Company Quick10K Filing
Insperity
Price99.18 EPS4
Shares41 P/E26
MCap4,029 P/FCF86
Net Debt-219 EBIT192
TEV3,810 TEV/EBIT20
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-05
10-K 2019-12-31 Filed 2020-02-12
10-Q 2019-09-30 Filed 2019-11-04
10-Q 2019-06-30 Filed 2019-07-29
10-Q 2019-03-31 Filed 2019-04-29
10-K 2018-12-31 Filed 2019-02-11
10-Q 2018-09-30 Filed 2018-11-01
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-04-30
10-K 2017-12-31 Filed 2018-02-12
10-Q 2017-09-30 Filed 2017-11-01
10-Q 2017-06-30 Filed 2017-08-01
10-Q 2017-03-31 Filed 2017-05-01
10-K 2016-12-31 Filed 2017-02-13
10-Q 2016-09-30 Filed 2016-11-01
10-Q 2016-06-30 Filed 2016-08-01
10-Q 2016-03-31 Filed 2016-05-02
10-K 2015-12-31 Filed 2016-02-12
10-Q 2015-09-30 Filed 2015-11-02
10-Q 2015-06-30 Filed 2015-08-03
10-Q 2015-03-31 Filed 2015-05-01
10-K 2014-12-31 Filed 2015-02-10
10-Q 2014-09-30 Filed 2014-11-03
10-Q 2014-06-30 Filed 2014-08-01
10-Q 2014-03-31 Filed 2014-05-02
10-K 2013-12-31 Filed 2014-02-10
10-Q 2013-09-30 Filed 2013-11-01
10-Q 2013-06-30 Filed 2013-08-01
10-Q 2013-03-31 Filed 2013-04-29
10-K 2012-12-31 Filed 2013-02-11
10-Q 2012-09-30 Filed 2012-11-01
10-Q 2012-06-30 Filed 2012-07-31
10-Q 2012-03-31 Filed 2012-04-30
10-K 2011-12-31 Filed 2012-02-14
10-Q 2011-09-30 Filed 2011-11-01
10-Q 2011-06-30 Filed 2011-08-01
10-Q 2011-03-31 Filed 2011-05-02
10-K 2010-12-31 Filed 2011-02-14
10-Q 2010-09-30 Filed 2010-11-01
10-Q 2010-06-30 Filed 2010-08-02
10-Q 2010-03-31 Filed 2010-05-03
10-K 2009-12-31 Filed 2010-02-11
8-K 2020-05-22
8-K 2020-05-04
8-K 2020-04-08
8-K 2020-02-11
8-K 2020-01-03
8-K 2019-12-02
8-K 2019-11-04
8-K 2019-09-16
8-K 2019-07-29
8-K 2019-05-28
8-K 2019-04-29
8-K 2019-02-11
8-K 2018-05-29
8-K 2018-05-07
8-K 2018-04-30
8-K 2018-02-12
8-K 2018-01-08

NSP 10Q Quarterly Report

Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 a03312020-nspex101.htm
EX-31.1 a03312020-nspex311.htm
EX-31.2 a03312020-nspex312.htm
EX-32.1 a03312020-nspex321.htm
EX-32.2 a03312020-nspex322.htm

Insperity Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.41.10.80.60.30.02012201420172020
Assets, Equity
1.21.00.70.50.20.02012201420172020
Rev, G Profit, Net Income
0.20.10.0-0.0-0.1-0.22012201420172020
Ops, Inv, Fin

Document
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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
March 31, 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
insperitylogoa08.jpg
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) 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


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 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 April 27, 2020, 38,766,043 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.


TABLE OF CONTENTS



FINANCIAL STATEMENTS
(Unaudited)

PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2020

 
December 31, 2019

 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
404,728

 
$
367,342

Restricted cash
48,349

 
49,295

Marketable securities
19,508

 
34,728

Accounts receivable, net
520,745

 
465,779

Prepaid insurance
45,525

 
10,418

Other current assets
40,425

 
43,493

Income taxes receivable

 
3,691

Total current assets
1,079,280

 
974,746

Property and equipment, net of accumulated depreciation
160,297

 
147,706

Right-of-use leased assets
58,461

 
56,886

Prepaid health insurance
9,000

 
9,000

Deposits – health insurance
8,100

 
8,100

Deposits – workers’ compensation
188,549

 
175,913

Goodwill and other intangible assets, net
12,711

 
12,714

Deferred income taxes, net

 
3,956

Other assets
6,010

 
5,975

Total assets
$
1,522,408

 
$
1,394,996

 
 
 
 
Liabilities and stockholders’ equity (deficit)
 
 
 
Accounts payable
$
6,240

 
$
4,565

Payroll taxes and other payroll deductions payable
268,245

 
277,248

Accrued worksite employee payroll cost
436,764

 
401,859

Accrued health insurance costs
46,841

 
21,180

Accrued workers’ compensation costs
52,311

 
52,868

Accrued corporate payroll and commissions
21,610

 
52,612

Other accrued liabilities
51,729

 
58,713

Income taxes payable
4,718

 

Total current liabilities
888,458

 
869,045

Accrued workers’ compensation cost, net of current
197,633

 
193,609

Long-term debt
369,400

 
269,400

Operating lease liabilities, net of current
61,623

 
58,863

Deferred income taxes, net
8,604

 

Total noncurrent liabilities
637,260

 
521,872

Commitments and contingencies


 


Common stock
555

 
555

Additional paid-in capital
46,327

 
48,141

Treasury stock, at cost
(595,487
)
 
(544,102
)
Retained earnings
545,295

 
499,485

Total stockholders’ equity (deficit)
(3,310
)
 
4,079

Total liabilities and stockholders’ equity (deficit)
$
1,522,408

 
$
1,394,996

See accompanying notes.

Insperity | 2020 First Quarter Form 10-Q
4

FINANCIAL STATEMENTS
(Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended 
 March 31,
(in thousands, except per share amounts)
2020
2019
 
 
 
Revenues(1)
$
1,229,483

$
1,153,010

Payroll taxes, benefits and workers’ compensation costs
995,461

926,293

Gross profit
234,022

226,717

Salaries, wages and payroll taxes
86,501

83,380

Stock-based compensation
6,552

6,040

Commissions
8,460

6,952

Advertising
4,833

5,031

General and administrative expenses
34,853

33,162

Depreciation and amortization
7,602

6,691

Total operating expenses
148,801

141,256

Operating income
85,221

85,461

Other income (expense):
 

 

Interest income
1,879

3,245

Interest expense
(2,362
)
(1,681
)
Income before income tax expense
84,738

87,025

Income tax expense
22,646

10,736

Net income
$
62,092

$
76,289

Less distributed and undistributed earnings allocated to participating securities
(462
)
(1,031
)
Net income allocated to common shares
$
61,630

$
75,258

 
 
 
Net income per share of common stock
 
 
Basic
$
1.59

$
1.86

Diluted
$
1.58

$
1.85

 ____________________________________
(1) 
Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows:
 
Three Months Ended 
 March 31,
(in thousands)
2020
2019
 
 
 
Gross billings
$
7,436,754

$
6,871,670

Less: WSEE payroll cost
6,207,271

5,718,660

Revenues
$
1,229,483

$
1,153,010


See accompanying notes.

Insperity | 2020 First Quarter Form 10-Q
5

FINANCIAL STATEMENTS
(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
 
 
 
 
Cash flows from operating activities
 
 
 
Net income
$
62,092

 
$
76,289

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,602

 
6,691

Stock-based compensation
6,552

 
6,040

Deferred income taxes
12,560

 
8,671

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(54,966
)
 
(20,674
)
Prepaid insurance
(35,107
)
 
(16,517
)
Other current assets
3,068

 
(8,893
)
Other assets and ROU assets
3,403

 
(809
)
Accounts payable
1,675

 
(2,768
)
Payroll taxes and other payroll deductions payable
(9,003
)
 
46,896

Accrued worksite employee payroll expense
34,905

 
33,883

Accrued health insurance costs
25,661

 
10,679

Accrued workers’ compensation costs
3,467

 
1,367

Accrued corporate payroll, commissions and other accrued liabilities
(46,531
)
 
(23,656
)
Income taxes payable/receivable
8,409

 
498

Total adjustments
(38,305
)
 
41,408

Net cash provided by operating activities
23,787

 
117,697

 
 
 
 
Cash flows from investing activities
 

 
 

Marketable securities:
 

 
 

Purchases
(8,689
)
 
(35,538
)
Proceeds from dispositions

 
5,499

Proceeds from maturities
24,000

 
37,360

Property and equipment:
 
 
 
Purchases
(15,625
)
 
(5,608
)
Net cash provided by (used in) investing activities
(314
)
 
1,713

 
 
 
 
Cash flows from financing activities
 
 
 
Purchase of treasury stock
(61,203
)
 
(29,037
)
Dividends paid
(15,557
)
 
(12,386
)
Borrowings under revolving line of credit
100,000

 

Other
2,363

 
1,085

Net cash provided by (used in) financing activities
25,603

 
(40,338
)
Net increase in cash, cash equivalents and restricted cash
49,076

 
79,072

Cash, cash equivalents and restricted cash beginning of period
592,550

 
535,474

Cash, cash equivalents and restricted cash end of period
$
641,626

 
$
614,546


Insperity | 2020 First Quarter Form 10-Q
6

FINANCIAL STATEMENTS
(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
 
 
 
 
Supplemental schedule of cash and cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
367,342

 
$
326,773

Restricted cash
49,295

 
42,227

Deposits – workers’ compensation
175,913

 
166,474

Cash, cash equivalents and restricted cash beginning of period
$
592,550

 
$
535,474

 
 
 
 
Cash and cash equivalents
$
404,728

 
$
398,936

Restricted cash
48,349

 
44,705

Deposits – workers’ compensation
188,549

 
170,905

Cash, cash equivalents and restricted cash end of period
$
641,626

 
$
614,546

 
 
 
 
Supplemental operating lease cash flow information:
 
 
 
ROU assets obtained in exchange for lease obligations
$
6,787

 
$
3,140

See accompanying notes.


Insperity | 2020 First Quarter Form 10-Q
7

FINANCIAL STATEMENTS
(Unaudited)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Three Months Ended March 31, 2020 and 2019
 
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



(61,203
)

(61,203
)
Issuance of long-term incentive awards and dividend equivalents


(7,088
)
7,898

(810
)

Stock-based compensation expense


4,893

1,659


6,552

Other


381

261


642

Dividends paid




(15,557
)
(15,557
)
Unrealized gain on marketable securities, net of tax




85

85

Net income




62,092

62,092

Balance at March 31, 2020
55,489

$
555

$
46,327

$
(595,487
)
$
545,295

$
(3,310
)
 
 
 
 
 
 
 
Balance at December 31, 2018
55,489

$
555

$
36,752

$
(357,569
)
$
397,938

$
77,676

Purchase of treasury stock, at cost



(29,037
)

(29,037
)
Issuance of long-term incentive awards and dividend equivalents


(7,695
)
8,646

(951
)

Stock-based compensation expense


4,340

1,700


6,040

Other


436

163


599

Dividends paid




(12,386
)
(12,386
)
Unrealized gain on marketable securities, net of tax




13

13

Net income




76,289

76,289

Balance at March 31, 2019
55,489

$
555

$
33,833

$
(376,097
)
$
460,903

$
119,194



Insperity | 2020 First Quarter Form 10-Q
8

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 SynchronizationTM 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 PremierTM platform.
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. 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, 2019. Our Condensed Consolidated Balance Sheet at December 31, 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 March 31, 2020 and our Consolidated Statements of Operations for the three month periods ended March 31, 2020 and 2019, our Consolidated Statements of Cash Flows for the three month periods ended March 31, 2020 and 2019 and our Consolidated Statements of Stockholders’ Equity for the three month periods ended March 31, 2020 and 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.
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 exceeds $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

Insperity | 2020 First Quarter Form 10-Q
9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs, which requires a significant level of judgment.
Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Condensed Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Condensed Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $6.5 million at March 31, 2020, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of March 31, 2020, Plan Costs were less than the net premiums paid and owed to United by $36.8 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $27.8 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 March 31, 2020 were $40.7 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 three months of 2020 included a reduction of $1.5 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first three months of 2019 included a reduction of $0.3 million for changes in estimated run-off related to prior periods.
Workers’ Compensation Costs
Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $1 million layer of claims per occurrence and, for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, we have financial responsibility to Chubb for the first $1.5 million layer of claims per occurrence and, for claims over $1.5 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1.5 million.
Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.
We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the three months ended March 31, 2020 and 2019, we reduced accrued workers’ compensation costs by $10.1 million and $7.8 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 1.0% and in the 2019 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 First Quarter Form 10-Q
10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
 
 
 
 
Beginning balance, January 1,
$
242,904

 
$
229,639

Accrued claims
14,339

 
15,787

Present value discount
(200
)
 
(1,689
)
Paid claims
(11,121
)
 
(12,409
)
Ending balance
$
245,922

 
$
231,328

 
 
 
 
Current portion of accrued claims
$
48,289

 
$
44,704

Long-term portion of accrued claims
197,633

 
186,624

Total accrued claims
$
245,922

 
$
231,328


The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at March 31, 2020 includes $4.0 million of workers’ compensation administrative fees.
As of March 31, 2020 and 2019, the undiscounted accrued workers’ compensation costs were $265.6 million and $250.2 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. At March 31, 2020, we had restricted cash of $48.3 million and deposits – workers’ compensation of $188.5 million.
Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Condensed Consolidated Balance Sheets.
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 $509.3 million and $448.1 million at March 31, 2020 and December 31, 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 First Quarter Form 10-Q
11

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 March 31,
(in thousands)
2020
2019
% Change
 
 
 
 
Northeast
$
344,086

$
310,945

10.7
%
Southeast
140,678

129,906

8.3
%
Central
211,302

195,753

7.9
%
Southwest
272,130

269,832

0.9
%
West
246,853

233,204

5.9
%
 
1,215,049

1,139,640

6.6
%
Other revenue
14,434

13,370

8.0
%
Total revenue
$
1,229,483

$
1,153,010

6.6
%

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 March 31, 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:
 
March 31, 2020
 
December 31, 2019
(in thousands)
Cash & Cash Equivalents
Marketable Securities
Total
 
Cash & Cash Equivalents
Marketable Securities
Total
 
 
 
 
 
 
 
 
Overnight holdings
$
372,469

$

$
372,469

 
$
349,857

$

$
349,857

Investment holdings
19,494

19,508

39,002

 
13,218

34,728

47,946

Cash in demand accounts
26,266


26,266

 
36,521


36,521

Outstanding checks
(13,501
)

(13,501
)
 
(32,254
)

(32,254
)
Total
$
404,728

$
19,508

$
424,236

 
$
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 March 31, 2020 and December 31, 2019 included $235.2 million and $234.6 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $22.1 million and $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. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:
Level 1 - quoted prices in active markets using identical assets
Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities,

Insperity | 2020 First Quarter Form 10-Q
12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

quoted prices in markets that are not active, or other observable inputs
Level 3 - significant unobservable inputs
Fair Value of Instruments Measured and Recognized at Fair Value
The following table summarizes the levels of fair value measurements of our financial assets:
 
March 31, 2020
 
December 31, 2019
(in thousands)
Total
Level 1
Level 2
 
Total
Level 1
Level 2
 
 
 
 
 
 
 
 
Money market funds
$
387,263

$
387,263

$

 
$
363,075

$
363,075

$

U.S. Treasury bills
18,060

18,060


 
34,728

34,728


Municipal bonds
6,148


6,148

 



Total
$
411,471

$
405,323

$
6,148

 
$
397,803

$
397,803

$


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
 
 
 
 
 
March 31, 2020
 
 
 
 
U.S. Treasury bills
$
13,290

$
70

$

$
13,360

Municipal bonds
6,122

26


6,148

Total
$
19,412

$
96

$

$
19,508

 
 
 
 
 
December 31, 2019
 
 
 
 
U.S. Treasury bills
$
34,716

$
13

$
(1
)
$
34,728

Total
$
34,716

$
13

$
(1
)
$
34,728


As of March 31, 2020, the contractual maturities of our marketable securities were as follows:
(in thousands)
Amortized Cost
Estimated Fair Value
 
 
 
Less than one year
$
19,412

$
19,508

One to five years


Total
$
19,412

$
19,508


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 March 31, 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 First Quarter Form 10-Q
13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.
Long-Term Debt
We have a revolving credit facility (the “Facility”) with borrowing capacity of up to $500 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 March 31, 2020, our outstanding balance on the Facility was $369.4 million, and we had an outstanding $1.0 million letter of credit issued under the Facility, resulting in an available borrowing capacity of $129.6 million.
The Facility matures on September 13, 2024. Borrowings under the Facility bear interest at 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%. The average interest rate for the period ended March 31, 2020 was 3.29%. 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 March 31, 2020.
6.
Stockholders' Equity (Deficit)
During the first three months of 2020, we repurchased or withheld an aggregate of 878,305 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 February 2020, the Board authorized an increase of 1,000,000 shares that may be repurchased under the Repurchase Program. During the three months ended March 31, 2020, 728,000 shares were repurchased under the Repurchase Program. As of March 31, 2020, we were authorized to repurchase an additional 685,833 shares under the Repurchase Program.
Withheld Shares
During the three months ended March 31, 2020, we withheld 150,305 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


During the three months ended March 31, 2020 and 2019, we paid dividends totaling $15.6 million and $12.4 million, respectively.

Insperity | 2020 First Quarter Form 10-Q
14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.
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 
 March 31,
(in thousands)
2020
2019
 
 
 
Net income
$
62,092

$
76,289

Less distributed and undistributed earnings allocated to participating securities
(462
)
(1,031
)
Net income allocated to common shares
$
61,630

$
75,258

 
 
 
Weighted average common shares outstanding
38,802

40,508

Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options
266

142

Adjusted weighted average common shares outstanding
39,068

40,650



Insperity | 2020 First Quarter Form 10-Q
15

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 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 denied plaintiffs’ request for a jury trial and set a bench trial, which was held from March 2, 2020 to March 13, 2020. The court has asked the parties to submit proposed findings of fact and conclusions of law by June 15, 2020, after which the court is expected to render its judgment. At trial, plaintiffs alleged damages up to approximately $146 million against all defendants. We believe we presented meritorious defenses, and we intend to continue to vigorously defend this litigation in the post-trial proceedings. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements.
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 First Quarter Form 10-Q
16

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, 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 SynchronizationTM 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 PremierTM platform.
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 which remains 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 sanitation of corporate facilities. To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients to obtain government provided tax credits, tax deferrals and loans as well as to provide guidance to assist clients addressing the challenges faced by employers as a result of the pandemic.
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, we began to see clients deciding to begin layoffs and temporary leaves of absence, which would result in a decline in the number of worksite employees (“WSEEs”) starting in the second quarter of 2020. We paid 230,500 WSEEs in April 2020, which represents a 3.3% decline from our March 2020 paid WSEEs. Based on actions taken by our clients in April 2020, we expect this trend to continue at least into May 2020. As a result, we expect these reduced employment levels to have a negative impact on our financial results for the remainder of 2020. While healthcare costs were not impacted significantly in the first quarter of 2020 by the COVID-19 pandemic, we expect for the remainder of 2020 to incur increased costs for the testing and treatment of participants affected by the COVID-19 virus. We currently expect that we may also experience lower costs related to certain non-essential elective healthcare procedures that have been deferred or cancelled in response to governmental requirements or guidance related to shelter in place and similar orders, which would result in healthcare claim costs that are not reflective of our historical quarterly claim trends.
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 as well as additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. See Part II, Item 1A. “Risk Factors – The COVID-19 pandemic is adversely impacting our business. The impact of the COVID-19 pandemic may have, and a future outbreak of other highly infectious or contagious diseases could have, a material and adverse impact on our business, results of operations, financial condition and cash flows.
2020 Highlights
First Quarter 2020 Compared to First Quarter 2019
Average number of WSEEs paid per month increased 5.5%
Net income and diluted earnings per share (“diluted EPS”) decreased 18.6% and 14.6%, to $62.1 million and $1.58, respectively

Insperity | 2020 First Quarter Form 10-Q
17

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

Adjusted EPS decreased 14.1% to $1.70
Adjusted EBITDA decreased 0.2% to $101.3 million
Key Financial and Statistical Data
(in thousands, except per share, WSEE and statistical data)
Three Months Ended 
 March 31,
2020
2019
% Change
 
 
 
 
Financial data:
 
 
 
Revenues
$
1,229,483

$
1,153,010

6.6
 %
Gross profit
234,022

226,717

3.2
 %
Operating expenses
148,801

141,256

5.3
 %
Operating income
85,221

85,461

(0.3
)%
Other income (expense)
(483
)
1,564

(130.9
)%
Net income
62,092

76,289

(18.6
)%
Diluted EPS
1.58

1.85

(14.6
)%
 
 
 
 
Non-GAAP financial measures(1):
 
 
 
Adjusted net income
$
66,893

$
81,584

(18.0
)%
Adjusted EBITDA
101,254

101,437

(0.2
)%
Adjusted EPS
1.70

1.98

(14.1
)%
 
 
 
 
Average WSEEs paid
238,014

225,525

5.5
 %
Statistical data (per WSEE per month):
 
 
 
Revenues(2)
$
1,722

$
1,704

1.1
 %
Gross profit
328

335

(2.1
)%
Operating expenses
208

209

(0.5
)%
Operating income
119

126

(5.6
)%
Net income
87

113

(23.0
)%
 ____________________________________
(1) 
Please read “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP.
(2) 
Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows:
 
Three Months Ended 
 March 31,
(per WSEE per month)
2020
2019
Gross billings
$
10,415

$
10,157

Less: WSEE payroll cost
8,693

8,453

Revenues
$
1,722

$
1,704

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

Insperity | 2020 First Quarter Form 10-Q
18

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
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 first quarter of 2020 (“Q1 2020”), the number of WSEEs paid from new client sales increased over the first quarter of 2019 (“Q1 2019”). However, net gains in our client base and client retention declined during Q1 2020 compared to Q1 2019.
Average WSEEs Paid and
Year-over-Year Growth Percentage
chart-986ce9423599f33d02b.jpg

Insperity | 2020 First Quarter Form 10-Q
19

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

Adjusted EBITDA and
Year-over-Year Growth Percentage
(in thousands)

chart-687ad743e26098fa253.jpg
Adjusted EPS and
Year-over-Year Growth Percentage
(amounts per share)

chart-5456ac7dae82e00a9ac.jpg
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 First Quarter Form 10-Q
20

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

Revenue and
Year-over-Year Growth Percentage
(in thousands)
chart-cdae35d3e7a67dbfff7.jpg
First Quarter 2020 Compared to First Quarter 2019
Our revenues for Q1 2020 were $1.2 billion, an increase of 6.6%, primarily due to the following:
Average WSEEs paid increased 5.5%.
Revenues per WSEE per month increased 1.1%, or $18.
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)
chart-5ca99a65065d2d236e6.jpg   chart-57b623cfd8e617a4792.jpg


Insperity | 2020 First Quarter Form 10-Q
21

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

The percentage of total PEO HR Outsourcing solutions revenue in our significant markets includes the following:
Significant Markets
chart-4774077b73c4f71cdbc.jpg   chart-07ad4017d03f662550f.jpg
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 clients, which are subject to pricing arrangements that are typically renewed annually. We use gross profit per WSEE per month as our principal measurement of relative performance at the gross profit level.

Insperity | 2020 First Quarter Form 10-Q
22

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

Gross Profit and
Year-over-Year Growth Percentage
(in thousands)
chart-856e757b20ea937beb6.jpg
Gross Profit per WSEE per Month and
Year-over-Year Growth Percentage
chart-b60d2af8c8a27e1e702.jpg 
First Quarter 2020 Compared to First Quarter 2019
Gross profit for Q1 2020 increased 3.2% to $234.0 million compared to $226.7 million in Q1 2019. Gross profit per WSEE per month for Q1 2020 decreased $7 to $328 compared to $335 in Q1 2019.
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 $18 and $25, respectively. The net decrease in costs between Q1 2020 and Q1 2019 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $3.5 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 $32 per WSEE per month and increased 5.8% on a cost per covered employee basis due primarily to an increase in the number of large individual healthcare claimants in Q1 2020 over the low level in Q1 2019, in addition to our historical healthcare trends.
The percentage of WSEEs covered under our health insurance plans was 66.9% in Q1 2020 compared to 67.4% in Q1 2019.

Insperity | 2020 First Quarter Form 10-Q
23

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 $1.5 million, or $2 per WSEE per month, in Q1 2020 compared to a decrease in costs of $0.3 million, or flat on per WSEE per month basis, in Q1 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 increased 2.1%, but decreased $1 on a per WSEE per month basis, in Q1 2020 compared to Q1 2019.
As a percentage of non-bonus payroll cost, workers’ compensation costs in Q1 2020 were 0.39% compared to 0.42% in Q1 2019.
As a result of closing out claims at lower than expected costs, we recorded a reduction in workers’ compensation costs of $10.1 million, or 0.20% of non-bonus payroll costs, in Q1 2020 compared to a reduction of $7.8 million, or 0.17% of non-bonus payroll costs, in Q1 2019.
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 4.5% on an 8.5% increase in payroll costs, but decreased $7 on a per WSEE per month basis primarily due to lower FICA as a result of Internal Revenue Service self-employed owner tax reporting changes for PEOs and lower unemployment tax rates in 2020.
Payroll taxes as a percentage of payroll costs were 7.8% in Q1 2020 and 8.1% in Q1 2019.
Operating Expenses
Salaries, wages and payroll taxes — Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional incentive compensation.
Stock-based compensation — Our stock-based compensation relates to the recognition of non-cash compensation expense over the requisite service period of time-vested and performance-based awards.
Commissions — Commissions expense consists primarily of amounts paid to sales managers and 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
technology and facility repairs and maintenance costs

Insperity | 2020 First Quarter Form 10-Q
24

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.
First Quarter 2020 Compared to First Quarter 2019
The following table presents certain information related to our operating expenses:
 
Three Months Ended March 31,
 
$
 
WSEE
(in thousands, except per WSEE)
2020
2019
% Change
 
2020
2019
% Change
 
 
 
 
 
 
 
 
Salaries
$
86,501

$
83,380

3.7
 %
 
$
121

$
123

(1.6
)%
Stock-based compensation
6,552

6,040

8.5
 %
 
9

9


Commissions
8,460

6,952

21.7
 %
 
12

10

20.0
 %
Advertising
4,833

5,031

(3.9
)%
 
7

7


General and administrative
34,853

33,162

5.1
 %
 
48

50

(4.0
)%
Depreciation and amortization
7,602

6,691

13.6
 %
 
11

10

10.0
 %
Total operating expenses
$
148,801

$
141,256

5.3
 %
 
$
208

$
209

(0.5
)%
Operating expenses for Q1 2020 increased 5.3% to $148.8 million compared to $141.3 million in Q1 2019. Operating expenses per WSEE per month for Q1 2020 decreased 0.5% to $208 compared to $209 in Q1 2019.
Salaries of corporate and sales staff for Q1 2020 increased 3.7% to $86.5 million, but decreased $2 on a per WSEE per month basis, compared to Q1 2019. This increase was primarily due to a 6.7% increase in corporate headcount, including an 11.2% increase in total BPAs in Q1 2020 compared to Q1 2019, partially offset by lower incentive compensation expense in Q1 2020.
Stock based compensation expense for Q1 2020 increased 8.5% to $6.6 million, but remained flat on a per WSEE per month basis, compared to Q1 2019. The increase was primarily due to awards issued under our incentive plan and the acceleration of expense for employees who meet the requirements for continued vesting. Please read Note 7 to the Consolidated Financial Statements, “Incentive Plans,” for additional information.
Commissions expense for Q1 2020 increased 21.7% to $8.5 million, or $2 per WSEE per month, compared to Q1 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 Q1 2020. Additionally, as a result of the extension of our fall campaign into Q1 2020, the bonuses paid to sales managers increased in Q1 2020 compared to Q1 2019.
Advertising expense for Q1 2020 decreased 3.9% to $4.8 million, but remained flat on a per WSEE per month basis, compared to Q1 2019. The decrease was primarily due to decreases in sponsorships and television advertising, which was partially offset by an increase in internet advertising.
General and administrative expenses for Q1 2020 increased 5.1% to $34.9 million, but decreased $2 on a per WSEE per month basis, compared to Q1 2019. The increase was primarily due to increased rent, technology licensing costs, printing and professional services. Travel and training costs were essentially flat compared to prior year due to our decision to restrict travel across the organization in the second half of March in response to the COVID-19 pandemic. We expect a reduction in travel and training costs for the remainder of 2020.
Depreciation and amortization expense for Q1 2020 increased 13.6% to $7.6 million, or $1 per WSEE per month, compared to Q1 2019. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.
Other Income (Expense)
Other Income (expense) for Q1 2020 was net expense of $0.5 million compared to net income of $1.6 million in Q1 2019, the net decrease was primarily due to decreased interest income on our marketable securities investments 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 Debt,” for additional information.

Insperity | 2020 First Quarter Form 10-Q
25

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

Income Tax Expense
 
Three Months Ended 
 March 31,
 
2020
2019
 
 
 
Effective income tax rate
26.7%
12.3%
For the three months ended March 31, 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 three months of 2020 and 2019, we recognized an income tax benefit of $2.0 million and $14.5 million, respectively, related to the vesting of long-term incentive and restricted stock awards in both periods.
Non-GAAP Financial Measures
Non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the tables below.
Non-GAAP Measure
Definition
Benefit of Non-GAAP Measure
Non-bonus payroll cost
Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs.

Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program.
Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs.

We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program.
Adjusted cash, cash equivalents and marketable securities
Excludes funds associated with:
•  federal and state income tax withholdings,
•  employment taxes,
•  other payroll deductions, and
•  client prepayments.
We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior periods, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because they allow investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments.
 
 
EBITDA
Represents net income computed in accordance with GAAP, plus:
•  interest expense,
•  income tax expense, and
•  depreciation and amortization expense.
 
 
Adjusted EBITDA
Represents EBITDA plus:
•  non-cash stock-based compensation.
 
 
Adjusted Net Income
Represents net income computed in accordance with GAAP, excluding:
•  non-cash stock-based compensation.
 
 
Adjusted EPS
Represents diluted net income per share computed in accordance with GAAP, excluding:
•  non-cash stock-based compensation.

Insperity | 2020 First Quarter Form 10-Q
26

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):
 
Three Months Ended March 31,
(in thousands, except per WSEE per month)
2020
 
2019
$
WSEE
 
$
WSEE
 
 
 
 
 
 
Payroll cost
$
6,207,271

$
8,693

 
$
5,718,660

$
8,453

Less: Bonus payroll cost
1,050,968

1,472

 
990,578

1,465

Non-bonus payroll cost
$
5,156,303

$
7,221

 
$
4,728,082

$
6,988

% Change period over period
9.1
%
3.3
%
 
15.9
%
0.6
%
Following is a reconciliation of cash, cash equivalents and marketable securities (GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP):
(in thousands)
March 31, 2020

 
December 31, 2019

 
 
 
 
Cash, cash equivalents and marketable securities
$
424,236

 
$
402,070

Less:
 
 
 
Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions
235,203

 
234,553

Client prepayments
22,143

 
59,612

Adjusted cash, cash equivalents and marketable securities
$
166,890

 
$
107,905

Following is a reconciliation of net income (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP):
 
Three Months Ended March 31,
(in thousands, except per WSEE per month)
2020
 
2019
$
WSEE
 
$
WSEE
 
 
 
 
 
 
Net income
$
62,092

$
87

 
$
76,289

$
113

Income tax expense
22,646

32

 
10,736

16

Interest expense
2,362

3

 
1,681

2

Depreciation and amortization
7,602

11

 
6,691

10

EBITDA
94,702

133

 
95,397

141

Stock-based compensation
6,552

9

 
6,040

9

Adjusted EBITDA
$
101,254

$
142

 
$
101,437

$
150

% Change period over period
(0.2
)%
(5.3
)%
 
21.0
%
4.9
%
Following is a reconciliation of net income (GAAP) to adjusted net income (non-GAAP):
 
Three Months Ended March 31,
(in thousands)
2020
2019
 
 
 
Net income
$
62,092

$
76,289

Non-GAAP adjustments:
 
 
Stock-based compensation
6,552

6,040

Total non-GAAP adjustments
6,552

6,040

Tax effect
(1,751
)
(745
)
Adjusted net income
$
66,893

$
81,584

% Change period over period
(18.0
)%
37.0
%

Insperity | 2020 First Quarter Form 10-Q
27

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

Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP):
 
Three Months Ended March 31,
(amounts per share)
2020
2019
 
 
 
Diluted EPS
$
1.58

$
1.85

Non-GAAP adjustments:
 
 
Stock-based compensation
0.17

0.15

Total non-GAAP adjustments
0.17

0.15

Tax effect
(0.05
)
(0.02
)
Adjusted EPS
$