Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the quarterly period ended September 30, 2016.
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the transition period from  _______________ to _______________


Commission File No. 1-13998
 
Insperity, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
76-0479645
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
19001 Crescent Springs Drive
 
 
Kingwood, Texas
 
77339
(Address of principal executive offices)
 
(Zip Code)

(Registrant’s Telephone Number, Including Area Code):  (281) 358-8986

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes o No ý
 
As of October 25, 2016, 21,276,834 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.



 
TABLE OF CONTENTS
 
 
 
 
 
Part I
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 1a.
 
 
 
Item 2.
 
 
 
Item 6.


Table of Contents

PART I

ITEM 1.  FINANCIAL STATEMENTS

INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

 
 
September 30,
2016
 
December 31, 2015
 
 
(Unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
223,550

 
$
269,538

Restricted cash
 
41,779

 
37,418

Marketable securities
 
1,820

 
9,875

Accounts receivable, net:
 
 

 
 

Trade
 
2,918

 
7,691

Unbilled
 
235,588

 
190,715

Other
 
2,903

 
2,259

Prepaid insurance
 
17,596

 
7,417

Other current assets
 
18,426

 
17,135

Income taxes receivable
 
4,084

 

Total current assets
 
548,664

 
542,048

 
 
 
 
 
Property and equipment:
 
 

 
 

Land
 
5,214

 
5,214

Buildings and improvements
 
83,306

 
70,273

Computer hardware and software
 
94,901

 
90,654

Software development costs
 
50,320

 
45,762

Furniture, fixtures and other
 
38,256

 
39,919

 
 
271,997

 
251,822

Accumulated depreciation and amortization
 
(199,260
)
 
(190,063
)
Total property and equipment, net
 
72,737

 
61,759

 
 
 
 
 
Other assets:
 
 

 
 

Prepaid health insurance
 
9,000

 
9,000

Deposits – health insurance
 
4,700

 
3,700

Deposits – workers’ compensation
 
134,588

 
136,462

Goodwill and other intangible assets, net
 
13,213

 
13,588

Deferred income taxes, net
 
9,771

 
16,976

Other assets
 
2,213

 
1,379

Total other assets
 
173,485

 
181,105

Total assets
 
$
794,886

 
$
784,912


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INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
4,034

 
$
5,381

Payroll taxes and other payroll deductions payable
 
162,076

 
205,393

Accrued worksite employee payroll cost
 
202,502

 
161,917

Accrued health insurance costs
 
20,707

 
13,643

Accrued workers’ compensation costs
 
43,930

 
39,053

Accrued corporate payroll and commissions
 
28,446

 
39,103

Other accrued liabilities
 
23,170

 
20,250

Income taxes payable
 

 
2,971

Total current liabilities
 
484,865

 
487,711

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 

Accrued workers’ compensation costs
 
136,041

 
124,746

Long-term debt
 
104,400

 

Total noncurrent liabilities
 
240,441

 
124,746

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock
 
277

 
308

Additional paid-in capital
 
7,047

 
144,701

Treasury stock, at cost
 
(211,662
)
 
(205,325
)
Retained earnings
 
273,918

 
232,771

Total stockholders’ equity
 
69,580

 
172,455

Total liabilities and stockholders’ equity
 
$
794,886

 
$
784,912

 
See accompanying notes.

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Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Revenues (gross billings of $4.314 billion, $3.826 billion, $13.040 billion and $11.469 billion less worksite employee payroll cost of $3.611 billion, $3.200 billion, $10.828 billion and $9.515 billion, respectively)
 
$
702,538

 
$
626,286

 
$
2,212,278

 
$
1,953,603

 
 
 
 
 
 
 
 
 
Direct costs:
 
 

 
 

 
 

 
 

Payroll taxes, benefits and workers’ compensation costs
 
584,742

 
519,543

 
1,831,207

 
1,612,781

 
 
 
 
 
 
 
 
 
Gross profit
 
117,796

 
106,743

 
381,071

 
340,822

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Salaries, wages and payroll taxes
 
56,897

 
51,329

 
170,910

 
158,311

Stock-based compensation
 
4,191

 
3,710

 
12,527

 
10,174

Commissions
 
5,030

 
4,516

 
13,646

 
12,923

Advertising
 
3,540

 
3,193

 
13,299

 
13,257

General and administrative expenses
 
21,318

 
19,572

 
66,356

 
65,002

Impairment charges and other
 

 

 

 
11,120

Depreciation and amortization
 
4,047

 
4,487

 
12,494

 
14,362

 
 
95,023

 
86,807

 
289,232

 
285,149

Operating income
 
22,773

 
19,936

 
91,839

 
55,673

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 

 
 

Interest income
 
335

 
145

 
927

 
336

Interest expense
 
(628
)
 
(126
)
 
(1,915
)
 
(350
)
Income before income tax expense
 
22,480

 
19,955

 
90,851

 
55,659

Income tax expense
 
8,415

 
8,005

 
34,380

 
22,608

Net income
 
$
14,065

 
$
11,950

 
$
56,471

 
$
33,051

 
 
 
 
 
 
 
 
 
Less distributed and undistributed earnings allocated to participating securities
 
(330
)
 
(303
)
 
(1,283
)
 
(822
)
 
 
 
 
 
 
 
 
 
Net income allocated to common shares
 
$
13,735

 
$
11,647

 
$
55,188

 
$
32,229

 
 
 
 
 
 
 
 
 
Basic net income per share of common stock
 
$
0.66

 
$
0.48

 
$
2.64

 
$
1.32

 
 
 
 
 
 
 
 
 
Diluted net income per share of common stock
 
$
0.66

 
$
0.48

 
$
2.64

 
$
1.32


See accompanying notes.

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Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2016
(in thousands)
(Unaudited)
 
 
 
Common Stock Issued
 
Additional Paid-In Capital
 
Treasury Stock
 
Retained Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
30,758

 
$
308

 
$
144,701

 
$
(205,325
)
 
$
232,771

 
$
172,455

Purchase of treasury stock, at cost
 

 

 

 
(13,913
)
 

 
(13,913
)
Repurchase of common stock
 
(3,014
)
 
(31
)
 
(144,232
)
 

 

 
(144,263
)
Exercise of stock options
 

 

 
(27
)
 
625

 

 
598

Stock-based compensation expense
 

 

 
6,153

 
6,374

 

 
12,527

Other
 

 

 
452

 
577

 

 
1,029

Dividends paid
 

 

 

 

 
(15,324
)
 
(15,324
)
Net income
 

 

 

 

 
56,471

 
56,471

Balance at September 30, 2016
 
27,744

 
$
277

 
$
7,047

 
$
(211,662
)
 
$
273,918

 
$
69,580

 
See accompanying notes.

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Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
56,471

 
$
33,051

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
12,494

 
14,362

Impairment charges and other
 

 
11,120

Amortization of marketable securities
 
71

 
733

Stock-based compensation
 
12,527

 
10,174

Deferred income taxes
 
7,205

 
(7,904
)
Changes in operating assets and liabilities:
 
 

 
 

Restricted cash
 
(4,361
)
 
984

Accounts receivable
 
(40,744
)
 
(98,305
)
Prepaid insurance
 
(10,179
)
 
1,124

Other current assets
 
(1,291
)
 
2,393

Other assets
 
47

 
(6,827
)
Accounts payable
 
(1,347
)
 
(2,061
)
Payroll taxes and other payroll deductions payable
 
(43,317
)
 
(60,084
)
Accrued worksite employee payroll expense
 
40,585

 
59,570

Accrued health insurance costs
 
7,064

 
(5,668
)
Accrued workers’ compensation costs
 
16,172

 
20,246

Accrued corporate payroll, commissions and other accrued liabilities
 
(9,543
)
 
1,169

Income taxes payable/receivable
 
(7,055
)
 
247

Total adjustments
 
(21,672
)
 
(58,727
)
Net cash provided by (used in) operating activities
 
34,799

 
(25,676
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Marketable securities:
 
 

 
 

Purchases
 
(946
)
 
(9,219
)
Proceeds from dispositions
 
7,269

 
9,483

Proceeds from maturities
 
1,665

 
17,869

Property and equipment:
 
 
 
 
Purchases
 
(21,302
)
 
(10,039
)
Proceeds from sale of aircraft
 

 
12,159

Net cash provided by (used in) investing activities
 
(13,314
)
 
20,253


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Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)

 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
Cash flows from financing activities:
 
 
 
 
Purchase of treasury stock
 
$
(13,913
)
 
$
(58,557
)
Repurchase of common stock
 
(144,263
)
 

Dividends paid
 
(15,324
)
 
(15,812
)
Proceeds from the exercise of stock options
 
598

 
374

Income tax benefit from stock-based compensation
 

 
3,036

Borrowings under long-term debt agreement
 
124,400

 

Principal repayments
 
(20,000
)
 

Other
 
1,029

 
1,011

Net cash used in financing activities
 
(67,473
)
 
(69,948
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(45,988
)
 
(75,371
)
Cash and cash equivalents at beginning of period
 
269,538

 
276,456

Cash and cash equivalents at end of period
 
$
223,550

 
$
201,085

 


See accompanying notes.

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Table of Contents

INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


1.
Basis of Presentation

Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our most comprehensive HR services offerings are provided through our professional employer organization (“PEO”) services, known as Workforce Optimization® and Workforce SynchronizationTM solutions (together, our “PEO HR Outsourcing solutions”), which encompass a broad range of HR functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management platform, the Employee Service CenterSM.

In addition to our PEO HR Outsourcing solutions, we offer a number of other business performance solutions, including Human Capital Management, Payroll Software, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial and Expense Management services, Retirement Services and Insurance Services, many of which are offered via desktop applications and cloud-based delivery models. These other products and services are offered separately, as a bundle, or along with our PEO HR Outsourcing solutions.

The Consolidated Financial Statements include the accounts of Insperity and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements at and for the year ended December 31, 2015. Our Consolidated Balance Sheet at December 31, 2015 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements.  Our Consolidated Balance Sheet at September 30, 2016 and our Consolidated Statements of Operations for the three and nine month periods ended September 30, 2016 and 2015, our Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2016 and 2015, and our Consolidated Statement of Stockholders’ Equity for the nine month period ended September 30, 2016, have been prepared by us without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made. Certain prior year amounts have been reclassified to conform to the 2016 presentation.

The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.

2.
Accounting Policies

Health Insurance Costs

We provide group health insurance coverage to our worksite employees through a national network of carriers, including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield, and Tufts, all of which provide fully insured policies or service contracts.

The policy 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 our Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during the quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA

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Table of Contents

enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our 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 require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $4.5 million as of September 30, 2016, and is reported as a long-term asset. As of September 30, 2016, Plan Costs were less than the net premiums paid and owed to United by $15.7 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $6.7 million difference is included in prepaid insurance, a current asset, in our Consolidated Balance Sheets. The premiums owed to United at September 30, 2016 were $16.9 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets. Our benefits costs incurred in the first nine months of 2016 included costs of $4.6 million for changes in estimated run-off related to prior periods.

Workers’ Compensation Costs

Our workers’ compensation coverage has been provided through an arrangement with the Chubb Group of Insurance Companies (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred regardless of whether we satisfy our responsibilities. Under the Chubb Program, we bear the economic burden for the first $1 million layer of claims per occurrence, as well as a maximum aggregate amount of $5 million per policy year for claim amounts that exceed $1 million. Chubb bears the economic burden for all claims in excess of these levels.

Because we bear the economic burden for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.

We employ a third party actuary to estimate our loss development rate, which is primarily based upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the nine months ended September 30, 2016 and 2015, our workers’ compensation costs decreased by $9.1 million and $0.5 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in both the 2016 period and the 2015 period was 1.0%) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.



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The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:

 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
 
(in thousands)
 
 
 
 
 
Beginning balance, January 1,
 
$
162,174

 
$
136,088

Accrued claims
 
46,967

 
49,607

Present value discount
 
(1,785
)
 
(1,816
)
Paid claims
 
(29,537
)
 
(28,735
)
Ending balance
 
$
177,819

 
$
155,144

 
 
 
 
 
Current portion of accrued claims
 
$
41,778

 
$
43,056

Long-term portion of accrued claims
 
136,041

 
112,088

 
 
$
177,819

 
$
155,144


The current portion of accrued workers’ compensation costs on our Consolidated Balance Sheets at September 30, 2016 includes $2.2 million of workers’ compensation administrative fees.

As of September 30, 2016 and 2015, the undiscounted accrued workers’ compensation costs were $187.7 million and $164.7 million, respectively.

At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated worksite employee payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits - workers’ compensation, a long-term asset in our Consolidated Balance Sheets. During the first nine months of 2016 and 2015, we received $12.8 million and $5.3 million, respectively, for the return of excess claim funds related to the workers’ compensation program. This resulted in a net decrease to deposits. As of September 30, 2016, we had restricted cash of $41.8 million and deposits - workers’ compensation of $134.6 million.

Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Consolidated Balance Sheets.

New Accounting Pronouncements

We believe 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, other than discussed below.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive revenue recognition model for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU No. 2014-09. We are currently evaluating the guidance and have not determined the impact this standard may have on our Consolidated Financial Statements.


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In April 2015, FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software providing guidance on the accounting for fees paid by a customer in a cloud computing arrangement, including whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer is required to account for the software license consistent with the acquisition of other software licenses. Conversely, if the arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance is effective for fiscal years beginning after December 15, 2015. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires recognition of lease assets and lease liabilities for leases previously classified as operating leases. The guidance is effective for fiscal years beginning after December 15, 2018. We are currently reviewing the guidance and assessing the impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based compensation payments, including (i) permitting the election of estimated or actual forfeitures for share grants, (ii) allowing excess tax benefits for share-based payments to be recorded as a reduction of income taxes reflected in operating cash flows in place of excess tax benefits currently recorded in equity and as financing activity in the cash flow statement, and (iii) providing for statutory withholding requirements. This guidance is effective for annual and interim reporting periods for public entities beginning after December 15, 2016; however, it can be elected early in any interim or annual period. We have elected to prospectively adopt this pronouncement for calendar year 2016, resulting in the recognition of an income tax benefit of $1.0 million, or $0.05 per diluted share in the first quarter of 2016 related to excess tax benefits from the vesting of restricted stock awards. Prior to the adoption of this pronouncement excess tax benefits were required to be reported as an increase in additional paid in capital. Prior periods have not been adjusted.

3.
Cash, Cash Equivalents and Marketable Securities

The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments:

 
 
September 30,
2016
 
December 31,
2015
 
 
(in thousands)
Overnight holdings
 
 
 
 
Money market funds (cash equivalents)
 
$
187,485

 
$
247,720

Investment holdings
 
 

 
 

Money market funds (cash equivalents)
 
24,070

 
26,048

Marketable securities
 
1,820

 
9,875

 
 
213,375

 
283,643

Cash held in demand accounts
 
25,260

 
19,377

Outstanding checks
 
(13,265
)
 
(23,607
)
Total cash, cash equivalents and marketable securities
 
$
225,370

 
$
279,413

 
 
 
 
 
Cash and cash equivalents
 
$
223,550

 
$
269,538

Marketable securities
 
1,820

 
9,875

Total cash, cash equivalents and marketable securities
 
$
225,370

 
$
279,413


Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Included in the cash, cash equivalents and marketable securities at September 30, 2016 and December 31, 2015, are $148.8 million and $185.7 million, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $8.7 million and $17.0 million in client prepayments, respectively.


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We account for our financial assets in accordance with Accounting Standard Codification 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:

Level 1 - quoted prices in active markets using identical assets
Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs
Level 3 - significant unobservable inputs

The following table summarizes the levels of fair value measurements of our financial assets:

 
 
Fair Value Measurements
 
 
(in thousands)
 
 
September 30,
2016
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Money market funds
 
$
211,555

 
$
211,555

 
$

 
$

Municipal bonds
 
1,820

 

 
1,820

 

Total
 
$
213,375

 
$
211,555

 
$
1,820

 
$

 
 
 
Fair Value Measurements
 
 
(in thousands)
 
 
December 31,
2015
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Money market funds
 
$
273,768

 
$
273,768

 
$

 
$

Municipal bonds
 
9,875

 

 
9,875

 

Total
 
$
283,643

 
$
273,768

 
$
9,875

 
$


The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.

The following is a summary of our available-for-sale marketable securities:

 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
 
 
(in thousands)
 
 
September 30, 2016
 
 
 
 
 
 
 
 
Municipal bonds
 
$
1,821

 
$
1

 
$
(2
)
 
$
1,820

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

Municipal bonds
 
$
9,875

 
$
3

 
$
(3
)
 
$
9,875



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As of September 30, 2016, the contractual maturities of our marketable securities were as follows:

 
 
Amortized
Cost
 
Estimated
Fair Value
 
 
(in thousands)
 
 
 
 
 
Less than one year
 
$
1,155

 
$
1,155

One to five years
 
666

 
665

Total
 
$
1,821

 
$
1,820

4.
Impairment Charges and Other

In the first quarter of 2015, we entered into a plan to sell our two aircraft, and as a result, we recorded impairment and other charges of $9.8 million, representing the difference between the carrying value and the estimated fair value of the assets as well as a provision for potential settlement of a Texas sales and use tax assessment. The fair value of assets held for sale of $13.5 million was determined based on the estimated selling price less costs incurred to sell and was classified as Level 2 in the fair value hierarchy. In July 2015, we received proceeds, net of selling costs, of $12.2 million for both aircraft and recorded an additional $1.3 million impairment charge in the second quarter of 2015. In the first quarter of 2016, we settled the Texas sales and use tax assessment.
5.
Long-Term Debt

We have a revolving credit facility (the “Facility”), which was increased from $125 million to $200 million in the first quarter of 2016. The Facility may be further increased to $250 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Our obligations under the Facility are secured by 65% of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. In January 2016, we had net borrowings of $104.4 million to fund a portion of the purchase price of our modified Dutch auction tender offer. In addition, as of September 30, 2016, we had an outstanding $1.0 million letter of credit issued under the Facility. As of September 30, 2016, our outstanding balance on the Facility was $104.4 million.

The Facility matures on February 6, 2020. Borrowings under the Facility bear interest at an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (i) in the case of LIBOR loans, from 2.00% to 2.75% and (ii) in the case of alternate base rate loans, from 0.00% to 0.75%. The alternate base rate is the highest of (i) the prime rate most recently published in The Wall Street Journal, (ii) the federal funds rate plus 0.50% and (iii) the 30-day LIBOR rate plus 2.00%. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25%. The interest rate at September 30, 2016 was 2.19%. Interest expense and unused commitment fees are recorded in other income (expense).

The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at September 30, 2016.

The carrying value of our borrowings under the Facility approximates their fair value and was classified as Level 2 in the fair value hierarchy as of September 30, 2016


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6.
Stockholders' Equity

During the first nine months of 2016, we repurchased or withheld an aggregate of 3.2 million shares of our common stock, as described below.

Tender Offer for Common Stock

In December 2015, we commenced a modified Dutch auction tender offer to purchase up to $125 million in value of our common stock at a price not less than $43.50 per share and not more than $50.00 per share. In January 2016, we exercised our right to increase the size of the tender offer by up to 2.0% of our outstanding common stock. The tender offer period expired on January 7, 2016 and on January 13, 2016, we purchased 3,013,531 shares of our common stock at a per share price of $47.50 and an aggregate price of $143.1 million, excluding $1.1 million of transaction costs. The shares were immediately canceled and retired.

The tender offer was funded through borrowings of $104.4 million under the Facility and the remainder with cash on hand.

Repurchase Program

Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. In May 2016, the Board increased the authorized number of shares to be repurchased under the Repurchase Program by one million. During the nine months ended September 30, 2016, 135,521 shares were repurchased under the Repurchase Program. As of September 30, 2016, we were authorized to repurchase an additional 1,388,811 shares under the Repurchase Program.

Withheld Shares

During the nine months ended, September 30, 2016, we withheld 100,731 shares to satisfy tax withholding obligations for the vesting of restricted stock awards.

Dividends

The Board declared quarterly dividends as follows:
 
 
2016
 
2015
 
 
(amounts per share)
 
 
 
 
 
First quarter
 
$
0.22

 
$
0.19

Second quarter
 
0.25

 
0.22

Third quarter
 
0.25

 
0.22


 During the nine months ended September 30, 2016 and 2015, we paid dividends totaling $15.3 million and $15.8 million, respectively.
7.
Long-Term Incentive Program

On March 30, 2015, we adopted the Insperity, Inc. Long-Term Incentive Program (the “LTIP”) under the Insperity, Inc. 2012 Incentive Plan. The LTIP provides for performance-based long-term compensation awards in the form of performance units to certain employees based on the achievement of pre-established performance goals.

Each performance unit represents the right to receive one common share at a future date based on our performance against specified targets. Performance units have a vesting schedule of three years. The fair value of each performance unit is the market price of one common share on the date of grant in the case of performance condition awards. In the case of market condition awards, the fair value is determined using a Monte Carlo lattice model approach at the date of grant. The compensation expense for such awards is recognized on a straight-line basis over the vesting term. For performance condition awards, the number of shares expected to be issued is adjusted upward or downward based upon the probability of achievement of the performance targets.

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The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.

The following is a summary of LTIP award activity for 2016:
 
 
Number of Performance Units at Target
 
Weighted Average Grant Date Fair Value
 
Maximum Shares Eligible to Receive
 
 
 
 
 
 
 
Unvested - December 31, 2015
 
100,900

 
$
52.80

 
183,401

Granted
 
118,525

 
59.13

 
237,050

Vested
 

 

 

Canceled
 
(2,550
)
 
52.80

 
(4,635
)
Unvested - September 30, 2016
 
216,875

 
56.26

 
415,816


As of September 30, 2016, we estimate 178,770 shares and 127,429 shares will vest with $4.6 million and $5.4 million in unamortized compensation expense related to the 2015 and 2016 grants, respectively.
8.
Net Income per Share

We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which include unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.

The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Net income
 
$
14,065

 
$
11,950

 
$
56,471

 
$
33,051

Less distributed and undistributed earnings allocated to participating securities
 
(330
)
 
(303
)
 
(1,283
)
 
(822
)
Net income allocated to common shares
 
$
13,735

 
$
11,647

 
$
55,188

 
$
32,229

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
20,843

 
24,030

 
20,895

 
24,502

Incremental shares from assumed conversions of common stock options
 
13

 
6

 
11

 
7

Adjusted weighted average common shares outstanding
 
20,856

 
24,036

 
20,906

 
24,509

9.
Commitments and Contingencies

Worksite Employee 401(k) Retirement Plan Class Action Litigation

In December 2015, a class action lawsuit was filed against us and our third party discretionary trustee of the Insperity 401(k) retirement plan available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division on behalf of Plan participants. This suit generally alleges that the Company’s third-party

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discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries and by making imprudent investment choices. We believe we have meritorious defenses and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying consolidated financial statements.

We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015, as well as our Consolidated Financial Statements and notes thereto included in this quarterly report on Form 10-Q.

New Accounting Pronouncements

Please read Note 2 to the Consolidated Financial Statements, "Accounting Policies – New Accounting Pronouncements," for new accounting pronouncements information.

Results of Operations

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015.

The following table presents certain information related to our results of operations:

 
 
Three Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
 
(in thousands, except per share and
statistical data)
 
 
 
 
 
 
 
Revenues (gross billings of $4.314 billion and $3.826 billion, less worksite employee payroll cost of $3.611 billion and $3.200 billion, respectively)
 
$
702,538

 
$
626,286

 
12.2
 %
Gross profit
 
117,796

 
106,743

 
10.4
 %
Operating expenses
 
95,023

 
86,807

 
9.4
 %
Operating income
 
22,773

 
19,936

 
14.2
 %
Other income (expense)
 
(293
)
 
19

 

Net income
 
14,065

 
11,950

 
17.7
 %
Diluted net income per share of common stock
 
0.66

 
0.48

 
37.5
 %
Adjusted net income(1)
 
16,687

 
14,171

 
17.8
 %
Adjusted diluted net income per share of common stock(1)
 
0.78

 
0.57

 
36.8
 %
Adjusted EBITDA(1)
 
31,346

 
28,278

 
10.8
 %
 
 
 
 
 
 
 
Statistical Data:
 
 

 
 

 
 

Average number of worksite employees paid per month
 
168,909

 
149,086

 
13.3
 %
Revenues per worksite employee per month(2)
 
$
1,386

 
$
1,400

 
(1.0
)%
Gross profit per worksite employee per month
 
232

 
239

 
(2.9
)%
Operating expenses per worksite employee per month
 
187

 
194

 
(3.6
)%
Operating income per worksite employee per month
 
45

 
45

 

Net income per worksite employee per month
 
28

 
27

 
3.7
 %
 ____________________________________

(1) 
Please read “Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP.

(2) 
Gross billings of $8,513 and $8,555 per worksite employee per month, less payroll cost of $7,127 and $7,155 per worksite employee per month, respectively.


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Revenues

Our revenues for the third quarter of 2016 increased 12.2% over the 2015 period, primarily due to a 13.3% increase in the average number of worksite employees paid per month, partially offset by a 1.0%, or $14, decrease in revenues per worksite employee per month.

We provide our PEO HR Outsourcing solutions to small and medium-sized businesses in strategically selected markets throughout the United States. Our revenue by region for our PEO HR Outsourcing solutions for the quarters ended September 30, 2016 and 2015 was as follows:

 
 
Three Months Ended 
 September 30,
 
Three Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
 
(in thousands)
 
(% of total revenue)
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
178,159

 
$
156,700

 
13.7
%
 
25.8
%
 
25.5
%
Southeast
 
78,854

 
64,420

 
22.4
%
 
11.4
%
 
10.5
%
Central
 
111,458

 
95,628

 
16.6
%
 
16.2
%
 
15.6
%
Southwest
 
163,314

 
155,581

 
5.0
%
 
23.7
%
 
25.4
%
West
 
157,772

 
141,353

 
11.6
%
 
22.9
%
 
23.0
%
 
 
689,557

 
613,682

 
12.4
%
 
100.0
%
 
100.0
%
Other revenue(1)
 
12,981

 
12,604

 
3.0
%
 
 
 
 
Total revenue
 
$
702,538

 
$
626,286

 
12.2
%
 
 
 
 
_____________________________

(1) Comprised primarily of revenues generated by our other products and services offerings.

The percentage of total PEO HR Outsourcing solutions revenues in our significant markets include the following:
 
 
Three Months Ended September 30,
 
 
2016
 
2015
 
 
 
 
 
Texas
 
22.1
%
 
23.6
%
California
 
18.0
%
 
18.3
%
New York
 
9.1
%
 
9.4
%
Other
 
50.8
%
 
48.7
%
Total
 
100.0
%
 
100.0
%

Our growth in the number of worksite employees paid is affected by three primary sources: new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs. During the third quarter of 2016, we saw improvement in worksite employees paid from new client sales, while net change in existing clients declined and client retention was consistent with 2015.

Gross Profit

Gross profit for the third quarter of 2016 increased 10.4% over the third quarter of 2015 to $117.8 million. The average gross profit per worksite employee decreased 2.9% to $232 per month in the 2016 period from $239 per month in the 2015 period. Included in gross profit in the 2016 period is a $17 per worksite employee per month contribution from our other products and services offerings compared to $18 per worksite employee per month in the 2015 period.

Our pricing objectives attempt to achieve a level of revenue per worksite employee that matches or exceeds changes in primary direct costs and operating expenses. Our revenues per worksite employee per month during the third quarter of 2016 decreased 1.0% compared to the third quarter of 2015. Our direct costs, which primarily include payroll taxes, benefits and

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workers’ compensation expenses, decreased 0.6% to $1,154 per worksite employee per month in the third quarter of 2016 compared to $1,161 in the third quarter of 2015. The primary direct cost components changed as follows:

Benefits costs – The cost of group health insurance and related employee benefits increased $14 per worksite employee per month, or 4.0% on a cost per covered employee basis, compared to the third quarter of 2015. Included in 2016 benefits costs is a charge of $2.8 million, or $6 per worksite employee per month, for changes in estimated claims run-off related to prior periods. The percentage of worksite employees covered under our health insurance plans was 68.5% in the 2016 period compared to 69.7% in the 2015 period. Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs – Workers’ compensation costs decreased 24.6%, or $15 per worksite employee per month, compared to the third quarter of 2015. In the third quarter of 2016, as a result of closing out claims at lower than expected costs, we recorded reductions in workers’ compensation costs of $7.1 million, or 0.21% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods. As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.46% in the 2016 period compared to 0.70% in the 2015 period. Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs – Payroll taxes increased 12.0% in part due to a 12.9% increase in payroll costs, but decreased $5 on a per worksite employee per month basis, compared to the third quarter of 2015. Payroll taxes as a percentage of payroll costs were 6.2% in 2016 and 6.3% in 2015.

Operating Expenses

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

 
 
Three Months Ended 
 September 30,
 
Three Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
(in thousands)
 
(per worksite employee per month)
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and payroll taxes
 
$
56,897

 
$
51,329

 
10.8
 %
 
$
112

 
$
115

 
(2.6
)%
Stock-based compensation
 
4,191

 
3,710

 
13.0
 %
 
8

 
8

 

Commissions
 
5,030

 
4,516

 
11.4
 %
 
10

 
10

 

Advertising
 
3,540

 
3,193

 
10.9
 %
 
7

 
7

 

General and administrative expenses
 
21,318

 
19,572

 
8.9
 %
 
42

 
44

 
(4.5
)%
Depreciation and amortization
 
4,047

 
4,487

 
(9.8
)%
 
8

 
10

 
(20.0
)%
Total operating expenses
 
$
95,023

 
$
86,807

 
9.4
 %
 
$
187

 
$
194

 
(3.6
)%

Operating expenses increased 9.4% to $95.0 million compared to $86.8 million in the third quarter of 2015. Operating expenses per worksite employee per month decreased to $187 in the 2016 period from $194 in the 2015 period. The components of operating expenses changed as follows:

Salaries, wages and payroll taxes of corporate and sales staff increased 10.8%, but decreased $3 on a per worksite employee per month basis, compared to the 2015 period. This increase was primarily due to a 6.1% increase in corporate headcount, including an 8.5% increase in the number of Business Performance Advisors.

Stock-based compensation increased 13.0%, but remained flat on a per worksite employee per month basis, compared to the 2015 period. This increase was primarily due to awards issued under the Insperity, Inc. Long-Term Incentive Program (the “LTIP”). Please read Note 7 to the Consolidated Financial Statements, “Long-Term Incentive Program,” for additional information.

Commissions expense increased 11.4%, but remained flat on a per worksite employee per month basis, compared to the 2015 period, primarily due to commissions associated with our PEO HR Outsourcing solutions.


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Advertising costs increased 10.9%, but remained flat on a per worksite employee per month basis, compared to the 2015 period. The increase was primarily due to increased spending on internet advertising and sponsorships.

General and administrative expenses increased 8.9%, but decreased $2 on a per worksite employee per month basis, compared to the 2015 period. The increase was primarily due to increased software maintenance costs, professional services expenses and rent expense on newly leased facilities.

Depreciation and amortization expense decreased 9.8%, or $2 per worksite employee per month, compared to the 2015 period, primarily due to certain acquired assets becoming fully depreciated in 2015.

Income Tax Expense

Our effective income tax rate was 37.4% in the 2016 period compared to 40.1% in the 2015 period. Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses.

Operating and Net Income

Operating and net income per worksite employee per month was $45 and $28 in the 2016 period, versus $45 and $27 in the 2015 period.


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Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015.

The following table presents certain information related to our results of operations:

 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
 
(in thousands, except per share and statistical data)
 
 
 
 
 
 
 
Revenues (gross billings of $13.040 billion and $11.469 billion, less worksite employee payroll cost of $10.828 billion and $9.515 billion, respectively)
 
$
2,212,278

 
$
1,953,603

 
13.2
 %
Gross profit
 
381,071

 
340,822

 
11.8
 %
Operating expenses
 
289,232

 
285,149

(1) 
1.4
 %
Operating income
 
91,839

 
55,673

 
65.0
 %
Other expense
 
(988
)
 
(14
)
 

Net income
 
56,471

 
33,051

 
70.9
 %
Diluted net income per share of common stock
 
2.64

 
1.32

 
100.0
 %
Adjusted net income(2)
 
64,463

 
46,578

 
38.4
 %
Adjusted diluted net income per share of common stock(2)
 
3.01

 
1.86

 
61.8
 %
Adjusted EBITDA(2)
 
118,110

 
93,211

 
26.7
 %
 
 
 
 
 
 
 
Statistical Data:
 
 

 
 

 
 

Average number of worksite employees paid per month
 
163,607

 
143,392

 
14.1
 %
Revenues per worksite employee per month(3)
 
$
1,502

 
$
1,514

 
(0.8
)%
Gross profit per worksite employee per month
 
259

 
264

 
(1.9
)%
Operating expenses per worksite employee per month
 
197

 
221

 
(10.9
)%
Operating income per worksite employee per month
 
62

 
43

 
44.2
 %
Net income per worksite employee per month
 
38

 
26

 
46.2
 %
 ____________________________________

(1) 
Includes non-cash impairment and other charges of $11.1 million, or an after-tax effect of $0.26 per share in the 2015 period. Please read Note 4 to the Consolidated Financial Statements, “Impairment Charges and Other,” for additional information.

(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) 
Gross billings of $8,856 and $8,887 per worksite employee per month, less payroll cost of $7,354 and $7,373 per worksite employee per month, respectively.

Revenues

Our revenues for the nine months ended September 30, 2016 increased 13.2% over the 2015 period, primarily due to a 14.1% increase in the average number of worksite employees paid per month, partially offset by a 0.8%, or $12, decrease in revenues per worksite employee per month.

We provide our PEO HR Outsourcing solutions to small and medium-sized businesses in strategically selected markets throughout the United States. Our revenue by region for our PEO HR Outsourcing solutions revenue for the nine months ended September 30, 2016 and 2015 was as follows:

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Nine Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
 
(in thousands)
 
(% of total revenue)
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
566,317

 
$
500,899

 
13.1
%
 
26.0
%
 
26.1
%
Southeast
 
236,393

 
193,970

 
21.9
%
 
10.9
%
 
10.1
%
Central
 
349,966

 
294,464

 
18.8
%
 
16.1
%
 
15.4
%
Southwest
 
519,147

 
489,790

 
6.0
%
 
23.9
%
 
25.5
%
West
 
502,417

 
438,758

 
14.5
%
 
23.1
%
 
22.9
%
 
 
2,174,240

 
1,917,881

 
13.4
%
 
100.0
%
 
100.0
%
Other revenue(1)
 
38,038

 
35,722

 
6.5
%
 
 
 
 
Total revenue
 
$
2,212,278

 
$
1,953,603

 
13.2
%
 
 
 
 
______________________________

(1) Comprised primarily of revenues generated by our other products and services offerings.

The percentage of total PEO HR Outsourcing solutions revenues in our significant markets include the following:
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
 
 
 
Texas
 
22.3
%
 
23.8
%
California
 
18.4
%
 
18.2
%
New York
 
9.5
%
 
9.7
%
Other
 
49.8
%
 
48.3
%
Total
 
100.0
%
 
100.0
%

Our growth in the number of worksite employees paid is affected by three primary sources: new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs. During the first nine months of 2016, we saw improvement in worksite employees paid from new client sales and client retention, while net change in existing clients declined as compared to the first nine months of 2015.

Gross Profit

Gross profit for the first nine months of 2016 increased 11.81% over the first nine months of 2015 to $381.1 million. The average gross profit per worksite employee decreased 1.9% to $259 per month in the 2016 period from $264 per month in the 2015 period. Included in gross profit is a $17 per worksite employee per month contribution from our other products and services offerings in both the 2016 and 2015 periods.

Our pricing objectives attempt to achieve a level of revenue per worksite employee that matches or exceeds changes in primary direct costs and operating expenses. Our revenues per worksite employee per month during the first nine months of 2016 decreased 0.8% compared to the first nine months of 2015. Our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, decreased 0.6% to $1,243 per worksite employee per month in the first nine months of 2016 compared to $1,250 in the first nine months of 2015. The primary direct cost components changed as follows:

Benefits costs – The cost of group health insurance and related employee benefits increased $5 per worksite employee per month, or 2.8% on a cost per covered employee basis, compared to the first nine months of 2015. Included in 2016 benefits costs is a charge of $4.6 million, or $3 per worksite employee per month, for changes in estimated claim run-off related to prior periods. Benefits costs incurred in the first nine months of 2015 reflect reductions in estimated claims run-off related to prior periods of $0.8 million, or $1 per worksite employee per month. The percentage of worksite employees covered under our health insurance plans was 69.2% in the 2016 period compared to 70.5% in the 2015 period. Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.

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Workers’ compensation costs – Workers’ compensation costs decreased 2.5% , or $7 per worksite employee per month, compared to the first nine months of 2015. In the first nine months of 2016, we recorded reductions in workers’ compensation costs of $9.1 million, or 0.09% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods. As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.59% in the 2016 period compared to 0.70% in the 2015 period. Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs – Payroll taxes increased 13.4% in part due to a 13.8% increase in payroll costs, but decreased $3 on a per worksite employee per month basis, compared to the first nine months of 2015. Payroll taxes as a percentage of payroll costs were 7.3% in both the 2016 and 2015 periods.  

Operating Expenses

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

 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
(in thousands)
 
(per worksite employee per month)
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and payroll taxes
 
$
170,910

 
$
158,311

 
8.0
 %
 
$
116

 
$
123

 
(5.7
)%
Stock-based compensation
 
12,527

 
10,174

 
23.1
 %
 
9

 
8

 
12.5
 %
Commissions
 
13,646

 
12,923

 
5.6
 %
 
9

 
10

 
(10.0
)%
Advertising
 
13,299

 
13,257

 
0.3
 %
 
9

 
10

 
(10.0
)%
General and administrative expenses
 
66,356

 
65,002

 
2.1
 %
 
45

 
50

 
(10.0
)%
Impairment charges and other
 

 
11,120

 
(100.0
)%
 

 
9

 
(100.0
)%
Depreciation and amortization
 
12,494

 
14,362

 
(13.0
)%
 
9

 
11

 
(18.2
)%
Total operating expenses
 
$
289,232

 
$
285,149

 
1.4
 %
 
$
197

 
$
221

 
(10.9
)%

Operating expenses increased 1.4% to $289.2 million compared to $285.1 million in the first nine months of 2015. Operating expenses per worksite employee per month decreased to $197 in the 2016 period from $221 in the 2015 period. We recorded impairment and other charges of $11.1 million during first nine months of 2015. Please read Note 4 to the Consolidated Financial Statements, “Impairment Charges and Other,” for additional information. Adjusted operating expenses increased 6.0% to $288.9 million in the 2016 period from $272.5 million in the 2015 period. Please read “—Non-GAAP Financial Measures” for additional information. The components of operating expenses changed as follows:

Salaries, wages and payroll taxes of corporate and sales staff increased 8.0%, but decreased $7 on a per worksite employee per month basis, compared to the 2015 period. This increase was primarily due to a 5.2% increase in corporate headcount, including a 10.5% increase in the number of Business Performance Advisors.

Stock-based compensation increased 23.1%, or $1 per worksite employee per month, compared to the 2015 period. This increase was primarily due to awards issued under the LTIP. Please read Note 7 to the Consolidated Financial Statements, “Long-Term Incentive Program,” for additional information.

Commissions expense increased 5.6%, but decreased $1 on a per worksite employee per month basis, compared to the 2015 period, primarily due to commissions associated with our PEO HR Outsourcing solutions.

Advertising costs increased 0.3%, but decreased $1 on a per worksite employee per month basis, compared to the 2015 period.

General and administrative expenses, which includes $0.3 million and $1.5 million in stockholder advisory expenses in the 2016 and 2015 periods, respectively, increased 2.1%, but decreased $5 on a per worksite employee per month basis compared to the 2015 period.


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Depreciation and amortization expense decreased 13.0%, or $2 per worksite employee per month, compared to the 2015 period, primarily due to certain acquired assets becoming fully depreciated in 2015 and the sale of our two aircraft in 2015, which eliminated the depreciation on those assets. Please read Note 4 to the Consolidated Financial Statements, “Impairment Charges and Other,” for additional information.

Income Tax Expense

Our effective income tax rate was 37.8% in the 2016 period compared to 40.6% in the 2015 period. Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes, non-deductible expenses, and the effects of the impairment charges recorded during the period. In addition, during first quarter of 2016, as a result of our adoption of Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting, we recognized an income tax benefit of $1.0 million related to the vesting of restricted stock awards. Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – New Accounting Pronouncements,” for additional information.

Operating and Net Income

Operating and net income per worksite employee per month was $62 and $38 in the 2016 period, versus $43 and $26 in the 2015 period.

Non-GAAP Financial Measures

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

Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our worksite employees. Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program. As a result, our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs. We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program.

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

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
(in thousands, except per worksite employee per month data)
GAAP to non-GAAP reconciliation:
 
 
 
 
 
 
 
 
 
 
 
 
Payroll cost (GAAP)
 
$
3,611,159

 
$
3,199,788

 
12.9
 %
 
$
10,828,301

 
$
9,515,662

 
13.8
 %
Less: Bonus payroll cost
 
255,112

 
262,445

 
(2.8
)%
 
1,050,649

 
1,038,315

 
1.2
 %
Non-bonus payroll cost
 
$
3,356,047

 
$
2,937,343

 
14.3
 %
 
$
9,777,652

 
$
8,477,347

 
15.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll cost per worksite employee per month (GAAP)
 
$
7,127

 
$
7,155

 
(0.4
)%
 
$
7,354

 
$
7,373

 
(0.3
)%
Less: Bonus payroll cost per worksite employee per month
 
504

 
588

 
(14.3
)%
 
714

 
805

 
(11.3
)%
Non-bonus payroll cost per worksite employee per month
 
$
6,623

 
$
6,567

 
0.9
 %
 
$
6,640

 
$
6,568

 
1.1
 %


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Adjusted cash, cash equivalents and marketable securities excludes funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as client prepayments. Insperity management believes adjusted cash, cash equivalents and marketable securities is a useful measure of the company’s available funds.

Following is a GAAP to non-GAAP reconciliation of cash, cash equivalents and marketable securities:
 
 
September 30,
2016
 
December 31,
2015
 
 
(in thousands)
 
 
 
 
 
Cash, cash equivalents and marketable securities (GAAP)
 
$
225,370

 
$
279,413

Less: Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions
 
148,789

 
185,719

Customer prepayments
 
8,661

 
17,037

Adjusted cash, cash equivalents and marketable securities
 
$
67,920

 
$
76,657


Adjusted operating expenses represent operating expenses excluding the impact of impairment and other charges related to the sale of two aircraft in 2015 and stockholder advisory expenses in both periods. Insperity management believes adjusted operating expenses is a useful measure of our operating costs, as it allows for additional analysis of our operating expenses separate from the impact of these items.

Following is a GAAP to non-GAAP reconciliation of operating expenses and adjusted operating expenses:

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
(in thousands, except per worksite employee per month data)
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses (GAAP)
 
$
95,023

 
$
86,807

 
9.4
 %
 
$
289,232