Third Quarter Form 10-Q			9


~~Insperity \| 2019 Third Quarter Form 10-Q~~			9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.			Basis of Presentation

Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our most comprehensive HR services offerings are provided through our professional employer organization (“PEO”) services, known as Workforce Optimization^® and Workforce Synchronization^TM solutions (together, our “PEO HR Outsourcing solutions”), which 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^TMplatform.

In addition to our PEO HR Outsourcing solutions, we also offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration. We also offer a number of other business performance solutions, including Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management Services, Retirement Services and Insurance Services, many of which are offered as a cloud-based software ~~solution and~~solution. These other products or services are offered separately or with our other solutions.

The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements at and for the year ended December 31, ~~2018~~.2019. Our Condensed Consolidated Balance Sheet at December 31, ~~2018~~2019 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements. Our Condensed Consolidated Balance Sheet at September 30, ~~2019~~2020 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, ~~2019~~2020 and ~~2018~~,2019, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, ~~2019~~2020 and ~~2018~~2019 and our Consolidated Statements of Stockholders’ Equity for the ~~three and~~ nine month periods ended September 30, ~~2019~~2020 and ~~2018~~,2019, have been prepared by us without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made. ~~Certain prior year amounts have been reclassified to conform to the 2019 presentation.~~

The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.



2.			Accounting Policies

Health Insurance Costs

We provide group health insurance coverage to our WSEEs in our PEO HR Outsourcing solutions through a national network of carriers, including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, and Tufts, all of which provide fully insured policies or service contracts.

The policy with United provides approximately 87% of our health insurance coverage. While the policy with United is a fully-insured plan, as a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Effective January 1, 2020, under the amended agreement with United, we no longer have financial responsibilities for a participant’s annual claim costs that exceed $1 million. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense, which is a component of direct costs, in our Consolidated Statements of Operations. The estimated incurred claims are based upon: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant


Insperity \| 2020 Third Quarter Form 10-Q			10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

demographics and other factors are incorporated into the benefits ~~costs.~~costs, which requires a significant level of judgment.



~~Insperity \| 2019 Third Quarter Form 10-Q~~		10

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Condensed Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Condensed Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of ~~$9.0~~$9.0 million,, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was ~~$5.0~~$6.5 million at September 30, ~~2019~~,2020, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, ~~2019,~~2020, Plan Costs were less than the net premiums paid and owed to United by ~~$17.4~~$32.8 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the ~~$8.4~~$23.8 million difference is included in prepaid insurance, a current asset, in our Condensed Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at September 30, ~~2019~~2020 were ~~$27.6~~$38.3 million,, which is included in accrued health insurance costs, a current liability in our Condensed Consolidated Balance Sheets. Our benefits costs incurred in the first nine months of ~~2019~~2020 included a ~~charge~~reduction of ~~$2.9~~$1.9 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first nine months of ~~2018~~2019 included a ~~reduction~~charge of ~~$1.3~~$2.9 million for changes in estimated run-off related to prior periods.

Workers’ Compensation Costs

Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $1 million layer of claims per occurrence and, for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, ~~our financial responsibility increased as~~ we have financial responsibility to Chubb for the first $1.5 million layer of claims per occurrence and, for claims over $1.5 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1.5 million.

Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.

We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, we reduced accrued workers’ compensation costs by ~~$26.0~~$32.4 million and ~~$13.4~~$26.0 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in the 2020 period was 0.7% and in the 2019 period was 2.0% ~~and in the 2018 period was 2.5%~~) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.


Insperity \| 2020 Third Quarter Form 10-Q			11


~~Insperity \| 2019 Third Quarter Form 10-Q~~			11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:

Nine Months Ended September 30,
(in thousands) 2019 2018

Beginning balance, January 1, $ 229,639
$ 207,630
Accrued claims 44,334
54,744
Present value discount (3,664 ) (5,372 )
Paid claims (34,669 ) (31,645 )
Ending balance $ 235,640
$ 225,357

Current portion of accrued claims $ 45,250
$ 42,258
Long-term portion of accrued claims 190,390
183,099
Total accrued claims $ 235,640
$ 225,357


	Nine Months Ended September 30,
(in thousands)	2020		2019

Beginning balance, January 1,	$	242,904	$	229,639
Accrued claims	33,397		44,334
Present value discount, net of accretion	(500)		(3,664)
Paid claims	(34,289)		(34,669)
Ending balance	$	241,512	$	235,640

Current portion of accrued claims	$	45,265	$	45,250
Long-term portion of accrued claims	196,247		190,390
Total accrued claims	$	241,512	$	235,640

The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, ~~2019~~2020 includes ~~$3.7~~$2.7 million of workers’ compensation administrative fees.

As of September 30, ~~2019~~2020 and ~~2018,~~2019, the undiscounted accrued workers’ compensation costs were ~~$255.3~~$259.4 million and ~~$241.3~~$255.3 million, respectively.

At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Condensed Consolidated Balance Sheets. During the first nine months of ~~2019~~2020 and ~~2018,~~2019, we received ~~$16.7~~$24.8 million and ~~$19.4~~$16.7 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in a ~~net~~ decrease to deposits -– workers’ compensation. At September 30, ~~2019,~~2020, we had restricted cash of $45.3 million and deposits – workers’ compensation of ~~$170.0~~$181.6 million.

Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Condensed Consolidated Balance Sheets.

Revenue and Direct Cost Recognition

We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally have a term of 12 months, but are cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms.

Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but unbilled of ~~$474.2~~$520.9 million and ~~$385.6~~$448.1 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, are included in accounts receivable, net on our Condensed Consolidated Balance Sheets.

Pursuant to the “practical expedients” provided under Accounting Standards Update (“ASU”) No 2014-09, we expense sales commissions when incurred because the terms of our contracts generally are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations.


Insperity \| 2020 Third Quarter Form 10-Q			12


~~Insperity \| 2019 Third Quarter Form 10-Q~~			12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2020		2019		% Change		2020		2019		% Change

Northeast	$	278,712	$	271,839	2.5	%	$	896,113	$	853,263	5.0	%
Southeast	121,439		122,992		(1.3)	%	379,614		373,044		1.8	%
Central	182,245		180,602		0.9	%	570,559		555,797		2.7	%
Southwest	217,527		242,200		(10.2)	%	712,185		756,495		(5.9)	%
West	195,412		212,618		(8.1)	%	634,533		661,460		(4.1)	%
	995,335		1,030,251		(3.4)	%	3,193,004		3,200,059		(0.2)	%
Other revenue	12,485		13,137		(5.0)	%	37,665		39,655		(5.0)	%
Total revenue	$	1,007,820	$	1,043,388	(3.4)	%	$	3,230,669	$	3,239,714	(0.3)	%

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 % Change 2019 2018 % Change

Northeast $ 271,839
$ 237,076
14.7 % $ 853,263
$ 748,717
14.0 %
Southeast 122,992
109,552
12.3 % 373,044
333,004
12.0 %
Central 180,602
155,184
16.4 % 555,797
476,277
16.7 %
Southwest 242,200
217,946
11.1 % 756,495
664,731
13.8 %
West 212,618
192,011
10.7 % 661,460
599,617
10.3 %
1,030,251
911,769
13.0 % 3,200,059
2,822,346
13.4 %
Other revenue 13,137
13,357
(1.6 )% 39,655
39,447
0.5 %
Total revenue $ 1,043,388
$ 925,126
12.8 % $ 3,239,714
$ 2,861,793
13.2 %
Recently Adopted Accounting Standards

We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) effective January 1, 2020 with no material impact. Under this standard, we estimate our reserves using information about past events, current conditions and risk characteristics of our customer when assessing risk associated with the collectability of accounts receivables, including unbilled accounts receivables. We require clients to pay invoices for service fees not later than the same day as the applicable payroll date. As such, we generally do not require collateral. As of September 30, 2020, allowance for bad debts was immaterial.



3.			Cash, Cash Equivalents and Marketable Securities

The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments:

September 30, 2019 December 31, 2018
(in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total

Overnight holdings $ 217,270
$ —
$ 217,270
$ 311,158
$ —
$ 311,158
Investment holdings 16,156
60,880
77,036
16,711
60,781
77,492
Cash in demand accounts 24,465
—
24,465
33,207
—
33,207
Outstanding checks (14,452 ) —
(14,452 ) (34,303 ) —
(34,303 )
Total $ 243,439
$ 60,880
$ 304,319
$ 326,773
$ 60,781
$ 387,554


	September 30, 2020						December 31, 2019
(in thousands)	Cash & Cash Equivalents		Marketable Securities		Total		Cash & Cash Equivalents		Marketable Securities		Total

Overnight holdings	$	314,952	$	0	$	314,952	$	349,857	$	0	$	349,857
Investment holdings	38,867		33,994		72,861		13,218		34,728		47,946
Cash in demand accounts	28,259		0		28,259		36,521		0		36,521
Outstanding checks	(9,722)		0		(9,722)		(32,254)		0		(32,254)
Total	$	372,356	$	33,994	$	406,350	$	367,342	$	34,728	$	402,070

Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Our cash, cash equivalents and marketable securities at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 included ~~$153.8~~$147.1 million and ~~$224.5~~$234.6 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as ~~$19.7~~$46.5 million and ~~$34.2~~$59.6 million, respectively, in client prepayments.



4.			Fair Value Measurements

We account for our financial assets in accordance with Accounting Standard Codification 820, Fair Value ~~Measurement~~.Measurement. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:

•Level 1 - quoted prices in active markets using identical assets


Insperity \| 2020 Third Quarter Form 10-Q			13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

•Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs

•Level 3 - significant unobservable inputs



~~Insperity \| 2019 Third Quarter Form 10-Q~~		13

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Fair Value of Instruments Measured and Recognized at Fair Value

The following table summarizes the levels of fair value measurements of our financial assets:

September 30, 2019 December 31, 2018
(in thousands) Total Level 1 Level 2 Total Level 1 Level 2

Money market funds $ 232,777
$ 232,777
$ —
$ 325,819
$ 325,819
$ —
U.S. Treasury bills 61,529
61,529
—
52,197
52,197
—
Municipal bonds —
—
—
10,634
—
10,634
Total $ 294,306
$ 294,306
$ —
$ 388,650
$ 378,016
$ 10,634


	September 30, 2020						December 31, 2019
(in thousands)	Total		Level 1		Level 2		Total		Level 1		Level 2

Money market funds	$	353,819	$	353,819	$	0	$	363,075	$	363,075	$	0
U.S. Treasury bills	10,411		10,411		0		34,728		34,728		0
Municipal bonds	23,583		0		23,583		0		0		0
Total	$	387,813	$	364,230	$	23,583	$	397,803	$	397,803	$	0

The municipal bond securities valued as Level 2 are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.

The following is a summary of our available-for-sale marketable securities:


(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

September 30, 2020
U.S. Treasury bills	$	10,410	$	1	$	0	$	10,411
Municipal bonds	23,554		29		0		23,583
Total	$	33,964	$	30	$	0	$	33,994

December 31, 2019
U.S. Treasury bills	$	34,716	$	13	$	(1)	$	34,728

Total	$	34,716	$	13	$	(1)	$	34,728

(in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value

September 30, 2019
U.S. Treasury bills $ 60,854
$ 27
$ (1 ) $ 60,880
Municipal bonds —
—
—
—
Total $ 60,854
$ 27
$ (1 ) $ 60,880

December 31, 2018
U.S. Treasury bills $ 50,150
$ —
$ (3 ) $ 50,147
Municipal bonds 10,640
1
(7 ) 10,634
Total $ 60,790
$ 1
$ (10 ) $ 60,781

As of September 30, ~~2019,~~2020, the contractual maturities of our marketable securities were as follows:

(in thousands) Amortized Cost Estimated Fair Value

Less than one year $ 60,854
$ 60,880
One to five years —
—
Total $ 60,854
$ 60,880


(in thousands)	Amortized Cost		Estimated Fair Value

Less than one year	$	33,964	$	33,994
One to five years	0		0
Total	$	33,964	$	33,994

Fair Value of Other Financial Instruments

The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments.

As of September 30, ~~2019,~~2020, the carrying value of borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 5, “Long-Term Debt,” for additional information.


Insperity \| 2020 Third Quarter Form 10-Q			14


~~Insperity \| 2019 Third Quarter Form 10-Q~~			14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



5.			Long-Term Debt

We have a revolving credit facility (the “Facility”)~~, which was increased from $350 million~~ with borrowing capacity of up to $500 ~~million of borrowing capacity in the third quarter of 2019.~~million. The Facility may be further increased to $550 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Our obligations under the Facility are secured by 65% of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. At September 30, ~~2019,~~2020, our outstanding balance on the Facility was ~~$239.4~~$369.4 million, and we had an outstanding $1.0 million letter of credit issued under the Facility, resulting in an available borrowing capacity of ~~$259.6~~$129.6 million.

The Facility matures on September 13, 2024. Borrowings under the Facility bear interest at an annual rate equal to an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from 1.50% to 2.25% and (2) in the case of alternate base rate loans, from 0.00% to 0.50%. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50% and (3) the 30-day LIBOR rate plus 2.00%. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25%. per year. The average interest rate for the nine month period ended September 30, ~~2019~~2020 was ~~3.90%~~2.52%. Interest expense and unused commitment fees are recorded in other income (expense). Upon the discontinuation of LIBOR, the Facility provides that we and the agent will negotiate in good faith to amend the agreement to address such discontinuation and to place the parties in substantially the same economic position.

The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at September 30, ~~2019.~~2020.



6.	~~Leases~~

~~In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,~~ ~~Leases~~ (Topic 842), which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter, the collection of lease guidance is referred to as “ASC 842”.

On January 1, 2019 we adopted ASC 842 using the modified retrospective transition method. Results for the reporting period beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting under ASC 840, ~~Leases.~~ ~~Uponadoption of ASC 842,~~we increased our total assets and liabilities due to the recording of operating lease ROU assets and operating lease liabilities of approximately $50.8 million and $63.7 million, respectively, as of January 1, 2019. These increases did not have a material impact on our results of operations or cash flows.

For all leases that commenced before the effective date of ASC 842, we elected to apply the permitted practical expedients to not reassess the following: (1) whether any expired or existing contracts contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases.

We determine if an arrangement is a lease at inception of a contract. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. We have lease agreements which require payments for lease and non-lease components and have elected to account for these as a single lease component related to our other operating facilities.



~~Insperity \| 2019 Third Quarter Form 10-Q~~6.			15

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

We have operating leases for office space, other operating facilities, vehicles and office equipment. Our fixed operating lease costs for the three and nine months ended September 30, 2019 were $4.1 million and $11.7 million, respectively, and are included in general and administrative expenses on our Consolidated Statements of Operations. During the nine months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $12.5 million.

~~The following table presents the lease balances within our Condensed Consolidated Balance Sheets, weighted average lease term and weighted average discount rates related to our operating leases:~~

(dollars in thousands) Classification in Condensed Consolidated Balance Sheets September 30, 2019

Operating lease ROU assets Right-of-use leased assets $ 58,185

Lease liabilities:
Current operating lease liabilities Other accrued liabilities $ 15,195
Long-term operating lease liabilities Operating lease liabilities, net of current 60,132
Total operating lease liabilities $ 75,327
Less:
Landlord funded tenant improvements $ 12,711
Deferred rent 4,431
Operating lease ROU assets $ 58,185

Weighted average remaining lease term (years) 6
Weighted average discount rate 4.6 %

~~The following presents the maturity of our operating leases liabilities as of September 30, 2019:~~

(in thousands) Operating Leases

Remainder of 2019 $ 4,564
2020 17,656
2021 15,049
2022 13,637
2023 11,134
Thereafter 24,174
Total remaining obligation 86,214
Less imputed interest 10,887
Present value of lease liabilities $ 75,327

~~As of September 30, 2019, we have additional operating leases that have not yet commenced of $8.2 million with lease terms ranging from 4 years to 8 years.~~



7.	Stockholders' Equity

During the first nine months of ~~2019,~~2020, we repurchased or withheld an aggregate of ~~1,481,369~~1,336,884 shares of our common stock, as described below.

Repurchase Program

Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. ~~In 2019, the Board authorized an increase of 700,000 shares that may be repurchased under the Repurchase Program.~~ During the nine months



~~Insperity \| 2019 Third Quarter Form 10-Q~~		16

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

ended September 30, ~~2019~~, ~~1,254,210~~2020, 1,186,000 shares were repurchased under the Repurchase Program. As of September 30, ~~2019~~,2020, we were authorized to repurchase an additional ~~1,056,945~~227,833 shares under the Repurchase Program.

Withheld Shares

During the nine months ended September 30, ~~2019,~~2020, we withheld ~~227,159~~150,884 shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards.

Dividends

The Board declared quarterly dividends as follows:


(amounts per share)	2020		2019

First quarter	$	0.40	$	0.30
Second quarter	0.40		0.30
Third quarter	0.40		0.30

(amounts per share) 2019
2018

First quarter $ 0.30
$ 0.20
Second quarter 0.30
0.20
Third quarter 0.30
0.20


Insperity \| 2020 Third Quarter Form 10-Q			15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, we paid dividends totaling ~~$36.8~~$46.5 million and ~~$25.2~~$36.8 million, respectively.

Rights Plan

On May 21, 2020, the Board declared a dividend of one right (“Right”) for each outstanding share of common stock to common stockholders of record at the close of business on June 1, 2020 (the “Rights Plan”). Each Right, if and when it becomes exercisable, entitles the registered holder to purchase from us 1 unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share. Initially, the Rights are attached to all outstanding shares of our common stock. The Rights are not currently exercisable and the Rights Plan will expire at the close of business on May 20, 2021, unless the Rights are earlier redeemed or exchanged by us.



8.7.			Incentive Plans

The Insperity, Inc. 2001 Incentive Plan, as amended, and the 2012 Incentive Plan, as amended (collectively, the “Incentive Plans”) provide for options and other stock-based awards that have been and may be granted to our eligible employees and non-employee directors. The 2012 Incentive Plan is currently the only plan under which new stock-based awards may be granted. Beginning with stock-based awards granted in 2020, employees who attain a minimum of age 62 and have provided 15 years or more of continuous service may continue to vest in awards following a qualifying retirement as defined under the 2012 Incentive Plan, as though he or she were still an employee, provided the grant date of the award is six months or more before the employees last day of employment. For a termination following a qualifying retirement, time-vested awards will continue to vest in the normal course. For a termination following a qualifying retirement, performance-based awards with completed or in-process performance periods are adjusted for achievement of the performance criteria, prorated through the date of termination and paid in the normal course, while performance-based awards for performance periods that have not started are forfeited. Stock-based compensation expense related to time-vested and performance-based awards is accelerated for employees who meet the requirements for continued vesting.


8.			Net Income Per Share

We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.


Insperity \| 2020 Third Quarter Form 10-Q			16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019

Net income	$	20,009	$	25,859	$	133,952	$	130,704
Less distributed and undistributed earnings allocated to participating securities	(104)		(284)		(792)		(1,546)
Net income allocated to common shares	$	19,905	$	25,575	$	133,160	$	129,158

Weighted average common shares outstanding	38,507		40,168		38,625		40,481
Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options	234		149		193		143
Adjusted weighted average common shares outstanding	38,741		40,317		38,818		40,624

Three Months Ended September 30, Nine Months Ended
September 30,
(in thousands) 2019 2018 2019 2018

Net income $ 25,859
$ 36,207
$ 130,704
$ 110,758
Less distributed and undistributed earnings allocated to participating securities (284 ) (503 ) (1,546 ) (1,546 )
Net income allocated to common shares $ 25,575
$ 35,704
$ 129,158
$ 109,212

Weighted average common shares outstanding 40,168
41,330
40,481
41,311
Incremental shares from assumed LTIP awards and conversions of common stock options 149
218
143
283
Adjusted weighted average common shares outstanding 40,317
41,548
40,624
41,594



~~Insperity \| 2019 Third Quarter Form 10-Q~~9.			17

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~



9.	Commitments and Contingencies

Worksite Employee 401(k) Retirement Plan Class Action Litigation

In December 2015, a class action lawsuit was filed against us and a third-party who served as the discretionary trustee (the “Co-Defendant”) of the Insperity 401(k) retirement plan that is available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division, on behalf of Plan participants. The suit generally alleges the third-party discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries, and by making imprudent investment choices. The court certified a class defined as “all participants and beneficiaries of the Insperity 401(k) Plan from December 22, 2009 through September 30, 2017.” The court dismissed the breach of fiduciary duty claims relating to the selection of an Insperity subsidiary to serve as the recordkeeper of the Plan. On March 28, 2019, the court partially granted Insperity’s motion for summary judgment, resulting in the dismissal of the claims concerning allegations of excessive recordkeeping fees. The court ~~has~~ denied the plaintiffs’ request for a jury trial and ~~has~~ set a bench trial, ~~for~~which was held from March 2, 2020 to March 13, 2020. ~~With respect to plaintiffs’ remaining claims,~~At trial, the plaintiffs ~~allege~~alleged damages up to ~~$128~~approximately $146 million against all defendants. All parties filed proposed findings of fact and conclusions of law on June 15, 2020. On September 18, 2020, the plaintiffs and Co-Defendant informed the court that they reached an agreement in principle to settle the entire case, including a full and final release of all claims against Insperity. Insperity did not participate in the settlement discussions and will make no financial contribution to the settlement. In connection with the settlement, the plaintiffs and Co-Defendant filed a motion to extend the class period to March 31, 2019, which the court granted. The court has also granted preliminary approval of the settlement and has set the final approval hearing on March 5, 2021. As a result of the uncertainty regarding the outcome of this matter and the subsequent settlement agreement that, if approved by the court, will end the case with no financial contribution from Insperity, 0 provision has been made in the accompanying Consolidated Financial Statements.

Securities Class Action Lawsuit

In July 2020, a federal securities class action was filed against us and certain of our officers in the United States District Court for the Southern District of New York. The name of the case is Building Trades Pension Fund of Western Pennsylvania v. Insperity, Inc., et al., Case No. 1:20-cv-05635-NRB. On October 23, 2020, the court issued an order appointing Oakland County Employees’ Retirement System and Oakland County Voluntary Employees’ Beneficiary Association Trust as lead plaintiff. The complaint alleges that we made materially false and misleading statements regarding our business and operations in violation of the federal securities laws and seeks unspecified damages, the payment of reasonable attorneys’ fees, expert fees and other costs, and such other relief that may be deemed proper. We believe ~~we have meritorious defenses,~~the allegations in the action are without merit, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, 0no provision has been made in the accompanying Consolidated Financial Statements.


Insperity \| 2020 Third Quarter Form 10-Q			17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Other Litigation

We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.


Insperity \| 2020 Third Quarter Form 10-Q			18


~~Insperity \| 2019 Third Quarter Form 10-Q~~			18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, ~~2018~~,2019, 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 Workforce Optimization^® and Workforce Synchronization^TM solutions (together, our “PEO HR Outsourcing solutions”), which 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^TMplatform.

COVID-19 Pandemic

The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant reduction in U.S. economic activity. As the duration of the pandemic and such economic impacts remain uncertain, we have planned for a range of scenarios and have modified certain business and workforce practices. To conform to government restrictions and best practices, we have taken steps designed to keep our staff safe while continuing to serve clients, including implementing remote working for all non-essential employees and providing extra safety measures at corporate facilities. To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients with obtaining government provided tax credits, tax deferrals, loans and loan forgiveness and to provide guidance to assist clients with addressing the challenges faced by employers as a result of the pandemic. These service offerings and guidance to assist clients during the pandemic included additional benefits support, remote workforce transition, monitoring and educating on regulatory changes, return to workforce and workplace safety.

The COVID-19 pandemic did not have a significant impact to our first quarter 2020 financial results due to the increased spread of, and related government and business responses to, the COVID-19 pandemic not occurring until late in the quarter. However, towards the end of the first quarter, clients began layoffs and temporary leaves of absence of worksite employees (“WSEEs”), and this trend continued into the second quarter and resulted in a 1.8% decline in year-over-year average number of paid WSEEs per month in the second quarter. In the third quarter of 2020, the number of WSEEs returning to work as well as new hires exceeded layoffs, resulting in a 1.7% sequential increase and a 3.8% year-over-year decline in the average number of paid WSEEs per month. We expect the average number of paid WSEEs per month to decline between 2.1% and 3.0% in the fourth quarter of 2020 as compared to the fourth quarter of 2019, which equates to the average number of paid worksite employees per month growing 2% to 3% sequentially from the third quarter of 2020. We expect overall reduced employment levels to have a negative impact on our financial results for at least the remainder of 2020 as compared to 2019.

We experienced a 10.7% decrease in the year-over-year benefits costs per covered employee during the second quarter of 2020 and a 1.1% increase in the year-over-year benefits costs per covered employee during the third quarter of 2020. The third quarter 2020 increase in benefits costs per covered employee over the preceding second quarter of 2020 was due primarily to an increase in non-essential claims as a result of higher utilization and fewer deferrals or cancellations associated with the COVID-19 pandemic. We currently expect to experience higher costs related to COVID-19 and certain non-essential elective healthcare procedures during the remainder of 2020 and possibly into 2021 that had been deferred in response to COVID-19 governmental requirements or guidance related to shelter in place and similar orders. As a result, we expect that our healthcare claim costs will not be reflective of our historical quarterly claim cost trends. In addition, the COVID-19 pandemic has not had a material impact on our workers’ compensation cost estimate; however, the ultimate impact of COVID-19 on our workers’ compensation program remains uncertain. As the impact of the COVID-19 pandemic emerges, such impact, if any, on our workers’ compensation program will be reflected in future reporting periods.


Insperity \| 2020 Third Quarter Form 10-Q			19


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the scope, duration and magnitude of the pandemic, actions by businesses and governments in response to the pandemic, including programs designed to assist small and medium-sized businesses with the economic impact of the pandemic; and the speed and effectiveness of responses to combat the virus, including the development and availability of therapeutics and vaccines. See Part II, Item 1A. “Risk Factors” for additional information.

2020 Highlights

Third Quarter ~~2019~~2020 Compared to Third Quarter ~~2018~~2019

•Average number of ~~worksite employees (“WSEEs”)~~WSEEs paid per month ~~increased 12.0%~~decreased 3.8%

•Net income and diluted earnings per share (“diluted EPS”) decreased ~~28.6%~~22.6% and ~~26.7%~~19.0%, to ~~$25.9~~$20.0 million and ~~$0.63,~~$0.51, respectively

•Adjusted EPS ~~decreased 21.9%~~increased 21.3% to ~~$0.75~~$0.91

•Adjusted EBITDA ~~decreased 16.9%~~increased 12.5% to ~~$51.2~~$57.6 million

First Nine Months ~~2019~~2020 Compared to First Nine Months ~~2018~~2019

•Average number of WSEEs paid per month ~~increased 13.6%~~decreased 0.1%

•Net income and diluted EPS increased ~~18.0%~~2.5% and ~~20.9%~~7.9% to ~~$130.7~~$134.0 million and ~~$3.18,~~$3.43, respectively

•Adjusted EPS increased ~~16.7%~~16.2% to ~~$3.57~~$4.15

•Adjusted EBITDA increased ~~9.0%~~19.8% to ~~$209.3~~$250.8 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 ~~GAAP.~~

accounting principles generally accepted in the United States (“GAAP”).


Insperity \| 2020 Third Quarter Form 10-Q			20


~~Insperity \| 2019 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,
	2020		2019		% Change		2020		2019		% Change

Financial data:
Revenues	$	1,007,820	$	1,043,388	(3.4)	%	$	3,230,669	$	3,239,714	(0.3)	%
Gross profit	185,033		170,546		8.5	%	639,304		570,998		12.0	%
Operating expenses	156,261		135,813		15.1	%	452,324		412,084		9.8	%
Operating income	28,772		34,733		(17.2)	%	186,980		158,914		17.7	%
Other income (expense)	(1,628)		452		—		(3,961)		3,179		—
Net income	20,009		25,859		(22.6)	%	133,952		130,704		2.5	%
Diluted EPS	0.51		0.63		(19.0)	%	3.43		3.18		7.9	%

Non-GAAP financial measures(1):
Adjusted net income	$	35,389	$	30,648	15.5	%	$	161,928	$	146,699	10.4	%
Adjusted EBITDA	57,558		51,154		12.5	%	250,770		209,277		19.8	%
Adjusted EPS	0.91		0.75		21.3	%	4.15		3.57		16.2	%

Average WSEEs paid	231,750		240,939		(3.8)	%	232,553		232,825		(0.1)	%

Statistical data (per WSEE per month):
Revenues(2)	$	1,450	$	1,444	0.4	%	$	1,544	$	1,546	(0.1)	%
Gross profit	266		236		12.7	%	305		272		12.1	%
Operating expenses	225		188		19.7	%	216		197		9.6	%
Operating income	41		48		(14.6)	%	89		76		17.1	%
Net income	29		36		(19.4)	%	64		62		3.2	%

(in thousands, except per share and WSEE data) Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 % Change 2019 2018 % Change

Financial data:
Revenues $ 1,043,388
$ 925,126
12.8 % $ 3,239,714
$ 2,861,793
13.2 %
Gross profit 170,546
166,054
2.7 % 570,998
520,318
9.7 %
Operating expenses 135,813
117,921
15.2 % 412,084
373,901
10.2 %
Operating income 34,733
48,133
(27.8 )% 158,914
146,417
8.5 %
Other income (expense) 452
854
(47.1 )% 3,179
1,939
64.0 %
Net income 25,859
36,207
(28.6 )% 130,704
110,758
18.0 %
Diluted EPS 0.63
0.86
(26.7 )% 3.18
2.63
20.9 %

Non-GAAP financial measures⁽¹⁾:

Adjusted net income $ 30,648
$ 40,471
(24.3 )% $ 146,699
$ 128,698
14.0 %
Adjusted EBITDA 51,154
61,572
(16.9 )% 209,277
192,005
9.0 %
Adjusted EPS 0.75
0.96
(21.9 )% 3.57
3.06
16.7 %

Average WSEEs paid 240,939
215,051
12.0 % 232,825
204,895
13.6 %
Statistical data (per WSEE per month):
Revenues⁽²⁾
$ 1,444
$ 1,434
0.7 % $ 1,546
$ 1,552
(0.4 )%
Gross profit 236
257
(8.2 )% 272
282
(3.5 )%
Operating expenses 188
183
2.7 % 197
203
(3.0 )%
Operating income 48
75
(36.0 )% 76
79
(3.8 )%
Net income 36
56
(35.7 )% 62
60
3.3 %
____________________________________

~~____________________________________~~(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.


⁽¹⁾ (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:	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,					Three Months Ended September 30,				Nine Months Ended September 30,
(per WSEE per month)	2019		2018		2019		2018		(per WSEE per month)	2020		2019		2020		2019
Gross billings	$	9,070	$	9,007	$	9,451	$	9,373	Gross billings	$	9,441	$	9,070	$	9,726	$	9,451
Less: WSEE payroll cost	7,626		7,573		7,905		7,821		Less: WSEE payroll cost	7,991		7,626		8,182		7,905
Revenues	$	1,444	$	1,434	$	1,546	$	1,552	Revenues	$	1,450	$	1,444	$	1,544	$	1,546

New Accounting Pronouncements

Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies – ~~New~~Recently Adopted Accounting ~~Pronouncements,~~Standards," for new accounting pronouncements information.



~~Insperity \| 2019 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:

~~WSEE~~•WSEEs


Insperity \| 2020 Third Quarter Form 10-Q			21


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•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 existing clients through WSEE new hires and layoffs.

•During the third quarter of 2020 (“Q3 2020”), WSEEs paid declined 3.8% compared to the third quarter of 2019 (“Q3 2019”),. The net gain (loss) in our client base improved over Q3 2019. In addition, the number of WSEEs paid from new client sales ~~decreased over the third quarter~~was 92% of ~~2018 (“Q3 2018”). During Q3 2018, we onboarded our largest client which impacts the~~ Q3 2019 ~~comparison. Net gains in our~~paid from new client ~~base improved slightly during Q3 2019 compared to Q3 2018~~sales and client retention averaged ~~just above~~ 99% in ~~both periods.~~2020 and 2019.

•During the first nine months of 2020 (“YTD 2020”), WSEEs paid declined 0.1% compared to the first nine months of 2019 (“YTD 2019”)~~, the~~. The number of WSEEs paid from new client sales ~~decreased slightly over~~was 96% of YTD 2019. While the ~~first nine months of 2018 (“YTD 2018”). During YTD 2018, we onboarded our largest client which impacts the YTD 2019 comparison. Net gains~~net gain (loss) in our client base ~~also~~ declined compared to YTD ~~2018~~2019, due primarily to ~~less~~layoffs and furloughs of WSEEs by our clients resulting from the effect of the on-going COVID-19 pandemic, we have seen certain clients make significant hiring of ~~full-time and seasonal employees. Client~~worksite employees while other clients have experienced significant layoffs. Average client retention ~~remained consistent~~declined slightly compared to YTD ~~2018.~~2019.

Average WSEEs Paid and

Year-over-Year Growth Percentage


Insperity \| 2020 Third Quarter Form 10-Q			22


~~Insperity \| 2019 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 markup computed as a percentage of the payroll cost.

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 total markup is computed 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 \| 2020 Third Quarter Form 10-Q			23


~~Insperity \| 2019 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 ~~2019~~2020 Compared to Third Quarter ~~2018~~2019

Our revenues for Q3 ~~2019~~2020 were $1.0 billion, ~~an increase~~a decrease of ~~12.8%~~3.4%, primarily due to the following:

•Average WSEEs paid ~~increased 12.0%~~decreased 3.8%.

•Revenues per WSEE per month increased ~~0.7%~~0.4%, or ~~$10.~~$6, primarily due to higher average pricing partially offset by $40.2 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on our gross profit.

First Nine Months ~~2019~~2020 Compared to First Nine Months ~~2018~~2019

Our revenues for YTD ~~2019~~2020 were $3.2 billion, ~~an increase~~a decrease of ~~13.2%~~0.3%, primarily due to the following:

•Average WSEEs paid ~~increased 13.6%~~decreased 0.1%.

•Revenues per WSEE per month decreased ~~0.4%~~0.1%, or $6$2, primarily due to higher average pricing, which was partially offset by $85.0 million in FICA deferral elections by clients and credits pursuant to the CARES Act and the Families First Coronavirus Response Act, which also reduced our direct costs and therefore has no net effect on ~~lower~~our gross profit. In addition, during the second quarter of 2020, we accrued $11.6 million of client comprehensive service fee credits applied generally on a WSEE ~~medical participation.~~

basis across our active client base to assist clients in addressing the unprecedented economic impact of the COVID-19 pandemic.


Insperity \| 2020 Third Quarter Form 10-Q			24


~~Insperity \| 2019 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 in strategically selected markets throughout the United States. Our PEO HR Outsourcing solutions revenue distribution by region follows:

PEO HR Outsourcing Solutions Revenue by Region

(in thousands)

The percentage of total PEO HR Outsourcing solutions revenue in our significant markets includes the following:

Significant Markets

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, control and manage 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 and control direct costs and our ability to incorporate changes in these costs into the gross billings charged to PEO HR Outsourcing solutions


Insperity \| 2020 Third Quarter Form 10-Q			25


~~Insperity \| 2019 Third Quarter Form 10-Q~~			24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Third Quarter ~~2019~~2020 Compared to Third Quarter ~~2018~~2019

Gross profit for Q3 ~~2019~~2020 increased ~~2.7%~~8.5% to $185.0 million compared to $170.5 million ~~compared to $166.1 million~~ in Q3 ~~2018.~~2019. Gross profit per WSEE per month for Q3 ~~2019 decreased $21~~2020 increased $30 to $266 compared to $236 ~~compared to $257~~ in Q3 ~~2018.~~2019 due primarily to the relative changes in higher pricing and lower 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 and direct costs per WSEE per month increased ~~$10~~$6 and ~~$31,~~decreased $24, respectively, due to higher average pricing, which was partially offset by client FICA deferral elections pursuant to the CARES Act in Q3 2020 and changes in the primary direct cost components, respectively.

The net ~~increase~~decrease in costs between Q3 ~~2019~~2020 and Q3 ~~2018~~2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled ~~$2.6~~$18.6 million as discussed below. The primary direct cost components changed as follows:

Benefits costs


•	The cost of group health insurance and related employee benefits increased $33 per WSEE per month and increased 6.0% on a cost per covered employee basis due primarily to a second consecutive quarter of large


Insperity \| 2020 Third Quarter Form 10-Q			26


~~Insperity \| 2019 Third Quarter Form 10-Q~~			25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•The cost of group health insurance and related employee benefits increased $27 per WSEE per month and increased 1.1% on a cost per covered employee basis.

~~claim activity. These~~ •The percentage of WSEEs covered under our health insurance plans was 67.9% in Q3 ~~2019~~2020 compared to 66.0% in Q3 2019.

• ~~large claims were incurred by a small number of plan participants and were largely unrelated to the Q2 2019 large claim claimants.~~


•	~~The percentage of WSEEs covered under our health insurance plans was~~ ~~66.0%~~ ~~in Q3 2019 compared to~~ ~~66.7%~~ ~~in Q3 2018.~~

Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $7.7 million, or $11 per WSEE per month, in Q3 2020 compared to an increase in costs of $7.0 million, or $10 per WSEE per month, in Q3 ~~2019 compared to a decrease in costs of $0.7 million, or $1 per WSEE per month, in Q3 2018.~~2019.

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, 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 decreased ~~9.6%~~30.8%, or ~~$7 on a~~$9 per WSEE per month, ~~basis,~~ in Q3 ~~2019~~2020 compared to Q3 ~~2018.~~2019.

•As a percentage of non-bonus payroll cost, workers’ compensation costs in Q3 ~~2019~~2020 were ~~0.43%~~0.30% compared to ~~0.55%~~0.43% in Q3 ~~2018.~~2019.

~~As a result of closing out claims at lower than expected costs, we~~•We recorded a reduction in workers’ compensation costs of $11.4 million, or 0.22% of non-bonus payroll costs, in Q3 2020 compared to a reduction of $7.5 million, or 0.15% of non-bonus payroll costs, in Q3 2019, ~~compared to~~primarily as a ~~reduction~~result of ~~$2.4 million, or 0.05% of non-bonus payroll costs, in Q3 2018.~~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 13.7%~~decreased 12.7% on ~~a 12.8%~~an 0.8% increase in payroll costs, or $7$44 per WSEE per ~~month.~~month, primarily due to $40.2 million of FICA deferral elections by clients pursuant to the CARES Act. In addition, Internal Revenue Service tax reporting changes in 2020 eliminated PEO reporting of payroll taxes for self-employed owners.

•Payroll taxes as a percentage of payroll costs ~~were~~decreased to 5.4% in Q3 2020 compared to 6.2% in ~~both~~ Q3 ~~2019 and Q3 2018.~~2019.

First Nine Months ~~2019~~2020 Compared to First Nine Months ~~2018~~2019

Gross profit for YTD ~~2019~~2020 increased ~~9.7%~~12.0% to $639.3 million compared to $571.0 million ~~compared to $520.3 million~~ in YTD ~~2018.~~2019. Gross profit per WSEE per month for YTD ~~2019 decreased $10~~2020 increased $33 to $305 compared to $272 ~~compared to $282~~ in YTD ~~2018.~~2019 due primarily to the relative changes in higher pricing and lower 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 decreased $6 due primarily to lower benefit participation in YTD 2019~~ and direct costs per WSEE per month ~~increased $4~~decreased $2 and $35, respectively, due to higher average pricing, which was offset by client FICA deferral elections pursuant to the CARES Act in YTD ~~2019.~~ 2020 and changes in the primary direct cost components, respectively.

The net decrease in costs between YTD ~~2019~~2020 and YTD ~~2018~~2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled ~~$8.4~~$11.2 million as discussed below. The primary direct cost components changed as follows:

Benefits costs

•The cost of group health insurance and related employee benefits increased $3 per WSEE per month and decreased 1.5% on a cost per covered employee basis due primarily to a decrease in claims as a result of lower utilization and the deferral of nonessential healthcare procedures, primarily in the second quarter of 2020, in response to COVID-19 government requirements or guidance.


•Insperity \| 2020 Third Quarter Form 10-Q			The cost of group health insurance and related employee benefits increased $10 per WSEE per month and increased 4.0% on a cost per covered employee basis due primarily to two consecutive quarters of large claim activity. These 2019 large claims were incurred by a small number of plan participants and were largely unrelated to the same large claim claimants. 27


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•The percentage of WSEEs covered under our health insurance plans was 68.0% in YTD 2020 compared to 66.6% in YTD ~~2019 compared to 68.3% in YTD 2018 due in part to a large client added in the third quarter of 2018 not covered under our medical plan.~~2019.



~~Insperity \| 2019 Third Quarter Form 10-Q~~		26

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

•Reported results include changes in estimated claims run-off related to prior periods which was a decrease in costs of $1.9 million, or $1 per WSEE per month, in YTD 2020 compared to an increase in costs of $2.9 million, or $2 per WSEE per month, in YTD ~~2019 compared to a decrease in costs of $1.3 million, or $1 per WSEE per month, in YTD 2018.~~2019.

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 decreased ~~10.1%~~15.4%, or $7$4 on a per WSEE per month basis, in YTD ~~2019~~2020 compared to YTD ~~2018.~~2019.

•As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD ~~2019~~2020 were ~~0.40%~~0.33% compared to ~~0.51%~~0.40% in YTD ~~2018.~~2019.

~~As a result of closing out claims at lower than expected costs, we~~•We recorded a reduction in workers’ compensation costs of $32.4 million, or 0.21% of non-bonus payroll costs, in YTD 2020 compared to a reduction of $26.0 million, or 0.18% of non-bonus payroll costs, in YTD 2019, ~~compared to~~primarily as a ~~reduction~~result of ~~$13.4 million, or 0.10% of non-bonus payroll costs, in YTD 2018.~~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 14.1%~~decreased 6.3% on a ~~14.9%~~3.4% increase in payroll costs, or $2$35 per WSEE per ~~month.~~month, primarily due to $85.0 million of FICA deferral elections by clients pursuant to the CARES Act. In addition, Internal Revenue Service tax reporting changes in 2020 eliminated PEO reporting of payroll taxes for self-employed owners.

•Payroll taxes as a percentage of payroll costs ~~were~~decreased to 6.4% in YTD 2020 compared to 7.1% in ~~both~~ YTD ~~2019 and YTD 2018.~~2019.

Operating Expenses

~~Our operating expenses~~•Salaries, wages and payroll taxes — Salaries, wages and payroll taxes (“Salaries”) are ~~comprised~~primarily a function of the ~~following:~~number of corporate employees, their associated average pay and any additional incentive compensation.

•

~~Salaries, wages and payroll taxes~~

•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:

◦ ~~— Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional incentive compensation.~~


•	~~Stock-based compensation~~ ~~— Our stock-based compensation relates to the recognition of non-cash compensation expense over the vesting period of restricted stock and long-term incentive plan awards.~~


•	~~Commissions~~ — Commissions expense consists primarily of amounts paid to sales managers and 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 \| 2020 Third Quarter Form 10-Q			28


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

◦technology and facility repairs and maintenance costs

•Depreciation and amortization — Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices and technology infrastructure.



~~Insperity \| 2019 Third Quarter Form 10-Q~~		27

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~


•	~~Depreciation and amortization~~ ~~— Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices and technology infrastructure.~~

Third Quarter ~~2019~~2020 Compared to Third Quarter ~~2018~~2019

The following table presents certain information related to our operating expenses:


	Three Months Ended September 30,													Three Months Ended September 30,
	$						WSEE							$						WSEE
(in thousands, except per WSEE)	2019		2018		% Change		2019		2018		% Change		(in thousands, except per WSEE)	2020		2019		% Change		2020		2019		% Change

Salaries	$	79,264	$	70,552	12.3	%	$	110	$	109	0.9	%	Salaries	$	89,429	$	79,264	12.8	%	$	129	$	110	17.3	%
Stock-based compensation	6,517		5,769		13.0	%	9		9		—		Stock-based compensation	20,864		6,517		220.1	%	30		9		233.3	%
Commissions	8,034		6,818		17.8	%	11		11		—		Commissions	7,722		8,034		(3.9)	%	11		11		—
Advertising	4,895		3,846		27.3	%	7		6		16.7	%	Advertising	4,781		4,895		(2.3)	%	7		7		—
General and administrative	29,773		25,294		17.7	%	41		39		5.1	%	General and administrative	25,646		29,773		(13.9)	%	37		41		(9.8)	%
Depreciation and amortization	7,330		5,642		29.9	%	10		9		11.1	%	Depreciation and amortization	7,819		7,330		6.7	%	11		10		10.0	%
Total operating expenses	$	135,813	$	117,921	15.2	%	$	188	$	183	2.7	%	Total operating expenses	$	156,261	$	135,813	15.1	%	$	225	$	188	19.7	%

Operating expenses for Q3 ~~2019~~2020 increased ~~15.2%~~15.1% to $156.3 million compared to $135.8 million ~~compared to $117.9 million~~ in Q3 ~~2018.~~2019. Operating expenses per WSEE per month for Q3 ~~2019~~ 2020 increased ~~2.7%~~ 19.7% to ~~$188~~$225 compared to ~~$183~~$188 in Q3 ~~2018.~~2019.

•Salaries of corporate and sales staff for Q3 2020 increased 12.8% to $89.4 million, or $19 per WSEE per month, compared to Q3 2019. This increase was primarily due to a 2.3% increase in corporate headcount, including a 6.8% increase in total BPAs in Q3 2020 compared to Q3 2019 and higher incentive compensation accruals in Q3 2020 related to better than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results in Q3 2019.


•	~~Salaries of corporate and sales staff for Q3 2019~~ ~~increased12.3%~~ ~~to $79.3 million, or $1 per WSEE per month, compared to Q3 2018. This increase was primarily due to a 12.2% increase in corporate headcount in Q3 2019 compared to Q3 2018.~~

Stock based compensation expense for Q3 ~~2019~~2020 increased ~~13.0%~~220.1% to ~~$6.5~~$20.9 million, or $21 per WSEE per month, compared to Q3 2019. The increase was primarily due to an increase in the number of stock awards anticipated to be earned related to performance-based awards granted under our short-term and long-term incentive plans based on our higher than expected year-to-date operating results in Q3 2020 compared to lower than expected year-to-date results in Q3 2019. In addition, Q3 2020 contains the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting. Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.

•Commissions expense for Q3 2020 decreased 3.9% to $7.7 million, but remained flat on a per WSEE per month basis, compared to Q3 ~~2018.~~2019. The ~~increase~~decrease was primarily due to ~~awards issued under~~reductions in commissions associated with PEO HR Outsourcing solutions and our ~~restricted stock plan.~~other business performance solutions offerings, partially offset by an increase in the amount of sales channel referral fees paid during Q3 2020.

~~Commissions~~•Advertising expense for Q3 ~~2019 increased 17.8%~~2020 decreased 2.3% to ~~$8.0~~$4.8 million, but remained flat on a per WSEE per month basis, compared to Q3 ~~2018.~~2019. The decrease was primarily due to decreases in trade shows and events due to COVID-19, partially offset by an increase in internet advertising.

•General and administrative expenses for Q3 2020 decreased 13.9% to $25.6 million, or $4 per WSEE per month, compared to Q3 2019. The decrease was primarily due to reductions in travel and training costs in response to the COVID-19 pandemic, partially offset by increases in technology licensing costs, corporate insurance and rent.

•Depreciation and amortization expense for Q3 2020 increased 6.7% to $7.8 million, or $1 per WSEE per month, compared to Q3 2019. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.


Insperity \| 2020 Third Quarter Form 10-Q			29


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

First Nine Months 2020 Compared to First Nine Months 2019


	Nine Months Ended September 30,
	$						WSEE
(in thousands, except per WSEE)	2020		2019		% Change		2020		2019		% Change

Salaries	$	266,640	$	237,340	12.3	%	$	127	$	113	12.4	%
Stock-based compensation	38,110		20,813		83.1	%	18		10		80.0	%
Commissions	23,657		22,727		4.1	%	11		11		—
Advertising	15,334		17,474		(12.2)	%	7		8		(12.5)	%
General and administrative	85,254		92,801		(8.1)	%	42		45		(6.7)	%
Depreciation and amortization	23,329		20,929		11.5	%	11		10		10.0	%
Total operating expenses	$	452,324	$	412,084	9.8	%	$	216	$	197	9.6	%

Operating expenses for YTD 2020 increased 9.8% to $452.3 million compared to $412.1 million in YTD 2019. Operating expenses per WSEE per month for YTD 2020 increased 9.6% to $216 compared to $197 in YTD 2019.

•Salaries of corporate and sales staff for YTD 2020 increased 12.3% to $266.6 million, or $14 per WSEE per month, compared to YTD 2019. This increase was primarily due to a 5.0% increase in corporate headcount, including an 10.7% increase in total BPAs in YTD 2020 compared to YTD 2019 and higher incentive compensation accruals in YTD 2020 related to better than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results in Q3 2019.

•Stock based compensation expense for YTD 2020 increased 83.1% to $38.1 million or $8 per WSEE per month, compared to YTD 2019. The increase was primarily due to an increase in the number of stock awards anticipated to be earned related to performance-based awards granted under our short-term and long-term incentive plans based on our higher than expected YTD 2020 operating results compared to lower than expected YTD 2019 operating results. In addition, YTD 2020 contains the acceleration of expense for employees who meet the retirement eligibility requirements for continued vesting. Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.

•Commissions expense for YTD 2020 increased 4.1% to $23.7 million, but remained flat on a per WSEE per month basis, compared to YTD 2019. The increase was primarily due to commissions associated with growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during 2020. Additionally, as a result of the extension of our fall campaign into Q1 2020, the bonuses paid to sales managers increased in YTD 2020 compared to YTD 2019.

•Advertising expense for ~~Q3 2019 increased 27.3%~~YTD 2020 decreased 12.2% to ~~$4.9~~$15.3 million, or $1 per WSEE per month, compared to ~~Q3 2018.~~YTD 2019. The ~~increase~~decrease was primarily due to the cancellation of the 2020 Insperity Invitational and decreases in trade shows and events due to COVID-19, partially offset by an increase in ~~advertising promotions.~~internet advertising.

•General and administrative expenses for ~~Q3 2019 increased 17.7%~~YTD 2020 decreased 8.1% to ~~$29.8~~$85.3 million, or $2$3 per WSEE per month, compared to ~~Q3 2018.~~YTD 2019. The ~~increase~~decrease was primarily due to ~~increased~~decreased travel and training expenses in response to the COVID-19 pandemic, partially offset by increases in technology licensing costs, corporate insurance and ~~professional services.~~rent.

•Depreciation and amortization expense for ~~Q3 2019~~YTD 2020 increased ~~29.9%~~11.5% to ~~$7.3~~$23.3 million, or $1 per WSEE per month, compared to ~~Q3 2018.~~YTD 2019. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

Other Income (Expense)



~~Insperity \| 2019 Third Quarter Form 10-Q~~		28

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~First Nine Months 2019 Compared to First Nine Months 2018~~

Nine Months Ended September 30,
$ WSEE
(in thousands, except per WSEE) 2019 2018 % Change 2019 2018 % Change

Salaries $ 237,340
$ 226,486
4.8 % $ 113
$ 123
(8.1 )%
Stock-based compensation 20,813
14,656
42.0 % 10
8
25.0 %
Commissions 22,727
19,863
14.4 % 11
11
—
Advertising 17,474
13,996
24.8 % 8
8
—
General and administrative 92,801
82,565
12.4 % 45
44
2.3 %
Depreciation and amortization 20,929
16,335
28.1 % 10
9
11.1 %
Total operating expenses $ 412,084
$ 373,901
10.2 % $ 197
$ 203
(3.0 )%

~~Operating expenses~~Other Income (expense) for ~~YTD 2019 increased 10.2% to $412.1~~Q3 2020 was an expense of $1.6 million compared to ~~$373.9~~income of $0.5 million in Q3 2019, and an expense of $4.0 million in YTD ~~2018. Operating expenses per WSEE per month for YTD 2019 decreased 3.0% to $197~~2020 compared to ~~$203~~income of $3.2 million in YTD ~~2018.~~

~~Salaries of corporate and sales staff for YTD 2019 increased 4.8% to $237.3 million, but decreased $10 on a per WSEE per month basis, compared to YTD 2018. This increase~~2019. The net decrease was primarily due to an 11.9% increase in corporate headcount, partially offset by the non-recurrence of a $9.3 million one-time tax reform bonus paid in the first quarter of 2018 (“Q1 2018”) and lower incentive compensation expense in YTD 2019 compared to YTD 2018.

Stock based compensation expense for YTD 2019 increased 42.0% to $20.8 million or $2 per WSEE per month, compared to YTD 2018. The increase was primarily due to the acceleration of restricted stock awards and associated expense into the fourth quarter of 2017 that were originally scheduled to vest in Q1 2018.

Commissions expense for YTD 2019 increased 14.4% to $22.7 million, but remained flat on a per WSEE per month basis, compared to YTD 2018. The increase was primarily due to commissions associated with growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during 2019.

Advertising expense for YTD 2019 increased 24.8% to $17.5 million, but remained flat on a per WSEE per month basis, compared to YTD 2018. The increase was primarily due to an increase in television and advertising promotions.

General and administrative expenses for YTD 2019 increased 12.4% to $92.8 million, or $1 per WSEE per month, compared to YTD 2018. The increase was primarily due to increased travel and training expenses associated with the increase in BPAs and technology licensing costs.

Depreciation and amortization expense for YTD 2019 increased 28.1% to $20.9 million, or $1 per WSEE per month, compared to YTD 2018. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

~~Other Income (Expense)~~

~~Other~~decreased interest income ~~net for Q3 2019 decreased to~~ ~~$0.5 million~~ ~~compared to~~ ~~$0.9 million~~ ~~in Q3 2018, and for YTD 2019 increased to $3.2 million compared to $1.9 million in YTD 2018, primarily due to increased interest earned~~ on our marketable securities investments ~~partially offset by~~and workers’ compensation deposit and increased interest expense related to the higher outstanding balance on our credit facility. Please read Note 5 to the Consolidated Financial Statements, “~~Long-Term~~“Long-Term Debt,,” for additional information.


Insperity \| 2020 Third Quarter Form 10-Q			30


~~Insperity \| 2019 Third Quarter Form 10-Q~~			29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income Tax Expense


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019

Effective income tax rate	26.3%	26.5%	26.8%	19.4%

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018

Effective income tax rate 26.5% 26.1% 19.4% 25.3%

~~For the three months ended September 30, 2019, our provision for income taxes differed from the U.S. statutory rate of 21% primarily due to state income taxes and non-deductible expenses.~~

For the nine months ended September 30, ~~2019,~~2020, 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 ~~2019~~2020 and ~~2018,~~2019, we recognized an income tax benefit of ~~$14.5~~$2.0 million and ~~$3.7~~$14.5 million, respectively, related to the vesting of long-term incentive ~~in both periods~~ and restricted stock awards.



~~Insperity \| 2019 Third Quarter Form 10-Q~~		30

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Non-GAAP Financial Measures

Non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the tables below.



Non-GAAP Measure	Definition	Benefit of Non-GAAP Measure
Non-bonus payroll cost	Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs. Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program.	Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs. We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program.
Adjusted cash, cash equivalents and marketable securities	Excludes funds associated with: • federal and state income tax withholdings, • employment taxes, • other payroll deductions, and • client prepayments.	We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior periods, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because they allow investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments.

~~Adjusted operating expense~~	~~Represents operating expenses excluding the impact of the following:~~ ~~• costs associated with a one-time tax reform bonus paid to corporate employees.~~

EBITDA	Represents net income computed in accordance with GAAP, plus: • interest expense, • income tax expense, and • depreciation and amortization expense.

Adjusted EBITDA	Represents EBITDA plus: • non-cash ~~stock based compensation, and~~ ~~• costs associated with a one-time tax reform bonus paid to corporate employees.~~stock-based compensation.

Adjusted Net Income	Represents net income computed in accordance with GAAP, excluding: • non-cash ~~stock based compensation, and~~ ~~• costs associated with a one-time tax reform bonus paid to corporate employees.~~stock-based compensation.

Adjusted EPS	Represents diluted net income per share computed in accordance with GAAP, excluding: • non-cash ~~stock based compensation, and~~ ~~• costs associated with a one-time tax reform bonus paid to corporate employees.~~stock-based compensation.


Insperity \| 2020 Third Quarter Form 10-Q			31


~~Insperity \| 2019 Third Quarter Form 10-Q~~			31

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,
	2020						2019						2020						2019
	$			WSEE			$			WSEE			$			WSEE			$			WSEE

Payroll cost	$	5,555,907		$	7,991		$	5,512,477		$	7,626		$	17,125,495		$	8,182		$	16,564,835		$	7,905
Less: Bonus payroll cost	431,861			621			408,931			566			1,935,950			925			1,851,338			884
Non-bonus payroll cost	$	5,124,046		$	7,370		$	5,103,546		$	7,060		$	15,189,545		$	7,257		$	14,713,497		$	7,021
% Change period over period	0.4		%	4.4		%	14.7		%	2.3		%	3.2		%	3.4		%	15.1		%	1.3		%

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per WSEE per month) 2019 2018 2019 2018
$ WSEE $ WSEE $ WSEE $ WSEE

Payroll cost $ 5,512,477
$ 7,626
$ 4,885,653
$ 7,573
$ 16,564,835
$ 7,905
$ 14,422,684
$ 7,821
Less: Bonus payroll cost 408,931
566
434,942
674
1,851,338
884
1,638,028
888
Non-bonus payroll cost $ 5,103,546
$ 7,060
$ 4,450,711
$ 6,899
$ 14,713,497
$ 7,021
$ 12,784,656
$ 6,933
% Change period over period 14.7 % 2.3 % 17.4 % 1.9 % 15.1 % 1.3 % 16.8 % 2.8 %

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, 2020		December 31, 2019

Cash, cash equivalents and marketable securities	$	406,350	$	402,070
Less:
Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions	147,149		234,553
Client prepayments	46,526		59,612
Adjusted cash, cash equivalents and marketable securities	$	212,675	$	107,905

(in thousands) September 30, 2019
December 31, 2018

Cash, cash equivalents and marketable securities $ 304,319
$ 387,554
Less:
Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions 153,761
224,487
Client prepayments 19,699
34,177
Adjusted cash, cash equivalents and marketable securities $ 130,859
$ 128,890

~~Following is a reconciliation of operating expenses (GAAP) to adjusted operating expenses (non-GAAP) in thousands, except per WSEE per month:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per WSEE per month) 2019 2018 2019 2018
$ WSEE $ WSEE $ WSEE $ WSEE

Operating expenses $ 135,813
$ 188
$ 117,921
$ 183
$ 412,084
$ 197
$ 373,901
$ 203
Less:
One-time tax reform bonus —
—
—
—
—
—
9,306
5
Adjusted operating expenses $ 135,813
$ 188
$ 117,921
$ 183
$ 412,084
$ 197
$ 364,595
$ 198
% Change period over period 15.2 % 2.7 % 8.2 % (6.2 )% 13.0 % (0.5 )% 13.1 % —



~~Insperity \| 2019 Third Quarter Form 10-Q~~		32

~~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 thousands, except per WSEE per month)	2020						2019						2020						2019
	$			WSEE			$			WSEE			$			WSEE			$			WSEE

Net income	$	20,009		$	29		$	25,859		$	36		$	133,952		$	64		$	130,704		$	62
Income tax expense	7,135			10			9,326			13			49,067			23			31,389			15
Interest expense	1,731			2			2,122			3			6,312			3			5,442			3
Depreciation and amortization	7,819			12			7,330			10			23,329			12			20,929			10
EBITDA	36,694			53			44,637			62			212,660			102			188,464			90
Stock-based compensation	20,864			30			6,517			9			38,110			18			20,813			10

Adjusted EBITDA	$	57,558		$	83		$	51,154		$	71		$	250,770		$	120		$	209,277		$	100
% Change period over period	12.5		%	16.9		%	(16.9)		%	(25.3)		%	19.8		%	20.0		%	9.0		%	(3.8)		%


Insperity \| 2020 Third Quarter Form 10-Q			32

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per WSEE per month) 2019 2018 2019 2018
$ WSEE $ WSEE $ WSEE $ WSEE

Net income $ 25,859
$ 36
$ 36,207
$ 56
$ 130,704
$ 62
$ 110,758
$ 60
Income tax expense 9,326
13
12,780
20
31,389
15
37,598
20
Interest expense 2,122
3
1,174
2
5,442
3
3,352
2
Depreciation and amortization 7,330
10
5,642
8
20,929
10
16,335
9
EBITDA 44,637
62
55,803
86
188,464
90
168,043
91
Stock-based compensation 6,517
9
5,769
9
20,813
10
14,656
8
One-time tax reform bonus —
—
—
—
—
—
9,306
5
Adjusted EBITDA $ 51,154
$ 71
$ 61,572
$ 95
$ 209,277
$ 100
$ 192,005
$ 104
% Change period over period (16.9 )% (25.3 )% 42.8 % 23.4 % 9.0 % (3.8 )% 38.0 % 20.9 %


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)	2020			2019			2020			2019

Net income	$	20,009		$	25,859		$	133,952		$	130,704
Non-GAAP adjustments:
Stock-based compensation	20,864			6,517			38,110			20,813

Total non-GAAP adjustments	20,864			6,517			38,110			20,813
Tax effect	(5,484)			(1,728)			(10,134)			(4,818)
Adjusted net income	$	35,389		$	30,648		$	161,928		$	146,699
% Change period over period	15.5		%	(24.3)		%	10.4		%	14.0		%

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018

Net income $ 25,859
$ 36,207
$ 130,704
$ 110,758
Non-GAAP adjustments:
Stock-based compensation 6,517
5,769
20,813
14,656
One-time tax reform bonus —
—
—
9,306
Total non-GAAP adjustments 6,517
5,769
20,813
23,962
Tax effect (1,728 ) (1,505 ) (4,818 ) (6,022 )
Adjusted net income $ 30,648
$ 40,471
$ 146,699
$ 128,698
% Change period over period (24.3 )% 68.1 % 14.0 % 60.9 %

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)	2020			2019			2020			2019

Diluted EPS	$	0.51		$	0.63		$	3.43		$	3.18
Non-GAAP adjustments:
Stock-based compensation	0.54			0.16			0.98			0.51

Total non-GAAP adjustments	0.54			0.16			0.98			0.51
Tax effect	(0.14)			(0.04)			(0.26)			(0.12)
Adjusted EPS	$	0.91		$	0.75		$	4.15		$	3.57
% Change period over period	21.3		%	(21.9)		%	16.2		%	16.7		%

Three Months Ended September 30, Nine Months Ended September 30,
(amounts per share) 2019 2018 2019 2018

Diluted EPS $ 0.63
$ 0.86
$ 3.18
$ 2.63
Non-GAAP adjustments:
Stock-based compensation 0.16
0.14
0.51
0.35
One-time tax reform bonus —
—
—
0.22
Total non-GAAP adjustments 0.16
0.14
0.51
0.57
Tax effect (0.04 ) (0.04 ) (0.12 ) (0.14 )
Adjusted EPS $ 0.75
$ 0.96
$ 3.57
$ 3.06
% Change period over period (21.9 )% 68.4 % 16.7 % 61.1 %



~~Insperity \| 2019 Third Quarter Form 10-Q~~		33

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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 repurchase, 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 debt or equity. 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~~ ~~$304.3~~a $500 million ~~in cash, cash equivalents and marketable securities at~~ ~~September 30, 2019, of which approximately~~ ~~$153.8 million~~ ~~was payable in early~~ ~~October2019~~ ~~for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately~~ ~~$19.7 million~~ ~~were client prepayments that were payable in~~ ~~October2019. During the first nine months of~~ ~~2019, we received $16.7 million for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital. At~~ ~~September 30, 2019, we had working capital of~~ ~~$132.5 million~~ ~~compared to~~ ~~$94.2 million~~ at ~~December 31, 2018~~. We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our revolving credit facility will be adequate to meet our liquidity requirements for the remainder of ~~2019. 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.~~

~~We have a~~ ~~$500 million~~ revolving credit facility (“Facility”) with a syndicate of financial institutions. 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 $406.4 million in cash, cash equivalents and marketable securities at September 30, 2020, of which approximately $147.1 million was payable in early October 2020 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $46.5 million represented client prepayments that were payable in October 2020. In March 2020, we borrowed $100.0 million under the Facility, which increased working capital. At September 30, 2020, we had working capital of $207.8 million compared to $105.7 million at December 31, 2019. 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 2020. 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, which we are carefully monitoring in light of the significant uncertainty created by the COVID-19 pandemic.


Insperity \| 2020 Third Quarter Form 10-Q			33


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of September 30, ~~2019~~,2020, we had an outstanding letter of credit and borrowings totaling ~~$240.4~~$370.4 million under the Facility. Please read Note 5 to the Consolidated Financial Statements, “~~Long-Term~~“Long-Term Debt,,” for additional information.

Cash Flows from Operating Activities

Net cash provided by operating activities in the first nine months of ~~2019~~2020 was ~~$47.1 million~~.$106.6 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients. Our cash and cash equivalents, and thus our reported cash flows from operating activities, are significantly impacted by various external and internal factors, which are reflected in part by the changes in our balance sheet accounts. These include the following:

•Timing of client payments / payroll taxes – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to 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, 2020, the last business day of the reporting period was a Wednesday, client prepayments were $46.5 million and employment taxes and other deductions were $147.1 million. In the period ended September 30, 2019, the last business day of the reporting period was a Monday, client prepayments were $19.7 million and employment taxes and other deductions were $153.8 million.

•

~~Timing of client payments / payroll taxes~~

•Workers’ compensation plan funding – During YTD 2020, we received $24.8 million for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital. We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to 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, 2019, the last business day of the reporting period was a~~ ~~Monday, client prepayments were~~ ~~$19.7 million~~ and employment taxes and other deductions were $153.8 million. In the period ended December 31, 2018, the last business day of the reporting period was a Monday, client prepayments were $34.2 million and employment taxes and other deductions were $224.5 million.

•

~~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, 2019, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in an $17.4 million surplus, $8.4 million of which is reflected as a current asset, and $9.0 million of which 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, 2019, were $27.6 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.

•

~~Operating results~~ ~~– Our net income has a significant impact on our operating cash flows. Our adjusted net income increased 14.0% to $146.7 million in the first~~ ~~nine months ended September 30, 2019, compared to $128.7 million in the first~~ ~~nine months ended September 30, 2018. Please read “Results of Operations~~ ~~– First~~ ~~Nine Months Ended September 30, 2019~~ ~~Compared to First~~ ~~Nine Months Ended September 30, 2018~~.”

•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, 2020, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $32.8 million surplus, $23.8 million of which is reflected as a current asset, and $9.0 million of which 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, 2020, were $38.3 million, which is included in accrued health insurance costs, a current liability, on our Condensed Consolidated Balance Sheets.



~~Insperity \| 2019 Third Quarter Form 10-Q~~		34

•Operating results – Our net income has a significant impact on our operating cash flows. Our adjusted net income increased 10.4% to $161.9 million in the first nine months ended September 30, 2020, compared to $146.7 million in the first nine months ended September 30, 2019. Please read “Results of Operations – First Nine Months 2020 Compared to First Nine Months 2019.”

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Cash Flows from Investing Activities

Net cash flows used in investing activities were ~~$35.6~~$68.4 million for the nine months ended September 30, ~~2019~~,2020, primarily due to property and equipment purchases of ~~$36.0~~$68.8 million.

Cash Flows from Financing Activities

Net cash flows used in financing activities were ~~$88.2~~$31.4 million for the nine months ended September 30, ~~2019.~~2020. We borrowed $100.0 million under the Facility for general corporate purposes, repurchased or withheld ~~$153.7~~$91.2 million in stock and paid ~~$36.8~~$46.5 million in ~~dividends and borrowed $95.0 million on our revolving line of credit for general corporate purposes.~~

dividends.



Insperity \| ~~2019~~2020 Third Quarter Form 10-Q			3534



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash equivalent short-term investments, our available-for-sale marketable securities and our borrowings under our Facility, which bears interest at a variable market rate. As of September 30, ~~2019,~~2020, we had outstanding letters of credit and borrowings totaling ~~$240.4~~$370.4 million under the Facility. Please read Note 5 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.

The cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. Our available-for-sale marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates.

We attempt to limit our exposure to interest rate risk primarily through diversification and low investment turnover. Our investment policy is designed to maximize after-tax interest income while preserving our principal investment. As a result, our marketable securities consist of tax-exempt short term and intermediate term debt securities, which are primarily U.S. Government Securities.

Item 4. Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, ~~2019~~.2020.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



Insperity \| ~~2019~~2020 Third Quarter Form 10-Q			3635



OTHER INFORMATION

PART II

Item 1. Legal Proceedings

Please read Note 9 to the Consolidated Financial Statements, “~~Commitments~~“Commitments and Contingencies,,” which is incorporated herein by reference.

Item 1A. Risk Factors

Forward-Looking Statements

The statements contained herein that are not historical facts are forward-looking statements within the meaning of the federal securities laws (Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act). You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “possibly,” “probably,” “goal,” “opportunity,” “objective,” “target,” “assume,” “outlook,” “guidance,” “predicts,” “appears,” “indicator” and similar expressions. Forward-looking statements involve a number of risks and uncertainties. In the normal course of business, Insperity, Inc., in an effort to help keep our stockholders and the public informed about our operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings, unit growth, profit per worksite employee, pricing, operating expenses, benefits and workers’ compensation costs, or other aspects of operating results. We base the forward-looking statements on our expectations, estimates and projections at the time such statements are made. These statements are not guarantees of future performance and involve risks and uncertainties that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are:

•adverse economic conditions;

•impact of the COVID-19 pandemic, or other future pandemics, including the scope, severity and duration of the pandemic; government responses; regulatory developments; and the related disruptions and economic impact to our business and the small and medium-sized businesses that we serve;

•regulatory and tax developments and possible adverse application of various federal, state and local regulations;

•the ability to secure competitive replacement contracts for health insurance and workers’ compensation insurance at expiration of current contracts;

•cancellation of client contracts on short notice, or the inability to renew client contracts or attract new clients;

•vulnerability to regional economic factors because of our geographic market concentration;

•increases in health insurance costs and workers’ compensation rates and underlying claims trends, health care reform, financial solvency of workers’ compensation carriers, other insurers or financial institutions, state unemployment tax rates, liabilities for employee and client actions or payroll-related claims;

•failure to manage growth of our operations and the effectiveness of our sales and marketing efforts;

•the impact of the competitive environment and other developments in the human resources services industry, including the PEO industry, on our growth and/or profitability;

•our liability for worksite employee payroll, payroll taxes and benefits costs;

•our liability for disclosure of sensitive or private information;

•our ability to integrate or realize expected returns on our acquisitions;

•failure of our information technology systems;


Insperity \| 2020 Third Quarter Form 10-Q			36


OTHER INFORMATION

•an adverse final judgment or settlement of claims against Insperity; and

•disruptions to our business resulting from the actions of certain stockholders.



~~Insperity \| 2019 Third Quarter Form 10-Q~~		37

~~OTHER INFORMATION~~

These factors are discussed in further detail in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 under “Item 1A. Risk Factors” in Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, under “Item 1A. Risk Factors” in Part II, and elsewhere in this report. Any of these factors, or a combination of such factors, could materially affect the results of our operations and whether forward-looking statements we make ultimately prove to be accurate.

~~Except to~~Any forward-looking statements are made only as of the ~~extent~~date hereof and, unless otherwise required by ~~federal~~applicable securities ~~law,~~laws, we ~~do not~~ undertake ~~any~~no obligation to update ~~our~~or revise any forward-looking statements, ~~to reflect~~whether as a result of new information, future events or ~~circumstances after the date they are made or to reflect the occurrence of unanticipated events.~~otherwise.

In addition, please read the following together with “Risk Factors -- Changes in federal, state and local regulation or our inability to obtain licenses under new regulatory frameworks could have a material adverse effect on our results of operations or financial condition” under “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018:

On April 19, 2019, the Internal Revenue Service released an advice memorandum from the Office of the Chief Counsel concerning the IRS’s interpretations of proposed regulations regarding the reporting of remuneration and associated payroll taxes related to WSEEs of Certified Professional Employer Organizations (CPEOs) who are also deemed self-employed owners of client companies for federal tax purposes. The memorandum advises that CPEOs should not report remuneration paid to such self-employed owners on Form W-2 or subject such remuneration to federal employment taxes. As an employer, we have historically reported remuneration and associated payroll taxes processed on Form W-2 for all WSEEs, including those who would be deemed self-employed owners of client companies. Accordingly, we are in the process of transitioning our reporting and payroll tax processing methods for self-employed owners to those described in the memorandum. Our failure to successfully make such a transition could have a material adverse impact on our business and operations, including our ability to attract and retain clients.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by Insperity during the three months ended September 30, ~~2019~~2020 of equity securities that are registered by Insperity pursuant to Section 12 of the Exchange Act:


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased Under Announced Program(1)	Maximum Number of Shares Available for Purchase under Announced Program(1)
07/01/2020 – 07/31/2020	—	$	—	—	685,833
08/01/2020 – 08/31/2020	54,000	68.67		54,000	631,833
09/01/2020 – 09/30/2020	404,000	65.04		404,000	227,833
Total	458,000	$	65.47	458,000

(1)As of September 30, 2020, we were authorized to repurchase an additional 227,833 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.

Period Total Number of Shares Purchased Average Price Paid per Share
Total Number of Shares Purchased Under Announced Program⁽¹⁾
Maximum Number of Shares Available for Purchase under Announced Program⁽²⁾
07/01/2019 – 07/31/2019 129,000
$ 106.32
129,000
1,393,945
08/01/2019 – 08/31/2019 835,000
97.10
835,000
1,258,945
09/01/2019 – 09/30/2019 202,000
99.41
202,000
1,056,945
Total 1,166,000
$ 98.52
1,166,000

~~____________________________________~~

⁽¹⁾

Our Board of Directors (the “Board”) has approved a program to repurchase shares of our outstanding common stock, including an additional 700,000 shares authorized for repurchase in August 2019. As of September 30, 2019, we were authorized to repurchase an additional 1,056,945 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.



Insperity \| ~~2019~~2020 Third Quarter Form 10-Q			3837



OTHER INFORMATION

Item 6. Exhibits



Exhibit No				Exhibit
~~10.1~~31.1			*	First Amendment to Amended and Restated Credit Agreement dated September 13, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2019).
~~31.1~~	*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			*	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			*	Inline XBRL Taxonomy Extension Schema Document.
101.CAL			*	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			*	Inline XBRL Extension Definition Linkbase Document.
101.LAB			*	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104				Cover Page Interactive Data File (embedded with the Inline XBRL document).


		____________________________________




		*	Filed with this report.

		~~____________________________________~~**
*	~~Filed with this report.~~

**	Furnished with this report.



Insperity \| ~~2019~~2020 Third Quarter Form 10-Q			3938

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	INSPERITY, INC.

Date: November ~~4, 2019~~2, 2020	By:	/s/ Douglas S. Sharp
		Douglas S. Sharp
		Senior Vice President of Finance,
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)



Insperity \| ~~2019~~2020 Third Quarter Form 10-Q			4039



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2019			2018			2019			2018

Revenues⁽¹⁾	$	1,043,388		$	925,126		$	3,239,714		$	2,861,793
Payroll taxes, benefits and workers’ compensation costs	872,842			759,072			2,668,716			2,341,475
Gross profit	170,546			166,054			570,998			520,318
Salaries, wages and payroll taxes	79,264			70,552			237,340			226,486
Stock-based compensation	6,517			5,769			20,813			14,656
Commissions	8,034			6,818			22,727			19,863
Advertising	4,895			3,846			17,474			13,996
General and administrative expenses	29,773			25,294			92,801			82,565
Depreciation and amortization	7,330			5,642			20,929			16,335
Total operating expenses	135,813			117,921			412,084			373,901
Operating income	34,733			48,133			158,914			146,417
Other income (expense):
Interest income	2,574			2,028			8,621			5,291
Interest expense	(2,122		)	(1,174		)	(5,442		)	(3,352		)
Income before income tax expense	35,185			48,987			162,093			148,356
Income tax expense	9,326			12,780			31,389			37,598
Net income	$	25,859		$	36,207		$	130,704		$	110,758
Less distributed and undistributed earnings allocated to participating securities	(284		)	(503		)	(1,546		)	(1,546		)
Net income allocated to common shares	$	25,575		$	35,704		$	129,158		$	109,212

Net income per share of common stock
Basic	$	0.64		$	0.86		$	3.19		$	2.64
Diluted	$	0.63		$	0.86		$	3.18		$	2.63



(dollars in thousands)	Classification in Condensed Consolidated Balance Sheets	September 30, 2019

Operating lease ROU assets	Right-of-use leased assets	$	58,185

Lease liabilities:
Current operating lease liabilities	Other accrued liabilities	$	15,195
Long-term operating lease liabilities	Operating lease liabilities, net of current	60,132
Total operating lease liabilities		$	75,327
Less:
Landlord funded tenant improvements		$	12,711
Deferred rent		4,431
Operating lease ROU assets		$	58,185

Weighted average remaining lease term (years)		6
Weighted average discount rate		4.6		%



(in thousands)	Operating Leases

Remainder of 2019	$	4,564
2020	17,656
2021	15,049
2022	13,637
2023	11,134
Thereafter	24,174
Total remaining obligation	86,214
Less imputed interest	10,887
Present value of lease liabilities	$	75,327