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Insperity(NSP) - 2021 Q4 - Annual Report

FORM 10-K Filing Information Registrant Information Insperity, Inc. filed its 2021 Form 10-K, is incorporated in Delaware, and trades on the NYSE under 'NSP' - Insperity, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 20212 - The company is incorporated in Delaware and its common stock trades on the New York Stock Exchange under the symbol 'NSP'34 Filer Status and Market Value Insperity is a Large Accelerated Filer with a non-affiliate common stock market value of approximately $3.3 billion as of June 30, 2021 - Insperity, Inc. is classified as a Large Accelerated Filer and a well-known seasoned issuer45 - As of February 3, 2022, 38,336,850 shares of common stock were outstanding7 Aggregate Market Value of Common Stock Held by Non-Affiliates | Date | Market Value (approx.) | | :--- | :--- | | June 30, 2021 | $3.3 billion | Documents Incorporated by Reference Part III information is incorporated by reference from the 2022 annual meeting proxy statement, to be filed within 120 days of fiscal year-end - Part III information is incorporated by reference from the proxy statement for the 2022 annual meeting of stockholders, to be filed within 120 days of the fiscal year-end8 Part I Item 1. Business Insperity provides comprehensive HR and business solutions, including PEO services, to small and medium-sized businesses, serving 268,978 WSEEs monthly in Q4 2021 - Insperity provides comprehensive HR and business solutions, evolving from a PEO pioneer to a full-service provider since 198612 - The most comprehensive HR services are offered through Workforce Optimization and Workforce Synchronization solutions, covering payroll, benefits, workers' compensation, and compliance13 Worksite Employees (WSEEs) and Office Locations (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Average WSEEs per month (Q4 2021) | 268,978 | | Physical office locations | 68 | | Sales markets | 40 | General Business Overview Insperity offers comprehensive HR outsourcing solutions, Workforce Optimization and Workforce Synchronization, and other business performance services, acting as a co-employer to manage administrative burdens for clients - Insperity's long-term strategy is to provide specialized HR services to small and medium-sized businesses in the U.S., leveraging its buying power and expertise13 - The company's most comprehensive HR services are Workforce Optimization and Workforce Synchronization (PEO HR Outsourcing solutions), including payroll, benefits, workers' compensation, government compliance, performance management, and training13 - Insperity also offers Workforce Acceleration (traditional payroll and HCM) and other business performance solutions like Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Retirement Services, and Insurance Services13 PEO Industry Context The PEO industry helps small and medium-sized employers manage complex regulations and achieve economies of scale for HR and benefits - The PEO industry evolved in the early 1980s due to increasing legal and regulatory burdens on small and medium-sized employers18 - Key demand drivers for PEO services include: focus on growth/productivity, need for competitive health care/benefits, increasing costs of health/workers' compensation insurance, complex payroll/employment regulation, and significant costs of HR technology infrastructure19 - 42 states have enacted legislation recognizing PEOs or requiring licensing/registration/certification, and Insperity actively supports these regulatory efforts20 - The Small Business Efficiency Act (SBEA) created a federal regulatory framework for Certified PEOs (CPEOs), clarifying their role in federal payroll tax reporting and remittance; Insperity PEO Services, L.P. is a CPEO21 Service Offerings Details Insperity's PEO HR Outsourcing solutions provide extensive services, including payroll, benefits, and compliance, supported by the cloud-based Insperity Premier platform, alongside standalone HR solutions - PEO HR Outsourcing solutions include payroll/benefits administration, health/workers' compensation programs, employer liability management, government compliance assistance, general HR advice, and access to Insperity Premier22242527282931 - Workforce Optimization adds 401(k) retirement plans, employee recruiting/support, performance management, and training/development services22242527282931 - Insperity Premier is a cloud-based human capital management platform providing role-based access for managers, owners, and WSEEs to manage payroll, benefits, HR information, and analytics22242527282931 - Other product and service offerings include Workforce Acceleration (comprehensive traditional payroll and HCM), Performance Management, Recruiting Services, and Insurance Services, with revenues from these offerings representing 0.9% of total revenues in both 2021 and 202037383940414243 Client Service Agreement and Responsibilities The Client Service Agreement (CSA) establishes a co-employment relationship, assigning Insperity responsibility for personnel administration and compliance, while clients retain daily supervisory control - All PEO HR Outsourcing solutions clients execute a Client Service Agreement (CSA) establishing a co-employment relationship with Insperity4446 - Insperity's responsibilities include payment of wages/salaries and related taxes, workers' compensation compliance, and employee benefits administration47484951 - Client responsibilities include product/service provision, OSHA/EPA/FLSA/FMLA/WARN/USERRA compliance, and professional licensing47484951 - Concurrent responsibilities include implementation of employee policies, internal compliance with employment laws (e.g., Title VII, ADEA, ADA), and COBRA/HIPAA/PPACA/Code/ERISA compliance for client-sponsored plans47484951 - CSAs generally establish pricing for one year (two years for middle market clients) and are terminable with 30 days' written notice (or a termination fee for middle market clients)45 PEO HR Outsourcing Solutions Clients Insperity targets small to medium-sized businesses, conducting risk analysis for client selection, and achieved an 82% client retention rate in 2021 - Insperity targets small and medium-sized businesses with approximately 10 to 5,000 employees, aiming to serve 10% of the overall market54 - All prospective clients undergo a comprehensive employer-related risk analysis, minimizing offerings to high-risk industries56 Client Retention Rate | Year | Retention Rate | | :--- | :--- | | 2021 | 82% | | 2020 | 82% | | Last 5-year average | 85% | Marketing and Sales Strategy Insperity operates 85 sales offices in 40 markets, employing diverse marketing and sales strategies, including a proprietary pricing model and cross-selling initiatives Sales Office and Personnel (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Sales offices | 85 | | Sales markets | 40 | - Marketing efforts include national and local advertising, digital marketing, and public relations, with the Insperity Invitational golf tournament and Jim Nantz as key brand marketing focal points6364 - The organic growth model generates sales leads from direct sales, digital/traditional advertising, third-party channels, referrals, and marketing alliances, utilizing a proprietary pricing model and comprehensive employer risk analysis64 Competitive Landscape Insperity competes in the fragmented PEO industry based on service quality, scope, benefits, reputation, and price, with a full-service approach yielding higher gross profit and operating income per WSEE than industry averages - Competition in the PEO industry centers on quality and scope of services, benefits packages, reputation, and price67 - Insperity's full-service approach resulted in a staff support ratio 52% higher than the PEO industry average from 2018-20206668 - During the same period, gross profit per WSEE and operating income per WSEE exceeded industry averages by 149% and 239%, respectively6668 - Primary competitors include traditional in-house HR, large national PEOs (Automatic Data Processing, Inc., Paychex, Inc., TriNet Group, Inc.), fee-for-service providers, and HR technology solution companies6668 Vendor Relationships Insperity's key vendor relationships are with UnitedHealthcare for health insurance and Chubb Group for workers' compensation, with contracts extending through 2026 and 2024, respectively - UnitedHealthcare and Chubb Group of Insurance Companies are Insperity's most significant employee benefits vendors69 - UnitedHealthcare provides approximately 87% of health insurance coverage, with the contract expiring December 31, 202670 - The Chubb Program for workers' compensation, a fully insured program with financial responsibility for claims up to certain levels, expires September 30, 2022, with terms committed through September 30, 202470 Information Technology Infrastructure Insperity's PEO HR Outsourcing solutions rely on a proprietary mix of internally developed and licensed software, including Insperity Premier, hosted in two leased facilities with robust security and business continuity plans - Insperity's PEO HR Outsourcing solutions utilize a proprietary mix of internally developed and licensed software, including Insperity Premier, for managing WSEE enrollment, HR, benefits, payroll, and client invoicing7274 - The company has two leased hosting facilities, with the primary one capable of running all critical business applications independently, supported by an active Business Continuity Plan75 - Security measures include industry-standard technologies, best practice policies, annual employee training, SOC-1 reports, and access controls to protect data and privacy77 Industry Regulations and Compliance Insperity's PEO HR Outsourcing solutions are subject to extensive federal, state, and local laws, with the company acting as a Certified PEO (CPEO) and plan sponsor for employee benefits - Insperity's operations are affected by numerous federal, state, and local laws related to tax, insurance, and employment, with the company assuming certain employer obligations as a co-employer78 - Insperity PEO Services, L.P. is a Certified PEO (CPEO) under the SBEA, clarifying its responsibility for federal payroll taxes7883 - Employee benefit plans (group health, 401(k), cafeteria plans, etc.) are offered to WSEEs and are subject to ERISA and the Code, with Insperity acting as plan sponsor80818287 - Insperity assumes responsibility for federal and state employment taxes (income tax withholding, FICA, FUTA) for WSEEs80818287 - State unemployment insurance (SUI) tax expense is based on taxable wages and state-assigned rates, which can vary based on compensation experience and state fund deficiencies80818287 Human Capital and Intellectual Property Insperity focuses on attracting and retaining skilled corporate employees, with approximately 3,600 corporate employees and 650 Business Performance Advisors as of 2021, and holds important intellectual property - Insperity's human capital management objective is to attract, develop, and retain qualified corporate employees to support growth, client service, and technology investments89 Corporate Employees and Business Performance Advisors (BPAs) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Corporate employees (as of Dec 31) | ~3,600 | N/A | | Average BPAs | 650 | 645 | | Average trained BPAs | 596 | 590 | - The company offers competitive compensation, 401(k), employee stock purchase programs, leadership development, and flexible remote working arrangements91 - Insperity holds registered trademarks, copyrights, and other intellectual property, which are considered of considerable importance to its business93 Item 1A. Risk Factors Insperity faces risks from adverse economic conditions, PEO-specific liabilities for WSEE payroll and benefits, rising healthcare costs, technology disruptions, cybersecurity threats, and challenges in integrating acquisitions - Adverse economic conditions, including the COVID-19 pandemic, can negatively affect demand for HR services, employment levels, and client ability to pay, impacting financial results96979899103 - Insperity assumes liability for WSEE payroll, payroll taxes, benefits, and workers' compensation costs, regardless of client payment, posing a significant financial risk114115116117125126127128129 - Increases in health insurance and workers' compensation costs, or inability to secure competitive coverage, could materially adversely affect the business114115116117125126127128129 - A determination that Insperity is not the employer of its WSEEs could jeopardize favorable tax treatment and ERISA compliance for benefit plans114115116117125126127128129 - Technology risks include the need to constantly enhance service/technology offerings, potential disruptions to IT systems, data theft/cyberattacks, and compliance with evolving privacy and data protection laws (e.g., CCPA)145146147148150151 Economic Risks Insperity's business is vulnerable to economic downturns, the COVID-19 pandemic's impact on employment and benefits, labor shortages, inflation, and regional economic factors, with credit facility covenants potentially restricting activities - Adverse economic conditions or difficulty obtaining credit can negatively impact demand for outsourced HR services, leading to reduced employment, compensation, and benefits levels, and increased client payment difficulties96 - The COVID-19 pandemic caused a 1.8% year-over-year decline in average paid WSEEs in Q2 2020, though 2021 saw a 7.1% increase to 250,745 WSEEs99101107108 - Health insurance costs experienced a 9.8% increase per covered employee in 2021 due to variable claim patterns and COVID-19 related costs, following lower utilization in 202099101107108 - Labor shortages and inflation could increase labor costs and reduce profitability, as client agreements generally fix pricing for a period99101107108 - Geographic market concentration in New York (10%), California (16%), and Texas (18%) makes results vulnerable to regional economic, statutory, and regulatory factors109 PEO HR Outsourcing Solutions Risks Insperity faces significant financial liability for WSEE payroll and benefits, regardless of client payment, along with risks from rising insurance costs, adverse employer status determinations, and short-term contract cancellations - Insperity assumes liability for WSEE payroll, payroll taxes, benefits, and workers' compensation costs, and is responsible for their payment even if client fees are insufficient114115 - Increases in health insurance costs (e.g., due to unexpected claims or inaccurate forecasts) or inability to secure replacement coverage could materially affect the business116117125126127128 - Workers' compensation costs are a significant direct cost, and unexpected increases in claims or inaccurate forecasts could adversely impact results116117125126127128 - A determination that Insperity is not the 'employer' of WSEEs for ERISA or tax purposes could lead to non-compliance, loss of preemption, and inability to offer current benefit plans116117125126127128 - Standard CSAs can generally be canceled with 30 days' notice, making Insperity vulnerable to client cancellations, especially from large middle market clients (23.8% of WSEEs in 2021)132 Technology Risks Insperity faces technology risks from the need for continuous system enhancements, potential IT infrastructure disruptions, cybersecurity threats, and compliance with evolving data privacy laws - Evolving regulations and client expectations necessitate constant enhancement and expansion of Insperity's service and technology offerings, requiring substantial resource investment145146 - Disruptions to IT systems (e.g., network outages, system upgrades, data processing failures) could prevent timely transaction processing, leading to client loss, regulatory penalties, or financial losses147148150151 - Handling large amounts of sensitive personal and business information exposes Insperity to risks of data theft, cyberattacks, and security vulnerabilities, which could result in disclosure/misuse of information, liability, or reputational harm147148150151 - Failure to comply with privacy, data protection, and cybersecurity laws (e.g., CCPA) could lead to fines, regulatory penalties, and significant liabilities147148150151 - Reliance on third-party providers (financial institutions, data centers, cloud-service providers) for critical operations exposes Insperity to risks of communication failures, interruptions, and non-compliance, impacting client retention and reputation152153154 Other Operational Risks Insperity's strategy of marketing additional products and services, including through acquisitions, carries risks such as over-valuation, integration challenges, and potential litigation - Acquiring new businesses involves risks such as over-valuation, entering new markets without prior experience, integration challenges, diversion of management's attention, and potential litigation155 - Failure to integrate or realize the expected return on acquisitions and investments could have a material adverse impact on financial condition or results of operations, potentially requiring impairment charges155 Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments156 Item 2. Properties Insperity's corporate headquarters is a 33-acre campus in Kingwood, Texas, complemented by two leased hosting facilities, four regional service centers, and 69 leased sales and service offices nationwide - Insperity's corporate headquarters is a 33-acre company-owned campus in Kingwood, Texas, with 700,000 square feet of office space and undeveloped land for future expansion159 - Two leased hosting facilities in Bryan, Texas (lease until 2024) and The Woodlands, Texas (lease until 2022) total approximately 2,000 square feet160161162163164 - Four regional service centers are located in Atlanta (servicing ~35% of WSEE base), Dallas (~24% of WSEE base), Houston (~20% of WSEE base), and Los Angeles (~21% of WSEE base)160161162163164 - As of December 31, 2021, there were 69 leased sales and service facilities in 40 sales markets across the United States, housing 85 sales offices160161162163164 Item 3. Legal Proceedings Insperity is defending a federal securities class action lawsuit filed in July 2020, alleging materially false statements, which the company believes is without merit, and is also involved in other routine litigation - A federal securities class action lawsuit was filed against Insperity and certain officers in July 2020, alleging materially false and misleading statements411 - Insperity believes the allegations are without merit and intends to vigorously defend the litigation; no provision has been made in the financial statements due to outcome uncertainty412 - The company is also a defendant in various other routine lawsuits and claims, which management believes will not have a material adverse effect on financial condition or results of operations413 Item 4. Mine Safety Disclosures This item is not applicable to Insperity, Inc - Mine Safety Disclosures are not applicable to Insperity, Inc168 Item S-K 401(b). Executive Officers of the Registrant This section lists Insperity's executive officers as of February 3, 2022, including Paul J. Sarvadi (Chairman and CEO) and A. Steve Arizpe (President and COO), highlighting their extensive experience Insperity, Inc. Executive Officers (as of Feb 3, 2022) | Name | Age | Position | | :--- | :--- | :--- | | Paul J. Sarvadi | 65 | Chairman of the Board and Chief Executive Officer | | A. Steve Arizpe | 64 | President and Chief Operating Officer | | Douglas S. Sharp | 60 | Senior Vice President of Finance, Chief Financial Officer and Treasurer | | Daniel D. Herink | 55 | Senior Vice President of Legal, General Counsel and Secretary | | James D. Allison | 53 | Senior Vice President of Gross Profit Operations | - Executive officers have extensive experience, with Paul J. Sarvadi co-founding Insperity in 1986 and A. Steve Arizpe joining in 1989170 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Insperity's common stock trades on the NYSE under 'NSP', with 422 holders of record, and the company paid $144.2 million in dividends in 2021, including a $76.7 million special cash dividend - Insperity's common stock is traded on the New York Stock Exchange under the symbol 'NSP'; as of February 3, 2022, there were 422 holders of record175 Dividends Paid | Year | Total Dividends Paid | | :--- | :--- | | 2021 | $144.2 million (includes $76.7 million special dividend) | | 2020 | $61.9 million | Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased under Program | Maximum Shares Remaining under Program | | :--- | :--- | :--- | :--- | :--- | | 10/01/2021 – 10/31/2021 | 257 | $115.66 | — | 874,828 | | 11/01/2021 – 11/30/2021 | 71,200 | $117.60 | 71,200 | 1,803,628 | | 12/01/2021 – 12/31/2021 | 100,049 | $115.45 | 100,000 | 1,703,628 | | Total | 171,506 | $116.34 | 171,200 | 1,703,628 | 5-Year Cumulative Total Return (Indexed to $100 on 12/31/16) | Index | 12/16 | 12/17 | 12/18 | 12/19 | 12/20 | 12/21 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Insperity, Inc. | 100.00 | 169.61 | 278.56 | 259.80 | 251.71 | 384.69 | | S&P Smallcap 600 | 100.00 | 113.23 | 103.63 | 127.24 | 141.60 | 179.58 | | S&P Midcap 400 | 100.00 | 116.24 | 103.36 | 130.44 | 148.26 | 184.96 | | S&P 1500 Composite Human Resource and Employment Services | 100.00 | 133.83 | 118.16 | 139.60 | 140.55 | 211.68 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Insperity's 2021 revenues grew 16.0% to $5.0 billion, but net income and diluted EPS decreased 10.2%, while liquidity remained strong with $607.6 million in cash and equivalents Key Financial and Statistical Information (2021 vs 2020) | Metric | 2021 | 2020 | % Change (YoY) | | :--- | :--- | :--- | :--- | | Revenues (in thousands) | $4,973,070 | $4,287,004 | 16.0% | | Gross profit (in thousands) | $820,102 | $806,854 | 1.6% | | Operating expenses (in thousands) | $646,773 | $612,165 | 5.7% | | Operating income (in thousands) | $173,329 | $194,689 | (11.0)% | | Net income (in thousands) | $124,080 | $138,237 | (10.2)% | | Diluted EPS | $3.18 | $3.54 | (10.2)% | | Adjusted EBITDA (in thousands) | $254,946 | $288,620 | (11.7)% | | Average WSEEs paid | 250,745 | 234,223 | 7.1% | | Revenues per WSEE per month | $1,653 | $1,525 | 8.4% | | Gross profit per WSEE per month | $273 | $287 | (4.9)% | | Operating expenses per WSEE per month | $215 | $218 | (1.4)% | | Adjusted EBITDA per WSEE per month | $85 | $103 | (17.5)% | - Revenues increased 16.0% in 2021, driven by a 7.1% increase in average WSEEs and an 8.4% increase in revenue per WSEE per month, partly due to higher pricing and the non-recurrence of 2020 FICA deferral credits190219220 - Liquidity is strong with $607.6 million in cash, cash equivalents, and marketable securities at December 31, 2021, and a $500 million revolving credit facility available for working capital and corporate purposes190257 Executive Summary Insperity's long-term strategy focuses on specialized HR services for small and medium-sized businesses, with average WSEEs increasing 7.1% in 2021, despite a 9.8% rise in benefits costs per covered employee - Insperity's long-term strategy is to provide specialized HR services to small and medium-sized businesses, leveraging its buying power and expertise183 - Average WSEEs paid per month increased 7.1% year-over-year in 2021 to 250,745185186 - Benefits costs per covered employee increased 9.8% in 2021 compared to 2020, reflecting variable claim incurral patterns and incremental COVID-19 testing, vaccination, and treatment costs185186 - The company expects average paid WSEEs per month to increase between 18.0% and 19.0% in Q1 2022 compared to Q1 2021185186 Revenues Insperity recognizes revenues from PEO HR Outsourcing solutions as the markup component of gross billings, excluding WSEE payroll costs, recognized ratably and driven by client and WSEE numbers - Revenues are accounted for in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)192 - Revenues exclude the payroll cost component of gross billings and consist solely of the markup, recognized ratably over the payroll period as WSEEs perform services192 - Revenue drivers include the number of enrolled clients, WSEEs paid, WSEEs in benefit plans, and WSEE payroll costs (influenced by composition, wage inflation, and local economies)193 Direct Costs Direct costs for Insperity's PEO HR Outsourcing solutions primarily include employment-related taxes, employee benefits, and workers' compensation, significantly impacting gross profit - Primary direct costs include employment-related taxes (payroll taxes), costs of employee benefit plans, and workers' compensation costs194195196 - Payroll taxes consist of employer portions of Social Security, Medicare, federal unemployment, and state unemployment taxes194195196 - Employee benefits costs primarily comprise health insurance premiums and claims, along with other benefits like life, vision, and disability insurance194195196 Gross Profit Gross profit per WSEE is a key performance metric, determined by Insperity's ability to accurately estimate and control direct costs and effectively incorporate them into annually renewed client gross billings - Gross profit per WSEE is the principal measurement of relative performance at the gross profit level197 - It is primarily determined by the ability to accurately estimate and control direct costs and incorporate these changes into annually renewed gross billings197 Operating Expenses Operating expenses encompass corporate employee salaries, stock-based compensation, sales commissions, advertising, general and administrative costs, and depreciation, influenced by headcount, incentives, and capital investments - Salaries, wages, and payroll taxes are driven by the number of corporate employees, average pay, and cash incentive compensation198203 - Stock-based compensation relates to non-cash expense recognition for time-vested and performance-based awards198203 - Commissions are based on new accounts sold and a percentage of revenue generated by sales personnel198203 - Advertising includes media advertising, business promotions, and sponsorships (e.g., Insperity Invitational)198203 - General and administrative expenses cover rent, professional services, administrative costs, travel, training, and technology/facility costs198203 - Depreciation and amortization are a function of capital investments in facilities, software development, and technology infrastructure198203 Other Income (Expense) Other income (expense) primarily consists of interest charges from credit facility borrowings and interest income from cash, cash equivalents, and marketable securities, influenced by interest rates and debt balances - Other income (expense) includes interest charges from credit facility borrowings and interest income from cash, cash equivalents, marketable securities, restricted cash, and deposits200 Income Taxes Insperity's income tax provision deviates from the U.S. statutory rate due to state taxes, non-deductible expenses, and equity awards, with deferred taxes reflecting temporary differences between financial and tax reporting - The provision for income taxes differs from the U.S. statutory rate of 21% due to state income taxes, non-deductible expenses, vesting of equity awards, and various tax credits201 - Deferred income taxes reflect net tax effects of temporary differences between financial reporting and income tax carrying amounts of assets and liabilities201 Critical Accounting Policies and Estimates Insperity's financial statements rely on critical accounting policies and estimates, particularly for health and workers' compensation costs, which involve significant judgment in estimating incurred claims and future trends - Critical accounting policies and estimates include health and workers' compensation insurance claims experience, client bad debts, income taxes, property and equipment, goodwill and other intangibles, and contingent liabilities202 - Benefits costs for the UnitedHealthcare plan are accounted for using a partially self-funded model, with estimated incurred claims based on processed claims, estimated completion rates, and participant numbers, requiring significant judgment204206207208209210211214216 - Workers' compensation costs involve estimates for incurred claims, which are recorded in the period incurred and discounted to present value, based on loss development rates and future cost trends204206207208209210211214216 - Allowance for doubtful accounts is maintained for estimated losses from client non-payment, mitigated by tight credit policies and the right to terminate CSAs or require collateral204206207208209210211214216 New Accounting Pronouncements Insperity has implemented all material accounting pronouncements and does not anticipate new or pending pronouncements to materially affect its financial position or results - Insperity has implemented accounting pronouncements with a material impact and does not believe new or pending pronouncements will materially affect its financial position or results of operations215 Results of Operations In 2021, revenues increased 16.0% to $5.0 billion, but gross profit per WSEE declined 4.9% due to higher benefits costs, leading to a 10.2% decrease in net income and diluted EPS Key Financial and Statistical Information (2021 vs 2020 vs 2019) | Metric | 2021 | 2020 | 2019 | % Change (2021 v 2020) | % Change (2020 v 2019) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues (in thousands) | $4,973,070 | $4,287,004 | $4,314,804 | 16.0% | (0.6)% | | Gross profit (in thousands) | $820,102 | $806,854 | $732,934 | 1.6% | 10.1% | | Operating expenses (in thousands) | $646,773 | $612,165 | $546,301 | 5.7% | 12.1% | | Operating income (in thousands) | $173,329 | $194,689 | $186,633 | (11.0)% | 4.3% | | Net income (in thousands) | $124,080 | $138,237 | $151,099 | (10.2)% | (8.5)% | | Diluted EPS | $3.18 | $3.54 | $3.70 | (10.2)% | (4.3)% | | Average WSEEs paid | 250,745 | 234,223 | 235,547 | 7.1% | (0.6)% | | Revenues per WSEE per month | $1,653 | $1,525 | $1,527 | 8.4% | (0.1)% | | Gross profit per WSEE per month | $273 | $287 | $259 | (4.9)% | 10.8% | | Operating expenses per WSEE per month | $215 | $218 | $193 | (1.4)% | 13.0% | | Adjusted EBITDA per WSEE per month | $85 | $103 | $88 | (17.5)% | 17.0% | - 2021 Revenues increased 16.0% to $5.0 billion, driven by a 7.1% increase in average WSEEs and an 8.4% increase in revenue per WSEE per month (due to higher pricing and non-recurrence of 2020 FICA deferral credits)219220230231233241243244246 - 2021 Gross profit increased 1.6% to $820.1 million, but gross profit per WSEE per month declined 4.9% to $273, primarily due to a 9.8% increase in benefits costs per covered employee219220230231233241243244246 - 2021 Operating expenses increased 5.7% to $646.8 million, mainly from higher salaries and advertising, but decreased 1.4% on a per WSEE per month basis; stock-based compensation decreased 32.5%219220230231233241243244246 - Net income and diluted EPS both decreased 10.2% in 2021 to $124.1 million and $3.18, respectively; the effective income tax rate was 26.3% in 2021190217250 Non-GAAP Financial Measures Insperity provides non-GAAP financial measures like Adjusted EBITDA and Adjusted EPS to enhance transparency into underlying business performance, excluding items such as bonus payrolls and stock-based compensation - Non-GAAP financial measures (non-bonus payroll cost, adjusted cash, EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS) are used to provide greater transparency and reflect the fundamentals of the underlying business model252253 Reconciliation of Net Income (GAAP) to Adjusted EBITDA (Non-GAAP) | Metric (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net income | $124,080 | $138,237 | $151,099 | | Income tax expense | 44,238 | 51,033 | 38,544 | | Interest expense | 7,458 | 8,016 | 7,647 | | Depreciation and amortization | 38,547 | 31,189 | 28,723 | | EBITDA | $214,323 | $228,475 | $226,013 | | Stock-based compensation | 40,623 | 60,145 | 23,993 | | Adjusted EBITDA | $254,946 | $288,620 | $250,006 | Reconciliation of Diluted EPS (GAAP) to Adjusted EPS (Non-GAAP) | Metric (per share) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Diluted EPS | $3.18 | $3.54 | $3.70 | | Non-GAAP adjustments: | | | | | Stock-based compensation | 1.04 | 1.54 | 0.59 | | Tax effect of non-GAAP adjustments | (0.27) | (0.44) | (0.14) | | Total non-GAAP adjustments, net | 0.77 | 1.10 | 0.45 | | Adjusted EPS | $3.95 | $4.64 | $4.15 | Liquidity and Capital Resources Insperity maintains strong liquidity with $607.6 million in cash, cash equivalents, and marketable securities, supported by a $500 million revolving credit facility, and manages capital for expansion, repurchases, and debt service - Insperity relies on cash from operations for short-term liquidity and may use public/private debt or equity for longer-term projects, stock repurchases, or significant acquisitions256 Liquidity and Capital Resources (as of Dec 31, 2021) | Metric | Amount (in millions) | | :--- | :--- | | Cash, cash equivalents and marketable securities | $607.6 | | Working capital | $116.3 | | Revolving credit facility | $500.0 | | Outstanding letters of credit and borrowings | $370.4 | Cash Flows Summary (2021) | Activity | Net Cash Flow (in millions) | | :--- | :--- | | Operating Activities | $260.2 | | Investing Activities | $(31.0) | | Financing Activities | $(208.1) | Seasonality, Inflation and Quarterly Fluctuations Insperity's quarterly earnings are influenced by seasonal medical claims costs, peaking in Q4, and payroll taxes, with higher gross profit in Q1/Q2, while inflation has not historically had a significant impact - Quarterly earnings are impacted by seasonal medical claims costs (higher in Q4) and payroll taxes (higher in Q1/Q2)262 - Medical claims costs show variability due to large claims and COVID-19 impacts on healthcare utilization262 - Inflation has not had a significant historical impact but could adversely affect future profitability263 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Insperity is primarily exposed to market risks from interest rate fluctuations affecting its investments and variable-rate borrowings, which it manages through diversification and a focus on principal preservation - Insperity is primarily exposed to market risks from fluctuations in interest rates, impacting cash equivalent short-term investments, available-for-sale marketable securities, and variable-rate borrowings under its credit facility265 - The company's investment policy aims to limit interest rate risk through diversification and low investment turnover, focusing on maximizing after-tax interest income while preserving principal266 Item 8. Financial Statements and Supplementary Data The required financial statements and supplementary data are presented in a separate section of this Annual Report, specifically referenced in the 'Index to Consolidated Financial Statements' - The information required by this Item 8 is contained in a separate section of this Annual Report, referenced in the 'Index to Consolidated Financial Statements'267 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in and disagreements with accountants on accounting and financial disclosure268 Item 9A. Controls and Procedures Insperity's management, including the CEO and CFO, concluded that its disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021, with no material changes during Q4 2021 - Insperity's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021269 - Management assessed and maintained effective internal control over financial reporting as of December 31, 2021, based on COSO (2013 framework), which was also audited by Ernst & Young LLP270313315 - There were no material changes in internal control over financial reporting during the three months ended December 31, 2021271 Item 9B. Other Information There is no other information to report under this item - No other information to report272 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Insperity, Inc - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections is not applicable273 Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance, including the Code of Business Conduct and Ethics, is incorporated by reference from Insperity's definitive Proxy Statement for the 2022 annual meeting of stockholders - Information on Directors, Executive Officers and Corporate Governance is incorporated by reference from the definitive Proxy Statement276 - The Board adopted a Code of Business Conduct and Ethics, accessible on the company's website, meeting NYSE and Regulation S-K requirements277 Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from Insperity's definitive Proxy Statement - Information on Executive Compensation is incorporated by reference from the definitive Proxy Statement278 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from Insperity's definitive Proxy Statement - Information on Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is incorporated by reference from the definitive Proxy Statement279 Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships and related transactions, and director independence, is incorporated by reference from Insperity's definitive Proxy Statement - Information on Certain Relationships and Related Transactions, and Director Independence is incorporated by reference from the definitive Proxy Statement280 Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from Insperity's definitive Proxy Statement - Information on Principal Accounting Fees and Services is incorporated by reference from the definitive Proxy Statement281 Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and a comprehensive list of exhibits filed as part of the Annual Report on Form 10-K - The Consolidated Financial Statements are filed as part of this Annual Report283 - The item includes a comprehensive list of exhibits, such as the Amended and Restated Certificate of Incorporation, Bylaws, various stock award agreements, credit agreements, and certifications284285287 Item 16. Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided288 Signatures Signatures The Annual Report on Form 10-K was signed on February 10, 2022, by authorized representatives of Insperity, Inc., including Douglas S. Sharp (CFO) and Paul J. Sarvadi (CEO) - The report was signed on behalf of Insperity, Inc. on February 10, 2022290 - Signatories include Douglas S. Sharp (Principal Financial Officer) and Paul J. Sarvadi (Principal Executive Officer), along with other directors291292 Consolidated Financial Statements Index to Consolidated Financial Statements This section provides an index to the Consolidated Financial Statements, including reports from independent registered public accounting firms, management's report on internal control, and the primary financial statements along with their accompanying notes - The index lists the Report of Independent Registered Public Accounting Firm, Management's Report on Internal Control, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income, Consolidated Statements of Stockholders' Equity (Deficit), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements295 Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on Insperity's 2021 consolidated financial statements and the effectiveness of its internal control over financial reporting, highlighting critical audit matters related to health and workers' compensation claims estimates - Ernst & Young LLP issued an unqualified opinion on Insperity's consolidated financial statements for the three years ended December 31, 2021, confirming fair presentation in conformity with U.S. GAAP297 - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021, based on COSO criteria298 - Critical audit matters included the estimation of the cost of incurred health insurance claims, due to significant estimation required in determining medical completion rates301302304305 - Another critical audit matter was the estimation of the cost of incurred workers' compensation claims, due to significant estimation required in determining the loss development rate and future cost trends301302304305 Management's Report on Internal Control Insperity's management assessed and concluded that the company maintained effective internal control over financial reporting as of December 31, 2021, based on the COSO 2013 framework, providing reasonable assurance regarding financial reporting reliability - Management assessed the effectiveness of its internal control over financial reporting as of December 31, 2021, based on COSO (2013 framework)311 - Management concluded that Insperity maintained effective internal control over financial reporting as of December 31, 2021313 - Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting, acknowledging inherent limitations312 Consolidated Balance Sheets Total assets reached $1.75 billion in 2021, while total liabilities increased, leading to a stockholders' equity deficit of $(1.8) million due to repurchases and dividends Consolidated Balance Sheet Summary (in thousands) | Item | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total assets | $1,753,085 | $1,584,276 | | Total current assets | $1,244,848 | $1,077,268 | | Total liabilities | $1,754,859 | $1,540,144 | | Total current liabilities | $1,128,573 | $904,924 | | Total stockholders' equity (deficit) | $(1,774) | $44,132 | - Cash and cash equivalents increased to $575.8 million in 2021 from $554.8 million in 2020322 - The shift to a stockholders' equity deficit in 2021 was influenced by treasury stock repurchases and dividends paid322328 Consolidated Statements of Operations In 2021, revenues increased 16.0% to $4.97 billion, but operating income declined 11.0%, and net income decreased 10.2% to $124.1 million Consolidated Statements of Operations Summary (in thousands, except per share amounts) | Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $4,973,070 | $4,287,004 | $4,314,804 | | Payroll taxes, benefits and workers' compensation costs | $4,152,968 | $3,480,150 | $3,581,870 | | Gross profit | $820,102 | $806,854 | $732,934 | | Total operating expenses | $646,773 | $612,165 | $546,301 | | Operating income | $173,329 | $194,689 | $186,633 | | Income before income tax expense | $168,318 | $189,270 | $189,643 | | Income tax expense | $44,238 | $51,033 | $38,544 | | Net income | $124,080 | $138,237 | $151,099 | | Diluted EPS | $3.18 | $3.54 | $3.70 | - Revenues increased 16.0% year-over-year in 2021, while net income and diluted EPS decreased by 10.2%324 Consolidated Statements of Comprehensive Income For 2021, Insperity reported comprehensive income of $124.1 million, slightly below net income due to a minor unrealized loss on available-for-sale securities Consolidated Statements of Comprehensive Income (in thousands) | Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net income | $124,080 | $138,237 | $151,099 | | Unrealized gain (loss) on available-for-sale securities, net of tax | (14) | (7) | 21 | | Comprehensive income | $124,066 | $138,230 | $151,120 | - Comprehensive income for 2021 was $124.1 million, reflecting a minor unrealized loss on available-for-sale securities326 Consolidated Statements of Stockholders' Equity (Deficit) Insperity's stockholders' equity shifted to a deficit of $(1.8) million in 2021, primarily due to $144.2 million in dividends paid and $69.7 million in treasury stock repurchases Consolidated Statements of Stockholders' Equity (Deficit) Summary (in thousands) | Item | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total stockholders' equity (deficit) | $(1,774) | $44,132 | | Treasury stock, at cost | $(665,089) | $(626,984) | | Retained earnings | $553,590 | $575,028 | - The shift to a stockholders' equity deficit in 2021 was primarily due to $144.2 million in dividends paid and $69.7 million in treasury stock repurchases328 - These outflows were partially offset by $124.1 million in net income and $40.6 million in stock-based compensation expense328 Consolidated Statements of Cash Flows Operating cash flow was $260.2 million in 2021, while financing activities used $208.1 million for dividends and repurchases, increasing cash to $807.8 million Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $260,155 | $346,353 | $205,153 | | Net cash used in investing activities | $(31,013) | $(98,621) | $(29,724) | | Net cash used in financing activities | $(208,073) | $(53,583) | $(118,353) | | Net increase in cash and cash equivalents | $21,069 | $194,149 | $57,076 | | Cash, cash equivalents and restricted cash at end of year | $807,768 | $786,699 | $592,550 | - Operating cash flows were $260.2 million in 2021, impacted by changes in accounts receivable and payroll tax payables259260261330 - Investing activities used $31.0 million, primarily for $32.9 million in property and equipment purchases259260261330 - Financing activities used $208.1 million, including $144.2 million in dividends and $69.7 million in treasury stock repurchases259260261330 Notes to Consolidated Financial Statements The notes detail Insperity's accounting policies, including revenue recognition, direct costs, and segment reporting, with critical estimates for health and workers' compensation costs, and disclosures on financial instruments, debt, equity, and contingencies - Insperity operates one reportable segment and recognizes revenue ratably over the payroll period, excluding WSEE payroll costs338343 - Health insurance costs are accounted for using a partially self-funded model, with significant judgment in estimating incurred claims and managing plan surpluses/deficits356357358 - Workers' compensation costs involve actuarial estimates of loss development rates and future cost trends, discounted to present value, with financial responsibility for claims up to certain levels359360361 - Long-term debt includes a $500 million revolving credit facility, with $369.4 million outstanding at year-end 2021, subject to financial covenants384385386 - Stockholders' equity details include treasury stock repurchases ($69.7 million in 2021) and dividends paid ($144.2 million in 2021), contributing to a shift to equity deficit; incentive plans include time-based RSAs/RSUs and performance-based LTIP awards391392394396399401 1. Accounting Policies Insperity's accounting policies detail its business as a PEO and comprehensive HR solutions provider, recognizing revenue as markup, with direct costs including payroll taxes, benefits, and workers' compensation, and critical estimates for claims and contingent liabilities - Insperity provides PEO HR Outsourcing solutions through a co-employment relationship, assuming employer rights and obligations for WSEEs334335 - Revenue is recognized ratably over the payroll period, consisting solely of the markup component of gross billings, with direct costs comprising payroll taxes, employee benefits, and workers' compensation338342 - Health insurance costs for the UnitedHealthcare plan are accounted for using a partially self-funded model, with estimates for incurred claims based on completion rates356357359360361366[3