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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
September 30, 2019
 
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
INSPERITYLOGOA07.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 October 28, 2019, 39,997,882 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)
September 30, 2019

 
December 31, 2018

 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
243,439

 
$
326,773

Restricted cash
45,251

 
42,227

Marketable securities
60,880

 
60,781

Accounts receivable, net
483,890

 
400,623

Prepaid insurance
22,161

 
8,411

Other current assets
26,438

 
27,721

Income taxes receivable
11,684

 
—

Total current assets
893,743

 
866,536

Property and equipment, net of accumulated depreciation
134,956

 
117,213

Right-of-use leased assets
58,185

 
—

Prepaid health insurance
9,000

 
9,000

Deposits – health insurance
6,600

 
6,200

Deposits – workers’ compensation
170,032

 
166,474

Goodwill and other intangible assets, net
12,717

 
12,726

Deferred income taxes, net
157

 
8,816

Other assets
6,732

 
4,851

Total assets
$
1,292,122

 
$
1,191,816

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Accounts payable
$
5,373

 
$
10,622

Payroll taxes and other payroll deductions payable
180,617

 
261,166

Accrued worksite employee payroll cost
411,457

 
329,979

Accrued health insurance costs
33,239

 
35,153

Accrued workers’ compensation costs
48,927

 
45,818

Accrued corporate payroll and commissions
39,414

 
60,704

Other accrued liabilities
42,185

 
28,890

Total current liabilities
761,212

 
772,332

Accrued workers’ compensation cost, net of current
190,390

 
187,412

Long-term debt
239,400

 
144,400

Operating lease liabilities, net of current
60,132

 
—

Other accrued liabilities, net of current
—

 
9,996

Total noncurrent liabilities
489,922

 
341,808

Commitments and contingencies


 


Common stock
555

 
555

Additional paid-in capital
46,401

 
36,752

Treasury stock, at cost
(496,917
)
 
(357,569
)
Retained earnings
490,949

 
397,938

Total stockholders’ equity
40,988

 
77,676

Total liabilities and stockholders’ equity
$
1,292,122

 
$
1,191,816

See accompanying notes.

Insperity | 2019 Third Quarter Form 10-Q
4
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) 
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)
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
5
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


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

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
 
 
 
Supplemental schedule of cash and cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
326,773

 
$
354,260

Restricted cash
42,227

 
41,137

Deposits – workers’ compensation
166,474

 
154,215

Cash, cash equivalents and restricted cash beginning of period
$
535,474

 
$
549,612

 
 
 
 
Cash and cash equivalents
$
243,439

 
$
328,299

Restricted cash
45,251

 
42,257

Deposits – workers’ compensation
170,032

 
152,268

Cash, cash equivalents and restricted cash end of period
$
458,722

 
$
522,824

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

 
$
—

See accompanying notes.


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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2019 and 2018
 
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



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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
For the Three Months Ended September 30, 2019 and 2018
 
Common Stock Issued
Additional Paid-In Capital
Treasury Stock
Retained Earnings and AOCI
Total
(in thousands)
Shares
Amount
 
 
 
 
 
 
 
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
)
Stock-based compensation expense
—

—

4,880

1,637

—

6,517

Other
—

—

512

148

—

660

Dividends paid
—

—

—

—

(12,037
)
(12,037
)
Unrealized loss on marketable securities, net of tax
—

—

—

—

(28
)
(28
)
Net income
—

—

—

—

25,859

25,859

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 | 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 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, Retirement Services and Insurance Services, many of which are offered as a cloud-based software solution and are offered separately or with our other solutions.
The Consolidated Financial Statements include the accounts of Insperity 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. Our Condensed Consolidated Balance Sheet at December 31, 2018 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 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2019 and 2018, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2019 and 2018 and our Consolidated Statements of Stockholders’ Equity for the three and nine month periods ended September 30, 2019 and 2018, 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. 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 demographics and other factors are incorporated into the benefits costs.

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 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 million at September 30, 2019, and is included in deposits - health insurance as a long-term asset on our Condensed Consolidated Balance Sheets. As of September 30, 2019, Plan Costs were less than the net premiums paid and owed to United by $17.4 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $8.4 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 were $27.6 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 included a charge of $2.9 million for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first nine months of 2018 included a reduction of $1.3 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, 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 and 2018, we reduced accrued workers’ compensation costs by $26.0 million and $13.4 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 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 | 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


The current portion of accrued workers’ compensation costs on our Condensed Consolidated Balance Sheets at September 30, 2019 includes $3.7 million of workers’ compensation administrative fees.
As of September 30, 2019 and 2018, the undiscounted accrued workers’ compensation costs were $255.3 million and $241.3 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 and 2018, we received $16.7 million and $19.4 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, we had restricted cash of $45.3 million and deposits – workers’ compensation of $170.0 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 million and $385.6 million at September 30, 2019 and December 31, 2018, 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 | 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)
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
%

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


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 and December 31, 2018 included $153.8 million and $224.5 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $19.7 million and $34.2 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, 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


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, 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, 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


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, 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 | 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 to $500 million of borrowing capacity in the third quarter of 2019. 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, our outstanding balance on the Facility was $239.4 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 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 September 30, 2019 was 3.90%. Interest expense and unused commitment fees are recorded in other income (expense).
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.
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. Upon adoption 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
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, we repurchased or withheld an aggregate of 1,481,369 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 shares were repurchased under the Repurchase Program. As of September 30, 2019, we were authorized to repurchase an additional 1,056,945 shares under the Repurchase Program.
Withheld Shares
During the nine months ended September 30, 2019, we withheld 227,159 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)
2019

 
2018

 
 
 
 
First quarter
$
0.30

 
$
0.20

Second quarter
0.30

 
0.20

Third quarter
0.30

 
0.20


During the nine months ended September 30, 2019 and 2018, we paid dividends totaling $36.8 million and $25.2 million, respectively.
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 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
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 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 plaintiffs’ request for a jury trial and has set a bench trial for March 2, 2020. With respect to plaintiffs’ remaining claims, plaintiffs allege damages up to $128 million against all defendants. We believe we have meritorious defenses, and we intend to vigorously defend this litigation. 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 | 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, 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.
2019 Highlights
Third Quarter 2019 Compared to Third Quarter 2018
•
Average number of worksite employees (“WSEEs”) paid per month increased 12.0%
•
Net income and diluted earnings per share (“diluted EPS”) decreased 28.6% and 26.7%, to $25.9 million and $0.63, respectively
•
Adjusted EPS decreased 21.9% to $0.75
•
Adjusted EBITDA decreased 16.9% to $51.2 million
First Nine Months 2019 Compared to First Nine Months 2018
•
Average number of WSEEs paid per month increased 13.6%
•
Net income and diluted EPS increased 18.0% and 20.9% to $130.7 million and $3.18, respectively
•
Adjusted EPS increased 16.7% to $3.57
•
Adjusted EBITDA increased 9.0% to $209.3 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.

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 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.
(2) 
Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows:
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
(per WSEE per month)
2019
2018
 
2019
2018
Gross billings
$
9,070

$
9,007

 
$
9,451

$
9,373

Less: WSEE payroll cost
7,626

7,573

 
7,905

7,821

Revenues
$
1,444

$
1,434

 
$
1,546

$
1,552

New Accounting Pronouncements
Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies – New Accounting Pronouncements," 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
•
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 2019 (“Q3 2019”), the number of WSEEs paid from new client sales decreased over the third quarter of 2018 (“Q3 2018”). During Q3 2018, we onboarded our largest client which impacts the Q3 2019 comparison. Net gains in our client base improved slightly during Q3 2019 compared to Q3 2018 and client retention averaged just above 99% in both periods.
•
During the first nine months of 2019 (“YTD 2019”), the number of WSEEs paid from new client sales decreased slightly over the first nine months of 2018 (“YTD 2018”). During YTD 2018, we onboarded our largest client which impacts the YTD 2019 comparison. Net gains in our client base also declined compared to YTD 2018 due to less hiring of full-time and seasonal employees. Client retention remained consistent compared to YTD 2018.
Average WSEEs Paid and
Year-over-Year Growth Percentage
CHART-3D370882803238BADE3.JPG    CHART-CF64317B334B8394522.JPG

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)

CHART-A0B746537624420F51D.JPG    CHART-580293E01390B9A647E.JPG
Adjusted EPS and
Year-over-Year Growth Percentage
(amounts per share)

CHART-36352CB0AF76645C0CF.JPG    CHART-0D4AA4074686B700BCB.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 | 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)
CHART-8ED18CDD9DCD4E5086E.JPG    CHART-09161F594F53BDAA488.JPG
Third Quarter 2019 Compared to Third Quarter 2018
Our revenues for Q3 2019 were $1.0 billion, an increase of 12.8%, primarily due to the following:
•
Average WSEEs paid increased 12.0%.
•
Revenues per WSEE per month increased 0.7%, or $10.
First Nine Months 2019 Compared to First Nine Months 2018
Our revenues for YTD 2019 were $3.2 billion, an increase of 13.2%, primarily due to the following:
•
Average WSEEs paid increased 13.6%.
•
Revenues per WSEE per month decreased 0.4%, or $6 on lower WSEE medical participation.

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)
CHART-B2D55E86B379952EBD0.JPG     CHART-1396A68E851DCF2152A.JPG

The percentage of total PEO HR Outsourcing solutions revenue in our significant markets includes the following:
Significant Markets
CHART-16AE50F8157582FBF75.JPG     CHART-8056704D73CFCE05456.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

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)
CHART-3D137A8D53D746974B9.JPG    CHART-043023643A148AD5C21.JPG
Gross Profit per WSEE per Month and
Year-over-Year Growth Percentage
CHART-6E19151FD321E7F7E2F.JPG    CHART-794BF7AAA024BFE19A5.JPG
Third Quarter 2019 Compared to Third Quarter 2018
Gross profit for Q3 2019 increased 2.7% to $170.5 million compared to $166.1 million in Q3 2018. Gross profit per WSEE per month for Q3 2019 decreased $21 to $236 compared to $257 in Q3 2018.
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 and $31, respectively. The net increase in costs between Q3 2019 and Q3 2018 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $2.6 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 | 2019 Third Quarter Form 10-Q
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

claim activity. These 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 was 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.
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%, or $7 on a per WSEE per month basis, in Q3 2019 compared to Q3 2018.
•
As a percentage of non-bonus payroll cost, workers’ compensation costs in Q3 2019 were 0.43% compared to 0.55% in Q3 2018.
•
As a result of closing out claims at lower than expected costs, we recorded a reduction in workers’ compensation costs of $7.5 million, or 0.15% of non-bonus payroll costs, in Q3 2019 compared to a reduction of $2.4 million, or 0.05% of non-bonus payroll costs, in Q3 2018.
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% on a 12.8% increase in payroll costs, or $7 per WSEE per month.
•
Payroll taxes as a percentage of payroll costs were 6.2% in both Q3 2019 and Q3 2018.
First Nine Months 2019 Compared to First Nine Months 2018
Gross profit for YTD 2019 increased 9.7% to $571.0 million compared to $520.3 million in YTD 2018. Gross profit per WSEE per month for YTD 2019 decreased $10 to $272 compared to $282 in YTD 2018.
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 in YTD 2019. The net decrease in costs between YTD 2019 and YTD 2018 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $8.4 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 $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.
•
The percentage of WSEEs covered under our health insurance plans was 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.

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 was 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.
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 10.1%, or $7 on a per WSEE per month basis, in YTD 2019 compared to YTD 2018.
•
As a percentage of non-bonus payroll cost, workers’ compensation costs in YTD 2019 were 0.40% compared to 0.51% in YTD 2018.
•
As a result of closing out claims at lower than expected costs, we recorded a reduction in workers’ compensation costs of $26.0 million, or 0.18% of non-bonus payroll costs, in YTD 2019 compared to a reduction of $13.4 million, or 0.10% of non-bonus payroll costs, in YTD 2018.
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% on a 14.9% increase in payroll costs, or $2 per WSEE per month.
•
Payroll taxes as a percentage of payroll costs were 7.1% in both YTD 2019 and YTD 2018.
Operating Expenses
Our operating expenses are comprised of the following:
•
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 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
•
technology and facility repairs and maintenance costs

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 Compared to Third Quarter 2018
 
Three Months Ended September 30,
 
$
 
WSEE
(in thousands, except per WSEE)
2019
2018
% Change
 
2019
2018
% Change
 
 
 
 
 
 
 
 
Salaries
$
79,264

$
70,552

12.3
%
 
$
110

$
109

0.9
%
Stock-based compensation
6,517

5,769

13.0
%
 
9

9

—

Commissions
8,034

6,818

17.8
%
 
11

11

—

Advertising
4,895

3,846

27.3
%
 
7

6

16.7
%
General and administrative
29,773

25,294

17.7
%
 
41

39

5.1
%
Depreciation and amortization
7,330

5,642

29.9
%
 
10

9

11.1
%
Total operating expenses
$
135,813

$
117,921

15.2
%
 
$
188

$
183

2.7
%
Operating expenses for Q3 2019 increased 15.2% to $135.8 million compared to $117.9 million in Q3 2018. Operating expenses per WSEE per month for Q3 2019 increased 2.7% to $188 compared to $183 in Q3 2018.
•
Salaries of corporate and sales staff for Q3 2019 increased 12.3% 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 increased 13.0% to $6.5 million, but remained flat on a per WSEE per month basis, compared to Q3 2018. The increase was primarily due to awards issued under our restricted stock plan.
•
Commissions expense for Q3 2019 increased 17.8% to $8.0 million, but remained flat on a per WSEE per month basis, compared to Q3 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 Q3 2019 increased 27.3% to $4.9 million, or $1 per WSEE per month, compared to Q3 2018. The increase was primarily due to an increase in advertising promotions.
•
General and administrative expenses for Q3 2019 increased 17.7% to $29.8 million, or $2 per WSEE per month, compared to Q3 2018. The increase was primarily due to increased technology licensing costs and professional services.
•
Depreciation and amortization expense for Q3 2019 increased 29.9% to $7.3 million, or $1 per WSEE per month, compared to Q3 2018. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

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 for YTD 2019 increased 10.2% to $412.1 million compared to $373.9 million in YTD 2018. Operating expenses per WSEE per month for YTD 2019 decreased 3.0% to $197 compared to $203 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 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 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 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 | 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,
 
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, 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 and 2018, we recognized an income tax benefit of $14.5 million and $3.7 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.
 
 
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.
 
 
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.

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):
 
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, 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)
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
%
Following reconciliation of net income (GAAP) to adjusted net income (non-GAAP):
 
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)
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 million in cash, cash equivalents and marketable securities at September 30, 2019, of which approximately $153.8 million was payable in early October 2019 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 October 2019. 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. As of September 30, 2019, we had an outstanding letter of credit and borrowings totaling $240.4 million under the Facility. Please read Note 5 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.
Cash Flows from Operating Activities
Net cash provided by operating activities in the first nine months of 2019 was $47.1 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, 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.”

Insperity | 2019 Third Quarter Form 10-Q
34
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 million for the nine months ended September 30, 2019, primarily due to property and equipment purchases of $36.0 million.
Cash Flows from Financing Activities
Net cash flows used in financing activities were $88.2 million for the nine months ended September 30, 2019. We repurchased or withheld $153.7 million in stock, paid $36.8 million in dividends and borrowed $95.0 million on our revolving line of credit for general corporate purposes.

Insperity | 2019 Third Quarter Form 10-Q
35
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, we had outstanding letters of credit and borrowings totaling $240.4 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.
There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


Insperity | 2019 Third Quarter Form 10-Q
36
OTHER INFORMATION

PART II
Item 1. Legal Proceedings

Please read Note 9 to the Consolidated Financial Statements, “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 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;
•
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;
•
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 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 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 the extent otherwise required by federal securities law, we do not undertake any obligation to update our forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
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 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(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 Third Quarter Form 10-Q
38
OTHER INFORMATION

Item 6. Exhibits
Exhibit No
 
Exhibit
10.1
 
31.1
*
31.2
*
32.1
**
32.2
**
101.INS
*
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
*
XBRL Taxonomy Extension Schema Document.
101.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
*
XBRL Extension Definition Linkbase Document.
101.LAB
*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document.
104
 
Cover Page Interactive Data File (embedded with the Inline XBRL document)
 
____________________________________
 
 
*
Filed with this report.
 
 
 
 
 
**
Furnished with this report.


Insperity | 2019 Third Quarter Form 10-Q
39


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
By:
/s/ Douglas S. Sharp
 
 
Douglas S. Sharp
 
 
Senior Vice President of Finance,
 
 
Chief Financial Officer and Treasurer
 
 
(Principal Financial Officer)

Insperity | 2019 Third Quarter Form 10-Q
40
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