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 offerings and to leverage our buying power and expertise to provide additional valuable services to clients.
Our comprehensive HR services offerings are provided through our Insperity ® HR 360 solution (formerly Workforce Optimization ® ), our Insperity ® HR 360 Select Edition solution (formerly Workforce Synchronization TM ), and our Insperity ® HR Scale solution (together, our “PEO HR Solutions”) which encompass a broad range of HR functions as discussed in Item 1. Business — Service Offerings — PEO HR Solutions .
HR 360. Insperity’s HR 360 solution, our largest source of revenue, is offered to small and medium-sized businesses seeking a comprehensive people strategy. From payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management to training and development, our HR 360 solution offers a full range of services empowering clients to achieve a sophisticated HR function. HR 360 provides access to our web-based human capital management platform, Insperity Premier TM .
HR 360 Select Edition. Insperity’s HR 360 Select Edition solution, which generally is offered only to our middle market client segment, is a lower cost offering with a typically longer commitment that includes the same compliance and administrative services as HR 360 and allows those clients to select, for an additional fee, from the strategic HR products and services that are included with HR 360. HR 360 Select Edition provides access to our web-based human capital management platform, Insperity Premier.
HR Scale. Insperity’s HR Scale solution is our newest service offering that we jointly developed through our strategic partnership with Workday, Inc. (“Workday”). Insperity’s HR Scale solution is intended for growing and middle market companies and provides access to the advanced capabilities of Workday Human Capital Management (“HCM”). Our HR Scale solution, which is priced higher than our HR 360 offering, is designed to combine the HR expertise of our HR 360 solution with the advanced capabilities of Workday HCM, with a focus on affordability, ease and speed of deployment, and agility as companies scale. Insperity’s HR Scale solution is under development and we expect an initial group of clients to begin using our HR Scale solution in the first quarter of 2026.
HR Core. We also offer a comprehensive traditional payroll and human capital management solution, known as Insperity HR Core TM (formerly Workforce Acceleration TM ), which we refer to as our “Traditional HR Solution” as discussed in Item 1. Business — Other Product and Services Offerings — Comprehensive Traditional Payroll and Human Capital Management Solution ”.
We also offer a number of other business performance solutions, including Talent Acquisition Services, Retirement Services, Insurance Services, Contractor Management, and Perks+. These other products and services generally are offered only with our other solutions as discussed in Item 1. Business — Other Product and Services Offerings .
2025 Performance
• Average number of WSEEs paid per month increased 1% to 310,089. Revenues increased 4% on a 3% increase in revenue per WSEE.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• We ended 2025 averaging 312,377 paid WSEEs in the fourth quarter of 2025, which represents a 1% increase over the fourth quarter of 2024.
• Approximately 26% of our average paid WSEEs were in our middle market sector for both the years ended December 31, 2025 and 2024, which is generally defined as companies with 150 to 5,000 WSEEs.
• Gross profit decreased 14% to $900 million. The decrease was primarily due to a 15% decrease in gross profit per WSEE, which was partially offset by a 1% increase 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 6% increase in direct costs per WSEE. The increase in direct costs per WSEE was primarily attributable to a 9% increase in benefits costs per participant.
• Operating expenses decreased 3% in 2025 to $910 million, and included decreases in professional services, travel and event costs, and salary and wages. On a per WSEE per month basis, operating expenses decreased from $253 in 2024 to $245 in 2025.
• Net income (loss) and diluted earnings (loss) per share (“Diluted EPS”) both decreased 108% to $(7) million and $(0.19), respectively.
• Adjusted net income and adjusted EPS both decreased 71% to $39 million and $1.03, respectively.
• Adjusted EBITDA decreased 51% to $131 million.
• Our net income (loss) per WSEE per month decreased 108% from $25 in 2024 to $(2) in 2025.
• Our adjusted EBITDA per WSEE per month decreased 52% from $73 in 2024 to $35 in 2025.
• We ended 2025 with working capital of $102 million.
• During 2025, we paid $90 million in dividends, repurchased approximately 232,000 shares of our common stock at a cost of $19 million and paid $31 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 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 Solutions are:
• employment-related taxes (“payroll taxes”)
• costs of employee benefit plans
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• 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 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.
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 Insperity HR Scale, our joint solution with Workday.
• 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.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 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, 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 program since its inception using a partially self-funded insurance accounting model. Accordingly, we record the costs of the United program, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Program Costs”), as benefits expense in the Consolidated Statements of Operations. 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 program; and (3) the number of participants in the program, 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.
Effective January 1, 2020 through December 31, 2025, our financial responsibility with United was limited to the first $1 million of paid claims per claimant per year. Beginning January 1, 2026, we have the option to annually elect to limit our responsibility for each participant’s claim costs to $500,000, $750,000, or $1,000,000 per year, which we elect based on the cost of the limit and our estimate of the benefit of that level of limit. For 2026, we have elected to limit our financial responsibility with United to the first $500,000 of paid claims per claimant per year.
Since the program’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 Program Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the program would be incurred and we would accrue a liability for the excess costs on our Consolidated Balance Sheets. On the other hand, if the Program Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the program would be incurred and we would record an asset for the excess premiums in our Consolidated Balance Sheets. The terms of the arrangement with
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
United require us to maintain an accumulated cash surplus in the program of $9 million, which is reported as long-term prepaid insurance. As of December 31, 2025, Program Costs were more than the net premiums paid and owed to United by $18 million, which is included in accrued health insurance costs, a current liability on our Consolidated Balance Sheets. In addition, the premiums owed to United at December 31, 2025, were $7 million, which is also included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets. Our benefits costs incurred included an increase of $11 million in 2025 and a decrease of $29 million in 2024 for changes in estimated run-off related to prior periods, net of Individual Claims Limit.
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 $3.2 billion in 2025:
Change in
Completion Rate
Change in
Benefits Costs
(in millions)
Change in
Net Income
(in millions)
• 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, 2025 and 2024, we reduced accrued workers’ compensation costs by $29 million and $32 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 3.9% in 2025 and 4.3% in 2024) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.
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 Operations.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table illustrates the sensitivity of changes in the loss development rate on our estimate of workers’ compensation costs totaling $87 million in 2025:
Change in Loss Development Rate
Change in Workers’ Compensation Costs
(in millions)
Change in
Net Income
(in millions)
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 2025, we received $29 million for the return of excess claim funds related to the workers’ compensation program, which decreased deposits – workers’ compensation. As of December 31, 2025, we had restricted cash of $82 million and deposits – workers’ compensation of $148 million. We have estimated and accrued $184 million in incurred workers’ compensation claim costs as of December 31, 2025. 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.
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.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Key Financial and Statistical Data
(in millions, except per share, WSEE, and statistical data)
Year Ended December 31,
% Change
Financial data:
Revenues (1)
Gross profit
Operating expenses
Operating income
Other income (expense), net
Net income (loss)
Diluted EPS
Non-GAAP financial measures (2) :
Adjusted net income
Adjusted EBITDA
Adjusted EPS
Average WSEEs paid
Statistical data (per WSEE per month) :
Revenues (3)
Gross profit
Operating expenses
Operating income
Net income (loss)
Adjusted EBITDA (2)
(1) Revenues are comprised of gross billings less WSEE payroll costs as follows:
Year Ended December 31,
(in millions)
Gross billings
Less: WSEE payroll cost
Revenues
(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:
Year Ended December 31,
(per WSEE per month)
Gross billings
Less: WSEE payroll cost
Revenues
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Key Operating Metrics
We monitor certain key metrics to measure our performance, including:
• WSEEs
• Adjusted EBITDA
• Adjusted EPS
Our growth in the number of WSEEs paid is affected by three primary sources: new client sales, client retention and the net change in WSEEs paid at existing clients through new hires and employee terminations.
• During 2025 , the average number of WSEEs paid from new client sales increased 1% from 2024. Average client retention increased from 81% in 2024 to 83% in 2025 . The net change in our client base also increased when compared to 2024.
• 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.
Average WSEEs Paid and
Year-over-Year Growth Percentage
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income (Loss) and
Year-over-Year Growth Percentage
(in millions)
EPS and
Year-over-Year Growth Percentage
(amounts per share)
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adjusted EBITDA and
Year-over-Year Growth Percentage
(in millions)
Adjusted EPS and
Year-over-Year Growth Percentage
(amounts per share)
Revenues
2025 Compared to 2024
Our revenues for 2025 were $6.8 billion, an increase of 4%, primarily due to the following:
• Average WSEEs paid increased 1%.
• Revenues per WSEE per month increased 3%, or $46.
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.
We provide our PEO HR Solutions to small and medium-sized businesses throughout the United States. PEO HR Solutions revenue distribution by region follows:
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PEO HR Solutions Revenue by Region
(in millions)
Note: Texas is included in the Southwest region.
The percentage of total PEO HR 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 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.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profit and
Year-over-Year Growth Percentage
(in millions)
Gross Profit per WSEE per Month and
Year-over-Year Growth Percentage
(per WSEE per month)
2025 Compared to 2024
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 $46 due to higher average pricing of 3%.
The net increase in direct costs between 2025 and 2024 attributable to the changes in cost estimates for benefits and workers’ compensation totaled $43 million as discussed below. The $89 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 $61 per WSEE per month, or 9.2% on a cost per covered employee basis.
• The percentage of WSEEs covered under our health insurance plans was 63% in 2025 compared to 64% in 2024.
• Reported results include changes in estimated claims run-off related to prior periods, which was an increase in costs of $11 million, or $3 per WSEE per month, in 2025 compared to a decrease in costs of $29 million, or $8 per WSEE per month, in 2024.
Please read “ —Critical Accounting Policies and Estimates—Benefits Costs ” for a discussion of our accounting for health insurance costs.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 15%, or $3 per WSEE per month, in 2025 compared to 2024.
• As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.26% in 2025 and 0.24% in 2024.
• We recorded a reduction in workers’ compensation costs of $29 million, or 0.09% of non-bonus payroll costs, in 2025 compared to a reduction of $32 million, or 0.10% of non-bonus payroll costs, in 2024, 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 5% on a 4% increase in payroll costs, or $25 per WSEE per month.
• Payroll taxes as a percentage of payroll costs were to 7% in both 2025 and 2024.
2024 Compared to 2023
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.
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.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• Payroll taxes as a percentage of payroll costs were 7% in 2024 and 6% in 2023.
Operating Expenses
2025 Compared to 2024
The following table presents certain information related to our operating expenses:
Year Ended December 31,
per WSEE
(in millions, except per WSEE)
% Change
% Change
Salaries
Stock-based compensation
Commissions
Advertising
General and administrative:
Amortization of SaaS implementation costs
Workday SaaS licensing and implementation expenses
All other general and administrative
Total general and administrative
Depreciation and amortization
Total operating expenses
• General and administrative expenses for 2025 decreased 9% to $203 million, or $4 per WSEE per month, compared to 2024. The decrease was primarily due to lower professional services fees, resulting from the capitalization in 2025 of a portion of the expenses related to the development of our HRScale solution. Additionally, we incurred lower travel and training costs and amortization of SaaS implementation costs, partially offset by accelerated lease costs associated with the consolidation of sales offices in 2025 and software licensing and maintenance costs.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2024 Compared to 2023
The following table presents certain information related to our operating expenses:
Year Ended December 31,
per WSEE
(in millions, except per WSEE)
% Change
% Change
Salaries
Stock-based compensation
Commissions
Advertising
General and administrative:
Amortization of SaaS implementation costs
Workday SaaS licensing and implementation expenses
All other general and administrative
Total general and administrative
Depreciation and amortization
Total operating expenses
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.
Other Income (Expense)
Other income (expense) was net income of $6 million, $9 million, and $6 million in 2025, 2024 and 2023, respectively.
In 2025, the decrease in other income from 2024 was due to lower deposits and interest rates on overnight investments. 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 (75)% in 2025, 28% in 2024 and 24% in 2023. Our provision for income taxes differed from the U.S. statutory rate of 21% primarily due to state income taxes, non-deductible expenses, and excess tax expense of $2 million associated with the vesting of equity compensation in 2025, and excess tax benefits associated with the vesting of equity compensation of less than $1 million and $5 million, in 2024 and 2023, respectively. Please read Note 1 “ Accounting Policies ” and Note 7 “Income Taxes,” to the Consolidated Financial Statements for additional
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
information.
On July 4, 2025, H.R.1, which is known as the “One Big Beautiful Bill Act,” was signed into federal law. This law includes significant changes to federal tax law and other regulatory provisions that may impact us. ASC 740, “Income Taxes”, requires the effect of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. We have evaluated the provisions of H.R.1 and the potential effects on our financial position, results of operations, and cash flows. Although there is no impact to our effective tax rate, we are accelerating tax deductions for unamortized software development costs.
2025 Form 10-K
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.
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.
Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs.
Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program.
We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program.
Adjusted cash, cash equivalents and marketable securities
Excludes funds associated with:
• federal and state income tax withholdings,
• employment taxes,
• other payroll deductions, and
• client prepayments.
We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior periods, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because they allow investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments.
EBITDA
Represents net income computed in accordance with GAAP, plus:
• interest expense,
• income tax expense,
• depreciation and amortization expense, and
• amortization of SaaS implementation costs.
Adjusted EBITDA
Represents EBITDA plus:
• non-cash stock-based compensation.
Adjusted net income
Represents net income computed in accordance with GAAP, excluding:
• non-cash stock-based compensation.
Adjusted EPS
Represents diluted net income per share computed in accordance with GAAP, excluding:
• non-cash stock-based compensation.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a reconciliation of payroll cost (GAAP) to non-bonus payroll costs (non-GAAP):
(in millions, except per WSEE per month)
Year Ended December 31,
Per WSEE
Per WSEE
Per WSEE
Payroll cost
Less: Bonus payroll cost
Non-bonus payroll cost
Payroll cost % change year over year
Non-bonus payroll cost % change year over year
Following is a reconciliation of cash, cash equivalents and marketable securities (GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP):
(in millions)
December 31, 2025
December 31, 2024
Cash, cash equivalents and marketable securities
Less:
Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions
Client prepayments
Adjusted cash, cash equivalents and marketable securities
Following is a reconciliation of net income (loss) (GAAP) to EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP):
Year Ended December 31,
(in millions, except per WSEE per month)
Per WSEE
Per WSEE
Per WSEE
Net income (loss)
Income tax expense
Interest expense
Amortization of SaaS implementation costs
Depreciation and amortization
EBITDA
Stock-based compensation
Adjusted EBITDA
Net income (loss) % change year over year
Adjusted EBITDA % change year over year
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a reconciliation of net income (loss) (GAAP) to adjusted net income (non-GAAP):
Year Ended December 31,
(in millions)
Net income (loss)
Non-GAAP adjustments:
Stock-based compensation
Tax effect
Total non-GAAP adjustments, net
Adjusted net income
Net income (loss) % change year over year
Adjusted net income % change year over year
Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP):
Year Ended December 31,
(amounts per share)
Diluted EPS
Non-GAAP adjustments:
Stock-based compensation
Tax effect
Total non-GAAP adjustments, net
Adjusted EPS
Diluted EPS % change year over year
Adjusted EPS % change year over year
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 revolving credit commitment of $750 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.
As of December 31, 2025, 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.
We had $660 million in cash, cash equivalents and marketable securities at December 31, 2025, of which approximately $468 million was payable in early January 2026 for withheld federal and state income taxes, employment taxes and other payroll deductions. Approximately $135 million represented client prepayments that were invoiced in January 2026. At December 31, 2025, we had working capital of $102 million compared to $155 million at December 31, 2024. 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 2026. 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.
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash Flows from Operating Activities
Net cash used in operating activities in 2025 was $278 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, 2025, the last business day of the reporting period was a Wednesday, client prepayments were $135 million and employment taxes and other deductions were $468 million. 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 were distributed to clients in early 2025.
• Workers’ compensation plan funding — During 2025 and 2024, we received $29 million and $39 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 program 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, 2025, Program Costs were more than the net premiums paid and owed to United by $18 million, which is included in accrued health insurance costs, a current liability on our Consolidated Balance Sheets at December 31, 2025. In addition, the premiums owed to United at December 31, 2025, were $7 million, which is also included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.
• Operating results — Our net income (loss) and adjusted net income has a significant impact on our operating cash flows. Our net income (loss) and adjusted net income decreased 108% and 71% to $(7) million and $39 million in 2025, respectively, compared to $91 million and $135 million in 2024, respectively. Please read “ Results of Operations .”
Cash Flows from Investing Activities
Net cash flows used in investing activities were $31 million for the year ended December 31, 2025, primarily due to property and equipment purchases.
Cash Flows from Financing Activities
Net cash flows used in financing activities were $90 million for the year ended December 31, 2025. We paid $90 million in dividends and repurchased or withheld $19 million in stock. In addition, client funds liability and other financing activities increased by $19 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
2025 Form 10-K
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
2025 Form 10-K
QUANTITATIVE AND QUALITATIVE DISCLOSURES
