INSPERITY, INC. 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 endedDecember 31, 2020 , as well as our Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q. Executive Summary OverviewInsperity, 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 we provide by entering into a co-employment relationship with our clients. Our PEO HR Outsourcing solutions encompass a broad range of HR functions, including payroll and employment administration, employee benefits, workers' compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management solution, the Insperity PremierTM platform. COVID-19 Pandemic The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in significant changes inU.S. economic activity. As the duration of the pandemic and such economic impacts remain uncertain, we have planned for a range of scenarios and have modified certain business and workforce practices. To conform to government restrictions and best practices, we have taken steps designed to keep our staff safe while continuing to serve clients, including implementing flexible remote working arrangements for our employees and providing extra safety measures at corporate facilities. To serve our clients, we have instituted a number of service offerings and developed COVID-19 resources to assist clients with obtaining government provided tax credits, tax deferrals, loans and loan forgiveness and to provide guidance to assist clients with addressing the challenges faced by employers as a result of the pandemic. These service offerings and guidance to assist clients during the pandemic included additional benefits support, remote workforce transition, monitoring and educating on regulatory changes, including vaccine mandates; return to the workplace and workplace safety. In the third quarter of 2021 ("Q3 2021"), the average number of WSEEs paid per month increased 11.1% year-over-year as the Q3 2021 increase in WSEEs paid at existing clients combined with WSEEs paid from new sales exceeded the third quarter of 2020 ("Q3 2020") levels. We expect the average number of paid WSEEs per month to increase between 11.0% and 12.0% in the fourth quarter of 2021 as compared to the fourth quarter of 2020, which, if achieved, would equate to the average number of paid WSEEs per month growing 3.1% to 4.1% sequentially from the third quarter of 2021. We experienced a 10.3% increase in the year-over-year benefits costs per covered employee during the first nine months of 2021 as compared to the first nine months of 2020, which had substantially lower costs primarily due to the significant decrease in benefits utilization that we experienced during the second quarter of 2020. During the second quarter of 2020, we experienced a 10.7% decrease in benefits costs per covered employee due primarily to lower utilization of medical services by plan participants as a result of the COVID-19 pandemic, including in response to COVID-19 governmental requirements or guidance related to the deferral of non-essential medical procedures and shelter-in-place and similar orders. During the remainder of 2021 and possibly beyond 2021, benefits costs are expected to continue to be affected by the dynamics of the pandemic, including the impact on healthcare utilization and incremental COVID-19 testing, vaccine and treatment costs. This may result in a higher level of healthcare claims costs than our historical claim cost trends. While we have experienced a reduced frequency in workers' compensation claims during the COVID-19 pandemic, the COVID-19 pandemic has not had a material impact on our workers' compensation cost estimate; however, the ultimate impact of COVID-19 on our workers' compensation program remains uncertain. 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, impacts of changes in or variants of the COVID-19 virus, actions by businesses and governments in response to the pandemic, including programs designed to assist small and medium-sized businesses with the economic impact of the pandemic; and theInsperity | 2021 Third Quarter Form 10-Q 20 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS speed and effectiveness of responses to combat the virus, including the development, availability and acceptance of therapeutics and vaccines. See Part II, Item 1A. "Risk Factors" for additional information. 2021 Highlights Third Quarter 2021 Compared to Third Quarter 2020 •Average number of WSEEs paid per month increased 11.1% •Net income and diluted earnings per share ("diluted EPS") increased 36.4% and 37.3% to$27.3 million and$0.70 , respectively •Adjusted EPS decreased 2.2% to$0.89 •Adjusted EBITDA increased 4.5% to$60.1 million First Nine Months 2021 Compared to First Nine Months 2020 •Average number of WSEEs paid per month increased 5.2% •Net income and diluted EPS decreased 14.6% and 14.3% to$114.4 million and$2.94 , respectively •Adjusted EPS decreased 12.8% to$3.62 •Adjusted EBITDA decreased 10.5% to$224.6 million Please read "Non-GAAP Financial Measures" for a reconciliation of adjusted EBITDA and adjusted EPS to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted inthe United States ("GAAP").Insperity | 2021 Third Quarter Form 10-Q 21 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Key Financial and Statistical Data
(in thousands, except per Three Months Ended September 30, Nine Months Ended September 30, share, WSEE and statistical data) 2021 2020 % Change 2021 2020 % Change Financial data: Revenues$ 1,209,628 $ 1,007,820 20.0 %$ 3,681,834 $ 3,230,669 14.0 % Gross profit 198,479 185,033 7.3 % 649,478 639,304 1.6 % Operating expenses 158,876 156,261 1.7 % 490,828 452,324 8.5 % Operating income 39,603 28,772 37.6 % 158,650 186,980 (15.2) % Other income (expense) (1,712) (1,628) 5.2 % (3,307) (3,961) (16.5) % Net income 27,296 20,009 36.4 % 114,372 133,952 (14.6) % Diluted EPS 0.70 0.51 37.3 % 2.94 3.43 (14.3) % Non-GAAP financial measures(1): Adjusted net income $ 34,793$ 35,389 (1.7) %$ 140,851 $ 161,928 (13.0) % Adjusted EBITDA 60,133 57,558 4.5 % 224,560 250,770 (10.5) % Adjusted EPS 0.89 0.91 (2.2) % 3.62 4.15 (12.8) % Average WSEEs paid 257,560 231,750 11.1 % 244,667 232,553 5.2 % Statistical data (per WSEE per month): Revenues(2) $ 1,565$ 1,450 7.9 % $ 1,672$ 1,544 8.3 % Gross profit 257 266 (3.4) % 295 305 (3.3) % Operating expenses 206 225 (8.4) % 223 216 3.2 % Operating income 51 41 24.4 % 72 89 (19.1) % Net income 35 29 20.7 % 52 64 (18.8) %
____________________________________
(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 Nine Months Ended September
September 30, 30,
(per WSEE per month) 2021 2020 2021 2020
Gross billings $ 10,346 $ 9,441 $ 10,755 $ 9,726
Less: WSEE payroll cost 8,781 7,991 9,083 8,182
Revenues $ 1,565 $ 1,450 $ 1,672 $ 1,544 --------------------------------------------------------------------------------
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:
•WSEEs
•Adjusted EBITDA
•Adjusted EPS
Our growth in the number of WSEEs paid is affected by three primary sources: new
client sales, client retention and the net change in WSEEs paid at existing
clients through new hires and layoffs.
•During Q3 2021, WSEEs paid increased 11.1% compared to Q3 2020. The number of
WSEEs paid from new client sales and client retention improved compared to Q3
2020 and the net gain (loss) in our client base improved compared to Q3 2020 as
clients continue to recover from the effects of the pandemic.
•During the first nine months of 2021 ("YTD 2021"), WSEEs paid increased 5.2%
compared to the first nine months of 2020 ("YTD 2020"). The number of WSEEs paid
from new client sales improved compared to YTD 2020 and the net gain (loss) in
our client base improved compared to YTD 2020 as clients continue to recover
from the effects of the pandemic. Client retention remained consistent compared
to YTD 2020.
Average WSEEs Paid and
Year-over-Year Growth Percentage
[[Image Removed: nsp-20210930_g2.jpg]]--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adjusted EBITDA and
Year-over-Year Growth Percentage
(in thousands)
[[Image Removed: nsp-20210930_g3.jpg]]
Adjusted EPS and
Year-over-Year Growth Percentage
(amounts per share)
[[Image Removed: nsp-20210930_g4.jpg]]Revenues
Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs and (2) a monthly markup component . Our revenues are primarily dependent on the number of clients enrolled, the resulting number of WSEEs paid each period and the number of WSEEs enrolled in our benefit plans. Because our monthly markup is computed in part as a percentage of payroll cost, certain revenues are also affected by the payroll cost of WSEEs, which may fluctuate based on the composition of the WSEE base, inflationary effects on wage levels and differences in the local economies of our markets.Insperity | 2021 Third Quarter Form 10-Q 24 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue and Year-over-Year Growth Percentage (in thousands) [[Image Removed: nsp-20210930_g5.jpg]] Third Quarter 2021 Compared to Third Quarter 2020 Our revenues for Q3 2021 were$1.2 billion , an increase of 20.0%, primarily due to the following: •Average WSEEs paid increased 11.1%. •Revenues per WSEE per month increased 7.9%, or$115 , on 3.9% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of$40.2 million . First Nine Months 2021 Compared to First Nine Months 2020 Our revenues for YTD 2021 were$3.7 billion , an increase of 14.0%, primarily due to the following: •Average WSEEs paid increased 5.2%. •Revenues per WSEE per month increased 8.3%, or$128 , on 5.2% higher average pricing, as well as the non-recurrence of the 2020 FICA deferral credits of$85.0 million and$11.6 million of comprehensive service fee credits.Insperity | 2021 Third Quarter Form 10-Q 25 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We provide our PEO HR Outsourcing solutions to small and medium-sized businesses
throughout
PEO HR Outsourcing Solutions Revenue by Region
(in thousands)
[[Image Removed: nsp-20210930_g6.jpg]] [[Image Removed: nsp-20210930_g7.jpg]]
________________________________________________________
(1)The Southwest region includes
The percentage of total PEO HR Outsourcing solutions revenue in our significant markets includes the following:
Significant Markets
[[Image Removed: nsp-20210930_g8.jpg]] [[Image Removed: nsp-20210930_g9.jpg]]
We believe the middle market sector, which we generally define as those
companies with employees ranging from approximately 150 to 5,000 WSEEs, has
historically been under-served by the PEO industry. Currently, we have a
dedicated sales management, service personnel, and consulting staff who
concentrate solely on the middle market sector. Our average number of WSEEs per
month in our middle market sector increased 2.4% during YTD 2021 compared to YTD
2020, representing approximately 23.7% and 24.4% of our total average paid WSEEs
during YTD 2021 and YTD 2020, respectively.
Insperity | 2021 Third Quarter Form 10-Q 26
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Gross Profit and
Year-over-Year Growth Percentage
(in thousands)
[[Image Removed: nsp-20210930_g10.jpg]]
Gross Profit per WSEE per Month and
Year-over-Year Growth Percentage
[[Image Removed: nsp-20210930_g11.jpg]]--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter 2021 Compared to Third Quarter 2020 Gross profit for Q3 2021 increased 7.3% to$198.5 million compared to$185.0 million in Q3 2020. Gross profit per WSEE per month for Q3 2021 decreased$9 to$257 compared to$266 in Q3 2020 due primarily to higher direct costs, offset in part by higher average pricing, as discussed below. Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. Our revenues per WSEE per month increased$115 due to higher average pricing, as well as the non-recurrence of the 2020 FICA deferral elections by clients pursuant to the CARES Act. The net increase in direct costs between Q3 2021 and Q3 2020 attributable to the changes in cost estimates for benefits and workers' compensation totaled$6.1 million as discussed below. The$124 per WSEE per month increase in direct costs is due primarily to the direct cost components changes as follows: Benefits costs •The cost of group health insurance and related employee benefits increased$27 per WSEE per month and increased 6.0% on a cost per covered employee basis. In Q3 2021, benefits costs continued to reflect the dynamics of the pandemic, including increased utilization of our health plan and COVID-19 related vaccination, testing and treatment costs. •The percentage of WSEEs covered under our health insurance plans was 66.4% in Q3 2021 compared to 67.9% in Q3 2020. •Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of$3.7 million , or$5 per WSEE per month, in Q3 2021 compared to a reduction in costs of$7.7 million , or$11 per WSEE per month, in Q3 2020. 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 has allowed for claims within our policy periods to be closed out at amounts below our original cost estimates. •Workers' compensation costs increased 20.5%, or$2 per WSEE per month, in Q3 2021 compared to Q3 2020 on an 18.2% increase in non-bonus payroll costs. •As a percentage of non-bonus payroll cost, workers' compensation costs in Q3 2021 were 0.30% in both Q3 2021 and Q3 2020. •We recorded a reduction in workers' compensation costs of$9.3 million , or 0.15% of non-bonus payroll costs, in Q3 2021 compared to a reduction of$11.4 million , or 0.22% of non-bonus payroll costs, in Q3 2020, primarily as a result of closing out claims at lower than expected costs. Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies - Workers' Compensation Costs," for a discussion of our accounting for workers' compensation costs. Payroll tax costs •Payroll taxes increased 35.8% on a 22.1% increase in payroll costs, or$96 per WSEE per month, due primarily to the non-recurrence of$40.2 million of the 2020 FICA deferral elections by clients pursuant to the CARES Act. •Payroll taxes as a percentage of payroll costs increased to 6.0% in Q3 2021 compared to 5.4% Q3 2020, primarily due to the non-recurrence of the 2020 FICA deferral elections by clients pursuant to the CARES Act. Insperity | 2021 Third Quarter Form 10-Q 28 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months 2021 Compared to First Nine Months 2020 Gross profit for YTD 2021 increased 1.6% to$649.5 million compared to$639.3 million in YTD 2020. Gross profit per WSEE per month for YTD 2021 decreased$10 to$295 compared to$305 in YTD 2020 due primarily to higher direct costs, offset in part by higher average pricing, as discussed below. Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. Our revenues per WSEE per month increased$128 due to higher average pricing as well as the non-recurrence of the 2020 FICA deferral elections pursuant to the CARES Act and the comprehensive service fee credits. The net increase in direct costs between YTD 2021 and YTD 2020 attributable to the changes in cost estimates for benefits and workers' compensation totaled$7.4 million as discussed below. The$138 per WSEE per month increase in direct costs is due primarily to the direct cost components changes as follows: Benefits costs •The cost of group health insurance and related employee benefits increased$60 per WSEE per month and increased 10.3% on a cost per covered employee basis due primarily to an increase in claims in YTD 2021 compared to YTD 2020, which had lower claims as a result of lower utilization and the deferral of non-essential health care procedures, primarily in the second quarter of 2020, in connection with the COVID-19 pandemic and related government requirements or guidance. •The percentage of WSEEs covered under our health insurance plans was 67.2% in YTD 2021 compared to 68.0% in YTD 2020. •Reported results include changes in estimated claims run-off related to prior periods which was an increase in costs of$4.5 million , or$2 per WSEE per month, in YTD 2021 compared to a reduction in costs of$1.9 million , or$1 per WSEE per month, in YTD 2020. 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 0.5%, but decreased$1 on a per WSEE per month basis, in YTD 2021 compared to YTD 2020. •As a percentage of non-bonus payroll cost, workers' compensation costs in YTD 2021 were 0.29% compared to 0.33% in YTD 2020. •We recorded a reduction in workers' compensation costs of$31.4 million , or 0.18% of non-bonus payroll costs, in YTD 2021 compared to a reduction of$32.4 million , or 0.21% of non-bonus payroll costs, in YTD 2020, primarily as a result of closing out claims at lower than expected costs. Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies - Workers' Compensation Costs," for a discussion of our accounting for workers' compensation costs. Payroll tax costs •Payroll taxes increased 21.0% on a 16.8% increase in payroll costs, or$79 per WSEE per month, due primarily to the non-recurrence of$85.0 million of client FICA deferral elections pursuant to the CARES Act in YTD 2020, partially offset by the YTD 2021 collection of$16.8 million in federal payroll tax refunds related to prior years. •Payroll taxes as a percentage of payroll costs increased to 6.7% in YTD 2021 compared to 6.4% in YTD 2020. Insperity | 2021 Third Quarter Form 10-Q 29 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 other sales personnel, including business performance advisors ("BPAs"), as well as, channel referral fees. Commissions are based on new accounts sold and a percentage of revenue generated by such personnel. •Advertising - Advertising expense primarily consists of media advertising and other business promotions in our current and anticipated sales markets. •General and administrative expenses - Our general and administrative expenses primarily include: •rent expenses related to our service centers and sales offices •outside professional service fees related to legal, consulting and accounting services •administrative costs, such as postage, printing and supplies •employee travel and training expenses •technology and facility costs, including repairs, maintenance and software-as-a-service ("SaaS") licensing costs •Depreciation and amortization - Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices, software development and technology infrastructure. Third Quarter 2021 Compared to Third Quarter 2020 The following table presents certain information related to our operating expenses: Three Months Ended September 30, per WSEE (in thousands, except per WSEE) 2021 2020 % Change 2021 2020 % Change Salaries$ 89,232 $ 89,429 (0.2) %$ 115 $ 129 (10.9) % Stock-based compensation 10,362 20,864 (50.3) % 13 30 (56.7) % Commissions 8,724 7,722 13.0 % 11 11 - Advertising 9,507 4,781 98.8 % 12 7 71.4 % General and administrative 31,134 25,646 21.4 % 42 37 13.5 % Depreciation and amortization 9,917 7,819 26.8 % 13 11 18.2 % Total operating expenses$ 158,876 $ 156,261 1.7 %$ 206 $ 225 (8.4) % Operating expenses for Q3 2021 increased 1.7% to$158.9 million compared to$156.3 million in Q3 2020. Operating expenses per WSEE per month for Q3 2021 decreased 8.4% to$206 compared to$225 in Q3 2020. •Salaries of corporate and sales staff for Q3 2021 decreased 0.2% to$89.2 million , or$14 per WSEE per month, compared to Q3 2020. The decrease was primarily due to lower incentive compensation accruals in Q3 2021. •Stock-based compensation expense for Q3 2021 decreased 50.3% to$10.4 million , or$17 per WSEE per month, compared to Q3 2020. The decrease was primarily due to the non-recurrence of stock-based compensation expense related to our 2020 short-term performance based awards. Insperity | 2021 Third Quarter Form 10-Q 30 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS •Advertising expense for Q3 2021 increased 98.8% to$9.5 million , or$5 per WSEE per month, compared to Q3 2020. The increase was primarily due to increases in television, radio, print and digital advertising and sponsorship costs. •General and administrative expenses for Q3 2021 increased 21.4% to$31.1 million , or$5 per WSEE per month, compared to Q3 2020. The increase was primarily due to technology SaaS licensing costs, as well as increased travel costs as the COVID-19 pandemic travel restrictions have eased. •Depreciation and amortization expense for Q3 2021 increased 26.8% to$9.9 million , or$2 per WSEE per month, compared to Q3 2020. The increase was primarily due to the completion of a new facility on our corporate campus and increased capital expenditures related to software development costs. First Nine Months 2021 Compared to First Nine Months 2020 Nine Months Ended
per WSEE
(in thousands, except per WSEE) 2021 2020 % Change 2021 2020 % Change
Salaries $ 286,669 $ 266,640 7.5 % $ 130 $ 127 2.4 %
Stock-based compensation 35,965 38,110 (5.6) % 16 18 (11.1) %
Commissions 24,694 23,657 4.4 % 11 11 -
Advertising 23,804 15,334 55.2 % 11 7 57.1 %
General and administrative 91,981 85,254 7.9 % 42 42 -
Depreciation and amortization 27,715 23,329 18.8 % 13 11 18.2 %
Total operating expenses $ 490,828 $ 452,324 8.5 % $ 223 $ 216 3.2 %
Operating expenses for YTD 2021 increased 8.5% to $490.8 million compared to
$452.3 million in YTD 2020. Operating expenses per WSEE per month for YTD 2021
increased 3.2% to $223 compared to $216 in YTD 2020.
•Salaries of corporate and sales staff for YTD 2021 increased 7.5% to $286.7
million , or $3 per WSEE per month, compared to YTD 2020. This increase was
primarily due to higher incentive compensation accruals in YTD 2021 related to
better than expected YTD 2021 operating results, as well as a 1.0% increase in
corporate headcount, including a 1.4% increase in total BPAs in YTD 2021
compared to YTD 2020.
•Stock-based compensation expense for YTD 2021 decreased 5.6% to $36.0 million
or $2 per WSEE per month, compared to YTD 2020. The decrease was primarily due
to the non-recurrence of stock-based compensation expense related to our 2020
short-term performance based awards.
•Advertising expense for YTD 2021 increased 55.2% to $23.8 million , or $4 per
WSEE per month, compared to YTD 2020. The increase was primarily due to the
resumption of the Insperity Invitational in 2021, which was canceled in 2020 due
to the COVID-19 pandemic, as well as increases in television, radio and digital
advertising and sponsorship costs.
•General and administrative expenses for YTD 2021 increased 7.9% to $92.0
million , but remained flat on a per WSEE per month basis, compared to YTD 2020.
The increase was primarily due to technology SaaS licensing costs and
professional services related to implementation of a CRM solution, partially
offset by decreases in travel costs.
•Depreciation and amortization expense for YTD 2021 increased 18.8% to $27.7
million , or $2 per WSEE per month, compared to YTD 2020. The increase was
primarily due to the completion of a new facility on our corporate campus and
increased capital expenditures related to software development costs and sales
office expansions.
Other Income (Expense)
Other Income (expense) for Q3 2021 was net expense of $1.7 million compared to
net expense of $1.6 million in Q3 2020, and for YTD 2021 was net expense of $3.3
million compared to net expense of $4.0 million in YTD 2020.
Insperity | 2021 Third Quarter Form 10-Q 31
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Expense
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Effective income tax rate 28.0% 26.3% 26.4% 26.8%
For the nine months ended September 30, 2021 , our provision for income taxes
differed from the U.S. statutory rate primarily due to state income taxes,
non-deductible expenses and vesting of restricted and long-term incentive stock
awards. During the first nine months of 2021 and 2020, we recognized an income
tax benefit of $2.2 million and $2.0 million , respectively, related to the
vesting of short-term, long-term incentive, and restricted stock awards.
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 Our management refers to non-bonus
financial measure that excludes the impact payroll cost in analyzing, reporting
of bonus payrolls paid to our WSEEs. and forecasting our workers'
compensation costs.
Bonus payroll cost varies from period to
period, but has no direct impact to our We include these non-GAAP financial
ultimate workers' compensation costs under measures because we believe they are
the current program. useful to investors in allowing for
greater transparency related to the
costs incurred under our current
workers' compensation program.
Adjusted cash, cash Excludes funds associated with:
equivalents and • federal and state income tax
marketable securities withholdings,
• employment taxes,
• other payroll deductions, and
• client prepayments. Webelieve 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,
EBITDA Represents net income computed in and to plan for future periods by
accordance with GAAP, plus: focusing on our underlying operations.
• interest expense, We believe that the adjusted results
• income tax expense, and provide relevant and useful information
• depreciation and amortization expense. for investors because they allow
investors to view performance in a
Adjusted EBITDA Represents EBITDA plus: manner similar to the method used by
• non-cash stock-based compensation. management and improves their ability
to understand and assess our operating Adjusted net income Represents net income computed in performance. Adjusted EBITDA is used by
accordance with GAAP, excluding: our lenders to assess our leverage and
• non-cash stock-based compensation. ability to make interest payments.
Adjusted EPS Represents diluted net income per share
computed in accordance with GAAP,
excluding:
• non-cash stock-based compensation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a reconciliation of payroll cost (GAAP) to non-bonus payroll costs
(non-GAAP):
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except 2021 2020 2021 2020
per WSEE per month) Per WSEE Per WSEE Per WSEE Per WSEE
Payroll cost $ 6,784,378 $ 8,781 $ 5,555,907 $
7,991
431,861 621 2,942,817 1,337 1,935,950 925
Non-bonus payroll cost
18.2 % 6.4 % 0.4 % 4.4 % 12.3 % 6.7 % 3.2 % 3.4 %
Following is a reconciliation of cash, cash equivalents and marketable
securities (GAAP) to adjusted cash, cash equivalents and marketable securities
(non-GAAP):
(in thousands) September 30, 2021 December 31, 2020
Cash, cash equivalents and marketable securities $ 500,618
$ 589,375
Less:
Amounts payable for withheld federal and state income
taxes, employment taxes and other payroll deductions 198,405 341,988
Client prepayments 74,646 35,328
Adjusted cash, cash equivalents and marketable $ 227,567
$ 212,059
securities
Following is a reconciliation of net income (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP):
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per 2021 2020 2021 2020
WSEE per month) Per WSEE Per WSEE Per WSEE Per WSEE
Net income $ 27,296 $ 35 $ 20,009 $ 29 $ 114,372 $ 52 $ 133,952 $ 64
Income tax expense 10,595 14 7,135 10 40,971 19 49,067 23
Interest expense 1,963 3 1,731 2 5,537 3 6,312 3
Depreciation and
amortization 9,917 12 7,819 12 27,715 12 23,329 12
EBITDA 49,771 64 36,694 53 188,595 86 212,660 102
Stock-based compensation 10,362 14 20,864 30 35,965 16 38,110 18
Adjusted EBITDA $ 60,133 $ 78 $ 57,558 $ 83 $ 224,560 $ 102 $ 250,770 $ 120
% Change period over
period 4.5 % (6.0) % 12.5 % 16.9 % (10.5) % (15.0) % 19.8 % 20.0 %
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a reconciliation of net income (GAAP) to adjusted net income (non-GAAP):
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2021 2020 2021 2020
Net income $ 27,296 $ 20,009 $ 114,372 $ 133,952
Non-GAAP adjustments:
Stock-based compensation 10,362 20,864 35,965 38,110
Tax effect (2,865) (5,484) (9,486) (10,134)
Total non-GAAP adjustments, net 7,497 15,380 26,479 27,976
Adjusted net income $ 34,793 $ 35,389 $ 140,851 $ 161,928
% Change period over period (1.7) % 15.5 % (13.0) % 10.4 %
Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP):
Three Months Ended September 30, Nine Months Ended September 30,
(amounts per share) 2021 2020 2021 2020
Diluted EPS $ 0.70 $ 0.51 $ 2.94 $ 3.43 Non-GAAP adjustments: Stock-based compensation
0.27 0.54 0.92 0.98
Tax effect (0.08) (0.14) (0.24) (0.26)
Total non-GAAP adjustments, net 0.19 0.40 0.68 0.72
Adjusted EPS $ 0.89 $ 0.91 $ 3.62 $ 4.15 % Change period over period
(2.2) % 21.3 % (12.8) % 16.2 %
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of resources in view of, among other things, our expansion plans,
stock repurchases, potential acquisitions, debt service requirements and other
operating cash needs. To meet short-term liquidity requirements, which are
primarily the payment of direct costs and operating expenses, we rely primarily
on cash from operations. Longer-term projects, large stock repurchases or
significant acquisitions may be financed with public or private debt or equity.
We have a $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 $500.6 million in cash, cash equivalents and marketable securities at
September 30, 2021 , of which approximately $198.4 million was payable in early
October 2021 for withheld federal and state income taxes, employment taxes and
other payroll deductions, and approximately $74.6 million represented client
prepayments that were payable in October 2021 . At September 30, 2021 , we had
working capital of $202.3 million compared to $172.3 million at December 31,
2020 . 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 2021. 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 continually monitor
in light of our strategic goals and the significant uncertainty created by the
COVID-19 pandemic.
As of September 30, 2021 , 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.
Insperity | 2021 Third Quarter Form 10-Q 34
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash Flows from Operating Activities
Net cash provided by operating activities in the first nine months of 2021 was
$54.8 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
no later than the same day as the payment of WSEE payrolls and associated
payroll taxes. Therefore, the last business day of a reporting period has a
substantial impact on our reporting of operating cash flows. For example, many
WSEEs are paid on Fridays; therefore, operating cash flows decrease in the
reporting periods that end on a Friday or a Monday. In the period ended
September 30, 2021 , the last business day of the reporting period was a
Thursday, client prepayments were $74.6 million and employment taxes and other
deductions were $198.4 million . In the period ended September 30, 2020 , the last
business day of the reporting period was a Wednesday, client prepayments were
$46.5 million and employment taxes and other deductions were $147.1 million .
•Medical plan funding - Our health care contract with United establishes
participant cash funding rates 90 days in advance of the beginning of a
reporting quarter. Therefore, changes in the participation level of the United
plan have a direct impact on our operating cash flows. In addition, changes to
the funding rates, which are solely determined by United based primarily upon
recent claim history and anticipated cost trends, also have a significant impact
on our operating cash flows. As of September 30, 2021 , premiums owed and cash
funded to United have exceeded the costs of the United plan, resulting in a
$15.3 million surplus, $6.3 million of which is reflected as a current asset,
and $9.0 million of which is reflected as a long-term asset on our Condensed
Consolidated Balance Sheets. The premiums, including an additional quarterly
premium, owed to United at September 30, 2021 , were $33.7 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 13.0% to $140.9 million in the
first nine months ended September 30, 2021 , compared to $161.9 million in the
first nine months ended September 30, 2020 . Please read "Results of Operations -
First Nine Months 2021 Compared to First Nine Months 2020."
Cash Flows from Investing Activities
Net cash flows used in investing activities were $22.4 million for the nine
months ended September 30, 2021 , primarily due to property and equipment
purchases of $23.6 million .
Cash Flows from Financing Activities
Net cash flows used in financing activities were $95.2 million for the nine
months ended September 30, 2021 . We paid $50.2 million in dividends and
repurchased or withheld $49.8 million in stock.
Insperity | 2021 Third Quarter Form 10-Q 35
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