# INSPERITY, INC. (NSP) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from INSPERITY, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1000753/000100075325000008/nsp-20241231.htm
Accession: 0001000753-25-000008
Filing date: 2025-02-11
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NSP/
All MD&A years: /company/NSP/mda/
Previous year: /company/NSP/mda/fy2023/ (FY 2023)
Next year: /company/NSP/mda/fy2025/ (FY 2025)

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this annual report. Historical results are not necessarily indicative of trends in operating results for any future period.

The statements contained in this annual report that are not historical facts are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this annual report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in Item 1A. Risk Factors and the uncertainties set forth from time to time in our other public reports and filings and public statements.

Executive Summary

Overview

Our long-term strategy is to provide the best small and medium-sized businesses in the United States with our specialized human resources service offering and to leverage our buying power and expertise to provide additional valuable services to clients. Our most comprehensive HR services offerings are provided through our Workforce Optimization® and Workforce SynchronizationTM solutions (together, our “PEO HR Outsourcing Solutions”), which encompass a broad range of human resources 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, our Insperity PremierTM platform. Our overall operating results can be measured in terms of revenues, gross profit or adjusted EBITDA per WSEE per month. We often use the average number of WSEEs paid during a period as our unit of measurement in analyzing and discussing our results of operations.

In addition to our PEO HR Outsourcing Solutions, we offer a comprehensive traditional payroll and human capital management solution, known as our Workforce AccelerationTM solution, our traditional payroll solution. We also offer a number of other business performance solutions, including Recruiting Services, Employment Screening, Retirement Services, and Insurance Services. These other products or services generally are offered only with our other solutions.

2024 Highlights

•Average number of WSEEs paid per month decreased 2% to 307,261. Revenues increased 1% on a 3% increase in revenue per WSEE, partially offset by the 2% decrease in average WSEEs paid.

•We ended 2024 averaging 309,093 paid WSEEs in the fourth quarter of 2024, which represents a 2% decrease over the fourth quarter of 2023.

•Approximately 26% of our average paid WSEEs were in our middle market sector for the years ended December 31, 2024 and 2023, which is generally defined as companies with 150 to 5,000 WSEEs.

•Gross profit increased 1% to $1.1 billion. The increase was primarily due to a 3% increase in gross profit per WSEE, which was partially offset by a 2% decline in the average number of WSEEs paid per month. Gross profit per WSEE paid per month reflected, in part, a 3% pricing increase offset by a 3% increase in direct costs per WSEE. The increase in direct costs per WSEE was primarily attributable to a 4% increase in benefits costs per participant.

•Operating expenses increased 14% in 2024 to $935 million, and included increases in travel and event costs, salary and wages, and the implementation of our Workday strategic partnership. On a per WSEE per month basis, operating expenses increased from $219 in 2023 to $253 in 2024.

•Net income and diluted earnings per share (“Diluted EPS”) decreased 47% and 46% to $91 million and $2.42, respectively.

•Adjusted net income and adjusted EPS decreased 36% and 35% to $135 million and $3.58, respectively.

•Adjusted EBITDA decreased 24% to $270 million.

[[GREPCENT_TABLE]]
[["","38","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

•Our net income per WSEE per month decreased 46% from $46 in 2023 to $25 in 2024.

•Our adjusted EBITDA per WSEE per month decreased 22% from $94 in 2023 to $73 in 2024.

•We ended 2024 with working capital of $155 million.

•During 2024, we paid $89 million in dividends, repurchased approximately 697,000 shares of our common stock at a cost of $63 million and paid $38 million in capital expenditures.

Please read “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA, adjusted net income, and adjusted EPS to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Revenues

We account for our revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Our PEO HR Outsourcing Solutions gross billings to clients include the payroll cost of each WSEE at the client location and a markup computed as a percentage of each WSEEs payroll cost. We invoice the gross billings concurrently with each periodic payroll of our WSEEs. Revenues, which exclude the payroll cost component of gross billings, and therefore, consist solely of the markup, are recognized ratably over the payroll period as WSEEs perform their service at the client worksite. This markup includes pricing components associated with our estimates of payroll taxes, benefits and workers’ compensation costs, plus a separate component related to our HR services. Revenues that have been recognized but not invoiced represent unbilled accounts receivable included in accounts receivable, net on our Consolidated Balance Sheets.

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.

Direct Costs

The primary direct costs associated with revenue-generating activities for our PEO HR Outsourcing Solutions are:

•employment-related taxes (“payroll taxes”)

•costs of employee benefit plans

•workers’ compensation costs

Payroll taxes consist of the employer’s portion of Social Security and Medicare taxes under FICA, federal unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as a percentage of payroll cost. The federal unemployment tax rates are defined by federal regulations. State unemployment tax rates are subject to claim histories and vary from state to state.

Employee benefits costs are comprised primarily of health insurance premiums and claims costs (including dental and pharmacy costs), but also include costs of other employee benefits such as life insurance, vision care, disability insurance, education assistance, adoption assistance, a flexible spending account program and an employee well-being program.

Workers’ compensation costs include administrative and risk charges paid to the insurance carrier, and claims costs, which are driven primarily by the frequency and severity of claims.

Gross Profit

Our gross profit per WSEE is primarily determined by our ability to accurately estimate 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.

[[GREPCENT_TABLE]]
[["","39","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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 cash incentive compensation. Our corporate employees include client services, sales and marketing, benefits, legal, finance, information technology, administrative support personnel and those associated with our other products and services.

•Stock-based compensation — Our stock-based compensation relates to the recognition of non-cash compensation expense over the requisite service period of time-based and performance-based incentive plan awards.

•Commissions — Commissions expense consists primarily of amounts paid to sales managers and other sales personnel, including 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, including the Insperity Invitational™ presented by UnitedHealthcare® sponsorship.

•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

◦facility costs, including repairs and maintenance

◦technology costs, including software-as-a-service (“SaaS”) subscription costs, amortization of SaaS implementation costs, and costs associated with the development and implementation of the Workday joint solution.

•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.

Other Income (Expense)

Other income (expense) includes interest charges incurred in connection with borrowings under our credit facility and interest income earned on our cash, cash equivalents, marketable securities, restricted cash and deposits. Please read “—Liquidity and Capital Resources” for additional information.

Income Taxes

Our provision for income taxes typically differs from the U.S. statutory rate of 21%, due primarily to state income taxes, non-deductible expenses, vesting of equity awards and various tax credits. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant items resulting in deferred income taxes include prepaid assets, accruals for workers’ compensation expenses, stock-based compensation, software development costs, accrued incentive compensation, operating lease assets and liabilities and depreciation. Changes in these items are reflected in our financial statements through a deferred income tax provision. Please read Note 7 to the Consolidated Financial Statements, “Income Taxes,” for additional information.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires

[[GREPCENT_TABLE]]
[["","40","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to health and workers’ compensation insurance claims experience, client bad debts, income taxes, property and equipment, goodwill and other intangibles, and contingent liabilities. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following accounting policies are critical and/or require judgments and estimates used in the preparation of our Consolidated Financial Statements:

•Benefits costs — We provide group health insurance coverage under a single-employer plan that covers both our WSEEs in our PEO HR Outsourcing Solutions and our corporate employees and utilizes a national network of carriers including United, UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, and Harvard Pilgrim Health Care, formerly known as Tufts, all of which provide fully insured policies or service contracts.

The health insurance contract with United provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense in the Consolidated Statements of Income. The estimated incurred but not reported claims are based upon: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into benefits costs.

Our financial responsibility with United is limited to the first $1 million of paid claims per claimant per year. 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 we would accrue a liability for the excess costs on our 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 Consolidated Balance Sheets. The terms of the arrangement with United require us to maintain an accumulated cash surplus in the plan of $9 million, which is reported as long-term prepaid insurance. As of December 31, 2024, Plan Costs were more than the net premiums paid and owed to United by $5 million. As this amount is less than the agreed-upon $9 million surplus maintenance level, the $14 million difference is included in accrued health insurance costs, a current liability, in our Consolidated Balance Sheets. In addition, the premiums owed to United at December 31, 2024, were less than $1 million, which is also included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.

We believe that recent claim development patterns are representative of incurred but not reported claims costs during the reporting period. The estimated completion rate used to compute incurred but not reported claims involves a significant level of judgment. Accordingly, an increase (or decrease) in the completion rate used to estimate the incurred claims would result in an increase (or decrease) in benefits costs and net income would decrease (or increase) accordingly.

The following table illustrates the sensitivity of changes in the completion rate on our estimate of total benefits costs of $3.0 billion in 2024:

[[GREPCENT_TABLE]]
[["Change in Completion Rate","","Change in Benefits Costs (in millions)","","Change in Net Income (in millions)"],["(2.5)%","","$","(31)","","","$","22"],["(1.0)%","","(12)","","","9"],["1.0%","","12","","","(9)"],["2.5%","","31","","","(22)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","41","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

•Workers’ compensation costs — Since 2007, our workers’ compensation coverage has been provided through an arrangement with Chubb. 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. 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 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 years ended December 31, 2024 and 2023, we reduced accrued workers’ compensation costs by $32 million and $33 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 was 4.3% in both 2024 and 2023) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Income.

Our claim trends could be greater than or less than our prior estimates, in which case we would revise our claims estimates and record an adjustment to workers’ compensation costs in the period such determination is made. If we were to experience any significant changes in actuarial assumptions, our loss development rates could increase (or decrease), which would result in an increase (or decrease) in workers’ compensation costs and a resulting decrease (or increase) in net income reported in our Consolidated Statements of Income.

The following table illustrates the sensitivity of changes in the loss development rate on our estimate of workers’ compensation costs totaling $75 million in 2024:

[[GREPCENT_TABLE]]
[["Change in Loss Development Rate","","Change in Workers\u2019 Compensation Costs (in millions)","","Change inNet Income (in millions)"],["(5.0)%","","$","(4)","","","$","3"],["(2.5)%","","(2)","","","1"],["2.5%","","2","","","(1)"],["5.0%","","4","","","(3)"]]
[[/GREPCENT_TABLE]]

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, a long-term asset in our Consolidated Balance Sheets. In 2024, we received $39 million for the return of excess claim funds related to the workers’ compensation program, which decreased deposits – workers’ compensation. As of December 31, 2024, we had restricted cash of $69 million and deposits – workers’ compensation of $178 million. We have estimated and accrued $204 million in incurred workers’ compensation claim costs as of December 31, 2024. Our estimate of incurred claim costs expected to be paid within one year is recorded as accrued workers’ compensation costs and 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 in our Consolidated Balance Sheets.

[[GREPCENT_TABLE]]
[["","42","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

New Accounting Pronouncements

We believe that we have implemented the accounting pronouncements with a material impact on our financial statements and do not believe there are any new or pending pronouncements that will materially impact our financial position or results of operations. Please read Note 1 to the Consolidated Financial Statements, “Accounting Policies,” for additional information.

Results of Operations

Key Financial and Statistical Data

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

 ____________________________________

(1)Revenues are comprised of gross billings less WSEE payroll costs as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions)","2024","2023","2022"],["Gross billings","$","43,752","","$","43,141","","$","40,127"],["Less: WSEE payroll cost","37,171","","36,655","","34,188"],["Revenues","$","6,581","","$","6,486","","$","5,939"]]
[[/GREPCENT_TABLE]]

(2)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.

(3)Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows:

[[GREPCENT_TABLE]]
[["","43","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(per WSEE per month)","2024","2023","2022"],["Gross billings","$","11,866","","$","11,519","","$","11,335"],["Less: WSEE payroll cost","10,081","","9,787","","9,657"],["Revenues","$","1,785","","$","1,732","","$","1,678"]]
[[/GREPCENT_TABLE]]

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 employee terminations.

•During 2024, the average number of WSEEs paid from new client sales increased 2% from 2023. Average client retention declined from 83% in 2023 to 81% in 2024, while the net change in our client base remained positive, although lower than 2023.

•During 2023, the average number of WSEEs paid from new client sales and the net change in our client base declined compared to 2022. Average client retention also declined from 85% in 2022 to 83% in 2023.

[[GREPCENT_TABLE]]
[["Average WSEEs Paid and Year-over-Year Growth Percentage","Net Income and Year-over-Year Growth Percentage(in millions)","EPS and Year-over-Year Growth Percentage(amounts per share)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","44","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Adjusted EBITDA and Year-over-Year Growth Percentage(in millions)","Adjusted EPS and Year-over-Year Growth Percentage(amounts per share)"]]
[[/GREPCENT_TABLE]]

Revenues

2024 Compared to 2023

Our revenues for 2024 were $6.6 billion, an increase of 1%, primarily due to the following:

•Revenues per WSEE per month increased 3%, or $53, partially offset by a 2% decrease in average WSEEs paid.

2023 Compared to 2022

Our revenues for 2023 were $6.5 billion, an increase of 9%, primarily due to the following:

•Average WSEEs paid increased 6%.

•Revenues per WSEE per month increased 3%, or $54.

[[GREPCENT_TABLE]]
[["","45","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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 the United States. PEO HR Outsourcing Solutions revenue distribution by region follows:

PEO HR Outsourcing Solutions Revenue by Region

(in millions)

____________________________________

Note: Texas is included in the Southwest region.

The percentage of total PEO HR Outsourcing Solutions revenues in our significant markets include 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 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 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.

[[GREPCENT_TABLE]]
[["","46","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Gross Profit andYear-over-Year Growth Percentage(in millions)","Gross Profit per WSEE per Month andYear-over-Year Growth Percentage(per WSEE per month)"]]
[[/GREPCENT_TABLE]]

2024 Compared to 2023

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 $53 due to higher average pricing of 3%.

The net decrease in direct costs between 2024 and 2023 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $15 million as discussed below. The $45 per WSEE per month increase in direct costs is due primarily to the direct cost component changes as follows:

Benefits costs

•The cost of group health insurance and related employee benefits increased $20 per WSEE per month, or 4.3% on a cost per covered employee basis.

•The percentage of WSEEs covered under our health insurance plans was 64% in 2024 compared to 65% in 2023.

•Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $29 million, or $8 per WSEE per month, in 2024 compared to a decrease in costs of $13 million, or $3 per WSEE per month, in 2023.

Please read “—Critical Accounting Policies and Estimates—Benefits Costs” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs

Our continued discipline around our client selection, workplace 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 2%, or $1 per WSEE per month, in 2024 compared to 2023.

•As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.24% in 2024 and 0.23% in 2023.

•We recorded a reduction in workers’ compensation costs of $32 million, or 0.10% of non-bonus payroll costs, in 2024 compared to a reduction of $33 million, or 0.11% of non-bonus payroll costs, in 2023, primarily as a result of closing out claims at lower than expected costs.

[[GREPCENT_TABLE]]
[["","47","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

Please read “—Critical Accounting Policies and Estimates—Workers' Compensation Costs” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs

•Payroll taxes increased 2% on a 1% increase in payroll costs, or $24 per WSEE per month.

•Payroll taxes as a percentage of payroll costs increased to 7% in 2024 compared to 6% in 2023.

2023 Compared to 2022

The net decrease in direct costs between 2023 and 2022 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $16 million as discussed below. The $63 per WSEE per month increase in direct costs is due primarily to the direct cost component changes as follows:

Benefits costs

•The cost of group health insurance and related employee benefits increased $44 per WSEE per month, or 7% on a cost per covered employee basis.

•The percentage of WSEEs covered under our health insurance plans was 65% in both 2023 and 2022.

•Reported results include changes in estimated claims run-off related to prior periods, which was a decrease in costs of $13 million, or $3 per WSEE per month, in 2023 compared to an increase in costs of $12 million, or $3 per WSEE per month, in 2022.

Please read “—Critical Accounting Policies and Estimates—Benefits Costs” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs

Our continued discipline around our client selection, workplace safety and claims management contributed to the small increase 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 12%, or $1 per WSEE per month, in 2023 compared to 2022.

•As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.23% in both 2023 and 2022.

•We recorded a reduction in workers’ compensation costs of $33 million, or 0.11% of non-bonus payroll costs, in 2023 compared to a reduction of $42 million, or 0.14% of non-bonus payroll costs, in 2022, primarily as a result of closing out claims at lower than expected costs.

Please read “—Critical Accounting Policies and Estimates—Workers' Compensation Costs” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs

•Payroll taxes increased 9% on a 7% increase in payroll costs, or $18 per WSEE per month.

•Payroll taxes as a percentage of payroll costs were 6% in both 2023 and 2022.

[[GREPCENT_TABLE]]
[["","48","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

Operating Expenses

2024 Compared to 2023

The following table presents certain information related to our operating expenses:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","","","per WSEE"],["(in millions, except per WSEE)","2024","2023","% Change","","2024","2023","% Change"],["Salaries","$","521","","$","461","","13","%","","$","141","","$","123","","15","%"],["Stock-based compensation","61","","53","","15","%","","17","","14","","21","%"],["Commissions","47","","47","","\u2014","","","13","","13","","\u2014"],["Advertising","38","","37","","3","%","","10","","10","","\u2014"],["General and administrative:"],["Amortization of SaaS implementation costs","11","","6","","83","%","","3","","2","","50","%"],["Workday SaaS licensing and implementation expenses","29","","\u2014","","\u2014","","","8","","\u2014","","\u2014"],["All other general and administrative","184","","171","","8","%","","49","","46","","7","%"],["Total general and administrative","224","","177","","27","%","","60","","48","","25","%"],["Depreciation and amortization","44","","43","","2","%","","12","","11","","9","%"],["Total operating expenses","$","935","","$","818","","14","%","","$","253","","$","219","","16","%"]]
[[/GREPCENT_TABLE]]

Operating expenses for 2024 increased 14% to $935 million compared to $818 million in 2023. Operating expenses per WSEE per month for 2024 increased 16% to $253 compared to $219 in 2023.

•Salaries of corporate and sales staff for 2024 increased 13% to $521 million, or $18 per WSEE per month, compared to 2023. The increase was primarily due to a 5% increase in BPA, service, technology and support headcount and staff compensation levels in 2024 compared to 2023.

•Stock-based compensation expense for 2024 increased 15% to $61 million, or $3 per WSEE per month, compared to 2023. The increase was primarily due to time-based restricted stock unit awards issued under our incentive plan. Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the Consolidated Financial Statements for additional information.

•General and administrative expenses for 2024 increased 27% to $224 million, or $12 per WSEE per month, compared to 2023. The increase was primarily due to increased professional services fees, which includes expenses related to the implementation of our Workday strategic partnership, software licensing and maintenance costs, and amortization of SaaS implementation costs.

[[GREPCENT_TABLE]]
[["","49","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

2023 Compared to 2022

The following table presents certain information related to our operating expenses:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","","","per WSEE"],["(in millions, except per WSEE)","2023","2022","% Change","","2023","2022","% Change"],["Salaries","$","461","","$","431","","7","%","","$","123","","$","122","","1","%"],["Stock-based compensation","53","","50","","6","%","","14","","14","","\u2014"],["Commissions","47","","46","","2","%","","13","","13","","\u2014"],["Advertising","37","","37","","\u2014","","","10","","11","","(9)","%"],["General and administrative","177","","156","","13","%","","48","","44","","9","%"],["Depreciation and amortization","43","","41","","5","%","","11","","11","","\u2014"],["Total operating expenses","$","818","","$","761","","7","%","","$","219","","$","215","","2","%"]]
[[/GREPCENT_TABLE]]

Operating expenses for 2023 increased 7% to $818 million compared to $761 million in 2022. Operating expenses per WSEE per month for 2023 increased 2% to $219 compared to $215 in 2022.

•Salaries of corporate and sales staff for 2023 increased 7% to $461 million, or $1 per WSEE per month, compared to 2022. The increase was primarily due to an increase in BPA, service and support headcount and staff compensation levels, which was partially offset by lower incentive compensation expense in 2023 compared to 2022.

•Stock-based compensation expense for 2023 increased 6% to $53 million, but remained flat on a per WSEE per month basis, compared to 2022. The increase was primarily due to awards issued under our long-term incentive and restricted stock unit programs. Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the Consolidated Financial Statements for additional information.

•Commissions expense for 2023 increased 2% to $47 million, but remained flat on a per WSEE per month basis, compared to 2022. The increase was primarily due to commissions associated with our PEO HR Outsourcing Solutions, as well as an increase in the amount of sales channel referral fees paid during 2023.

•General and administrative expenses for 2023 increased 13% to $177 million, or $4 per WSEE per month, compared to 2022. The increase was primarily due to increased travel and event costs, software licensing and maintenance costs, and amortization of SaaS implementation costs.

•Depreciation and amortization expense for 2023 increased 5% to $43 million, but remained flat on a per WSEE per month basis, compared to 2022. The increase was primarily due to increased capital expenditures related to computer hardware and software and software development costs.

Other Income (Expense)

Other income (expense) was net income of $9 million and $6 million in 2024 and 2023, respectively, and net expense of $5 million in 2022.

In 2024 and 2023, the increase in other income was due to an increase in interest rates on our marketable securities investments and workers’ compensation deposits, which was partially offset by an increase in interest expense related to higher average interest rates on borrowings under our credit facility. Please read Note 2 to the Consolidated Financial Statements, “Other Balance Sheet Information,” for additional information.

Income Tax Expense

Our effective income tax rate was 28% in 2024, 24% in 2023 and 27% in 2022. Our provision for income taxes differed from the U.S. statutory rate of 21% primarily due to state income taxes and non-deductible expenses, offset by excess tax benefits associated with the vesting of equity compensation of less than $1 million, $5 million and less than $1 million, in 2024, 2023 and 2022, respectively. Please read Note 1 “Accounting Policies” and Note 7 “Income Taxes,” to the Consolidated Financial Statements for additional information.

[[GREPCENT_TABLE]]
[["","50","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

Non-GAAP Financial Measures

Non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the tables below.

[[GREPCENT_TABLE]]
[["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\u2019 compensation costs under the current program.","Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers\u2019 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\u2019 compensation program."],["Adjusted cash, cash equivalents and marketable securities","Excludes funds associated with: \u2022 federal and state income tax withholdings, \u2022 employment taxes, \u2022 other payroll deductions, and \u2022 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: \u2022 interest expense, \u2022 income tax expense, \u2022 depreciation and amortization expense, and \u2022 amortization of SaaS implementation costs."],["Adjusted EBITDA","Represents EBITDA plus: \u2022 non-cash stock-based compensation."],["Adjusted net income","Represents net income computed in accordance with GAAP, excluding: \u2022 non-cash stock-based compensation."],["Adjusted EPS","Represents diluted net income per share computed in accordance with GAAP, excluding: \u2022 non-cash stock-based compensation."]]
[[/GREPCENT_TABLE]]

Following is a reconciliation of payroll cost (GAAP) to non-bonus payroll costs (non-GAAP):

[[GREPCENT_TABLE]]
[["(in millions, except per WSEE per month)","Year Ended December 31,"],["2024","","2023","","2022"],["","Per WSEE","","","Per WSEE","","","Per WSEE"],["Payroll cost","$","37,171","","$","10,081","","","$","36,655","","$","9,787","","","$","34,188","","$","9,657"],["Less: Bonus payroll cost","5,101","","1,383","","","4,978","","1,329","","","4,960","","1,401"],["Non-bonus payroll cost","$","32,070","","$","8,698","","","$","31,677","","$","8,458","","","$","29,228","","$","8,256"],["Payroll cost % change year over year","1","%","3","%","","7","%","1","%","","21","%","3","%"],["Non-bonus payroll cost % change year over year","1","%","3","%","","8","%","2","%","","24","%","5","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","51","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

Following is a reconciliation of cash, cash equivalents and marketable securities (GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP):

[[GREPCENT_TABLE]]
[["(in millions)","December 31, 2024","","December 31, 2023"],["Cash, cash equivalents and marketable securities","$","1,055","","","$","709"],["Less:"],["Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions","830","","","510"],["Client prepayments","91","","","28"],["Adjusted cash, cash equivalents and marketable securities","$","134","","","$","171"]]
[[/GREPCENT_TABLE]]

Following is a reconciliation of net income (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions, except per WSEE per month)","2024","","2023","","2022"],["","Per WSEE","","","Per WSEE","","","Per WSEE"],["Net income","$","91","","$","25","","","$","171","","$","46","","","$","179","","$","51"],["Income tax expense","35","","8","","","54","","14","","","66","","19"],["Interest expense","28","","8","","","27","","7","","","14","","4"],["Amortization of SaaS implementation costs","11","","3","","","6","","2","","","2","","1"],["Depreciation and amortization","44","","12","","","43","","11","","","41","","11"],["EBITDA","209","","56","","","301","","80","","","302","","86"],["Stock-based compensation","61","","17","","","53","","14","","","50","","14"],["Adjusted EBITDA","$","270","","$","73","","","$","354","","$","94","","","$","352","","$","100"],["Net income % change year over year","(47)","%","(46)","%","","(4)","%","(10)","%","","44","%","24","%"],["Adjusted EBITDA % change year over year","(24)","%","(22)","%","","1","%","(6)","%","","38","%","18","%"]]
[[/GREPCENT_TABLE]]

Following is a reconciliation of net income (GAAP) to adjusted net income (non-GAAP):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions)","2024","2023","2022"],["Net income","$","91","","$","171","","$","179"],["Non-GAAP adjustments:"],["Stock-based compensation","61","","53","","50"],["Tax effect","(17)","","(12)","","(13)"],["Total non-GAAP adjustments, net","44","","41","","37"],["Adjusted net income","$","135","","$","212","","$","216"],["Net income % change year over year","(47)","%","(4)","%","44","%"],["Adjusted net income % change year over year","(36)","%","(2)","%","40","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","52","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(amounts per share)","2024","2023","2022"],["Diluted EPS","$","2.42","","$","4.47","","$","4.64"],["Non-GAAP adjustments:"],["Stock-based compensation","1.61","","1.38","","1.30"],["Tax effect","(0.45)","","(0.33)","","(0.35)"],["Total non-GAAP adjustments, net","1.16","","1.05","","0.95"],["Adjusted EPS","$","3.58","","$","5.52","","$","5.59"],["Diluted EPS % change year over year","(46)","%","(4)","%","46","%"],["Adjusted EPS % change year over year","(35)","%","(1)","%","42","%"]]
[[/GREPCENT_TABLE]]

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 revolving credit facility (“Facility”) with a syndicate of financial institutions with a current borrowing capacity of $650 million. 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 $1.1 billion in cash, cash equivalents and marketable securities at December 31, 2024, of which approximately $390 million was payable in early January 2025 for withheld federal and state income taxes, employment taxes and other payroll deductions, approximately $91 million represented client prepayments that were payable in January 2025, and $440 million of funds we received in late December 2024 from the Internal Revenue Service related to employee retention tax credits claimed by our PEO clients under COVID relief programs that are expected to be distributed to clients in early 2025. At December 31, 2024, we had working capital of $155 million compared to $159 million at December 31, 2023. 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 2025. 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.

As of December 31, 2024, we had outstanding letters of credit and borrowings totaling $370 million under the Facility. Please read Note 6 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.

Cash Flows from Operating Activities

Net cash provided by operating activities in 2024 was $520 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 year ended December 31, 2024, the last business day of the reporting period was a Tuesday, client prepayments were $91 million and employment taxes and other deductions were $830 million, which included $440 million of funds related to client employee retention tax credits received on their behalf from the Internal Revenue Service that are expected to be distributed to clients in early 2025. In the year ended December 31, 2023, the last business day of the reporting period was a Friday, client prepayments were $28 million and employment taxes and other deductions were $510 million.

[[GREPCENT_TABLE]]
[["","53","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

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

•Workers’ compensation plan funding — During 2024 and 2023, we received $39 million and $46 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase in working capital.

•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 December 31, 2024, Plan Costs were more than the net premiums paid and owed to United by $5 million, which is $14 million less than our agreed-upon $9 million surplus maintenance level. The $14 million difference is therefore reflected as a current liability and $9 million is reflected as a long-term asset on our Consolidated Balance Sheet at December 31, 2024. In addition, the premiums owed to United at December 31, 2024, were less than $1 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheet. In addition, the premiums owed to United at December 31, 2024, were less than $1 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheet.

•Operating results — Our net income and adjusted net income has a significant impact on our operating cash flows. Our net income and adjusted net income decreased 47% and 36% to $91 million and $135 million in 2024, respectively, compared to $171 million and $212 million in 2023, respectively. Please read “Results of Operations.”

Cash Flows from Investing Activities

Net cash flows used in investing activities were $38 million for the year ended December 31, 2024, primarily due to property and equipment purchases.

Cash Flows from Financing Activities

Net cash flows used in financing activities were $173 million for the year ended December 31, 2024. We paid $89 million in dividends and repurchased or withheld $63 million in stock. In addition, client funds liability and other financing activities decreased by $21 million.

Seasonality, Inflation and Quarterly Fluctuations

Our quarterly earnings are impacted by the seasonal nature of our medical claims costs and payroll taxes. Typically, medical claims costs tend to increase throughout the year with the fourth quarter being the period with the highest costs, which has a negative impact on our fourth quarter earnings. This trend is primarily the result of many WSEEs’ medical plan deductibles being fully met by the fourth quarter, which increases our liability with respect to those claims. We have also experienced variability on a quarterly basis in medical claims costs based on the unpredictable nature of large claims. Payroll taxes and associated billings are computed based on an employee’s annual taxable wage base. The annual payroll tax wage bases are frequently met in the first two quarters of each year depending on the employee’s compensation levels. As a result, the gross profit contribution from payroll taxes is typically higher in the first two quarters and declines in the latter half of each year. These historical trends may change and other seasonal trends may develop in the future. For further information related to our health insurance costs, please read “—Critical Accounting Policies and Estimates—Benefits Costs.”

We believe the effects of inflation have not had a significant impact on our results of operations or financial condition; however, inflationary pressure could adversely impact our profitability in the future.

[[GREPCENT_TABLE]]
[["","54","2024 Form 10-K"]]
[[/GREPCENT_TABLE]]

QUANTITATIVE AND QUALITATIVE DISCLOSURES