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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
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

 
 
Page
 
 
 
Part I, Item 1.
 
 
 
 
 
Part I, Item 2.
Part I, Item 3.
Part I, Item 4.
Part II, Item 1.
Part II, Item 1A.
Part II, Item 2.
Part II, Item 6.


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

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)

Adjusted EPS and
Year-over-Year Growth Percentage
(amounts per share)

Revenues
Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs and (2) a markup computed as a percentage of the payroll cost.
Our revenues are primarily dependent on the number of clients enrolled, the resulting number of WSEEs paid each period and the number of WSEEs enrolled in our benefit plans. Because our total markup is computed as a percentage of payroll cost, certain revenues are also affected by the payroll cost of WSEEs, which may fluctuate based on the composition of the WSEE base, inflationary effects on wage levels and differences in the local economies of our markets.

Insperity | 2020 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)
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)
   


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
   
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)
Gross Profit per WSEE per Month and
Year-over-Year Growth Percentage
 
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
$
1.70

$
1.98

% Change period over period
(14.1
)%
40.4
%
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 a $500 million revolving credit facility (“Facility”) with a syndicate of financial institutions. The Facility is available for working capital and general corporate purposes, including acquisitions and stock repurchases. We have in the past sought, and may in the future seek, to raise additional capital or take other steps to increase or manage our liquidity and capital resources.
We had $424.2 million in cash, cash equivalents and marketable securities at March 31, 2020, of which approximately $235.2 million was payable in early April 2020 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $22.1 million represented client prepayments that were payable in April 2020. In March 2020, we borrowed $100.0 million under the Facility, which increased working capital. At March 31, 2020, we had working capital of $190.8 million compared to $105.7 million at December 31, 2019. We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under the Facility will be adequate to meet our liquidity requirements for the remainder of 2020. We intend to rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs, which we are carefully monitoring in light of the significant uncertainty created by the COVID-19 pandemic.
As of March 31, 2020, we had an outstanding letter of credit and borrowings totaling $370.4 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 three months of 2020 was $23.8 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 March 31, 2020, the last business day of the reporting period was a Tuesday, client prepayments were $22.1 million and employment taxes and other deductions were $235.2 million. In the period ended March 31, 2019, the last business day of the reporting period was a Friday, client prepayments were $32.4 million and employment taxes and other deductions were $279.6 million.

Insperity | 2020 First Quarter Form 10-Q
28

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

Medical plan funding Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. As of March 31, 2020, premiums owed and cash funded to United have exceeded the costs of the United plan, resulting in a $36.8 million surplus, $27.8 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Condensed Consolidated Balance Sheets. The premiums, including an additional quarterly premium, owed to United at March 31, 2020, were $40.7 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 decreased 18.0% to $66.9 million in the first three months ended March 31, 2020, compared to $81.6 million in the first three months ended March 31, 2019. Please read “Results of Operations – First Quarter 2020 Compared to First Quarter 2019.”
Cash Flows from Investing Activities
Net cash flows used in investing activities were $0.3 million for the three months ended March 31, 2020, primarily due to property and equipment purchases of $15.6 million offset by $15.3 million of marketable securities maturities, net of purchases.
Cash Flows from Financing Activities
Net cash flows provided by financing activities were $25.6 million for the three months ended March 31, 2020. We borrowed $100.0 million under the Facility for general corporate purposes, repurchased or withheld $61.2 million in stock and paid $15.6 million in dividends.

Insperity | 2020 First Quarter Form 10-Q
29

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 March 31, 2020, we had outstanding letters of credit and borrowings totaling $370.4 million under the Facility. Please read Note 5 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.
The cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. Our available-for-sale marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates.
We attempt to limit our exposure to interest rate risk primarily through diversification and low investment turnover. Our investment policy is designed to maximize after-tax interest income while preserving our principal investment. As a result, our marketable securities consist of tax-exempt short term and intermediate term debt securities, which are primarily U.S. Government Securities.
Item 4. Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.
There has been no change in our internal controls over financial reporting that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


Insperity | 2020 First Quarter Form 10-Q
30

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;
impact of the COVID-19 pandemic, or other future pandemics, including the scope, severity and duration of the pandemic; government responses; regulatory developments; and the related disruptions and economic impact to our business and the small and medium-sized businesses that we serve;
regulatory and tax developments and possible adverse application of various federal, state and local regulations;
the ability to secure competitive replacement contracts for health insurance and workers’ compensation insurance at expiration of current contracts;
cancellation of client contracts on short notice, or the inability to renew client contracts or attract new clients;
vulnerability to regional economic factors because of our geographic market concentration;
increases in health insurance costs and workers’ compensation rates and underlying claims trends, health care reform, financial solvency of workers’ compensation carriers, other insurers or financial institutions, state unemployment tax rates, liabilities for employee and client actions or payroll-related claims;
failure to manage growth of our operations and the effectiveness of our sales and marketing efforts;
the impact of the competitive environment and other developments in the human resources services industry, including the PEO industry, on our growth and/or profitability;
our liability for worksite employee payroll, payroll taxes and benefits costs;
our liability for disclosure of sensitive or private information;
our ability to integrate or realize expected returns on our acquisitions;
failure of our information technology systems;

Insperity | 2020 First Quarter Form 10-Q
31

OTHER INFORMATION

an adverse final judgment or settlement of claims against Insperity; and
disruptions to our business resulting from the actions of certain stockholders.
These factors are discussed in further detail in our Annual Report on Form 10-K for the year ended December 31, 2019 under “Item 1A. Risk Factors” in Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, and 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.
Any forward-looking statements are made only as of the date hereof and, unless otherwise required by applicable securities laws, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition, please read the following together with “Risk Factors -– Adverse economic conditions could negatively affect our industry, business, and results of operations.” under “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019:
The economic impact of the COVID-19 pandemic is adversely affecting our business. The current 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.
The spread of the COVID-19 virus has created significant volatility, uncertainty and economic disruption, including because of actions taken by businesses and governments in response to the pandemic that have resulted or could result in a significant reduction in commercial activity. The extent to which the COVID-19 pandemic impacts our business, operations, financial results and financial condition will depend on numerous evolving factors that are highly uncertain and that we may not be able to accurately predict, including:
scope, severity and duration of the pandemic;
varying impact that the pandemic has within each locality;
actions taken by government authorities to contain the outbreak or address its impact;
development of safe and effective treatments or vaccines for COVID-19;
direct and indirect economic effects of the pandemic and containment measures;
scope, significant and duration of business disruptions on small and medium-sized businesses, including any reduction in employment levels, compensation levels and employee benefit levels;
magnitude and extent of business failures among the small and medium-sized businesses that we serve;
ability of our clients to pay for the outsourced HR services and solutions we provide; and
any resulting impact on the demand for our outsourced HR services and solutions.
While the COVID-19 pandemic is continuing and even after it has subsided, we may experience materially adverse impacts to our business, operations and financial results due to any existing or continuing reduction in economic activity, including a recession or depression.
The COVID-19 pandemic has resulted in a sharp decrease in employment levels throughout the United States. We have begun to experience a decline in the number of paid WSEEs due primarily to layoffs and temporary leaves of absence in our client base. We paid 230,500 WSEEs in April 2020, which represents a 3.3% decline from March 2020 paid WSEEs. Based on actions taken by our clients in April 2020, we expect this trend to continue into May 2020. Further, if the adverse economic conditions relating to the COVID-19 pandemic persist, we may continue to experience a decline in our paid WSEEs and such declines may increase. Accordingly, such declines in WSEEs are likely to have a material adverse effect on our business, financial condition and results of operations. See Item 1A. “Risk Factors – Adverse economic conditions could negatively affect our industry, business, and results of operations.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.

Insperity | 2020 First Quarter Form 10-Q
32

OTHER INFORMATION

The spread of the COVID-19 virus has changed how and when we incur health insurance costs under our health insurance contract with United. We may experience changes in quarterly levels and timing of both medical and pharmaceutical health insurance claims. Government imposed treatment mandates, restrictions on certain elective healthcare treatments, and changes in treatment delivery options may significantly alter our healthcare claim trends. Our ability to estimate healthcare claim trends becomes more difficult as participant utilization of healthcare services are deferred or canceled while stay-at-home orders and social distancing requirements are enacted by state and local governments. Furthermore, predicting the rate at which participants will increase utilization of healthcare services in subsequent periods once stay-at-home orders and social distancing requirements are lifted, is also difficult. In addition, if the increased number of former WSEEs elect COBRA coverage to continue their benefits, we would expect an increase in claim activity levels, resulting in higher benefits costs incurred and decreased profitability. The Department of Labor and the Department of Treasury released a rule on April 29, 2020 that extends the period during which any former WSEE who became eligible for COBRA coverage in 2020 may elect such coverage and allows any former WSEEs electing COBRA coverage (including those already electing COBRA coverage) to defer payment of such coverage until a later date. Depending on the number of participants electing COBRA and the resulting claim activity levels, COBRA-related claims have the potential to increase total plan costs in future periods as well. The extended period during which former WSEEs may elect COBRA coverage, and their ability to defer payment of related premiums, may further result in increased costs to us and we may ultimately be unable to collect premiums from those former WSEEs or from our clients. See Item 1A. “Risk Factors – Increases in health insurance costs or our inability to secure replacement health insurance coverage on competitive terms could have a material adverse effect on our business, financial condition or results of operations.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
The recent increase in U.S. unemployment levels has resulted in a significant increase in unemployment claims with state unemployment agencies. A continuous increase in unemployment claims is likely to increase state unemployment rates. In addition, some states have the authority to increase unemployment tax rates retroactively. Any such increases, which are reflected in our comprehensive service fee, may result in client attrition due to increased prices or we may have to reduce our overall pricing, which would adversely affect our profitability, to assist clients with these additional costs. See Item 1A. “Risk Factors – Our ability to adjust and collect service fees for increases in unemployment tax rates may be limited.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 economic disruptions may cause customers to have difficulty meeting their financial obligations to us or increase business failures. As a co-employer, we assume the obligation to pay the salaries, wages and related benefits and taxes of the WSEEs. An increase in the number of clients unable to pay us would result in an increase in bad debts, which could have a material adverse effect on our financial condition and results of operations. See Item 1A. “Risk Factors – We assume liability for WSEE payroll, payroll taxes, and benefits costs and are responsible for their payment regardless of the amount billed to or paid by our clients.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
In addition, we have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to and employees may become sick themselves and be unable to work. Further, our increased reliance on remote access to our information systems as our employees work remotely decreases our control over cybersecurity protection and service stability and performance, which increases our exposure to cybersecurity and privacy issues and to disruptions to employee productivity. We may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, clients, partners and vendors. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our ability to perform critical functions could be harmed, and we may be unable to respond to the needs of our business. See Item 1A. “Risk Factors – Disruptions of our information technology systems could damage our reputation and materially disrupt our business operations.” and “Risk Factors – We could be subject to reduced revenues, increased costs, liability claims, or harm to our competitive position as a result of data theft, cyberattacks or other security vulnerabilities.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
The Families First Coronavirus Response Act and the Coronavirus, Aid, Relief, and Economic Security Act, or the CARES Act, which both became law in March 2020, created various programs and incentives to assist businesses and individuals manage through the COVID-19 pandemic. Certain of these programs and incentives have required us

Insperity | 2020 First Quarter Form 10-Q
33

OTHER INFORMATION

to make changes to our systems that manage leave, payroll and payroll-related tax calculation and reporting and invoicing and collection of service fees. In addition, various states and localities are considering further legislation that may require further changes to our processes and systems or that may expand the coverage afforded to WSEEs under our health and workers’ compensation programs. If we are unable to timely make these changes, incur substantial additional costs in doing so, or are otherwise adversely affected by these requirements, then we may face fines, penalties, other regulatory action, or litigation relating to such failure, which could further adversely impact our PEO state licenses, our certified PEO status, our results of operations and our ability to attract and retain clients. See Item 1A. “Risk Factors – Evolving regulations, market trends and client expectations require us to constantly enhance and expand our service and technology offerings.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 pandemic business interruptions and associated economic impact has adversely and disproportionately affected certain industries, including the oil and gas industry. The substantial decrease in the global demand for oil contributed to a significant decline in its commodity price, which has materially and adversely impacted businesses dependent on oil production, including those with operations in Texas. While our oil and gas related customers account for approximately 3% of our customer base, our Texas market accounts for approximately 20% of our revenues. The impact of the COVID-19 pandemic on oil prices and the resulting impact on regional economies with oil-focused businesses could aggravate our risk factors for clients operating in the oil and gas sector as well as other clients who operate in the Texas market. See Item 1A. “Risk Factors – Geographic market concentration makes our results of operations vulnerable to regional economic factors.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
The impact and evolving nature of the COVID-19 pandemic precludes any prediction as to its full adverse impact. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, including as a result of the forgoing reasons, and may have a material adverse effect on our financial condition, results of operations, cash flows and business. Further, many risk factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
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 March 31, 2020 of equity securities that are registered by Insperity pursuant to Section 12 of the Exchange Act:
 
 
 
 
Period
Total Number of Shares Purchased(1)(2)
Average Price Paid per Share
Total Number of Shares Purchased Under Announced Program(2)
Maximum Number of Shares Available for Purchase under Announced Program(2)
01/01/2020 – 01/31/2020
30

$
92.70


413,833

02/01/2020 – 02/29/2020
709,675

70.93

559,400

854,433

03/01/2020 – 03/31/2020
168,600

64.44

168,600

685,833

Total
878,305

$
69.68

728,000

 
____________________________________
(1) 
During the three months ended March 31, 2020, 150,305 shares of stock were withheld to satisfy tax-withholding obligations arising in conjunction with the vesting of restricted stock and long term incentive compensation awards. The required withholding is calculated using the closing sales price reported by the New York Stock Exchange on the date prior to the applicable vesting date. These shares are not subject to the repurchase program.
(2) 
Our Board of Directors (the “Board”) has approved a program to repurchase shares of our outstanding common stock, including an additional 1,000,000 shares authorized for repurchase in February 2020. As of March 31, 2020, we were authorized to repurchase an additional 685,833 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.


Insperity | 2020 First Quarter Form 10-Q
34

OTHER INFORMATION

Item 6. Exhibits
Exhibit No
 
Exhibit
10.1
*(+)
10.2
10.3
31.1
*
31.2
*
32.1
**
32.2
**
101.INS
*
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
*
Inline XBRL Extension Definition Linkbase Document.
101.LAB
*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
 
Cover Page Interactive Data File (embedded with the Inline XBRL document)
 
____________________________________
 
 
Management contract or compensatory plan or arrangement
 
 
 
 
(+)
Certain portions of the exhibit have been omitted pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause competitive hard to the Company if publicly disclosed.
 
 
 
 
*
Filed with this report.
 
 
 
 
 
**
Furnished with this report.


Insperity | 2020 First Quarter Form 10-Q
35



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

Insperity | 2020 First Quarter Form 10-Q
36
Exhibit


Certain portions of this exhibit have been omitted pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed.
Exhibit 10.1
February 7, 2020

Mr. James D. Allison
Sr. Vice President, Gross Profit Operations
Insperity Holdings, Inc.
19001 Crescent Springs Drive
Kingwood, Texas 77339-3802

Re: Insperity and UnitedHealthcare Pooling Feature Agreement

Dear James:

I am providing this Letter of Agreement (LOA) to propose the terms and conditions of changes to existing contracts between United HealthCare Insurance Company (“UnitedHealthcare”) and Insperity Holdings, Inc. (“Insperity”) (together the “Parties”) to implement a pooling feature, consistent with the 2005 Minimum Premium Financial Agreement, as restated and amended from time to time (collectively the “MP Agreement”.) We hope that you will find these terms and conditions agreeable.

Upon execution, this LOA and the attached Terms of Agreement (Exhibit A) will constitute a legally binding agreement as to the principal terms of the pooling feature to be included as part of the MP Agreement by and between the Parties. The Parties anticipate that such amendment shall be completed as soon as possible. Except as otherwise set forth herein, the terms and conditions of any eventual pooling feature will be only as set forth in any subsequent amendment(s) signed by the parties.

The Parties acknowledge and agree that the terms and conditions of this LOA and the attached Exhibit A related to the MP Agreement, including the existence hereof, are subject to the provisions of Section 5(e) of the Minimum Premium Administrative Services Agreement (relating to the publicity of the arrangement). As such, Insperity and UnitedHealthcare each agree not to make any unauthorized disclosure or public announcement concerning the subject matter hereof without the written consent of the other.

If this LOA and the terms set forth in Exhibit A are in accordance with your understanding of the proposed modifications to our existing contracts, please sign below and return an executed copy to me via email to Anthony_r@carr@uhc.com or facsimile at (954) 378-0771. Should you have any questions, please call me at (954) 378-0596.

Best Regards,
 
AGREED TO AND ACCEPTED BY:
 
 
 
/s/ Anthony R. Carr
 
/s/ James Allison
 
 
Insperity Holdings, Inc.
 
 
 
Anthony R. Carr
 
James Allison
National Vice President,
 
Sr. Vice President, Gross Profit Operations
UnitedHealthcare
 
Insperity Holdings, Inc.
 
 
Date: 2/10/2020





Exhibit A
UnitedHealthcare/Insperity
Terms of Agreement
February 7, 2020
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