UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2013. | |
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
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Rights to Purchase Series A Junior Participating Preferred Stock | New York Stock Exchange | |
(Title of class) | (Name of Exchange on Which Registered) | |
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý
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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | 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 February 3, 2014, 25,504,983 shares of the registrant’s common stock, par value $0.01 per share, were outstanding. As of the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the common stock held by non-affiliates (based upon the June 30, 2013, closing price of the common stock as reported by the New York Stock Exchange) was approximately $688 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part III information is incorporated by reference from the proxy statement for the annual meeting of stockholders to be held May 13, 2014, which the registrant intends to file within 120 days of the end of the fiscal year.
TABLE OF CONTENTS
Part I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item S-K 401(b). | ||
Part II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
Part III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
Part IV | ||
Item 15. | ||
PART I
Unless otherwise indicated, “Insperity,” “we,” “our” and “us” are used in this annual report to refer to Insperity, Inc. and its consolidated subsidiaries. This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “possibly,” “probably,” “goal,” “opportunity,” “objective,” “target,” “assume,” “outlook,” “guidance,” “predicts,” “appears,” “indicator” and similar expressions. In the normal course of business, in an effort to help keep our stockholders and the public informed about our operations we may, from time to time, issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other operating results. We base the forward-looking statements on our current expectations, estimates and projections. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements in this annual report, or elsewhere, 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 this annual report, including, without limitation, factors discussed in Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 1. BUSINESS.
General
Insperity, Inc., formerly named Administaff, Inc. (“Insperity”) provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our name change, which was effective March 3, 2011, reflects our evolution over 27 years from a professional employer organization (“PEO”), an industry we pioneered, to our current position as a comprehensive business performance solutions provider. We were organized as a corporation in 1986 and have provided PEO services since inception.
Our long-term strategy is to provide the best small and medium-sized businesses in the United States with our unique human resources service offering and to leverage our buying power and expertise to provide additional valuable services to clients. Our most comprehensive HR business offering is provided through our PEO services, now known as our Workforce Optimization® solution, which encompasses a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management and training and development services.
In addition to our Workforce Optimization solution, we offer a number of other business performance solutions, including Human Capital Management, Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Insurance Services, (collectively “Adjacent Businesses”), many of which are offered via desktop applications and software as a service (“SaaS”) delivery models. These other products or services are offered separately, as a bundle, or along with Workforce Optimization.
Our Workforce Optimization solution is designed to improve the productivity and profitability of small and medium-sized businesses. It relieves business owners and key executives of many employer-related administrative and regulatory burdens, which enables them to focus on the core competencies of their businesses. It also promotes employee performance through human resources management techniques designed to improve employee satisfaction. We provide our Workforce Optimization solution by entering into a Client Service Agreement (“CSA”), which establishes a three-party relationship whereby we and our client act as co-employers of the employees who work at the client’s location (“worksite employees”). Under the CSA, we assume responsibility for personnel administration and compliance with most employment-related governmental regulations, while the client retains the employees’ services in its business and remains the employer for various other purposes. We charge a comprehensive service fee (“comprehensive service fee” or “gross billing”), which is invoiced concurrently with the processing of payroll for the worksite employees of the client. The comprehensive service fee consists of the payroll of our worksite employees and a markup computed as a percentage of the payroll cost of the worksite employees.
We accomplish the objectives of our Workforce Optimization solution through a “high-touch/high-tech” approach to service delivery. In advisory areas, such as recruiting, employee performance management and employee training, we employ a high-touch approach designed to ensure that our clients receive the personal attention and expertise needed to create a
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customized human resources solution. For transactional processing, we employ a high-tech approach that provides secure, convenient information exchange among Insperity, our clients and our worksite employees, creating efficiencies for all parties. The primary component of the high-tech portion of our strategy is the Employee Service CenterSM (“ESC”). The ESC is our web-based interactive Workforce Optimization solution delivery platform, which is designed to provide automated, personalized Workforce Optimization solutions to our clients and worksite employees.
As of December 31, 2013, we had 57 offices, including 48 Workforce Optimization sales offices in 25 markets. In addition, we had four regional service centers along with human resources and client service personnel located in a majority of our 25 sales markets, which serviced an average of 130,732 worksite employees per month in the fourth quarter of 2013. Our service centers coordinate Workforce Optimization solutions for clients on a regional basis and localized face-to-face human resources services.
Our principal executive offices are located at 19001 Crescent Springs Drive, Kingwood, Texas 77339. Our telephone number at that address is (281) 358-8986 and our website address is insperity.com. Our stock is traded on the New York Stock Exchange under the symbol “NSP.” Periodic Securities and Exchange Commission (“SEC”) filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our website free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
PEO Industry
The PEO industry began to evolve in the early 1980s largely in response to the burdens placed on small and medium-sized employers by an increasingly complex legal and regulatory environment. While various service providers were available to assist these businesses with specific tasks, PEOs emerged as providers of a more comprehensive range of services relating to the employer/employee relationship. In a PEO arrangement, the PEO assumes certain aspects of the employer/employee relationship as defined in the contract between the PEO and its client. Because PEOs provide employer-related services to a large number of employees, they can achieve economies of scale that allow them to perform employment-related functions more efficiently, provide a greater variety of employee benefits, and devote more attention to human resources management than a client can individually.
We believe the key factors driving demand for PEO services include:
• | the focus on growth and productivity of the small and medium-sized business community in the United States, utilizing outsourcing to concentrate on core competencies |
• | the need to provide competitive health care and related benefits to attract and retain employees |
• | the increasing costs associated with health and workers’ compensation insurance coverage, workplace safety programs, employee-related complaints and litigation |
• | complex regulation of employment issues and the related costs of compliance, including the allocation of time and effort to such functions by owners and key executives |
A significant factor in the development of the PEO industry has been increasing recognition and acceptance of PEOs and the co-employer relationship by federal and state governmental authorities. Insperity and other industry leaders, in concert with the National Association of Professional Employer Organizations (“NAPEO”), have worked with the relevant governmental entities for the establishment of a regulatory framework that protects clients and employees, discourages unscrupulous and financially unsound companies, and promotes further development of the industry. Currently, 41 states have enacted legislation either recognizing PEOs or requiring licensing, registration, or certification, and several others are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO operations and helps to resolve interpretive issues concerning employee status for specific purposes under applicable state law. We have actively supported such regulatory efforts and are currently recognized, licensed, registered, certified or pursuing registration in all 41 of these states. The cost of compliance with these regulations is not material to our financial position or results of operations.
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Service Offerings
Workforce Optimization® Solution
We serve small and medium-sized businesses by providing our Workforce Optimization solution, which encompasses a broad range of services, including the following:
• | benefits and payroll administration |
• | health and workers’ compensation insurance programs |
• | personnel records management |
• | employer liability management |
• | employee recruiting and selection |
• | employee performance management |
• | training and development services |
Our Workforce Optimization solution is designed to attract and retain high-quality employees, while relieving client owners and key executives of many employer-related administrative and regulatory burdens. Among the employment-related laws and regulations that may affect a client are the following:
Ÿ | Internal Revenue Code (the “Code”) | Ÿ | The Family and Medical Leave Act (FMLA)* |
Ÿ | Federal Income Contribution Act (FICA) | Ÿ | Genetic Information Nondiscrimination Act of 2008 |
Ÿ | Federal Unemployment Tax Act (FUTA) | Ÿ | Drug-Free Workplace Act* |
Ÿ | Fair Labor Standards Act (FLSA)* | Ÿ | Occupational Safety and Health Act (OSHA)* |
Ÿ | Employee Retirement Income Security Act, as amended (ERISA) | Ÿ | Worker Adjustment and Retraining Notification Act (WARN)* |
Ÿ | Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)* | Ÿ | Uniformed Services Employment and Reemployment Rights Act (USERRA) |
Ÿ | Immigration Reform and Control Act (IRCA) | Ÿ | State unemployment and employment security laws |
Ÿ | Title VII (Civil Rights Act of 1964)* | Ÿ | State workers’ compensation laws |
Ÿ | Health Insurance Portability and Accountability Act (HIPAA) | Ÿ | Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”) |
Ÿ | Age Discrimination in Employment Act (ADEA)* | Ÿ | Patient Protection and Affordable Care Act (PPACA) |
Ÿ | Americans with Disabilities Act (ADA)* | ||
* And similar state laws
While these laws and regulations are complex, and in some instances overlapping, we assist our clients in achieving compliance with these laws and regulations by providing services in four primary categories:
• | administrative functions |
• | benefit plans administration |
• | personnel management |
• | employer liability management |
All of the following services are included in our Workforce Optimization solution and are available to all clients:
Administrative Functions. Administrative functions encompass a wide variety of processing and recordkeeping tasks, mostly related to payroll administration and government compliance. Specific examples include:
• | payroll processing |
• | payroll tax deposits |
• | quarterly payroll tax reporting |
• | employee file maintenance |
• | unemployment claims processing |
• | workers’ compensation claims reporting |
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Benefit Plans Administration. We maintain several benefit plans including the following:
• | a group health plan |
• | a health savings account program |
• | a health care flexible spending account plan |
• | an educational assistance plan |
• | an adoption assistance plan |
• | group term life insurance |
• | group universal life insurance |
• | accidental death and dismemberment insurance |
• | short-term and long-term disability insurance |
• | a 401(k) retirement plan |
• | cafeteria plans for group health and health savings account contributions |
The group health plan includes medical, dental, vision and prescription drug coverage, as well as a work-life program. All benefit plans are provided to eligible employees based on the specific eligibility provisions of each plan. We are the policyholder responsible for the costs and premiums associated with any group insurance policies that provide benefits under these plans, and we act as plan sponsor and administrator of the plans. We negotiate the terms and costs of the plans, maintain the plans in accordance with applicable federal and state regulations and serve as liaison for the delivery of such benefits to worksite employees. COBRA coverage is extended to eligible terminated worksite and corporate employees and other eligible individuals, in accordance with applicable law. We believe that the variety and comprehensive nature of our benefit plan offerings are generally not available to employees in our small and medium-sized business target market and are usually offered only by larger companies that can spread program costs over a much larger group of employees. As a result, we believe the availability of these benefit plans provides our clients with a competitive advantage that small and medium-sized businesses are typically unable to attain on their own.
Personnel Management. We provide a wide variety of personnel management services that give our clients access to resources normally found only in the human resources departments of large companies. All clients have access to our comprehensive personnel guide, which sets forth a systematic approach to administering personnel policies and practices, including recruiting, discipline and termination procedures. Other personnel management services we provide include:
• | drafting and reviewing personnel policies and employee handbooks |
• | designing job descriptions |
• | performing prospective employee screening and background investigations |
• | designing performance appraisal processes and forms |
• | professional development and issues-oriented training |
• | employee counseling |
• | substance abuse awareness training |
• | outplacement services |
• | compensation guidance |
Employer Liability Management. Under the CSA, we assume many of the employment-related responsibilities associated with the administrative functions, benefit plans administration and personnel management services we provide. For many of those employment-related responsibilities that are the responsibility of the client or that we share with our clients, we may assist our clients in managing and limiting exposure. This includes first-time and ongoing safety-related risk management reviews, as well as the implementation of safety programs designed to reduce workplace accidents and consequently, workers’ compensation claims. We also provide guidance to clients for avoiding discrimination, sexual harassment and civil rights violations, and participate in termination decisions to attempt to minimize liability on those grounds. While we do not provide legal services to our clients, we employ in-house and external counsel, specializing in several areas of employment law, who have broad experience in disputes concerning the employer/employee relationship and who provide support to our human resources service specialists. As part of our comprehensive service, we also maintain employment practice liability insurance coverage for ourselves and our clients, monitor changing government laws and regulations, and notify clients of the potential effect of such changes on employer liability.
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Employee Service CenterSM. The ESC is our web-based interactive Workforce Optimization solution delivery platform, which is designed to provide automated, personalized Workforce Optimization content and services to our clients and worksite employees. The ESC provides a wide range of functionality, including:
• | WebPayroll for the submission, approval and reporting of payroll data |
• | client-specific payroll information and reports |
• | employee information, including online check stubs and pay history reports |
• | employee on-boarding including payroll enrollment, policy acknowledgments and employment verification |
• | employee benefits enrollment and changes |
• | employee-specific benefits content, including summary plan descriptions and enrollment status |
• | access to 401(k) plan information through the Retirement Service CenterSM powered by Insperity® |
• | self-service and customizable access to data and reports through an interactive reporting environment |
• | online human resources forms |
• | best practices human resources management process maps and process overviews |
• | online personnel guide |
• | e-Learning web-based training |
• | online recruiting services |
• | links to benefits providers and other key vendors |
• | frequently asked questions |
MarketPlaceSM provided by Insperity®. Through our many alliances with best-of-class providers, Insperity’s MarketPlace is an eCommerce portal that brings a wide range of products and services to our clients, worksite employees and their families. Through MarketPlace, our clients also have the opportunity to offer their products and services to other clients and worksite employees.
MidMarket Solutions™. We believe the mid-market sector, which we generally define as those companies with employees ranging from 150 to 2,000 worksite employees, has historically been under-served by the PEO industry. Currently, we have a dedicated sales management and consulting staff who concentrate solely on the mid-market sector. In addition, we have service personnel who have been trained and specialize in the mid-market sector. The mid-market sector, which represented approximately 19% of our total paid worksite employees during 2013, increased 8% over 2012.
Adjacent Business Unit Offerings
Our ABU strategy is designed to expand the type of business performance improvement services we offer to our current and prospective clients and to increase our overall client base by providing services that can be offered separately from our Workforce Optimization solution. We also strive to leverage our ABU customer relationships to cross sell our Workforce Optimization solution as well as other ABU services. During 2013 and 2012, total ABU revenues unrelated to our Workforce Optimization solution as a percentage of our total revenues were 1.4% and 1.2%, respectively. Also during 2013 and 2012, our ABU gross profit unrelated to our Workforce Optimization as a percentage of our total gross profit was 5.6% and 4.3%, respectively. The following are the key components of our ABU services, which are offered separately or as a bundle:
Human Capital Management. Insperity HCM™ is a comprehensive human capital management solution for human resources data and processes. This SaaS solution is a unified human resources suite that includes payroll processing, tax compliance, employee administration, benefits management and enrollment, reporting and analytics, as well as employee and manager self-service. The solution is offered as a stand-alone SaaS solution or in conjunction with our Payroll Services offering and/or our Time and Attendance products. We initially launched this product late in 2012.
Payroll Services. Insperity® Payroll Services offers a robust SaaS payroll solution that is designed to help alleviate administrative burdens associated with payroll processing and government-related compliance and includes a premium level support of our highly skilled service team. We offer a seamless integration with three new offerings, including Insperity NetSaver™, an online 401(k) solution for small businesses; a pay-as-you-go workers’ compensation program; and HR Essentials, a fully integrated HR platform that assists companies with tracking employee data, important milestones and company property.
Time and Attendance. Our Time and Attendance business unit provides small to medium-sized businesses, including Workforce Optimization clients, with software, hardware and services to track, allocate, and analyze employee resources and provide inputs into customers’ payroll processing and accounting systems. The service is delivered as a SaaS solution or as an “on-premise” client-server solution. Custom interfaces exist between our Time and Attendance products and our Workforce Optimization technologies for those customers utilizing both services.
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Performance Management. Our Performance Management business provides human resources software offerings including a suite of desktop products: Insperity® Descriptions Now®, Insperity® Policies Now®, Insperity® Performance Now®, and Insperity® Ultimate Employer®; along with Insperity® PerformSmart® a performance management SaaS offering. Insperity PerformSmart has been integrated into our Workforce Optimization solution and we will continue to sell to both Workforce Optimization and non-Workforce Optimization customers through online subscription arrangements, packaged software ordered online, and through various reseller arrangements.
Organizational Planning. In January 2011, we entered the organizational planning and analysis solution business with our acquisition of certain assets from HumanConcepts associated with the OrgPlus® desktop product lines for small and medium-sized businesses and a source code license for a SaaS based version. In December 2012 we launched the SaaS product derived from this source code, OrgPlus® Realtime™. Organizational planning facilitates the creation, management and communication of detailed organizational management charts.
Recruiting Services. Our Recruiting Services business unit offers direct hire placement on an as-needed basis and provides outsourced support for individual requisitions or large-scale hiring projects. In addition, we provide consulting services to assist in the creation and maintenance of consistent hiring practices and retention strategies. We also provide compensation services, behavior-based interview training and talent assessment. These services are provided to both Workforce Optimization customers and non-Workforce Optimization customers.
Employment Screening. Our Employment Screening business unit offers a customized approach to background-check reporting for companies, including our Workforce Optimization clients. Services include criminal records checks; verification of employment history or education; driving record, civil record and credit history checks; and confirmation of extraordinary credentials.
Financial Services. In 2012, we announced the launch of Insperity® Financial Services. This suite of financial management tools and solutions for small to medium-sized companies provides business owners with financial intelligence. The core products and services include Insperity Reveal®, a Web-based financial dashboard and toolset, and an outsourced, online bookkeeping and controller service offered through an alliance with a third party.
Expense Management. Our Expense Management business unit delivers employee expense management solutions that automate employee expense reporting, enforce travel and expense policies, and provide management reporting and analysis. The service is delivered both as a SaaS solution and as a desktop software product.
Retirement Services. Our Retirement Services business unit delivers comprehensive 401(k) plan recordkeeping and administrative services to small and medium-sized businesses, primarily to our Workforce Optimization clients. Services include employee education and enrollment, participant communications, elective deferral withholding and transmission, matching contribution calculation, loan and distribution processing, regulatory filing preparation and nondiscrimination testing.
Insurance Services. Our Insurance Services business unit offers assistance to small businesses to secure affordable, customizable business insurance packages and life, health and disability insurance policies. Insurance Services also assists individuals in obtaining insurance solutions.
Client Service Agreement
All Workforce Optimization clients execute a CSA with us. The CSA generally provides for an ongoing relationship between Insperity and the Workforce Optimization client. The CSA generally is subject to termination by Insperity or the client upon 30 days written notice or upon shorter notice in the event of default. The CSA establishes our comprehensive service fee, which is subject to periodic adjustments to account for changes in the composition of the client’s workforce, employee benefit election changes and statutory changes that affect our costs. Under the provisions of the CSA, clients active in January of any year are obligated to pay the estimated payroll tax component of the comprehensive service fee in a manner that reflects the pattern of incurred payroll tax costs. This practice aligns clients’ payments to Insperity for payroll taxes with Insperity’s obligations to make payments to tax authorities, which are higher in the earlier part of the year, and decrease as limits on wages subject to payroll tax, are reached. New clients enrolling subsequent to January of any year are invoiced at a relatively constant rate throughout the remaining portion of the year, resulting in Insperity’s improving profitability over the course of the year for those clients because of the typical pattern of incurred payroll tax costs.
The CSA also establishes the division of responsibilities between Insperity and the client as co-employers. Pursuant to the CSA, we are responsible for personnel administration and are liable for compliance with certain employment-related
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government regulations. In addition, we assume liability for payment of salaries and wages (as well as related payroll taxes) of our worksite employees and responsibility for providing specified employee benefits to such persons. These liabilities are not contingent on the prepayment by the client of the associated comprehensive service fee and, as a result of our employment relationship with each of our worksite employees, we are liable for payment of salary and wages to the worksite employees as reported by the client and are responsible for providing specified employee benefits to such persons, regardless of whether the client pays the associated comprehensive service fee. The client retains the employees’ services and remains liable for complying with certain government regulations that require control of the worksite or daily supervisory responsibility or is otherwise beyond our ability to assume. A third group of responsibilities and liabilities are shared by Insperity and the client where such joint responsibility is appropriate. The specific division of applicable responsibilities under the majority of CSAs are as follows:
Insperity
• | Payment of wages and salaries as reported by the client and related tax reporting and remittance (local, state and federal withholding, FICA, FUTA, state unemployment) |
• | Workers’ compensation compliance, procurement, management and reporting |
• | Compliance with the Code, COBRA, HIPAA and ERISA (for each employee benefit plan sponsored solely by Insperity), as well as monitoring changes in other governmental laws and regulations governing the employer/employee relationship and updating the client when necessary |
• | Offering benefits under Insperity-sponsored employee benefit plans that comply with PPACA requirements |
• | Employee benefits administration of plans sponsored solely by Insperity |
Client
• | Payment, through Insperity, of commissions, bonuses, vacations, paid time off, sick pay, paid leaves of absence and severance payments |
• | Payment and related tax reporting and remittance of non-qualified deferred compensation and equity-based compensation |
• | Ownership and protection of all client intellectual property rights |
• | Compliance with OSHA regulations, EPA regulations, FLSA, FMLA, WARN, USERRA and state and local equivalents and compliance with government contracting provisions |
• | Compliance with federal, state and local pay or play health care mandates and all such other similar federal, state and local legislation |
• | Compliance with the National Labor Relations Act (“NLRA”), including all organizing efforts and expenses related to a collective bargaining agreement and related benefits |
• | Professional licensing requirements, fidelity bonding and professional liability insurance |
• | Products produced and/or services provided |
• | COBRA, HIPAA and ERISA compliance for client-sponsored benefit plans |
Joint
• | Implementation of policies and practices relating to the employee/employer relationship |
• | Compliance with all federal, state and local employment laws, including, but not limited to Title VII of the Civil Rights Act of 1964, ADEA, Title I of ADA, the Consumer Credit Protection Act, and immigration laws and regulations |
We maintain employment practice liability insurance coverages (including coverages for our clients) to manage our exposure for various employee-related claims, and as a result, our incurred costs with respect to this exposure have historically been insignificant to our operating results.
Because we are a co-employer with the client for some purposes, it is possible that we could incur liability for violations of such laws, even if we are not responsible for the conduct giving rise to such liability. The CSA addresses this issue by providing that the client will indemnify us for liability incurred to the extent the liability is attributable to conduct by the client. Notwithstanding this contractual right to indemnification, it is possible that we could be unable to collect on a claim for indemnification and may therefore be ultimately responsible for satisfying the liability in question.
In most instances, clients are required to remit their comprehensive service fees no later than one day prior to the applicable payroll date by wire transfer or automated clearinghouse transaction. Although we are ultimately liable, as the employer for payroll purposes, to pay employees for work previously performed, we retain the ability to terminate immediately the CSA and associated worksite employees or to require prepayment, letters of credit or other collateral upon deterioration in a
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client’s financial condition or upon non-payment by a client. These rights, the periodic nature of payroll, and the overall quality of our client base have resulted in an excellent overall collections history.
Workforce Optimization Clients
Insperity’s Workforce Optimization solution provides a value-added, full-service human resources solution we believe is most suitable to a specific segment of the small and medium-sized business community. We target successful businesses with 10 to 2,000 employees that recognize the advantage in the strategic use of high-performance human resources practices. We refer to clients with approximately 150 to 2,000 employees as mid-market clients. These clients, which represented approximately 19% of our total client base as of December 31, 2013, are sold and serviced by sales and service personnel who specialize in the mid-market sector. We have set a long-term goal to serve approximately 10% of the overall small and medium-sized business community. We serve clients and worksite employees located throughout the United States. By region, our 2013 revenue change compared to 2012 and revenue distribution for the year ended December 31, 2013, was as follows:
Revenue Change | % of Total Revenues | |||||
Northeast | 3.0 | % | 26.0 | % | ||
Southeast | 7.4 | % | 9.6 | % | ||
Central | 5.4 | % | 14.8 | % | ||
Southwest | 3.0 | % | 27.6 | % | ||
West | 5.8 | % | 22.0 | % | ||
As part of our client selection strategy, we generally do not offer our Workforce Optimization solution to businesses falling within certain specified NAICS (North American Industry Classification System) codes, attempting to minimize our exposure to certain industries which we believe present a higher employer risk such as employee injury, high turnover or litigation. All prospective Workforce Optimization clients are evaluated individually on the basis of workers’ compensation risk, group medical history (where permitted by law), unemployment history, operating stability and human resources practices.
Our client base is broadly distributed throughout a wide variety of industries including:
Industry | % of Client Base | ||
Computer and information services | 25 | % | |
Finance, insurance and real estate | 14 | % | |
Management, administration and consulting services | 14 | % | |
Manufacturing | 9 | % | |
Wholesale trade | 8 | % | |
Medical services | 7 | % | |
Retail trade | 5 | % | |
Not-for-profit and similar organizations | 5 | % | |
Engineering, accounting and legal services | 4 | % | |
Construction | 4 | % | |
Other | 5 | % | |
This diverse client base lowers our exposure to downturns or volatility in any particular industry. However, our performance could be affected by a downturn in one of these industries or by general economic conditions within the small and medium-sized business community.
We focus heavily on client retention. During both 2013 and 2012, our retention rate was approximately 81%. Insperity’s client retention record over the last five years reflects that approximately 79% of our Workforce Optimization clients remain for more than one year. The average annual retention rate over the last five years was approximately 80%. Client attrition is attributable to a variety of factors, including: (i) client non-renewal due to price or service factors; (ii) client business
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failure, sale, merger, or disposition; (iii) our termination of the CSA resulting from the client’s non-compliance or inability to make timely payments; and (iv) competition from other PEOs or business services firms.
Marketing and Sales
As of December 31, 2013, we had 48 Workforce Optimization sales offices located in 25 markets. Our sales offices typically consist of six to eight Business Performance Advisors (“BPAs”), a district sales manager and an office administrator. To take advantage of economic efficiencies, multiple sales offices may share a physical location. Insperity’s markets and their respective year of entry are as follows:
Initial | ||||
Market | Sales Offices | Entry Date | ||
Houston | 5 | 1986 | ||
San Antonio | 1 | 1989 | ||
Austin | 1 | 1989 | ||
Orlando | 1 | 1989 | ||
Dallas/Fort Worth | 4 | 1993 | ||
Atlanta | 2 | 1994 | ||
Phoenix | 1 | 1995 | ||
Chicago | 2 | 1995 | ||
Washington D.C. | 2 | 1995 | ||
Denver | 2 | 1996 | ||
Los Angeles | 5 | 1997 | ||
Charlotte | 1 | 1997 | ||
St. Louis | 1 | 1998 | ||
San Francisco | 3 | 1998 | ||
New York | 3 | 1999 | ||
Maryland | 2 | 2000 | ||
New Jersey | 2 | 2000 | ||
San Diego | 1 | 2001 | ||
Boston | 2 | 2001 | ||
Minneapolis | 2 | 2002 | ||
Raleigh | 1 | 2006 | ||
Kansas City | 1 | 2007 | ||
Columbus | 1 | 2010 | ||
Nashville | 1 | 2011 | ||
Philadelphia | 1 | 2012 | ||
Our existing and prospective markets are identified using a systematic market evaluation and selection process. We continue to evaluate a broad range of factors in the selection process, using a market selection model that weights various criteria we believe are reliable predictors of successful penetration based on our experience. Among the factors we consider are:
• | market size, in terms of small and medium-sized businesses engaged in selected industries that meet our risk profile; |
• | market receptivity to PEO services, including the regulatory environment and relevant history with other PEO providers; |
• | existing relationships within a given market, such as vendor or client relationships; |
• | expansion cost issues, such as advertising and overhead costs; |
• | direct cost issues that bear on our effectiveness in controlling and managing the cost of our services, such as; workers’ compensation and health insurance costs, unemployment risks and various legal and other factors; |
• | a comparison of the services we offer to alternatives available to small and medium-sized businesses in the relevant market, such as the cost to the target clients of procuring services directly or through other PEOs; and |
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• | long-term strategy issues, such as the general perception of markets and our estimate of the long-term revenue growth potential of the market. |
Each of our expansion markets, beginning with Dallas in 1993, was selected in this manner.
In 2011, we launched our rebranding initiative whereby Administaff became Insperity; a new brand backed by an innovative strategy for meeting the ongoing performance needs of America’s best companies. The name Insperity is drawn from the linked entrepreneurial goals of inspiration and prosperity, and underscores our ongoing vision of helping businesses succeed.
We develop a mix of national and local advertising media and a placement strategy tailored to each individual market. After selecting a market and developing our marketing mix, but prior to entering the market, we engage in an organized media and public relations campaign to prepare the market for our entry and to begin the process of generating sales leads. We market our services through various business promotions and a broad range of media outlets, including television, radio, newspapers, periodicals, direct mail and the Internet. We employ public relations firms for most of our markets as well as advertising consultants to coordinate and implement our marketing campaigns. We have developed an inventory of television, radio and newsprint advertisements, which are utilized in this effort.
We continuously seek to develop new marketing approaches and campaigns to capitalize on changes in the competitive landscape for our human resources services and to more successfully reach our target market. We have an agreement with the Professional Golf Association Champions Tour to be the title sponsor of the annual Insperity Invitational™ presented by UnitedHealthcare® professional golf tournament held annually in The Woodlands, Texas (a suburb of Houston). In addition, we have arrangements with Arnold Palmer and Jim Nantz, a sports commentator, to serve as our national spokespersons. Our marketing campaigns use this event and the relationships with Mr. Palmer and Mr. Nantz as a focal point of our brand marketing efforts.
Our organic growth model generates sales leads from five primary sources: direct sales efforts, advertising, referrals, marketing alliances and the Internet. These leads result in initial presentations to prospective Workforce Optimization clients, and ultimately, prospective Workforce Optimization client census reports. A prospective Workforce Optimization client’s census report reflects information gathered by the BPA about the prospect’s employees, including job classification, state of employment, workers’ compensation claims history, group medical information (where permitted by law), salary and desired level of benefits. This information is entered into our customized bid system, which applies Insperity’s proprietary pricing model to the census data, leading to the preparation of a bid. Concurrent with this process, we evaluate the prospective client’s workers’ compensation, health insurance, employer practices and financial stability from a risk management perspective. Upon completion of a favorable risk evaluation, the BPA presents the bid and attempts to enroll the prospect. Our selling process typically takes approximately 90 days for clients with less than 150 employees, and up to approximately 180 days for larger clients. The process can be extended during economic downturns.
We have implemented cross-selling channels between our Workforce Optimization business and our ABUs in order to execute on our ABU strategy. This strategy focuses on using our Workforce Optimization offering to increase market penetration in each of our ABU businesses and using our ABU offering as a source of leads for our Workforce Optimization solution. The cross-selling channels attempt to reduce barriers to selling our products and services and results in tailored service packages to better meet the specific needs of the business.
Competition
We provide a value-added, full-service human resources solution through our Workforce Optimization solution, which we believe is most suitable to a specific segment of the small and medium-sized business community. This full-service approach is exemplified by our commitment to provide a high level of service and technology personnel, which has produced a ratio of corporate staff to worksite employees (the “staff support ratio”) that is higher than average for the PEO industry. Based on an analysis of the 2010 through 2012 annual NAPEO surveys of the PEO industry, we have successfully leveraged our full-service approach into significantly higher returns for Insperity on a per worksite employee per month basis. During the three-year period from 2010 through 2012, our staff support ratio averaged 55% higher than the PEO industry average. During the same three-year period, our gross profit per worksite employee and operating income per worksite employee exceeded industry averages by 154% and 249%, respectively.
Competition in the PEO industry revolves primarily around quality of services, scope of services, choice and quality of benefits packages, reputation and price. We believe reputation, national presence, regulatory expertise, financial resources, risk management and information technology capabilities distinguish leading PEOs from the rest of the industry. We also
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believe we compete favorably in these areas; however, other PEOs may offer their PEO services at more competitive prices than we may be able to offer.
Due to the differing geographic regions and market segments in which most PEOs operate, and the relatively low level of market penetration by the industry, we consider our primary competition to be the traditional in-house provision of human resources services. The PEO industry is highly fragmented, and we believe Insperity is one of the largest PEO service providers in the United States. Our largest national competitors include PEO divisions of large business services companies such as Automatic Data Processing, Inc. and Paychex, Inc., and other national PEOs, such as TriNet. In addition, we compete to some extent with: i) fee-for-service providers such as payroll processors and human resources consultants; ii) human resources technology solution companies; and iii) large regional PEOs in certain areas of the country. As Insperity and other large PEO service providers expand nationally, we expect that competition may intensify.
Vendor Relationships
Insperity provides benefits to its worksite employees under arrangements with a variety of vendors. We consider our contracts with UnitedHealthcare (“United”) and member insurance companies of ACE American Insurance Company (“ACE”) to be the most significant elements of our employee benefits package. These contracts would be the most difficult to replace.
We provide group health insurance coverage to our worksite employees through a national network of carriers including United, UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii, Unity Health Plan and Tufts, all of which provide fully insured policies or service contracts. The health insurance contract with United provides approximately 85% of our health insurance coverage and expires on December 31, 2015, subject to cancellation by either party upon 180 days notice. For a discussion of our contract with United, which is accounted for using a partially self-funded insurance accounting model, please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Benefits Costs.”
Our workers’ compensation coverage (the “ACE Program”) has been provided through an arrangement with ACE since 2007. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. For additional discussion of the ACE Program, which includes terms shifting some of the economic burden to us, please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Workers’ Compensation Costs.”
Information Technology
Insperity utilizes a variety of information technology capabilities to provide its human resources services and business performance improvement services to its clients and worksite employees and for its own administrative and management information requirements.
Insperity’s Workforce Optimization information system is a proprietary system that utilizes internally developed and licensed software applications. This system manages transactions and information unique to the Workforce Optimization solution and to Insperity, including:
• | worksite employee enrollment |
• | human resources management |
• | benefits and defined contribution plan administration |
• | payroll processing |
• | client invoicing and collection |
• | management information and reporting |
• | sales bid calculations |
Our ABUs utilize a variety of owned and licensed software applications to deliver business performance improvement services to our clients, including to some of our Workforce Optimization clients.
Central to the system are transaction processing capabilities that allow us to process a high volume of payroll, invoice, and bid transactions that meet the specific needs of our clients and prospects. We administer our employee benefits through a proprietary application designed to process employee eligibility and enrollments, manage carrier relationships, and maintain a variety of plan offerings. Our retirement services operations are conducted utilizing an industry leading retirement plan administration application in a third-party hosted environment. Aspects of all of these components are delivered to our Workforce Optimization clients and worksite employees through the ESC. We utilize commercially available software for
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other business functions such as finance and accounting, contract and litigation management, sales force activity management and customer relationship management.
Insperity has hosting facilities located at our corporate headquarters in Kingwood, Texas (a suburb of Houston), and in Bryan, Texas. The hosting facilities house the majority of our business applications, telecommunications equipment and network equipment. Each hosting facility houses a mix of primary production applications, disaster recovery, replication and back-up applications, and pre-production environments with the Bryan facility acting as our primary data center for all mission-critical applications. Both hosting facilities are designed to run all of our critical business applications and have sufficient capacity to handle all of our operations on a stand-alone basis, if required. Periodically, we perform testing to ensure our disaster recovery capabilities remain effective and available. We leverage the hosting facilities and related infrastructure that we originally designed for our Workforce Optimization system to support the systems required for our business performance improvement services offered through our ABUs. We also utilize additional leased hosting facilities for certain of our business units.
Our network infrastructure ensures appropriate connectivity exists among all of our facilities and employees and provides appropriate Internet connectivity to conduct business with our clients and worksite employees. The network infrastructure is provided through industry standard core network hardware and via high-speed network services provided by multiple vendors.
We have incorporated a variety of measures to maintain the security and privacy of the information managed through our systems and applications. These measures include industry standard technologies designed to protect, monitor and assess the network environment; best practice security policies and procedures; and standard access controls designed to control access to sensitive and private information.
Industry Regulations
Insperity’s Workforce Optimization operations are affected by numerous federal and state laws relating to tax, insurance and employment matters. By entering into a co-employer relationship with our worksite employees, we assume certain obligations and responsibilities of an employer under these federal and state laws. Because many of these federal and state laws were enacted prior to the development of nontraditional employment relationships, such as PEOs, temporary employment and outsourcing arrangements, many of these laws do not specifically address the obligations and responsibilities of nontraditional employers. Currently, 41 states have passed laws that recognize PEOs or require licensing, registration or certification requirements for PEOs, and several others are considering such regulation.
As an employer, we are subject to federal statutes and regulations governing the employer/employee relationship. Subject to the issues discussed below, we believe that our operations are in compliance, in all material respects, with all applicable federal statutes and regulations.
Employee Benefit Plans
We offer various employee benefits plans to eligible employees, including our worksite employees. These plans include:
• | a 401(k) retirement plan |
• | cafeteria plans under Code Section 125 |
• | a group health plan, which includes medical, dental, vision and prescription drug coverage, as well as a work-life program |
• | a health savings account program |
• | a welfare benefits plan, which includes life, disability and accidental death and dismemberment coverage |
• | a health care flexible spending account plan |
• | an educational assistance program |
• | an adoption assistance program |
• | a commuter benefits program |
Generally, employee benefit plans are subject to provisions of the Code, ERISA and COBRA.
Employer Status. In order to qualify for favorable tax treatment under the Code, employee benefit plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an “employer” of individuals for federal employment tax purposes if an employment relationship exists between the entity and the individuals
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under the common law test of employment. In addition, the officers of a corporation are deemed to be employees of that corporation for federal employment tax purposes. The common law test of employment, as applied by the IRS, involves an examination of approximately 20 factors to ascertain whether an employment relationship exists between a worker and a purported employer. Generally, the test is applied to determine whether an individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a “co-employer.” Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual’s work. Among the factors that appear to have been considered more important by the IRS are:
• | the employer’s degree of behavioral control (the extent of instructions, training and the nature of the work) |
• | the financial control or the economic aspects of the relationship |
• | the intended relationship of the parties (whether employee benefits are provided, whether any contracts exist, whether services are ongoing or for a project, whether there are any penalties for discharge/termination, and the frequency of the business activity) |
ERISA Requirements. Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan.” ERISA defines the term “employee” as “any individual employed by an employer.” The United States Supreme Court has held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. A definitive judicial interpretation of “employer” in the context of a PEO or employee leasing arrangement has not been established.
If Insperity were found not to be an employer with respect to worksite employees for ERISA purposes, its plans would not comply with ERISA. Further, as a result of such finding, Insperity and its plans would not enjoy, with respect to worksite employees, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulations, as well as to claims based upon state common laws. Even if such a finding were made, we believe we would not be materially adversely affected because we would endeavor to make available similar benefits at comparable costs.
In addition to ERISA and the Code provisions discussed herein, issues related to the relationship between Insperity and its worksite employees may also arise under other federal laws, including other federal income tax laws.
Patient Protection and Affordable Care Act. The PPACA was signed into law on March 23, 2010. The PPACA was subsequently amended on March 30, 2010, by the Reconciliation Act. The PPACA and the Reconciliation Act (collectively the “Act”) entail sweeping health care reforms with staggered effective dates from 2010 through 2018, and many provisions in the Act require the issuance of additional guidance from the U.S. Department of Labor, the Internal Revenue Service (“IRS”), the U.S. Department of Health & Human Services and the states. Many provisions of the Act do not become operative until future years. The Act did not have a material adverse impact on our results of operations in 2013.
The number and complex nature of federal and state regulations relating to employer-sponsored health plans has continued to increase over time. The Act has already generated many new regulations, and is expected to generate many more as various provisions take effect. We believe that additional regulatory burdens placed on employers can increase the demand for our services because small and medium-sized businesses are especially challenged by such governmental regulations due to limited resources and the lack of expertise. As a co-employer in the PEO relationship, we assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental laws and regulations. Historically, we believe we have successfully marketed the compliance component of our service offering and that our compliance-related services have increased the value proposition of our service offering. However, given the length and complexity of the Act, the extended time period over which the reforms will be implemented, and the unknown impact of regulatory guidance, much of which has not yet been issued, we are unable to determine the ultimate impact the Act will have in future periods on the costs we will incur to comply with the Act, our ability to match any resulting increased costs with pricing, our ability to attract and retain clients, our business model and our results of operations.
Beginning in 2010, the Act provided for a small business tax credit for eligible companies offering health care coverage to employees. Based upon information contained in the Congressional Record, which specifically references PEOs, we believe that these tax credits are available to our clients that meet the qualification requirements. However, the Act and subsequently issued IRS guidance do not expressly address the issue of whether qualifying small business clients of a PEO are entitled to the tax credits. At this time, we do not believe that this issue has had an adverse effect on our operations or our ability to attract and retain clients.
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Beginning in 2011, the Act imposed a number of new mandates on the coverage required to be provided under health insurance plans, some of which were already standard in our group health plan. For mandates not already included, we worked with our insurance carriers to incorporate the required changes. While we are unable to determine the impact of the required plan changes at this time, in future periods they may result in increased costs to us and could affect our ability to attract and retain clients. Additionally, contractual arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset the associated potential increased costs.
Beginning in 2014, the Act provided for the establishment of state insurance exchanges (“Exchanges”) to make health insurance available to individuals and small employers (initially defined as 100 employees or less). States had the option of building a state-based exchange, entering into a state-federal partnership exchange or accepting the federally-facilitated exchange. States that accept the federally-facilitated exchange can transition to a state-based exchange at a later date. The Exchanges provide consumers with educational services and information on available options and offer a variety of health plans. Small business tax credits and subsidies are available to qualifying businesses and individuals who purchase health insurance through the Exchanges.
Additionally in 2014, the Act ushers in a number of insurance market reforms for the small group and individual markets. The reforms, intended to result in the community rating of health insurance for these markets, require guaranteed issue and renewability of coverage, eliminate certain underwriting practices by issuers, consolidate the number of risk pools in each state and restrict the permissible factors and variable ranges of those factors that can be considered in determining health insurance premiums.
The health insurance industry will be subject to additional excise taxes beginning in 2014. In addition, starting in 2014 reinsurance taxes will be imposed on insurers and third party administrators for the purpose of helping to offset the cost for insurance covering high risk individuals. As the policyholder, all or a portion of these increased costs may be passed on to us by our carriers. Contractual arrangements and competitive market conditions may limit or delay our ability to match pricing with any potential increased costs.
On July 2, 2013, the federal government delayed implementation of the employer shared responsibility (“pay or play”) provisions of the Act until 2015. Under pay or play, penalties are imposed on large employers (those with at least 50 full-time equivalent employees) who fail to offer “minimum essential coverage” if any employee obtains coverage from an Exchange and receives a subsidy or tax credit for such coverage. To qualify as minimum essential coverage, employer plans must satisfy affordability and minimum value tests or be subject to financial penalties if any employee obtains coverage from an Exchange and receives a subsidy or tax credit for such coverage. Information contained in the Congressional Record, which specifically references PEOs, indicates that any pay or play penalties should apply separately to clients of a PEO and not at the PEO level. However, the Act and subsequently issued IRS guidance do not expressly address the issue of whether the pay or play penalties apply only at the client level or whether the penalties can be applied at the PEO level. At this time, we are unable to determine whether the Exchanges, tax credits, subsidies, insurance market reforms or the pay or play penalties will have an adverse impact on our business operations, our ability to attract and retain clients, or our ability to increase service fees to offset any increased costs or associate penalties assessed at the PEO level.
In 2018, the Act implements rules imposing excise taxes on employers and insurers who offer excessive health benefits under so-called “Cadillac plans.” We anticipate taking appropriate steps to avoid, to the extent necessary and possible, benefits under our group health plan from triggering such excise taxes, which our carrier may pass on to us in the form of increased premiums. At this time, we are unable to determine the effect the excise taxes will have on our ability to match pricing with any increased costs.
401(k) Retirement Plans. Our 401(k) Retirement Plans are operated pursuant to guidance provided by the IRS under Revenue Procedure 2002-21 and Revenue Procedure 2003-86, each of which provides guidance for the operation of defined contribution plans maintained by PEOs that benefit worksite employees. This guidance provides qualification standards for PEO plans which, if met, negate the inquiry of common law employer status for purposes of the exclusive benefit rule. All of Insperity’s 401(k) Retirement Plans have received determination letters from the IRS confirming the qualified status of the Plans.
Employment Taxes
As a co-employer, Insperity assumes responsibility and liability for the payment of federal and state employment taxes with respect to wages and salaries paid to our worksite employees. There are essentially three types of federal employment tax obligations:
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• | withholding of income tax requirements governed by Code Section 3401, et seq. |
• | obligations under FICA, governed by Code Section 3101, et seq. |
• | obligations under FUTA, governed by Code Section 3301, et seq. |
Under these Code sections, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes.
Code Section 3401, which applies to federal income tax withholding requirements, contains an exception to the general common law test applied to determine whether an entity is an “employer” for purposes of federal income tax withholding. Section 3401(d)(1) states that if the person for whom services are rendered does not have control of the payment of wages, the “employer” for this purpose is the person having control of the payment of wages. The Treasury regulations issued under Section 3401(d)(1) state that a third party can be deemed to be the employer of workers under this section for income tax withholding purposes where the person for whom services are rendered does not have legal control of the payment of wages. While Section 3401(d)(1) has been examined by several courts, its ultimate scope has not been delineated. Moreover, the IRS has to date relied extensively on the common law test of employment in determining liability for failure to comply with federal income tax withholding requirements.
Accordingly, while we believe that we can assume the withholding obligations for worksite employees, in the event we fail to meet these obligations, the client may be held ultimately liable for those obligations. While this interpretive issue has not to our knowledge discouraged clients from enrolling with Insperity, there can be no assurance that a definitive adverse resolution of this issue would not do so in the future. These interpretive uncertainties may also impact our ability to report employment taxes on our own account rather than the accounts of our clients.
Unemployment Taxes
We record our state unemployment (“SUI”) tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on Insperity’s prior years’ compensation experience in each state. Certain rates are determined, in part, by each client’s own compensation experience. In addition, states have the ability under law to increase unemployment tax rates, including retroactively, to cover deficiencies in the unemployment tax funds. State unemployment tax rates increased substantially from 2010 to 2012 due to U.S. economic conditions, but declined in 2013 and are anticipated to decline in 2014. Rate notices are typically provided by the states during, or prior to, the first quarter of each year; however, some notices are received later. Until we receive the final tax rate notices, we estimate our expected SUI rate in those particular states.
Employers in certain states are experiencing higher FUTA tax rates as a result of certain states not repaying their unemployment loans from the federal government in a timely manner. We are obligated to pay the federal government at a higher rate in these situations. As such, we estimate the additional tax owed in states that have had a history of not repaying their federal loans in a timely manner.
State Regulation
While many states do not explicitly regulate PEOs, 41 states have adopted provisions for licensing, registration, certification or recognition of PEOs, and several others are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers’ compensation and other purposes under state law. Insperity is in compliance with the requirements in all 41 states. Regardless of whether a state has licensing, registration or certification requirements for PEOs, we must comply with a number of other state and local regulations that could impact our operations.
Corporate Office Employees
We had approximately 2,300 corporate employees as of December 31, 2013. We believe our relations with our corporate employees are good. None of our corporate employees is covered by a collective bargaining agreement.
Intellectual Property
Insperity currently has registered trademarks, copyrights and other intellectual property. In connection with our rebranding, we registered our new trademarks in 2013. We believe that our trademarks as a whole are of considerable importance to our business.
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ITEM 1A. RISK FACTORS.
Factors That May Affect Future Results and the Market Price of Common Stock
Adverse Economic Conditions Could Negatively Affect our Industry, Business and Results of Operations
The small and medium-sized business market is sensitive to changes in economic activity levels as well as the credit markets. As a result, the demand for the outsourced HR services we provide clients could be adversely impacted by weak economic conditions or difficulty obtaining credit. Current and prospective clients may respond to such conditions by reducing employment levels, compensation levels, employee benefit levels and outsourced HR services. In addition, during periods of weak economic levels, current clients may have difficulty meeting their financial obligations to us and may select alternative HR services at more competitive rates than we offer. Such developments could adversely impact our financial condition, results of operations and future growth rates.
We Assume Liability for Worksite Employee Payroll, Payroll Taxes and Benefits Costs and are Responsible for their Payment Regardless of the Amount Billed to or Paid by our Clients
Under the CSA, we become a co-employer of worksite employees and assume the obligations to pay the salaries, wages and related benefits costs and payroll taxes of such worksite employees. We assume such obligations as a principal, not as an agent of the client. Our obligations include responsibility for:
• | payment of the salaries and wages for work performed by worksite employees, regardless of whether the client timely pays us the associated service fee |
• | withholding and payment of federal and state payroll taxes with respect to wages and salaries reported by Insperity |
• | providing benefits to worksite employees even if our costs to provide such benefits exceed the fees the client pays us |
If a client does not pay us, or if the costs of benefits we provide to worksite employees exceed the fees a client pays us, our ultimate liability for worksite employee payroll and benefits costs could have a material adverse effect on our financial condition or results of operations.
Increases in Health Insurance Costs or Inability to Secure Replacement Contracts on Competitive Terms Could have a Material Adverse Effect on our Financial Condition or Results of Operations
Maintaining health insurance plans that cover worksite employees is a significant part of our business. Our primary health insurance contract expires on December 31, 2015, subject to cancellation by either party upon 180 days notice. In the event we are unable to secure replacement contracts on competitive terms, significant disruption to our business could occur.
Health insurance costs are in part determined by our claims experience and comprise a significant portion of our direct costs. If we experience an increase in the number or severity of claims, our health insurance costs could increase. Claim activity levels are impacted by a number of factors, including, but not limited to, macro-economic changes, proposed and enacted regulatory changes and medical outbreaks. Contractual arrangements with our clients limit our ability to incorporate such increases into service fees, which could result in a delay before such increases could be reflected in service fees. As a result, such increases could have a material adverse effect on our financial condition or results of operations. For additional information related to our health insurance costs, please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Benefits Costs.”
Health Care Reform Could Affect Our Health Insurance Plan and Could Lead to a Significant Disruption in our Business
The PPACA was signed into law on March 23, 2010. The PPACA was subsequently amended on March 30, 2010 by the Reconciliation Act. The PPACA and Reconciliation Act (collectively the “Act”) entail sweeping health care reforms with staggered effective dates from 2010 through 2018, and many provisions in the Act require the issuance of additional guidance from the U.S. Department of Labor, the IRS, the U.S. Department of Health & Human Services (“HHS”), and the states.
Beginning in 2014, a number of key provisions of the Act take effect including, the establishment of state insurance exchanges (“Exchanges”), insurance market reforms and the imposition of excise taxes on the health insurance industry and reinsurance taxes on insurers and third party administrators. Additionally, the pay or play penalties on large employers take effect in 2015. Collectively, these items have the potential to significantly change the insurance marketplace for small and
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medium sized businesses and how employers provide insurance to employees. In addition, as a co-employer in the PEO relationship, we assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental regulations. Generally, the Act and subsequently issued guidance by IRS and HHS have not addressed or in some instances are unclear as to their application in the PEO relationship or whether such provisions should be applied at the PEO or client level.
We are currently unable to determine the impact of the Act on our benefit plans, business model and future results of operations. In future periods, the changes may result in increased costs to us and could affect our ability to attract and retain clients. Additionally, contractual arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset any associated potential increased costs. For additional information related to PPACA, please read Item 1. “Business – Industry Regulations – Patient Protection and Affordable Care Act.”
Increases in Workers’ Compensation Costs or Inability to Secure Replacement Coverage on Competitive Terms Could Lead to a Significant Disruption to our Business
Our workers’ compensation coverage has been provided through an arrangement with ACE since 2007. Under our current arrangement with ACE, we bear the economic burden for the first $1 million layer of claims per occurrence and the economic burden for claims over $1 million, up to a maximum aggregate amount of $5 million per policy year for claims that exceed the first $1 million. ACE bears the burden for all claims in excess of these levels. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. For additional discussion of our policy with ACE, please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Workers’ Compensation Costs.”
Workers’ compensation costs are a significant portion of our direct costs. If we were to experience an unexpected large increase in the number or severity of claims, our workers’ compensation costs could increase, which could have a material adverse effect on our results of operations or financial condition.
The current workers’ compensation coverage with ACE expires on September 30, 2014. In the event we are unable to secure replacement coverage on competitive terms, significant disruption to our business could occur.
Our Ability to Adjust and Collect Service Fees for Increases in Unemployment Tax Rates May be Limited
We record our SUI tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of final tax rate notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received for purposes of pricing. In a period of adverse economic conditions state unemployment funds may experience a significant increase in the number of unemployment claims. Accordingly, state unemployment tax rates would likely increase substantially. Some states have the ability under law to increase unemployment tax rates retroactively to cover deficiencies in the unemployment fund. In addition, federal unemployment tax rates may be retroactively increased in certain states in the event the state fails to timely repay federal unemployment loans. Generally, our contractual agreements allow us to incorporate such increases into our service fees upon the effective date of the rate change. However, our ability to fully adjust service fees in our billing systems and collect such increases over the remaining term of the customers’ contracts could be limited, resulting in a potential tax increase not being fully recovered. As a result, such increases could have a material adverse effect on our financial condition or results of operations. For additional information related to state unemployment taxes, please read Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies.”
Our Contracts May be Canceled on Short Notice. Our Inability to Renew Client Contracts or Attract New Clients Could Materially and Adversely Affect our Financial Conditions and Results of Operations
Our standard CSA can generally be canceled by us or the client with 30 days notice. Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by existing clients, which could materially and adversely affect our financial condition and results of operations. In the event we have a high proportion of terminating clients from our mid-market customer base (which are generally under a two-year CSA), the financial impact of such an event could be significant. In addition, our results of operations are dependent in part upon our ability to retain or replace our clients upon the termination or cancellation of the CSA. Our client attrition rate was approximately 19% in 2013. There can be no assurance that the number of contract cancellations will continue at these levels and such cancellations may increase in the future due to various factors, including but not limited to, economic conditions in the markets we operate. Clients electing to purchase our
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services or electing an alternative solution often do so at the beginning of the calendar year. As a result, we typically experience our largest concentration of new client additions and attrition in the first quarter of each year.
Established Competitors and New Market Entrants May Have a Competitive Advantage over Us
The human resources services industry, including the PEO industry, is highly fragmented. Many PEOs have limited operations and fewer than 1,000 worksite employees, but there are several industry participants that are comparable to our size or larger. We also encounter competition from “fee for service” companies such as payroll processing firms, insurance companies, human resources consultants and human resources technology solutions. Our competitors include the PEO divisions of large business services companies, such as Automatic Data Processing, Inc. and Paychex, Inc., and other national PEOs such as TriNet. Other PEOs may offer their PEO services at more competitive prices than we may be able to offer. Moreover, we expect that as the PEO industry grows and its regulatory framework becomes better established, well-organized competition with greater resources than we have may enter the PEO market, possibly including large “fee for service” companies currently providing a more limited range of services.
We May be Subject to Liabilities for Client and Employee Actions
A number of legal issues remain unresolved with respect to the co-employment arrangement between a PEO and its worksite employees, including questions concerning the ultimate liability for violations of employment and discrimination laws. Our CSA establishes the contractual division of responsibilities between Insperity and our clients for various personnel management matters, including compliance with and liability under various governmental regulations.
Because we act as a co-employer, we may be subject to liability for violations of various employment and discrimination laws despite these contractual provisions, even if we do not participate in such violations. Although the CSA provides that the client is to indemnify us for any liability attributable to the client’s conduct, we may not be able to collect on such a contractual indemnification claim and thus may be responsible for satisfying such liabilities to the extent that such liabilities are not covered or insured against under our insurance policies. In addition, worksite employees may be deemed to be our agents, which may subject us to liability for the actions of such worksite employees.
Changes in Federal, State and Local Regulation or our Inability to Obtain Licenses under New Regulatory Frameworks Could Have a Material Adverse Effect on our Results of Operations or Financial Condition
As a major employer, our operations are affected by numerous federal, state and local laws and regulations relating to labor, tax, benefit, insurance and employment matters. By entering into a co-employer relationship with employees assigned to work at client locations, we assume certain obligations and responsibilities of an employer under these laws. However, many of these laws (such as the Act, ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of “employer” under these laws is not uniform. In addition, many of the states in which we operate have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship. Any adverse application of new or existing federal or state laws to the PEO relationship with our worksite employees and client companies could have a material adverse effect on our results of operations or financial condition.
While many states do not explicitly regulate PEOs, 41 states have passed laws that have recognition, licensing, certification or registration requirements for PEOs and several other states are considering such regulation. Such laws vary from state to state, but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers’ compensation and other purposes under state law. While we generally support licensing regulation because it serves to validate the PEO relationship, we may not be able to satisfy licensing requirements or other applicable regulations for all states. In addition, there can be no assurance that we will be able to renew our licenses in all states.
Geographic Market Concentration Makes our Results of Operations Vulnerable to Economic Factors
Our New York, California, and Texas (including 13% in Houston) markets accounted for approximately 9%, 18% and 26%, respectively, of our worksite employees for the year ended December 31, 2013. Accordingly, while we have a goal of expanding in our current markets and into new markets, for the foreseeable future, a significant portion of our revenues may be subject to economic factors specific to New York, Texas and California.
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A Determination that a Client is Liable for Employment Taxes not Paid by a PEO May Discourage Clients from Contracting With Us in the Future
Under the CSA, we assume sole responsibility and liability for paying federal employment taxes imposed under the Code with respect to wages and salaries we pay our worksite employees. There are essentially three types of federal employment tax obligations:
• | income tax withholding requirements |
• | FICA |
• | FUTA |
Under the Code, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes. Most states impose similar employment tax obligations on the employer. While the CSA provides that we have sole legal responsibility for making these tax contributions, the IRS or applicable state taxing authority could conclude that such liability cannot be completely transferred to us. Accordingly, in the event that we fail to meet our tax withholding and payment obligations, the client may be held jointly and severally liable for those obligations. While this interpretive issue has not, to our knowledge, discouraged clients from enrolling with Insperity, a definitive adverse resolution of this issue may discourage clients from enrolling in the future.
Failure of our Information Technology Systems Could Disrupt the HR Services we Provide to Clients
Many of the HR services offerings we provide to clients is conducted through a network infrastructure using both internally developed and purchased commercial software. The processing of payroll, benefits and other transactions is dependent upon Internet connectivity using high-speed network services provided by third party vendors. Any delays or failures caused by network outages, software or hardware failures, or other data processing disruptions, could result in our inability to timely process transactions. If such failures cause us to not meet client service expectations, we may lose existing clients and may have difficulty attracting new clients. Such developments could have a material impact on our financial condition, results of operations and future growth rates.
Potential Disclosure of Sensitive or Private Information Could Damage our Reputation and Impact our Operating Results
Unauthorized access or unintentional disclosure of personal or confidential information could damage our reputation and operating results. While we strive to comply with all applicable data protection laws and regulations, and maintain stringent privacy and security policies and procedures, any failure or perceived failure to adequately protect sensitive information may result in negative publicity and / or proceedings or actions against us by government entities or others, which could potentially have an adverse effect on our business.
Most states and the District of Columbia have enacted notification rules concerning privacy and data protection. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have a material effect on our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
The Failure of our Insurance Carriers or Financial Institutions Could Have a Material Adverse Effect on Us
We contract with various insurance carriers to provide certain insurance coverages as a part of our Workforce Optimization solution, which includes health insurance, workers’ compensation insurance and employment practices liability insurance. In addition, we obtain insurance coverage for various commercial risks in our business such as property insurance, errors and omissions insurance, general liability insurance, fiduciary liability insurance, automobile liability insurance, and directors’ and officers’ liability insurance. The failure of any insurance carrier providing such coverage could leave us exposed to uninsured risk and could have a material adverse effect upon our business.
Please read Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information concerning the potential failure of one of our former workers’ compensation carriers.
In conjunction with providing services to clients, we rely on financial institutions to electronically transfer funds for the collection of our comprehensive service fee as well as the payment of wages and associated payroll tax withholdings.
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Failure by these financial institutions, for any reason, to deliver their services in a timely manner could result in material interruptions to our operations, impact client relations, and result in significant penalties or liabilities to us.
New and Higher Federal, State and Local Taxes Could have a Material and Adverse Impact on our Financial Condition and Results of Operations
Many states and municipalities in which we operate have experienced economic slowdowns, as has the nation as a whole. This decline in economic activity has resulted in reductions of tax revenues and corresponding budget deficits. In response to the budget shortfalls, many states and municipalities have increased or enacted new taxes on businesses operating within their tax jurisdiction, including but not limited to, business activity taxes and income taxes. In addition, many federal, state and local taxing agencies have increased their audit activity in an effort to identify additional tax revenues. New tax assessments on our operations could result in increased costs. Our ability to adjust our service fees and incorporate additional tax assessments into our billing system could be limited. As a result, such higher taxes could have a material adverse impact on our financial condition or results of operations. Please read Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information regarding tax assessments by the State of Texas and the State of Massachusetts.
Failure to Integrate or Realize the Expected Return on our Acquisitions and Investments Could Have a Material and Adverse Impact on our Financial Condition and Results of Operations
We have adopted a strategy to market and sell additional products and services within and outside of the core Workforce Optimization solution. As part of this strategy, periodically we make strategic long-term decisions to invest in and/or acquire new companies, business units or assets. Acquiring new businesses involves a number of risks such as over-valuation of the acquired companies, entering markets or businesses in which we have no prior experience, integrating the technology, operations, and personnel, diversion of management’s attention from other business concerns and litigation resulting from the activities of the acquired company. The occurrence of one or more of these events could result in the loss of existing or prospective clients or employees, not achieving anticipated revenues or profitability, or impairment of acquired assets. Such developments could have a material impact to our financial condition, results of operations and future growth rates.
In connection with our annual goodwill impairment assessment, we recorded impairment charges of $3.3 million in our Expense Management reporting unit in 2013 and $4.2 million in our Performance Management reporting unit in 2012. In addition, we recorded a $2.7 million impairment charge related to our minority investment in The Receivables Exchange in 2013. Based on market conditions or changes in operating plans, the fair value of our other acquired businesses could decline, requiring us to record additional impairment charges for all or portions of the investments. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information regarding the impairment charges.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We believe our current real estate and facilities are adequate for the purposes for which they are intended and provide for further expansion to accommodate our long-term growth and expansion goals. We believe that short-term leased facilities are readily available if needed to accommodate near-term needs if they arise. We will continue to evaluate the need for additional facilities based on the extent of our product and service offerings, the rate of customer growth, the geographic distribution of our customer base and our long-term service delivery requirements.
Corporate Facilities
Our corporate headquarters is located in Kingwood, Texas, in a 327,000 square foot office campus-style facility. This 30-acre company-owned office campus includes approximately nine acres of undeveloped land for future expansion. Development and support operations are located in the Kingwood facility, along with our record retention center and a technology hosting facility.
Service Centers
We currently have four regional service centers located in Atlanta, Dallas, Houston and Los Angeles.
The Atlanta service center, which currently services approximately 33% of our worksite employee base, is located in a 40,000 square foot facility under lease until 2014. We are in the process of moving to a 40,500 square foot facility in Atlanta that is under lease until 2022.
The Dallas service center, which currently services approximately 19% of our worksite employee base, is located in a 48,600 square foot facility under lease until 2016. In addition to the service center, the facility also contains sales operations.
The Houston service center, which currently services approximately 24% of our worksite employee base, is located in a 60,600 square foot facility under lease until 2016. In addition to the service center operations, the facility also contains corporate support operations.
The Los Angeles service center, which currently services approximately 24% of our worksite employee base, is located in a 38,000 square foot facility under lease until 2019.
Sales Offices
As of December 31, 2013, we had Workforce Optimization sales and service personnel in 39 facilities located in 25 sales markets throughout the United States. All of the facilities are leased and some are shared by multiple sales offices and/or client service personnel. As of December 31, 2013, we had 48 Workforce Optimization sales offices in these 25 markets. To take advantage of economic efficiencies, multiple sales offices may share a physical location. Each sales office is typically staffed by six to eight BPAs, a district sales manager and an office administrator. In addition, we have placed certain client service personnel in a majority of our sales markets to provide high-quality, localized service to our clients in those major markets. We expect to continue placing various client service personnel in sales markets as a critical mass of clients is attained in each market.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings other than ordinary routine litigation incidental to our business that we believe would not have a material adverse effect on our financial condition or results of operations, except as discussed in Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies,” which is incorporated herein by reference.
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ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages (as of February 3, 2014) and positions of Insperity’s executive officers:
Name | Age | Position | ||
Paul J. Sarvadi | 57 | Chairman of the Board and Chief Executive Officer | ||
Richard G. Rawson | 65 | President | ||
A. Steve Arizpe | 56 | Executive Vice President of Client Services and Chief Operating Officer | ||
Jay E. Mincks | 60 | Executive Vice President of Sales and Marketing | ||
Douglas S. Sharp | 52 | Senior Vice President of Finance, Chief Financial Officer and Treasurer | ||
Daniel D. Herink | 47 | Senior Vice President of Legal, General Counsel and Secretary | ||
Paul J. Sarvadi has served as Chairman of the Board and Chief Executive Officer since August 2003. Mr. Sarvadi co-founded Insperity in 1986 and served as Vice President and Treasurer of Insperity from its inception in 1986 through April 1987, as Vice President from April 1987 through 1989 and as President and Chief Executive Officer from 1989 to August 2003. Prior to founding Insperity, Mr. Sarvadi started and operated several small businesses. Mr. Sarvadi has served as President of NAPEO and was a member of its Board of Directors for five years. Mr. Sarvadi was selected as the 2001 National Ernst & Young Entrepreneur Of The Year® for service industries. In 2004, he received the Conn Family Distinguished New Venture Leader Award from Mays Business School at Texas A&M University. In 2007, he was inducted into the Texas Business Hall of Fame.
Richard G. Rawson is President of Insperity and most of its subsidiaries, a Class III director, and has been a director of Insperity since 1989. He has been President since August 2003. Before being elected President, he served as Executive Vice President of Administration, Chief Financial Officer and Treasurer of the Company from February 1997 until August 2003. Prior to that, he served as Senior Vice President, Chief Financial Officer and Treasurer of Insperity since 1989. Prior to joining Insperity in 1989, Mr. Rawson served as a Senior Financial Officer and Controller for several companies in the manufacturing and seismic data processing industries. Mr. Rawson has served NAPEO as Chairman of the Accounting Practices Committee and several other offices and became President in 1999-2000. Mr. Rawson has a Bachelor of Business Administration in finance from the University of Houston and currently serves as a board member for the C.T. Bauer College of Business.
A. Steve Arizpe has served as Executive Vice President of Client Services and Chief Operating Officer since August 2003. He joined Insperity in 1989 and has served in a variety of roles, including Houston Sales Manager, Regional Sales Manager and Vice President of Sales. Prior to joining Insperity, Mr. Arizpe served in sales and sales management roles for NCR Corporation and Clarke-American. He has also served as a director of the Texas Chapter of NAPEO. Mr. Arizpe graduated from Texas A&M University in 1979, earning his degree in Business Management.
Jay E. Mincks has served as Executive Vice President of Sales and Marketing since January 1999. Mr. Mincks served as Vice President of Sales and Marketing from February 1997 through January 1999. He joined Insperity in 1990 and has served in a variety of other roles, including Houston Sales Manager and Regional Sales Manager for the Western United States. Prior to joining Insperity, Mr. Mincks served in a variety of positions, including management positions, in the sales and sales training fields with various large companies. He holds a business degree from the University of Houston.
Douglas S. Sharp has served as Senior Vice President of Finance, Chief Financial Officer and Treasurer since May 2008. He served as Vice President of Finance, Chief Financial Officer and Treasurer from August 2003 until May 2008. Mr. Sharp joined Insperity in January 2000 as Vice President of Finance and Controller. From July 1994 until he joined Insperity, he served as Chief Financial Officer for Rimkus Consulting Group, Inc. Prior to that, he served as Controller for a small publicly held company; as Controller for a software company; and as an Audit Manager for Ernst & Young LLP. Mr. Sharp has served as a member of the Accounting Practices Committee of NAPEO. Mr. Sharp is also a certified public accountant.
Daniel D. Herink has served as Senior Vice President of Legal, General Counsel and Secretary since May 2008. Mr. Herink joined Insperity in 2000 as Assistant General Counsel and was promoted to Associate General Counsel in 2002. He was elected to his current position in May 2007. Mr. Herink previously served as an attorney at Rodriguez, Colvin & Chaney, L.L.P. and McGinnis, Lochridge & Kilgore, L.L.P. He earned his Bachelor of Science degree in business administration from the University of Nebraska and a Doctorate of Jurisprudence from The University of Texas School of Law, where he was a member of the Texas Law Review and The Order of the Coif. Mr. Herink is also a certified public accountant.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Price Range of Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “NSP.” As of February 3, 2014, there were 333 holders of record of our common stock. This number does not include stockholders for whom shares were held in “nominee” or “street name.” The following table sets forth the high and low sales prices for the common stock as reported on the New York Stock Exchange transactional tape.
2013 | High | Low | Dividends per Share | ||||||||||
First Quarter | $ | 34.20 | $ | 27.04 | $ | 0.17 | |||||||
Second Quarter | 31.80 | 26.44 | 0.17 | ||||||||||
Third Quarter | 37.80 | 30.36 | 0.17 | ||||||||||
Fourth Quarter | 39.69 | 32.67 | 0.17 | ||||||||||
2012 | |||||||||||||
First Quarter | $ | 31.79 | $ | 25.62 | $ | 0.15 | |||||||
Second Quarter | 31.14 | 24.10 | 0.17 | ||||||||||
Third Quarter | 28.48 | 23.94 | 0.17 | ||||||||||
Fourth Quarter | 33.24 | 24.95 | 1.17 | (1) | |||||||||
____________________________________
(1) | Includes a $1.00 per share special dividend. |
Dividend Policy
During 2013 and 2012, we paid dividends of $17.4 million and $42.7 million, respectively, including a special cash dividend of $25.7 million paid in the fourth quarter of 2012. The payment of dividends is made at the discretion of our Board of Directors and depends upon our operating results, financial condition, capital requirements, general business conditions and such other factors as our Board of Directors deems relevant.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of Insperity common stock during the three months ended December 31, 2013:
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | Maximum Number of Shares that may yet be Purchased under the Program(1) | |||||||||
10/01/2013 – 10/31/2013 | — | $ | — | — | 1,352,569 | ||||||||
11/01/2013 – 11/30/2013 | — | — | — | 1,352,569 | |||||||||
12/01/2013 – 12/31/2013 | 3,000 | 32.83 | 3,000 | 1,349,569 | |||||||||
Total | 3,000 | $ | 32.83 | 3,000 | 1,349,569 | ||||||||
(1) | Our Board of Directors has authorized a program to repurchase shares of our outstanding common stock. During the three months ended December 31, 2013, 3,000 shares were repurchased under the program and no shares were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards. As of December 31, 2013, we are authorized to repurchase an additional 1,349,569 shares under the program. Unless terminated early by resolution of the Board of Directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program. |
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Performance Graph
The following graph compares our cumulative total stockholder return since December 31, 2008, with the S&P Smallcap 600 Index and the S&P 1500 Composite Human Resources and Employment Services Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 31, 2008.
12/08 | 12/09 | 12/10 | 12/11 | 12/12 | 12/13 | |||||||||||||
Insperity, Inc. | 100.00 | 111.38 | 141.58 | 125.34 | 170.42 | 193.23 | ||||||||||||
S&P Smallcap 600 | 100.00 | 125.57 | 158.60 | 160.22 | 186.37 | 263.37 | ||||||||||||
S&P 1500 Composite Human Resources and Employment Services | 100.00 | 132.13 | 156.59 | 130.21 | 146.25 | 262.24 | ||||||||||||
This graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and accompanying Notes and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands, except per share and statistical data) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Revenues(1) | $ | 2,256,112 | $ | 2,158,824 | $ | 1,976,219 | $ | 1,719,752 | $ | 1,653,096 | ||||||||||
Gross profit | 393,251 | 382,221 | 351,775 | 298,536 | 287,967 | |||||||||||||||
Operating income | 56,223 | (2) | 67,494 | (3) | 57,314 | 37,060 | 27,033 | |||||||||||||
Net income | 32,032 | (4) | 40,402 | 30,470 | (5) | 22,440 | 16,574 | |||||||||||||
Diluted net income per share | $ | 1.25 | $ | 1.56 | $ | 1.16 | $ | 0.86 | $ | 0.65 | ||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 128,630 | $ | 115,706 | $ | 126,562 | $ | 144,479 | $ | 127,627 | ||||||||||
Total assets | 766,560 | 750,200 | 712,259 | 659,845 | 576,470 | |||||||||||||||
Total stockholders’ equity | 253,272 | 240,905 | 245,207 | 240,395 | 223,160 | |||||||||||||||
Cash dividends per share | $ | 0.68 | $ | 1.66 | (6) | $ | 0.60 | $ | 0.52 | $ | 0.52 | |||||||||
Statistical Data: | ||||||||||||||||||||
Average number of worksite employees paid per month during period | 127,517 | 125,650 | 116,839 | 107,014 | 108,736 | |||||||||||||||
Revenues per worksite employee per month(7) | $ | 1,474 | $ | 1,432 | $ | 1,410 | $ | 1,339 | $ | 1,267 | ||||||||||
Gross profit per worksite employee per month | $ | 257 | $ | 253 | $ | 251 | $ | 232 | $ | 221 | ||||||||||
Operating income per worksite employee per month | $ | 37 | $ | 45 | $ | 41 | $ | 29 | $ | 21 | ||||||||||
____________________________________
(1) | Gross billings of $13.462 billion, $12.992 billion, $11.700 billion, $10.169 billion and $9.856 billion, less worksite employee payroll cost of $11.206 billion, $10.833 billion, $9.724 billion, $8.449 billion and $8.203 billion, respectively. |
(2) | Includes a non-cash impairment charge in the fourth quarter of 2013 of $3.3 million. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
(3) | Includes a non-cash impairment charge in the fourth quarter of 2012 of $4.2 million. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
(4) | Includes the impact of a $2.7 million non-cash impairment charge in the second quarter of 2013, please read Note 6 to the Consolidated Financial Statements, “Other Assets,” for additional information. We also recorded a $2.0 million tax benefit in the fourth quarter of 2013 related to tax years 2009 through 2012, please read Note 9 to the Consolidated Financial Statements, “Income Taxes,” for additional information. |
(5) | Includes the impact of a $4.4 million pre-tax loss related to the exchange of an aircraft, and a $3.1 million pre-tax loss related to a settlement with the State of California. Please read Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the settlement with the State of California. |
(6) | Includes a 1.00 per share special dividend paid in the fourth quarter of 2012. |
(7) | Gross billings of $8,797, $8,617, $8,345, $7,919 and $7,553 per worksite employee per month, less payroll cost of $7,323, $7,185, $6,935, $6,580 and $6,286 per worksite employee per month, respectively. |
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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.
Overview
Our long-term strategy is to provide the best small and medium-sized businesses in the United States with our unique human resources service offering, and to leverage our buying power and expertise to provide additional valuable services to clients. Our most comprehensive HR business offering is provided through our PEO services, now known as our Workforce Optimization™ solution, which encompasses a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management and training and development services. Our overall operating results can be measured in terms of revenues, payroll costs, gross profit or operating income per worksite employee per month. We often use the average number of worksite employees paid during a period as our unit of measurement in analyzing and discussing our results of operations.
In addition to Workforce Optimization, we offer Human Capital Management, Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Insurance Services, many of which are offered via desktop applications and SaaS delivery models. These other products or services are offered separately, as a bundle, or along with Workforce Optimization.
We ended 2013 averaging 130,732 paid worksite employees in the fourth quarter, which represents a 1.1% increase over the fourth quarter of 2012. Approximately 19% of our paid worksite employees were in our mid-market sector for the year ended December 31, 2013, which is defined as companies with 150 to 2,000 worksite employees. We expect the average number of paid worksite employees per month to be in the range of 127,000 to 128,000 in the first quarter of 2014.
Our 2013 average gross profit per worksite employee per month was $257, a $4 increase over 2012. Included in gross profit in 2013 is a $14 per worksite employee per month contribution from our Adjacent Businesses compared to $11 per worksite employee per month in the 2012 period.
Operating expenses increased 7.1% in 2013 to $337.0 million. On a per worksite employee per month basis, operating expenses increased from $208 in 2012 to $220 in 2013.
Other expense increased $3.3 million, primarily due to a $2.7 million non-cash impairment charge related to our investment in The Receivables Exchange.
Our net income in 2013 was $32.0 million, an $8.4 million decrease compared to 2012.
We ended 2013 with working capital of $128.6 million. During 2013, we paid $17.4 million in dividends and repurchased shares at a cost of $17.2 million.
Revenues
We account for our revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition. Our Workforce Optimization gross billings to clients include the payroll cost of each worksite employee at the client location and a markup computed as a percentage of each worksite employee’s payroll cost. We invoice the gross billings concurrently with each periodic payroll of our worksite employees. 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 worksite employees 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. We include revenues that have been recognized but not invoiced in unbilled accounts receivable on our Consolidated Balance Sheets.
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Our revenues are primarily dependent on the number of clients enrolled, the resulting number of worksite employees paid each period and the number of worksite employees 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 worksite employees, which may fluctuate based on the composition of the worksite employee base, inflationary effects on wage levels and differences in the local economies of our markets.
Direct Costs
The primary direct costs associated with our Workforce Optimization revenue-generating activities are:
• | employment-related taxes (“payroll taxes”) |
• | costs of employee benefit plans |
• | workers’ compensation costs |
Payroll taxes consist of the employer’s portion of Social Security and Medicare taxes under FICA, federal unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as a percentage of payroll cost. The federal 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 and a work-life 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 worksite employee is primarily determined by our ability to accurately estimate and control direct costs and our ability to incorporate changes in these costs into the gross billings charged to Workforce Optimization clients, which are subject to contractual arrangements that are typically renewed annually. We use gross profit per worksite employee 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 are primarily a function of the number of corporate employees and their associated average pay and any additional incentive compensation. Our corporate employees include client services, sales and marketing, benefits, legal, finance, information technology, administrative support personnel and those associated with our ABUs. |
• | Stock-based compensation – Our stock-based compensation relates to the recognition of non-cash compensation expense over the vesting period of restricted stock awards. |
• | Commissions – Commission expense consists primarily of amounts paid to sales managers and BPAs. Commissions are based on the number of 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. In 2011, certain costs were incurred as a result of our rebranding initiative and are also included in advertising. |
• | 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, and acquisition transaction expenses |
• | administrative costs, such as postage, printing and supplies |
• | employee travel expenses |
• | technology and facility repairs and maintenance costs |
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• | rebranding initiative costs in 2011 |
• | Depreciation and amortization – Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices, technology infrastructure and that associated with our acquisitions. |
• | Impairment charge – Non-cash expense associated with the decline in fair value of intangible assets, including goodwill. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
Income Taxes
Our provision for income taxes typically differs from the U.S. statutory rate of 35%, due primarily to state income taxes and non-deductible expenses. 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 and depreciation. Changes in these items are reflected in our financial statements through a deferred income tax provision.
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 accounting principles generally accepted in the United States (“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 management believes 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 significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
• | Benefits 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 of Hawaii, Unity Health Plan and Tufts, all of which provide fully insured policies or service contracts. |
The health insurance contract with United provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”), as benefits expense in the Consolidated Statements of 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 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 we would accrue a liability for the excess costs on our Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums on our Consolidated Balance Sheets. The terms of the arrangement with United require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. As of December 31, 2013, Plan Costs were less than the premiums paid and owed to United by $13.5 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $4.5 million balance is included in prepaid insurance, a current asset, on our Consolidated Balance Sheets. The premiums owed to United at December 31, 2013, were $2.1 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.
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We believe that recent claims activity is representative of incurred and paid trends during the reporting period. The estimated completion rate and annual trend used to compute incurred but not reported claims involves a significant level of judgment. Accordingly, an increase (or decrease) in the completion rate or annual trend 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 and annual trend on our estimate of total benefit costs of $997.6 million in 2013:
Change in Completion Rate and Annual Trend | Change in Benefits Costs (in thousands) | Change in Net Income (in thousands) | ||||||
(2.5)% | $ | (12,377 | ) | $ | 5,075 | |||
(1.0)% | (4,951 | ) | 2,030 | |||||
1.0% | 4,951 | (2,030 | ) | |||||
2.5% | 12,377 | (5,075 | ) | |||||
• | Workers’ compensation costs – Since October 1, 2007, our workers’ compensation coverage has been provided through our arrangement with the ACE Group of Companies (“ACE”). Under our arrangement with ACE (the “ACE Program”), we bear the economic burden for the first $1 million layer of claims per occurrence, and effective October 1, 2010, we also bear the economic burden for a maximum aggregate amount of $5 million per policy year for claim amounts that exceed the first $1 million. ACE bears the economic burden for all claims in excess of these levels. The ACE Program is a fully insured policy whereby ACE has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Our coverage from September 1, 2003 through September 30, 2007 was provided through selected member insurance companies of American International Group, Inc. |
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 years ended December 31, 2013 and 2012, Insperity reduced accrued workers’ compensation costs by $9.3 million and $13.1 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 2013 and 2012 was 0.8% and 0.6%, respectively) 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.
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The following table illustrates the sensitivity of changes in the loss development rate on our estimate of workers’ compensation costs totaling $54.9 million in 2013:
Change in Loss Development Rate | Change in Workers’ Compensation Costs (in thousands) | Change in Net Income (in thousands) | ||||||
(5.0)% | $ | (2,434 | ) | $ | 1,436 | |||
(2.5)% | (1,217 | ) | 718 | |||||
2.5% | 1,217 | (718 | ) | |||||
5.0% | 2,434 | (1,436 | ) | |||||
At the beginning of each policy period, the 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 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 2013, we paid the insurance carrier an additional $5.0 million in claim funds for policy years prior to 2013, which increased deposits. As of December 31, 2013, we had restricted cash of $51.9 million and deposits of $81.9 million. We have estimated and accrued $120.8 million in incurred workers’ compensation claim costs as of December 31, 2013. Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on our Consolidated Balance Sheets.
• | Contingent liabilities – We accrue and disclose contingent liabilities in our Consolidated Financial Statements in accordance with ASC 450-10, Contingencies. GAAP requires accrual of contingent liabilities that are considered probable to occur and that can be reasonably estimated. For contingent liabilities that are considered reasonably possible to occur, financial statement disclosure is required, including the range of possible loss if it can be reasonably determined. From time to time we disclose in our financial statements issues that we believe are reasonably possible to occur, although we cannot determine the range of possible loss in all cases. As issues develop, we evaluate the probability of future loss and the potential range of such losses. If such evaluation were to determine that a loss was probable and the loss could be reasonably estimated, we would be required to accrue our estimated loss, which would reduce net income in the period that such determination was made. |
• | Deferred taxes – We have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, our ability to realize our deferred tax assets could change from our current estimates. If we determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to reduce the valuation allowance would increase net income in the period that such determination is made. Likewise, should we determine that we will not be able to realize all or part of our net deferred tax assets in the future, an adjustment to increase the valuation allowance would reduce net income in the period such determination is made. |
• | Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to pay their comprehensive service fees. We believe that the success of our business is heavily dependent on our ability to collect these comprehensive service fees for several reasons, including: |
• | the fact that we are at risk for the payment of our direct costs and worksite employee payroll costs regardless of whether our clients pay their comprehensive service fees |
• | the large volume and dollar amount of transactions we process |
• | the periodic and recurring nature of payroll, upon which the comprehensive service fees are based |
To mitigate this risk, we have established very tight credit policies. We generally require our Workforce Optimization clients to pay their comprehensive service fees no later than one day prior to the applicable payroll date. In addition, we maintain the right to terminate the CSA and associated worksite employees or to require prepayment, letters of credit or other collateral if a client’s financial position deteriorates or if the client does not pay the comprehensive service fee. As a
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result of these efforts, losses related to customer nonpayment have historically been low as a percentage of revenues. However, if our clients’ financial conditions were to deteriorate rapidly, resulting in nonpayment, our accounts receivable balances could grow and we could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.
• | Property and equipment – Our property and equipment relate primarily to our facilities and related improvements, furniture and fixtures, computer hardware and software and capitalized software development costs. These costs are depreciated or amortized over the estimated useful lives of the assets. If we determine that the useful lives of these assets will be shorter than we currently estimate, our depreciation and amortization expense could be accelerated, which would decrease net income in the periods of such a determination. In addition, we periodically evaluate these costs for impairment. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we may record an impairment loss, which would reduce net income, to the extent that the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset. |
• | Goodwill and other intangibles – Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and is written down when impaired. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which ranges from three to 10 years. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
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.
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Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012.
The following table presents certain information related to our results of operations:
Year ended December 31, | |||||||||||
2013 | 2012 | % Change | |||||||||
(in thousands, except per share and statistical data) | |||||||||||
Revenues (gross billings of $13.462 billion and $12.992 billion, less worksite employee payroll cost of $11.206 billion and $10.833 billion, respectively) | $ | 2,256,112 | $ | 2,158,824 | 4.5 | % | |||||
Gross profit | 393,251 | 382,221 | 2.9 | % | |||||||
Operating expenses | 337,028 | (1) | 314,727 | (2) | 7.1 | % | |||||
Operating income | 56,223 | 67,494 | (16.7 | )% | |||||||
Other income (expense) | (2,491 | ) | (3) | 796 | (412.9 | )% | |||||
Net income | 32,032 | (4) | 40,402 | (20.7 | )% | ||||||
Diluted net income per share of common stock | 1.25 | 1.56 | (19.9 | )% | |||||||
Statistical Data: | |||||||||||
Average number of worksite employees paid per month | 127,517 | 125,650 | 1.5 | % | |||||||
Revenues per worksite employee per month(5) | $ | 1,474 | $ | 1,432 | 2.9 | % | |||||
Gross profit per worksite employee per month | 257 | 253 | 1.6 | % | |||||||
Operating expenses per worksite employee per month | 220 | 208 | 5.8 | % | |||||||
Operating income per worksite employee per month | 37 | 45 | (17.8 | )% | |||||||
Net income per worksite employee per month | 21 | 27 | (22.2 | )% | |||||||
____________________________________
(1) | Includes a non-cash impairment charge in the fourth quarter of 2013 of $3.3 million. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
(2) | Includes a non-cash impairment charge in the fourth quarter of 2012 of $4.2 million. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
(3) | Includes the impact of a $2.7 million non-cash impairment charge in the second quarter of 2013. Please read Note 6 to the Consolidated Financial Statements, “Other Assets,” for additional information. |
(4) | Includes a $2.0 million tax benefit in the fourth quarter of 2013 related to tax years 2009 through 2012. Please read Note 9 to the Consolidated Financial Statements, “Income Taxes,” for additional information. |
(5) | Gross billings of $8,797 and $8,617 per worksite employee per month, less payroll cost of $7,323 and $7,185 per worksite employee per month, respectively. |
Revenues
Our revenues in 2013, which represent gross billings net of worksite employee payroll cost, increased 4.5% compared to 2012, due to a 2.9%, or $42 increase in revenues per worksite employee per month and a 1.5% increase in the average number of worksite employees paid per month. The 2.9% increase in revenues per worksite employee per month was due primarily to increases in the benefits and payroll tax pricing to offset increases in these direct costs.
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By region, our Workforce Optimization revenue change from 2012 and distribution for the years ended December 31, 2013 and 2012 were as follows:
Year ended December 31, | Year ended December 31, | ||||||||||||||||
2013 | 2012 | % Change | 2013 | 2012 | |||||||||||||
(in thousands) | (% of total revenue) | ||||||||||||||||
Northeast | $ | 577,280 | $ | 560,455 | 3.0 | % | 26.0 | % | 26.3 | % | |||||||
Southeast | 212,664 | 198,049 | 7.4 | % | 9.6 | % | 9.3 | % | |||||||||
Central | 329,110 | 312,373 | 5.4 | % | 14.8 | % | 14.7 | % | |||||||||
Southwest | 613,175 | 595,379 | 3.0 | % | 27.6 | % | 28.0 | % | |||||||||
West | 488,047 | 461,427 | 5.8 | % | 22.0 | % | 21.7 | % | |||||||||
2,220,276 | 2,127,683 | 4.4 | % | 100.0 | % | 100.0 | % | ||||||||||
Other revenue(1) | 35,836 | 31,141 | 15.1 | % | |||||||||||||
Total revenue | $ | 2,256,112 | $ | 2,158,824 | 4.5 | % | |||||||||||
____________________________________
(1) Comprised primarily of revenues generated by Adjacent Businesses.
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 2013, new client sales and the net change in existing clients remained flat, while client retention declined slightly compared to 2012. As a result, our year-over-year growth in worksite employees paid per month during 2013 was 1.5% compared to 7.5% during 2012.
Gross Profit
Gross profit was $393.3 million in 2013, a 2.9% increase over 2012. The average gross profit per worksite employee increased 1.6% to $257 per month in 2013 versus $253 in 2012. Our pricing objectives attempt to maintain or improve the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in primary direct costs and operating expenses. Included in gross profit in 2013 is a $14 per worksite employee per month contribution from our Adjacent Businesses compared to $11 per worksite employee per month in the 2012 period.
While our revenues per worksite employee per month increased 2.9% to $1,474 in 2013 versus 2012, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 3.2% to $1,217 per worksite employee per month. The primary direct cost components changed as follows:
• | Benefits costs – The cost of group health insurance and related employee benefits increased $29 per worksite employee per month, or 4.7%, on a per covered employee basis compared to 2012. The percentage of worksite employees covered under our health insurance plan was 72.1% in both 2013 and 2012. Please read “—Critical Accounting Policies and Estimates – Benefits Costs” for a discussion of our accounting for health insurance costs. |
• | Workers’ compensation costs – Workers’ compensation costs increased 6.3%, or $2 per worksite employee per month compared to 2012. As a percentage of non-bonus payroll cost, workers’ compensation costs increased to 0.55% in 2013 from 0.54% in 2012. During 2013, we recorded reductions in workers’ compensation costs of $9.3 million, or 0.09% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $13.1 million, or 0.14% of non-bonus payroll costs in 2012. The 2013 period costs include the impact of a 0.8% discount rate used to accrue workers’ compensation loss claims, compared to a 0.6% discount rate used in the 2012 period. 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 3.2%, or $9 per worksite employee per month compared to 2012, due primarily to a 3.4% increase in total payroll cost in 2013 and a $2.9 million, or $2 per worksite employee per month credit recognized in 2012 related to a Pennsylvania tax matter. Payroll taxes as a percentage of payroll cost decreased to 7.04% in 2013 compared to 7.05% in 2012. |
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Operating Expenses
The following table presents certain information related to our operating expenses:
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||
2013 | 2012 | % Change | 2013 | 2012 | % Change | |||||||||||||||||
(in thousands) | (per worksite employee per month) | |||||||||||||||||||||
Salaries, wages and payroll taxes | $ | 181,444 | $ | 168,807 | 7.5 | % | $ | 119 | $ | 112 | 6.3 | % | ||||||||||
Stock–based compensation | 11,103 | 9,814 | 13.1 | % | 7 | 7 | — | |||||||||||||||
Commissions | 14,581 | 14,515 | 0.5 | % | 9 | 10 | (10.0 | )% | ||||||||||||||
Advertising | 23,795 | 21,586 | 10.2 | % | 16 | 14 | 14.3 | % | ||||||||||||||
General and administrative expenses | 81,699 | 77,564 | 5.3 | % | 53 | 50 | 6.0 | % | ||||||||||||||
Impairment charge | 3,342 | 4,191 | (20.3 | )% | 2 | 3 | (33.3 | )% | ||||||||||||||
Depreciation and amortization | 21,064 | 18,250 | 15.4 | % | 14 | 12 | 16.7 | % | ||||||||||||||
Total operating expenses | $ | 337,028 | $ | 314,727 | 7.1 | % | $ | 220 | $ | 208 | 5.8 | % | ||||||||||
____________________________________
Operating expenses were $337.0 million in 2013, a 7.1% increase over 2012. We recorded impairment charges of $3.3 million in our Expense Management reporting unit in 2013 and $4.2 million in our Performance Management reporting unit in 2012. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. Operating expenses per worksite employee per month increased to $220 in 2013 from $208 in 2012. The components of operating expenses changed as follows:
• | Salaries, wages and payroll taxes of corporate and sales staff increased 7.5%, or $7 per worksite employee per month compared to 2012, primarily due to a 6.4% rise in headcount, which includes additions in Business Performance Advisors, service and technology personnel. |
• | Stock-based compensation increased 13.1%, but remained flat on a per worksite employee per month basis compared to 2012, due primarily to an increase in the weighted average market value on the date of grant associated with restricted stock awards. The stock-based compensation expense represents amortization of restricted stock awards granted to employees and the annual stock grant made to non-employee directors. Please read Note 1 to the Consolidated Financial Statements, “Accounting Policies,” for additional information. |
• | Commissions expense increased 0.5%, but decreased $1 on a per worksite employee per month basis compared to 2012. |
• | Advertising costs increased 10.2%, or $2 per worksite employee per month compared to 2012, primarily due to increased spending on health care reform-related advertising and business promotions. |
• | General and administrative expenses increased 5.3%, or $3 per worksite employee per month, primarily due to increased travel, training, utilities, and repairs and maintenance, partially offset by reductions in professional services. |
• | Depreciation and amortization expense increased 15.4%, or $2 per worksite employee per month compared to 2012, primarily due to investments in our technology infrastructure and amortization associated with our Adjacent Business investments. |
Other Income (Expense)
Other expense was $2.5 million in 2013 compared to other income of $0.8 million in 2012. Included in 2013 is a $2.7 million non-cash impairment charge related to our minority investment in The Receivables Exchange. Please read Note 6 to the Consolidated Financial Statements, “Other Assets,” for additional information.
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Income Tax Expense
During 2013 we incurred federal and state income tax expense of $21.7 million on pre-tax income of $53.7 million. Our provision for income taxes differed from the US statutory rate of 35% primarily due to state income taxes and non-deductible expenses, partially offset by tax benefits of $2.5 million related to tax years 2009 through 2013. Our effective income tax rate was 40.4% in 2013 compared to 40.8% in 2012.
Net Income
Net income for 2013 was $32.0 million, or $1.25 per diluted share, compared to $40.4 million, or $1.56 per diluted share in 2012. On a per worksite employee per month basis, net income was $21 in 2013 compared to $27 in 2012.
Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011.
The following table presents certain information related to our results of operations:
Year ended December 31, | |||||||||||
2012 | 2011 | % Change | |||||||||
(in thousands, except per share and statistical data) | |||||||||||
Revenues (gross billings of $12.992 billion and $11.700 billion, less worksite employee payroll cost of $10.833 billion and $9.724 billion, respectively) | $ | 2,158,824 | $ | 1,976,219 | 9.2 | % | |||||
Gross profit | 382,221 | 351,775 | 8.7 | % | |||||||
Operating expenses | 314,727 | (1) | 294,461 | 6.9 | % | ||||||
Operating income | 67,494 | 57,314 | 17.8 | % | |||||||
Other income (expense) | 796 | (6,539 | ) | (2) | (112.2 | )% | |||||
Net income | 40,402 | 30,470 | 32.6 | % | |||||||
Diluted net income per share of common stock | 1.56 | 1.16 | 34.5 | % | |||||||
Statistical Data: | |||||||||||
Average number of worksite employees paid per month | 125,650 | 116,839 | 7.5 | % | |||||||
Revenues per worksite employee per month(3) | $ | 1,432 | $ | 1,410 | 1.6 | % | |||||
Gross profit per worksite employee per month | 253 | 251 | 0.8 | % | |||||||
Operating expenses per worksite employee per month | 208 | 210 | (1.0 | )% | |||||||
Operating income per worksite employee per month | 45 | 41 | 9.8 | % | |||||||
Net income per worksite employee per month | 27 | 22 | 22.7 | % | |||||||
____________________________________
(1) | Includes a non-cash impairment charge in the fourth quarter of 2012 of $4.2 million. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. |
(2) | Includes the impact of a $4.4 million loss related to the exchange of an aircraft, and a $3.1 million loss related to a settlement with the State of California. Please read Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the settlement with the State of California. |
(3) | Gross billings of $8,617 and $8,345 per worksite employee per month, less payroll cost of $7,185 and $6,935 per worksite employee per month, respectively. |
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Revenues
Our revenues in 2012, which represent gross billings net of worksite employee payroll cost, increased 9.2% compared to 2011, due to a 1.6%, or $22 increase in revenues per worksite employee per month and a 7.5% increase in the average number of worksite employees paid per month. The 1.6% increase in revenues per worksite employee per month was due primarily to increases in the benefits and payroll tax pricing to offset increases in these direct costs.
By region, our Workforce Optimization revenue change from 2011 and distribution for the years ended December 31, 2012 and 2011 were as follows:
Year ended December 31, | Year ended December 31, | ||||||||||||||||
2012 | 2011 | % Change | 2012 | 2011 | |||||||||||||
(in thousands) | (% of total revenue) | ||||||||||||||||
Northeast | $ | 560,455 | $ | 513,075 | 9.2 | % | 26.3 | % | 26.3 | % | |||||||
Southeast | 198,049 | 192,116 | 3.1 | % | 9.3 | % | 9.9 | % | |||||||||
Central | 312,373 | 282,503 | 10.6 | % | 14.7 | % | 14.5 | % | |||||||||
Southwest | 595,379 | 561,908 | 6.0 | % | 28.0 | % | 28.9 | % | |||||||||
West | 461,427 | 397,363 | 16.1 | % | 21.7 | % | 20.4 | % | |||||||||
2,127,683 | 1,946,965 | 9.3 | % | 100.0 | % | 100.0 | % | ||||||||||
Other revenue(1) | 31,141 | 29,254 | 6.5 | % | |||||||||||||
Total revenue | $ | 2,158,824 | $ | 1,976,219 | 9.2 | % | |||||||||||
____________________________________
(1) Comprised primarily of revenues generated by Adjacent Businesses.
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 2012, new client sales and client retention declined, while the net change in existing clients remained flat compared to 2011. As a result, our year-over-year growth in worksite employees paid per month during 2012 was 7.5% compared to 9.2% during 2011.
Gross Profit
Gross profit increased 8.7% to $382.2 million compared to 2011. The average gross profit per worksite employee increased 0.8% to $253 per month in 2012 versus $251 in 2011. Our pricing objectives attempt to maintain or improve the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in primary direct costs and operating expenses. Included in gross profit in both 2012 and 2011 is an $11 per worksite employee per month contribution from our Adjacent Businesses.
While our revenues per worksite employee per month increased 1.6% to $1,432 in 2012 versus 2011, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 1.7% to $1,179 per worksite employee per month. The primary direct cost components changed as follows:
• | Benefits costs – The cost of group health insurance and related employee benefits increased $8 per worksite employee per month, or 3.5%, on a per covered employee basis compared to 2011. The percentage of worksite employees covered under our health insurance plan was 72.1% in 2012 versus 73.7% in 2011. Please read “—Critical Accounting Policies and Estimates – Benefits Costs” for a discussion of our accounting for health insurance costs. |
• | Workers’ compensation costs – Workers’ compensation costs increased 9.8%, or $1 per worksite employee per month compared to 2011. As a percentage of non-bonus payroll cost, workers’ compensation costs remained flat at 0.54% compared to 2011. During 2012, we recorded reductions in workers’ compensation costs of $13.1 million, or 0.14% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $11.4 million, or 0.13% of non-bonus payroll costs in 2011. The 2012 period costs include the impact of a 0.6% discount rate used to accrue workers’ compensation loss claims, compared to a 1.1% discount rate used in the 2011 period. Please read “—Critical Accounting Policies and Estimates – Workers’ Compensation Costs” for a discussion of our accounting for workers’ compensation costs. |
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• | Payroll tax costs – Payroll taxes increased 9.9%, or $11 per worksite employee per month compared to 2011, due primarily to an 11.4% increase in total payroll cost in 2012 as compared to 2011. Payroll taxes as a percentage of payroll cost decreased to 7.05% in 2012 compared to 7.15% in 2011. |
Operating Expenses
The following table presents certain information related to our operating expenses:
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||
2012 | 2011 | % Change | 2012 | 2011 | % Change | |||||||||||||||||
(in thousands) | (per worksite employee per month) | |||||||||||||||||||||
Salaries, wages and payroll taxes | $ | 168,807 | $ | 155,233 | 8.7 | % | $ | 112 | $ | 111 | 0.9 | % | ||||||||||
Stock–based compensation | 9,814 | 8,601 | 14.1 | % | 7 | 6 | 16.7 | % | ||||||||||||||
Commissions | 14,515 | 13,451 | 7.9 | % | 10 | 10 | — | |||||||||||||||
Advertising | 21,586 | 26,613 | (18.9 | )% | 14 | 19 | (26.3 | )% | ||||||||||||||
General and administrative expenses | 77,564 | 75,345 | 2.9 | % | 50 | 53 | (5.7 | )% | ||||||||||||||
Impairment charge | 4,191 | — | — | 3 | — | — | ||||||||||||||||
Depreciation and amortization | 18,250 | 15,218 | 19.9 | % | 12 | 11 | 9.1 | % | ||||||||||||||
Total operating expenses | $ | 314,727 | $ | 294,461 | 6.9 | % | $ | 208 | $ | 210 | (1.0 | )% | ||||||||||
Operating expenses increased 6.9% to $314.7 million compared to 2011. The 2012 operating expenses included a $4.2 million impairment charge incurred in connection with our annual goodwill impairment assessment of our Performance Management reporting unit. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information. Operating expenses per worksite employee per month decreased to $208 in 2012 from $210 in 2011. The components of operating expenses changed as follows:
• | Salaries, wages and payroll taxes of corporate and sales staff increased 8.7%, or $1 per worksite employee per month compared to 2011, primarily due to a 6.1% rise in headcount. |
• | Stock-based compensation increased 14.1%, or $1 per worksite employee per month compared to 2011, due primarily to an increase in the weighted average market value on the date of grant associated with restricted stock awards. The stock-based compensation expense represents amortization of restricted stock awards granted to employees and the annual stock grant made to non-employee directors. Please read Note 1 to the Consolidated Financial Statements, “Accounting Policies,” for additional information. |
• | Commissions expense increased 7.9%, but remained flat on a per worksite employee per month basis compared to 2011. |
• | Advertising costs decreased 18.9%, or $5 per worksite employee per month compared to 2011, primarily due to the non-recurrence of expenses related to our 2011 rebranding initiative. |
• | General and administrative expenses increased 2.9%, but decreased $3 per worksite employee per month, primarily due to increased professional fees and office expenses, partially offset by the non-recurrence of expenses related to our 2011 rebranding initiative. |
• | Depreciation and amortization expense increased 19.9%, or $1 per worksite employee per month compared to 2011, primarily due to investments in our technology infrastructure and amortization associated with our acquisitions. |
Other Income (Expense)
Other income was $0.8 million in 2012 compared to other expense of $6.5 million in 2011, primarily due to a $4.4 million loss in 2011 related to the exchange of an aircraft and a $3.1 million loss in 2011 related to a settlement with the State of California. Please read Note 14 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the settlement with the State of California.
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Income Tax Expense
During 2012 we incurred federal and state income tax expense of $27.9 million on pre-tax income of $68.3 million. Our provision for income taxes differed from the US statutory rate of 35% primarily due to state income taxes and non-deductible expenses, offset slightly by tax-exempt interest income. Our effective income tax rate was 40.8% in 2012 compared to 40.0% in 2011.
Net Income
Net income for 2012 was $40.4 million, or $1.56 per diluted share, compared to $30.5 million, or $1.16 per diluted share in 2011. On a per worksite employee per month basis, net income was $27 in 2012 compared to $22 in 2011.
Non-GAAP Financial Measures
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. 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. 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. 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 table below.
Year ended December 31, | |||||||||||
2013 | 2012 | % Change | |||||||||
(in thousands, except per worksite employee) | |||||||||||
GAAP to non-GAAP reconciliation: | |||||||||||
Payroll cost (GAAP) | $ | 11,205,652 | $ | 10,832,966 | 3.4 | % | |||||
Less: bonus payroll cost | 1,274,575 | 1,326,442 | (3.9 | )% | |||||||
Non-bonus payroll cost | $ | 9,931,077 | $ | 9,506,524 | 4.5 | % | |||||
Payroll cost per worksite employee (GAAP) | $ | 7,323 | $ | 7,185 | 1.9 | % | |||||
Less: Bonus payroll cost per worksite employee | 833 | 880 | (5.3 | )% | |||||||
Non-bonus payroll cost per worksite employee | $ | 6,490 | $ | 6,305 | 2.9 | % | |||||
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, potential acquisitions, debt service requirements and other operating cash needs. To meet short-term liquidity requirements, which are primarily the payment of direct and operating expenses, we rely primarily on cash from operations. Longer-term projects or significant acquisitions may be financed with debt or equity. We have in the past sought, and may in the future seek, to raise additional capital or take other steps to increase or manage our liquidity and capital resources. We had $272.1 million in cash, cash equivalents and marketable securities at December 31, 2013, of which approximately $143.0 million was payable in early January 2014 for withheld federal and state income taxes, employment taxes and other payroll deductions, and $24.5 million were customer prepayments that were payable in January 2014. At December 31, 2013, we had working capital of $128.6 million compared to $115.7 million at December 31, 2012. We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our credit facility will be adequate to meet our liquidity requirements for 2014. We will rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs.
We have a $100 million revolving credit facility (“credit facility”), with a syndicate of financial institutions. The credit facility, which expires in September of 2015, is available for working capital and general corporate purposes, including
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acquisitions, and was undrawn at December 31, 2013. Please read Note 8 to the Consolidated Financial Statements, “Revolving Credit Facility,” for additional information.
Cash Flows From Operating Activities
Our cash flows from operating activities in 2013 were $34.7 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our Workforce Optimization clients. 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 levels – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to the payment of worksite employee 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 worksite employees are paid on Fridays and at month-end; therefore, operating cash flows decrease in the reporting periods that end on a Friday. In the year ended December 31, 2013, which the last business day of the reporting period ended on a Tuesday, client prepayments were $24.5 million and accrued worksite employee payroll was $173.8 million. In the year ended December 31, 2012, which ended on a Monday, client prepayments were $13.5 million and accrued worksite employee payroll was $150.1 million. |
• | Workers’ compensation plan funding – Under our workers’ compensation insurance arrangements, we make monthly payments to the carriers comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). These pre-determined amounts are stipulated in our agreements with the carriers, and are based primarily on anticipated worksite employee payroll levels and workers’ compensation loss rates during the policy year. Changes in payroll levels from those that were anticipated in the arrangements can result in changes in the amount of the cash payments, which will impact our reporting of operating cash flows. Our claim funds paid, based upon anticipated worksite employee payroll levels and workers’ compensation loss rates, were $50.0 million in 2013 and $46.7 million in 2012. However, our estimates of workers’ compensation loss costs were $41.7 million and $36.9 million in 2013 and 2012, respectively. During 2013, we paid the insurance carrier an additional $5.0 million in claim funds for policy years prior to 2013, which resulted in a decrease to working capital. During 2012, we received $2.5 million for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase to working capital. |
• | Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United Plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. Since inception of the United plan, premiums paid and owed to United have exceeded Plan Costs, resulting in an $13.5 million surplus, $4.5 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Consolidated Balance Sheets at December 31, 2013. The premiums owed to United at December 31, 2013, were $2.1 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets. |
• | Operating results – Our net income has a significant impact on our operating cash flows. Our net income decreased 20.7% to $32.0 million in 2013 from $40.4 million in 2012. Please read “Results of Operations – Year Ended December 31, 2013 Compared to Year Ended December 31, 2012.” |
Cash Flows Used in Investing Activities
Our cash flows used in investing activities were $43.0 million during 2013. We invested $11.6 million in capital expenditures, primarily related to our technology infrastructure. We also invested $31.5 million, net, in marketable securities.
Cash Flows Used in Financing Activities
Our cash flows used in financing activities were $30.4 million during 2013, primarily due to $17.2 million in share repurchases and $17.4 million in dividends paid.
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Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of
December 31, 2013, and the effect they are expected to have on our liquidity and capital resources (in thousands):
Less than | More than | |||||||||||||||||||
Contractual obligations | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Non-cancelable operating leases | $ | 51,987 | $ | 12,763 | $ | 21,761 | $ | 11,598 | $ | 5,865 | ||||||||||
Purchase obligations(1) | 26,751 | 6,448 | 12,431 | 3,528 | 4,344 | |||||||||||||||
Other long-term liabilities: | ||||||||||||||||||||
Accrued workers’ compensation claim costs(2) | $ | 120,833 | $ | 50,645 | $ | 33,324 | $ | 24,351 | $ | 12,513 | ||||||||||
Total contractual cash obligations | $ | 199,571 | $ | 69,856 | $ | 67,516 | $ | 39,477 | $ | 22,722 | ||||||||||
____________________________________
(1) | The table includes purchase obligations associated with non-cancelable contracts individually greater than $100,000 and one year. |
(2) | Accrued workers’ compensation claim costs include the short and long-term amounts. For more information, please read, “Critical Accounting Policies and Estimates – Workers’ Compensation Costs.” |
Seasonality, Inflation and Quarterly Fluctuations
We believe the effects of inflation have not had a significant impact on our results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash equivalent short-term investments and our available-for-sale marketable securities. In addition, borrowings under our Facility bear interest at a variable market rate. As of December 31, 2013, we had not drawn on the Facility. Please read Note 8 to the Consolidated Financial Statements, “Revolving Credit Facility,” for additional information. The cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. The available-for-sale marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates.
We attempt to limit our exposure to interest rate risk primarily through diversification and low investment turnover. Our investment policy is designed to maximize after-tax interest income while preserving our principal investment. As a result, our marketable securities consist of tax-exempt short and intermediate-term debt securities, which are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. Government Securities.
The following table presents information about our available-for-sale marketable securities as of December 31, 2013 (dollars in thousands):
Principal Maturities | Coupon Interest Rate | Effective Yield | ||||||||
2014 | $ | 28,445 | 5.12 | % | 0.66 | % | ||||
2015 | 10,894 | 5.18 | % | 0.29 | % | |||||
2016 | 4,995 | 5.84 | % | 0.53 | % | |||||
Total | $ | 44,334 | 5.22 | % | 0.56 | % | ||||
Fair Market Value | $ | 46,340 | ||||||||
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 is contained in a separate section of this Annual Report. See “Index to Consolidated Financial Statements.”
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Design and Evaluation of Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Ernst & Young, LLP, our independent registered public accounting firm, also audited our internal control over financial reporting. Management’s report and the independent registered public accounting firm’s audit report are included in our 2013 Consolidated Financial Statements under the captions entitled “Management’s Report on Internal Control” and “Report of Independent Registered Public Accounting Firm,” and are incorporated herein by reference.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Some of the information required by this item is incorporated by reference to the information set forth under the captions “Proposal Number 1: Election of Directors – Nominees – Class I Directors (For Terms Expiring at the 2017 Annual Meeting),” “– Directors Remaining in Office,” and “– Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Insperity Proxy Statement”).
Code of Business Conduct and Ethics
Our Board of Directors adopted our Code of Business Conduct and Ethics (the “Code of Ethics”), which meets the requirements of Rule 303A.10 of the New York Stock Exchange Listed Company Manual and Item 406 of Regulation S-K. You can access our Code of Ethics on the Corporate Governance page of our website at insperity.com. Changes in and waivers to the Code of Ethics for our directors, executive officers and certain senior financial officers will be posted on our Internet website within five business days and maintained for at least 12 months.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the information set forth under the captions “Proposal Number 1: Election of Directors – Director Compensation” and “—Executive Compensation” in the Insperity Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Insperity Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this item is incorporated by reference to the information set forth under the caption “Proposal Number 1: Election of Directors – Certain Relationships and Related Transactions” in the Insperity Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference to the information set forth under the caption “Proposal Number 3: Ratification and Appointment of Independent Public Accountants – Fees of Ernst & Young LLP” and “—Finance, Risk Management and Audit Committee Pre-Approval Policy for Audit and Non-Audit Services” in the Insperity Proxy Statement.
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PART IV
ITEM 15. EXHIBITS FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements of the Company
The Consolidated Financial Statements listed by the Registrant on the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report.
(a) 2. Financial Statement Schedules
The required information is included in the Consolidated Financial Statements or Notes thereto.
(a) 3. List of Exhibits
3.1 | Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-96952)). | |
3.2 | Certificate of Ownership and Merger dated March 3, 2011 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2011). | |
3.3 | Amended and Restated Bylaws of Insperity, Inc. dated March 3, 2011 (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2011). | |
3.4 | Certificate of Designation of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock (included as Exhibit A to the Rights Agreement). | |
4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-96952)). | |
4.2 | Rights Agreement dated as of November 13, 2007 between Insperity, Inc. and Mellon Investor Services, LLC, as Rights Agent (the “Rights Agreement”) (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 16, 2007). | |
4.3 | Form of Rights Certificate (included as Exhibit B to the Rights Agreement). | |
10.1† | Insperity, Inc. 2001 Incentive Plan, as amended and restated (incorporated by reference to Appendix A to the Registrant’s definitive proxy statement on Schedule 14A filed on March 18, 2009 (No. 1-13998)). | |
10.2† | Form of Incentive Stock Option Agreement (1997 Plan) (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-K filed for the year ended December 31, 2004). | |
10.3† | Form of Incentive Stock Option Agreement (2001 Plan – 3 year vesting) (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K filed for the year ended December 31, 2004). | |
10.4† | Form of Incentive Stock Option Agreement (2001 Plan – 5 year vesting) (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K filed for the year ended December 31, 2004). | |
10.5† | Form of Director Stock Option Agreement (Annual Grant) (incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-K filed for the year ended December 31, 2004). | |
10.6† | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K filed for the year ended December 31, 2004). | |
10.7† | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed for the quarter ended September 30, 2012). | |
10.8† | Form of Director Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q filed for the quarter ended September 30, 2012). | |
10.9† | Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q filed for the quarter ended September 30, 2012). | |
10.10 | Insperity, Inc. Nonqualified Stock Option Plan (incorporated by reference to Exhibit 99.6 to the Registrant’s Registration Statement on Form S-8 (No. 333-85151)). | |
10.11 | First Amendment to Insperity, Inc. Nonqualified Stock Option Plan, effective August 7, 2001 (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K for the year ended December 31, 2002). | |
10.12 | Second Amendment to Insperity, Inc. Nonqualified Stock Option Plan, effective January 28, 2003 (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K for the year ended December 31, 2002). | |
10.13 | Insperity, Inc. Amended and Restated Employee Stock Purchase Plan effective April 1, 2002 (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-K for the year ended December 31, 2002). | |
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10.14 | First Amendment to Insperity, Inc. Amended and Restated Employee Stock Purchase Plan, effective July 31, 2002 (incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-K for the year ended December 31, 2002). | |
10.15 | Second Amendment to Insperity, Inc. Amended and Restated Employee Stock Purchase Plan, effective August 15, 2003 (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K for the year ended December 31, 2003). | |
10.16† | Directors Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q filed for the quarter ended September 30, 2012). | |
10.17† | Board of Directors Compensation Arrangements (incorporated by reference to the Registrant’s Form 8-K dated February 7, 2005). | |
10.18 | Insperity, Inc. 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (No. 333-151275)). | |
10.19 | Insperity, Inc. 2012 Incentive Plan (incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A filed on March 29, 2012 (No. 1-13998)). | |
10.20(+) | Minimum Premium Financial Agreement by and between Insperity Holdings, Inc. and United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002). | |
10.21(+) | Minimum Premium Administrative Services Agreement by and between Insperity Holdings, Inc. and United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002). | |
10.22(+) | Amended and Restated Security Deposit Agreement by and between Insperity Holdings, Inc. and United Healthcare Insurance Company, Hartford, Connecticut (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002). | |
10.23(+) | Amendment to Various Agreements between United Healthcare Insurance Company and Insperity Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005). | |
10.24 | Houston Service Center Operating Lease Amendment (incorporated by reference to Exhibit 10.27 to the Registrant’s Form 10-K for the year ended December 31, 2004). | |
10.25(+) | Letter Agreement dated April 21, 2007, between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007). | |
10.26(+) | Amendment to Minimum Premium Financial Agreement, as amended and restated effective January 1, 2005, by and between Insperity Holdings, Inc., and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007). | |
10.27(+) | Amendment to Minimum Premium Administrative Services Agreement, as amended and restated effective January 1, 2005, by and between Insperity Holdings, Inc., and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007). | |
10.28(+) | Letter Agreement dated October 1, 2010, between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.29 to the Registrant’s Form 10-K filed for the year ended December 31, 2010). | |
10.29(+) | Letter Agreement dated October 22, 2012, between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.29 to the Registrant’s Form 10-K filed for the year ended December 31, 2012). | |
10.30(+) | Amendment to Minimum Premium Financial Agreement, as amended effective January 1, 2009, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and United Healthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed for the quarter ended March 31, 2013). | |
10.31(+) | Amendment to Minimum Premium Administrative Services Agreement, as amended effective January 1, 2008, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and United Healthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q filed for the quarter ended March 31, 2013). | |
10.32 | Exchange Agreement for Corporate Aircraft, dated August 30, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2011). | |
10.33 | Credit Agreement dated September 15, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 1, 2011). | |
10.34 | Amendment No. 1 to the Credit Agreement dated December 7, 2012 (incorporated by reference to Exhibit 10.32 to the Registrant’s Form 10-K filed for the year ended December 31, 2012). | |
21.1* | Subsidiaries of Insperity, Inc. | |
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23.1* | Consent of Independent Registered Public Accounting Firm. | |
24.1* | Powers of Attorney. | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2** | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS* | XBRL Instance Document(1). | |
101.SCH* | XBRL Taxonomy Schema Document. | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF* | XBRL Extension Definition Linkbase Document. | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | |
* | Filed herewith. | |
** | Furnished with this report. | |
____________________________________
(1) | Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011; (ii) the Consolidated Balance Sheets at December 31, 2013 and 2012; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011; and (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011. Users of this data are advised pursuant to Rule 406T of Regulation S-T this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, additionally the data is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under these sections. |
† | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. |
(+) | Confidential treatment has been requested for this exhibit and confidential portions have been filed with the Securities and Exchange Commission. |
- 46 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Insperity, Inc. has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized, on February 10, 2014.
INSPERITY, INC. | ||
By: | /s/ Douglas S. Sharp | |
Douglas S. Sharp | ||
Senior Vice President of Finance | ||
Chief Financial Officer and Treasurer | ||
- 47 -
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Insperity, Inc. in the capacities indicated on February 10, 2014:
Signature | Title | |
/s/ Paul J. Sarvadi | Chairman of the Board, Chief Executive Officer and Director | |
Paul J. Sarvadi | ||
(Principal Executive Officer) | ||
/s/ Richard G. Rawson | President and Director | |
Richard G. Rawson | ||
/s/ Douglas S. Sharp | Senior Vice President of Finance | |
Douglas S. Sharp | Chief Financial Officer and Treasurer | |
(Principal Financial Officer) | ||
* | Director | |
Michael W. Brown | ||
* | Director | |
Jack M. Fields, Jr. | ||
* | Director | |
Eli Jones | ||
* | ||
Carol R. Kaufman | Director | |
* | Director | |
Paul S. Lattanzio | ||
* | Director | |
Gregory E. Petsch | ||
* | Director | |
Austin P. Young | ||
* By: /s/ Daniel D. Herink | ||
Daniel D. Herink, attorney-in-fact | ||
- 48 -
INSPERITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | F-2 |
Management’s Report on Internal Control | F-3 |
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting | F-4 |
Consolidated Balance Sheets as of December 31, 2013 and 2012 | F-5 |
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 | F-7 |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011 | F-8 |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011 | F-9 |
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 | F-10 |
Notes to Consolidated Financial Statements | F-12 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Insperity, Inc.
We have audited the accompanying Consolidated Balance Sheets of Insperity, Inc. as of December 31, 2013 and 2012, and the related Consolidated Statements of Operations, Comprehensive Income, Stockholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Insperity, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Insperity, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 10, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP | |
Houston, Texas
February 10, 2014
F-2
MANAGEMENT’S REPORT ON INTERNAL CONTROL
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2013, based on the 1992 criteria established by Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by the Company’s independent registered public accounting firm, as stated in their report that is included herein.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2013, based on criteria established in the COSO Framework.
/s/ Paul J. Sarvadi | /s/ Douglas S. Sharp | |
Paul J. Sarvadi | Douglas S. Sharp | |
Chairman of the Board and | Senior Vice President of Finance | |
Chief Executive Officer | Chief Financial Officer and Treasurer | |
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Insperity, Inc.
We have audited Insperity, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Insperity, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Insperity, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Insperity, Inc. as of December 31, 2013 and 2012, and the related Consolidated Statements of Operations, Comprehensive Income, Stockholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2013 of Insperity, Inc. and our report dated February 10, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP | |
Houston, Texas
February 10, 2014
F-4
INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31, 2013 | December 31, 2012 | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 225,755 | $ | 264,544 | ||||
Restricted cash | 51,928 | 47,149 | ||||||
Marketable securities | 46,340 | 16,904 | ||||||
Accounts receivable, net: | ||||||||
Trade | 7,453 | 6,931 | ||||||
Unbilled | 199,628 | 181,040 | ||||||
Other | 2,928 | 2,415 | ||||||
Prepaid insurance | 10,638 | 15,620 | ||||||
Other current assets | 12,053 | 9,651 | ||||||
Income taxes receivable | 409 | — | ||||||
Deferred income taxes | 8,185 | 7,211 | ||||||
Total current assets | 565,317 | 551,465 | ||||||
Property and equipment: | ||||||||
Land | 4,115 | 4,115 | ||||||
Buildings and improvements | 67,939 | 68,583 | ||||||
Computer hardware and software | 85,241 | 81,140 | ||||||
Software development costs | 38,522 | 35,866 | ||||||
Furniture and fixtures | 36,479 | 36,717 | ||||||
Aircraft | 35,879 | 35,879 | ||||||
268,175 | 262,300 | |||||||
Accumulated depreciation and amortization | (181,760 | ) | (168,358 | ) | ||||
Total property and equipment, net | 86,415 | 93,942 | ||||||
Other assets: | ||||||||
Prepaid health insurance | 9,000 | 9,000 | ||||||
Deposits – health insurance | 3,700 | 3,000 | ||||||
Deposits – workers’ compensation | 81,878 | 64,201 | ||||||
Goodwill and other intangible assets, net | 18,434 | 23,775 | ||||||
Other assets | 1,816 | 4,817 | ||||||
Total other assets | 114,828 | 104,793 | ||||||
Total assets | $ | 766,560 | $ | 750,200 | ||||
F-5
INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31, 2013 | December 31, 2012 | |||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,678 | $ | 3,660 | ||||
Payroll taxes and other payroll deductions payable | 165,604 | 178,534 | ||||||
Accrued worksite employee payroll cost | 173,801 | 150,070 | ||||||
Accrued health insurance costs | 5,103 | 13,942 | ||||||
Accrued workers’ compensation costs | 52,930 | 49,484 | ||||||
Accrued corporate payroll and commissions | 21,611 | 23,537 | ||||||
Other accrued liabilities | 14,960 | 12,478 | ||||||
Income tax payable | — | 4,054 | ||||||
Total current liabilities | 436,687 | 435,759 | ||||||
Noncurrent liabilities: | ||||||||
Accrued workers’ compensation costs | 68,905 | 64,536 | ||||||
Deferred income taxes | 7,696 | 9,000 | ||||||
Total noncurrent liabilities | 76,601 | 73,536 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.01 per share: | ||||||||
Shares authorized – 20,000 | ||||||||
Shares issued and outstanding – none | — | — | ||||||
Common stock, par value $0.01 per share: | ||||||||
Shares authorized – 60,000 | ||||||||
Shares issued – 30,758 at December 31, 2013 and 2012 | 308 | 308 | ||||||
Additional paid-in capital | 135,653 | 133,207 | ||||||
Treasury stock, at cost – 5,175 and 5,096 shares at December 31, 2013 and 2012, respectively | (138,688 | ) | (133,950 | ) | ||||
Accumulated other comprehensive income, net of tax | 29 | 16 | ||||||
Retained earnings | 255,970 | 241,324 | ||||||
Total stockholders’ equity | 253,272 | 240,905 | ||||||
Total liabilities and stockholders’ equity | $ | 766,560 | $ | 750,200 | ||||
See accompanying notes.
F-6
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues (gross billings of $13.462 billion, $12.992 billion and $11.700 billion, less worksite employee payroll cost of $11.206 billion, $10.833 billion and $9.724 billion, respectively) | $ | 2,256,112 | $ | 2,158,824 | $ | 1,976,219 | ||||||
Direct costs: | ||||||||||||
Payroll taxes, benefits and workers’ compensation costs | 1,862,861 | 1,776,603 | 1,624,444 | |||||||||
Gross profit | 393,251 | 382,221 | 351,775 | |||||||||
Operating expenses: | ||||||||||||
Salaries, wages and payroll taxes | 181,444 | 168,807 | 155,233 | |||||||||
Stock-based compensation | 11,103 | 9,814 | 8,601 | |||||||||
Commissions | 14,581 | 14,515 | 13,451 | |||||||||
Advertising | 23,795 | 21,586 | 26,613 | |||||||||
General and administrative expenses | 81,699 | 77,564 | 75,345 | |||||||||
Impairment charge | 3,342 | 4,191 | — | |||||||||
Depreciation and amortization | 21,064 | 18,250 | 15,218 | |||||||||
337,028 | 314,727 | 294,461 | ||||||||||
Operating income | 56,223 | 67,494 | 57,314 | |||||||||
Other income (expense): | ||||||||||||
Interest, net | 158 | 609 | 969 | |||||||||
Other, net | (2,649 | ) | 187 | (7,508 | ) | |||||||
Income before income tax expense | 53,732 | 68,290 | 50,775 | |||||||||
Income tax expense | 21,700 | 27,888 | 20,305 | |||||||||
Net income | $ | 32,032 | $ | 40,402 | $ | 30,470 | ||||||
Less distributed and undistributed earnings allocated to participating securities | (916 | ) | (1,224 | ) | (908 | ) | ||||||
Net income allocated to common shares | $ | 31,116 | $ | 39,178 | $ | 29,562 | ||||||
Basic net income per share of common stock | $ | 1.25 | $ | 1.57 | $ | 1.16 | ||||||
Diluted net income per share of common stock | $ | 1.25 | $ | 1.56 | $ | 1.16 | ||||||
See accompanying notes.
F-7
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income | $ | 32,032 | $ | 40,402 | $ | 30,470 | ||||||
Other comprehensive income: | ||||||||||||
Unrealized gain (loss) on available-for-sale securities, net of tax | 13 | (8 | ) | 3 | ||||||||
Comprehensive income | $ | 32,045 | $ | 40,394 | $ | 30,473 | ||||||
F-8
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | |||||||||||||||||||||||
Shares | Amount | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 | 30,839 | $ | 309 | $ | 135,607 | $ | (124,464 | ) | $ | 21 | $ | 228,922 | $ | 240,395 | |||||||||||||
Purchase of treasury stock, at cost | — | — | — | (25,079 | ) | — | — | (25,079 | ) | ||||||||||||||||||
Exercise of stock options | — | — | (1,042 | ) | 4,998 | — | — | 3,956 | |||||||||||||||||||
Income tax benefit from stock-based compensation, net | — | — | 1,663 | — | — | — | 1,663 | ||||||||||||||||||||
Stock-based compensation expense | — | — | (416 | ) | 9,017 | — | — | 8,601 | |||||||||||||||||||
Other | — | — | 59 | 881 | — | — | 940 | ||||||||||||||||||||
Dividends paid | — | — | — | — | — | (15,742 | ) | (15,742 | ) | ||||||||||||||||||
Unrealized gain on marketable securities, net of tax | — | — | — | — | 3 | — | 3 | ||||||||||||||||||||
Net income | — | — | — | — | — | 30,470 | 30,470 | ||||||||||||||||||||
Balance at December 31, 2011 | 30,839 | $ | 309 | $ | 135,871 | $ | (134,647 | ) | $ | 24 | $ | 243,650 | $ | 245,207 | |||||||||||||
Purchase of treasury stock, at cost | — | — | — | (13,773 | ) | — | — | (13,773 | ) | ||||||||||||||||||
Repurchase of common stock | (81 | ) | (1 | ) | (3,161 | ) | — | — | — | (3,162 | ) | ||||||||||||||||
Exercise of stock options | — | — | (1,630 | ) | 3,879 | — | — | 2,249 | |||||||||||||||||||
Income tax benefit from stock-based compensation, net | — | — | 1,751 | — | — | — | 1,751 | ||||||||||||||||||||
Stock-based compensation expense | — | — | 289 | 9,525 | — | — | 9,814 | ||||||||||||||||||||
Other | — | — | 87 | 1,066 | — | — | 1,153 | ||||||||||||||||||||
Dividends paid | — | — | — | — | — | (42,728 | ) | (42,728 | ) | ||||||||||||||||||
Unrealized loss on marketable securities, net of tax | — | — | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||||
Net income | — | — | — | — | — | 40,402 | 40,402 | ||||||||||||||||||||
Balance at December 31, 2012 | 30,758 | $ | 308 | $ | 133,207 | $ | (133,950 | ) | $ | 16 | $ | 241,324 | $ | 240,905 | |||||||||||||
Purchase of treasury stock, at cost | — | — | — | (17,229 | ) | — | — | (17,229 | ) | ||||||||||||||||||
Exercise of stock options | — | — | (790 | ) | 2,238 | — | — | 1,448 | |||||||||||||||||||
Income tax benefit from stock-based compensation, net | — | — | 1,259 | — | — | — | 1,259 | ||||||||||||||||||||
Stock-based compensation expense | — | — | 1,798 | 9,305 | — | — | 11,103 | ||||||||||||||||||||
Other | — | — | 179 | 948 | — | — | 1,127 | ||||||||||||||||||||
Dividends paid | — | — | — | — | — | (17,386 | ) | (17,386 | ) | ||||||||||||||||||
Unrealized gain on marketable securities, net of tax | — | — | — | — | 13 | — | 13 | ||||||||||||||||||||
Net income | — | — | — | — | — | 32,032 | 32,032 | ||||||||||||||||||||
Balance at December 31, 2013 | 30,758 | $ | 308 | $ | 135,653 | $ | (138,688 | ) | $ | 29 | $ | 255,970 | $ | 253,272 | |||||||||||||
See accompanying notes.
F-9
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 32,032 | $ | 40,402 | $ | 30,470 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 21,033 | 18,183 | 15,218 | |||||||||
Loss on exchange of assets | — | — | 4,408 | |||||||||
Impairment charges | 6,021 | 4,191 | — | |||||||||
Amortization of marketable securities | 2,119 | 2,295 | 2,172 | |||||||||
Stock-based compensation | 11,103 | 9,814 | 8,601 | |||||||||
Deferred income taxes | (2,288 | ) | (5,743 | ) | (46 | ) | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Restricted cash | (4,779 | ) | (2,412 | ) | (3,533 | ) | ||||||
Accounts receivable | (19,623 | ) | (19,453 | ) | (28,826 | ) | ||||||
Prepaid insurance | 4,982 | 5,680 | 3,678 | |||||||||
Other current assets | (2,402 | ) | 1,837 | (2,862 | ) | |||||||
Other assets | (18,060 | ) | (12,924 | ) | (652 | ) | ||||||
Accounts payable | (982 | ) | (1,425 | ) | 1,776 | |||||||
Payroll taxes and other payroll deductions payable | (12,930 | ) | 9,922 | 23,556 | ||||||||
Accrued worksite employee payroll expense | 23,731 | 19,753 | 20,620 | |||||||||
Accrued health insurance costs | (8,839 | ) | 4,515 | (5,992 | ) | |||||||
Accrued workers’ compensation costs | 7,815 | 7,418 | 8,791 | |||||||||
Accrued corporate payroll, commissions and other accrued liabilities | 556 | 2,353 | (1,871 | ) | ||||||||
Income taxes payable/receivable | (4,825 | ) | 6,392 | (1,597 | ) | |||||||
Total adjustments | 2,632 | 50,396 | 43,441 | |||||||||
Net cash provided by operating activities | 34,664 | 90,798 | 73,911 | |||||||||
Cash flows from investing activities: | ||||||||||||
Marketable securities: | ||||||||||||
Purchases | (54,756 | ) | (30,680 | ) | (51,397 | ) | ||||||
Proceeds from maturities | 15,201 | 32,619 | 31,706 | |||||||||
Proceeds from dispositions | 8,026 | 35,891 | 3,907 | |||||||||
Investments and acquisitions, net of cash acquired | — | (2,410 | ) | (14,555 | ) | |||||||
Property and equipment: | ||||||||||||
Purchases | (11,562 | ) | (17,631 | ) | (31,440 | ) | ||||||
Proceeds from dispositions | 57 | 69 | 82 | |||||||||
Net cash provided by (used in) investing activities | (43,034 | ) | 17,858 | (61,697 | ) | |||||||
F-10
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from financing activities: | ||||||||||||
Purchase of treasury stock | $ | (17,229 | ) | $ | (13,773 | ) | $ | (25,079 | ) | |||
Repurchase of common stock | — | (3,162 | ) | — | ||||||||
Dividends paid | (17,386 | ) | (42,728 | ) | (15,742 | ) | ||||||
Proceeds from the exercise of stock options | 1,448 | 2,249 | 3,956 | |||||||||
Income tax benefit from stock-based compensation | 1,621 | 2,316 | 2,166 | |||||||||
Other | 1,127 | (222 | ) | (1,136 | ) | |||||||
Net cash used in financing activities | (30,419 | ) | (55,320 | ) | (35,835 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (38,789 | ) | 53,336 | (23,621 | ) | |||||||
Cash and cash equivalents at beginning of year | 264,544 | 211,208 | 234,829 | |||||||||
Cash and cash equivalents at end of year | $ | 225,755 | $ | 264,544 | $ | 211,208 | ||||||
Supplemental disclosures: | ||||||||||||
Cash paid for income taxes | $ | 27,191 | $ | 24,924 | $ | 19,782 | ||||||
In September 2011, we exchanged an existing aircraft with a fair value of $4.0 million and paid an additional $10.0 million to acquire a replacement aircraft, resulting in a non-cash loss of $4.4 million, which is included in other income (expense).
See accompanying notes.
F-11
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
1. | Accounting Policies |
Description of Business
Insperity, Inc., formerly named Administaff, Inc. (“Insperity” or “we”, “our”, and “us”) provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our name change, which was effective March 3, 2011, reflects our evolution over the past 27 years from a professional employer organization (“PEO”), an industry we pioneered, to our current position as a comprehensive business performance solutions provider. We were organized as a corporation in 1986 and have provided PEO services since inception.
Our most comprehensive HR business offering is provided through our PEO services, known as Workforce Optimization® solution, which encompasses a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services.
In addition to Workforce Optimization, we offer Human Capital Management, Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Insurance Services, (collectively “Adjacent Businesses”), many of which are offered via desktop applications and software as a service delivery models. These other products or services are offered separately, as a bundle, or along with Workforce Optimization.
We provide our Workforce Optimization solution by entering into a co-employment relationship with our clients, under which Insperity and its clients each take responsibility for certain portions of the employer-employee relationship. Insperity and its clients designate each party’s responsibilities through its Client Services Agreement (“CSA”), under which Insperity becomes the employer of the employees who work at the client’s location (“worksite employees”) for most administrative and regulatory purposes.
As a co-employer of its worksite employees, we assume many of the rights and obligations associated with being an employer. We enter into an employment agreement with each worksite employee, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the right to evaluate employee qualifications or performance, and the right to establish employee compensation levels. Typically, Insperity only exercises these rights in consultation with its clients or when necessary to ensure regulatory compliance. The responsibilities associated with our role as employer include the following obligations with regard to our worksite employees: (i) to compensate its worksite employees through wages and salaries; (ii) to pay the employer portion of payroll-related taxes; (iii) to withhold and remit (where applicable) the employee portion of payroll-related taxes; (iv) to provide employee benefit programs; and (v) to provide workers’ compensation insurance coverage.
In addition to our assumption of employer status for our worksite employees, our Workforce Optimization solution also includes other human resources functions for our clients to support the effective and efficient use of personnel in their business operations. To provide these functions, we maintain a significant staff of professionals trained in a wide variety of human resources functions, including employee training, employee recruiting, employee performance management, employee compensation, and employer liability management. These professionals interact and consult with clients on a daily basis to help identify each client’s service requirements and to ensure that we are providing appropriate and timely personnel management services.
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We provide our Workforce Optimization solution to small and medium-sized businesses in strategically selected markets throughout the United States. Significant markets include the following:
Year ended December 31, | |||||||||
2013 | 2012 | 2011 | |||||||
Percentage of total Workforce Optimization revenues: | |||||||||
Texas | 26 | % | 26 | % | 27 | % | |||
California | 17 | % | 17 | % | 16 | % | |||
New York | 10 | % | 9 | % | 9 | % | |||
Other | 47 | % | 48 | % | 48 | % | |||
Total | 100 | % | 100 | % | 100 | % | |||
Revenue and Direct Cost Recognition
We account for our Workforce Optimization revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition, Principal Agent Considerations. Our Workforce Optimization revenues are derived from our gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup, are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our Consolidated Balance Sheets.
In determining the pricing of the markup component of the gross billings, we take into consideration our estimates of the costs directly associated with our worksite employees, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings.
Consistent with our revenue recognition policy, our direct costs do not include the payroll cost of our worksite employees. Our direct costs associated with our revenue generating activities are primarily comprised of all other costs related to our worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.
Segment Reporting
We operate one reportable segment under ASC 280, Segment Reporting.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles 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.
Concentrations of Credit Risk
Financial instruments that could potentially subject us to concentration of credit risk include accounts receivable and marketable securities.
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Cash, Cash Equivalents and Marketable Securities
We invest our excess cash in federal government and municipal-based money market funds and debt instruments of U.S. municipalities. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Liquid investments with stated maturities of greater than three months are classified as marketable securities in current assets.
We account for marketable securities in accordance with ASC 320, Investments – Debt and Equity Securities. We determine the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluate such classification as of each balance sheet date. At December 31, 2013 and 2012, all of our investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. We use the specific identification method of determining the cost basis in computing realized gains and losses on the sale of our available-for-sale securities. Realized gains and losses are included in other income.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short-term maturities of these instruments.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:
Buildings and improvements | 5-30 years | |
Computer hardware and software | 1-5 years | |
Software development costs | 3 years | |
Furniture and fixtures | 5-7 years | |
Aircraft | 15-20 years | |
Software development costs relate primarily to software coding, system interfaces and testing of our proprietary professional employer information systems and are accounted for in accordance with ASC 350-40, Internal Use Software. Capitalized software development costs are amortized using the straight-line method over the estimated useful lives of the software, generally three years. We recognized $3.6 million, $2.8 million and $1.6 million in amortization of capitalized computer software costs in 2013, 2012 and 2011, respectively. Unamortized computer software costs were $7.2 million and $8.2 million in 2013 and 2012, respectively.
We account for our software products in accordance with ASC 985-20, Costs of Software to be Sold. This Topic establishes standards of financial accounting and reporting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, whether internally developed and produced or purchased.
We periodically evaluate our long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we may record an impairment loss to the extent that the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.
Goodwill and Other Intangible Assets
Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, ranging from three to 10 years.
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Our goodwill and intangible assets are subject to the provisions of ASC 350, Intangibles – Goodwill and Other. Accordingly, we perform our annual goodwill impairment testing as of December 31st of each calendar year or earlier if indicators of impairment exist on an interim basis. Step one of the impairment testing involves a comparison of the estimated fair value of a reporting unit to the related carrying value. Fair value is estimated using a discounted cash flow model. If the estimated fair value is less than its related carrying value, step two of the goodwill impairment test is completed, which involves allocating the estimated fair value of the reporting unit to individual assets and liabilities. If the carrying value of goodwill is greater than the estimated fair value, an impairment exists, which results in a write-down of the goodwill to the estimated fair value. Furthermore, ASC 350 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Please read Note 5, “Goodwill and Other Intangible Assets,” for additional information.
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, Unity Health Plan 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 cost of the United portion of the plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during each 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 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 $3.5 million as of December 31, 2013, and is reported as a long-term asset.
As of December 31, 2013, Plan Costs were less than the net premiums paid and owed to United by $13.5 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $4.5 million balance is included in prepaid insurance, a current asset, in our Consolidated Balance Sheets. The premiums owed to United at December 31, 2013, were $2.1 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets.
Workers’ Compensation Costs
Our workers’ compensation coverage has been provided through an arrangement with the ACE Group of Companies (“the ACE Program”) since 2007. The ACE Program is fully insured in that ACE has the responsibility to pay all claims incurred regardless of whether we satisfy our responsibilities. Through September 30, 2010, we bore the economic burden for the first $1 million layer of claims per occurrence and the insurance carrier was and remains responsible for the economic burden for all claims in excess of such first $1 million layer.
Effective October 1, 2010, in addition to bearing the economic burden for the first $1 million layer of claims per occurrence, we also bear the economic burden for those claims exceeding $1 million, up to a maximum aggregate amount of $5 million per policy year.
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.
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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 years ended December 31, 2013 and 2012, we reduced accrued workers’ compensation costs by $9.3 million and $13.1 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 rates utilized in 2013 and 2012 were 0.8% and 0.6%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.
The following table provides the activity and balances related to incurred but not reported workers’ compensation claims:
Year ended December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Beginning balance | $ | 111,685 | $ | 104,791 | ||||
Accrued claims | 42,900 | 37,772 | ||||||
Present value discount | (1,169 | ) | (868 | ) | ||||
Paid claims | (32,583 | ) | (30,010 | ) | ||||
Ending balance | $ | 120,833 | $ | 111,685 | ||||
Current portion of accrued claims | $ | 51,928 | $ | 47,149 | ||||
Long-term portion of accrued claims | 68,905 | 64,536 | ||||||
$ | 120,833 | $ | 111,685 | |||||
The current portion of accrued workers’ compensation costs at December 31, 2013 and 2012 includes $1.0 million and $2.3 million, respectively, of workers’ compensation administrative fees.
As of December 31, the undiscounted accrued workers’ compensation costs were $131.2 million in 2013 and $123.4 million in 2012.
At the beginning of each policy period, the 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, a long-term asset in our Consolidated Balance Sheets. In 2013, we paid the insurance carrier an additional $5.0 million in claim funds for policy years prior to 2013, which increased deposits. As of December 31, 2013, we had restricted cash of $51.9 million and deposits of $81.9 million.
Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on our Consolidated Balance Sheets.
Stock-Based Compensation
At December 31, 2013, we have three stock-based employee compensation plans. We account for these plans under the recognition and measurement principles of ASC 718, Compensation – Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
We generally make annual grants of restricted and unrestricted stock under our stock-based incentive compensation plans to our directors, officers and other management. Restricted stock grants to officers and other management vest over three to five years from the date of grant. Restricted stock grants issued to directors upon their initial appointment to the board are
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one-third vested on each anniversary of the grant date. Annual stock grants issued to directors are 100% vested on the grant date. Shares of restricted stock are based on fair value on date of grant and the associated expense, net of estimated forfeitures, is recognized over the vesting period.
Company-Sponsored 401(k) Plans
Under our 401(k) plan for corporate employees (the “Corporate Plan”), we matched 50% of eligible corporate employees’ contributions, up to 6% of the employees’ eligible compensation in 2013, 2012 and 2011. Under our separate
401(k) plan for worksite employees (the “Worksite Employee Plan”), the match percentage for worksite employees ranges from 0% to 6%, as determined by each client company. Matching contributions under the Corporate Plan and the Worksite Employee Plan are immediately vested. During 2013, 2012 and 2011, we made matching contributions to the Corporate and Worksite Employee Plans of $74.7 million, $65.9 million and $58.1 million, respectively. Of these contributions, $71.7 million, $63.3 million and $55.7 million were made under the Worksite Employee Plan on behalf of worksite employees. The remainder represents matching contributions made under the Corporate Plan on behalf of corporate employees.
Advertising
We expense all advertising costs as incurred.
Income Taxes
We use the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2013 presentation.
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 announcements that will materially impact our financial position or results of operations.
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2. | Cash, Cash Equivalents and Marketable Securities |
The following table summarizes our investments in cash equivalents and marketable securities held by investment managers and overnight investments:
December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Overnight holdings: | ||||||||
Money market funds (cash equivalents) | $ | 192,040 | $ | 255,000 | ||||
Investment holdings: | ||||||||
Money market funds (cash equivalents) | 42,913 | 26,087 | ||||||
Marketable securities | 46,340 | 16,904 | ||||||
281,293 | 297,991 | |||||||
Cash held in demand accounts | 23,054 | 21,732 | ||||||
Outstanding checks | (32,252 | ) | (38,275 | ) | ||||
Total cash, cash equivalents and marketable securities | $ | 272,095 | $ | 281,448 | ||||
Cash and cash equivalents | $ | 225,755 | $ | 264,544 | ||||
Marketable securities | 46,340 | 16,904 | ||||||
$ | 272,095 | $ | 281,448 | |||||
Our cash and overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the cash balance as of December 31, 2013 and December 31, 2012, are $143.0 million and $158.2 million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions, as well as $24.5 million and $13.5 million respectively, in client prepayments.
We account for our financial assets in accordance with ASC 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 tables summarize the levels of fair value measurements of our financial assets:
Fair Value Measurements | ||||||||||||||||
(in thousands) | ||||||||||||||||
December 31, 2013 | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 234,953 | $ | 234,953 | $ | — | $ | — | ||||||||
Municipal bonds | 46,340 | — | 46,340 | — | ||||||||||||
Total | $ | 281,293 | $ | 234,953 | $ | 46,340 | $ | — | ||||||||
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Fair Value Measurements | ||||||||||||||||
(in thousands) | ||||||||||||||||
December 31, 2012 | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 281,087 | $ | 281,087 | $ | — | $ | — | ||||||||
Municipal bonds | 16,904 | — | 16,904 | — | ||||||||||||
Total | $ | 297,991 | $ | 281,087 | $ | 16,904 | $ | — | ||||||||
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) | ||||||||||||||||
December 31, 2013 | ||||||||||||||||
Municipal bonds | $ | 46,290 | $ | 51 | $ | (1 | ) | $ | 46,340 | |||||||
December 31, 2012 | ||||||||||||||||
Municipal bonds | $ | 16,878 | $ | 29 | $ | (3 | ) | $ | 16,904 | |||||||
For the years ended December 31, 2013 and 2012 we realized a $3,000 and $58,000 gain on sales of available-for-sale marketable securities. For the year ended December 31, 2011, we had no realized gains or losses recognized on sales of available-for-sale marketable securities.
As of December 31, 2013, the contractual maturities of our marketable securities were as follows:
Amortized Cost | Estimated Fair Value | |||||||
(in thousands) | ||||||||
Less than one year | $ | 29,077 | $ | 29,098 | ||||
One to five years | 17,213 | 17,242 | ||||||
Total | $ | 46,290 | $ | 46,340 | ||||
3. | Accounts Receivable |
Our accounts receivable is primarily composed of trade receivables and unbilled receivables. Our trade receivables, which represent outstanding gross billings to customers, are reported net of allowance for doubtful accounts of $0.9 million and $1.0 million as of December 31, 2013 and 2012, respectively. We establish an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making a general provision for other potentially uncollectible amounts.
We make an accrual at the end of each accounting period for our obligations associated with the earned but unpaid wages of our worksite employees and for the accrued gross billings associated with such wages. These accruals are included in accrued worksite employee payroll cost and unbilled accounts receivable; however, these amounts are presented net in the Consolidated Statements of Operations. We generally require clients to pay invoices for service fees no later than one day prior to the applicable payroll date. As such, we generally do not require collateral. Customer prepayments directly attributable to unbilled accounts receivable have been netted against such receivables as the gross billings have been earned and the payroll
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cost has been incurred, thus we have the legal right of offset for these amounts. Unbilled accounts receivable consisted of the following:
December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Accrued worksite employee payroll cost | $ | 173,801 | $ | 150,070 | ||||
Unbilled revenues | 50,286 | 44,483 | ||||||
Customer prepayments | (24,459 | ) | (13,513 | ) | ||||
Unbilled accounts receivable | $ | 199,628 | $ | 181,040 | ||||
4. | Deposits |
The contractual arrangement with United for health insurance coverage requires us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid health insurance. Please read Note 1, “Accounting Policies,” for a discussion of our accounting policies for health insurance costs.
As of December 31, 2013, we had $3.7 million in health insurance long-term deposits. Please read Note 1 “Accounting Policies” for a discussion of our accounting policies for health insurance costs.
As of December 31, 2013, we had $81.9 million in workers’ compensation long-term deposits. Please read Note 1 “Accounting Policies” for a discussion of our accounting policies for workers’ compensation costs.
5. | Goodwill and Other Intangible Assets |
The following table provides the gross carrying amount and accumulated amortization for each class of intangible assets:
December 31, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||||
Trademarks | $ | 1,230 | $ | (680 | ) | $ | 550 | $ | 1,285 | $ | (571 | ) | $ | 714 | ||||||||||
Customer relationships | 7,784 | (4,340 | ) | 3,444 | 9,643 | (3,790 | ) | 5,853 | ||||||||||||||||
Total intangible assets | $ | 9,014 | $ | (5,020 | ) | $ | 3,994 | $ | 10,928 | $ | (4,361 | ) | $ | 6,567 | ||||||||||
Our amortization expense related to purchased intangible assets other than goodwill was $2.0 million in 2013, $1.8 million in 2012 and $1.7 million in 2011, and is estimated to be $1.6 million in 2014, $1.3 million in 2015, $695,000 in 2016, $522,000 in 2017 and $79,000 in 2018.
During the fourth quarter of 2013 and 2012, we performed step one of the annual impairment testing for each of our reporting units and concluded the estimated fair value of our Expense Management and Performance Management reporting units, respectively, were below their respective carrying values. The declines in the estimated fair values of Expense Management and Performance Management resulted primarily from lower projected revenue growth rates and profitability levels. The timing of the lower revenue growth rates and profitability level revisions coincided with the timing of our overall forecasting process for all reporting units, which is performed in the fourth quarter of each calendar year. Upon completion of step two of the goodwill impairment test, we recognized goodwill and other intangible asset impairment write-downs of $3.3 million in 2013 related to our Expense Management reporting unit, and $4.2 million in 2012 related to our Performance Management reporting unit. The fair value of the reporting units was estimated using a discounted cash flow model, which we
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believe appropriately estimates the fair value of the reporting units. The material assumptions used in the model included the weighted average cost of capital and long-term growth rates. We consider this a Level 3 fair value measure.
The following table provides the gross carrying amount and accumulated impairment for goodwill:
Year ended December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Gross amount: | ||||||||
Aggregate goodwill acquired | $ | 21,156 | $ | 21,156 | ||||
Accumulated impairment loss: | ||||||||
Beginning balance | (3,948 | ) | — | |||||
Impairment | (2,768 | ) | (3,948 | ) | ||||
Ending balance | (6,716 | ) | (3,948 | ) | ||||
Goodwill, net | $ | 14,440 | $ | 17,208 | ||||
6. | Other Assets |
In 2011, we acquired a minority interest in The Receivables Exchange ("TRE"), an online marketplace for the sale of accounts receivable, for $2.8 million. In the second quarter of 2013, TRE issued similar securities at per share amounts substantially below the per share book value of our investment. Accordingly, we valued the investment based on a similar security market transaction, which is a Level 2 valuation technique. This resulted in a non-cash impairment charge of $2.7 million, which is included in other income (expense) in our Consolidated Statements of Operations in 2013. Due to federal income tax limitations on capital losses, no tax benefit associated with the impairment was recognized.
7. | Acquisitions |
We account for our acquisitions in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on the fair value at the date of purchase. All acquisition related costs are expensed as incurred and recorded in operating expenses. We include operations associated with acquisitions from the date of acquisition forward.
In January 2011, we acquired certain assets from HumanConcepts, a provider of workforce decision support solutions. We acquired ownership of the OrgPlus desktop software product line (“OrgPlus”), targeted at small and medium-sized businesses, and its associated customer base, as well as a source code license for a SaaS based version. The OrgPlus software facilitates creation, management and communication of detailed organizational charts. The acquisition represents our continued business strategy to expand the sales opportunity of our human resources services as well as the solutions available to our current and prospective clients. We paid $10.8 million upon the closing of the transaction and paid an additional $1.2 million in 2012 based on the terms of the agreement.
In June 2010, we acquired OneMind Connect, Inc. which conducted business under the name “ExpensAble,” and provides expense report management solutions delivered as both a SaaS and as a desktop software product. The acquisition of ExpensAble extends the sales opportunity of our human resources services as well as the solutions available to our current and prospective clients. We paid $5.5 million upon the closing of the transaction and paid an additional $1.3 million in 2011 based on the terms of the agreement.
In July 2010, we acquired certain assets from Galaxy Technologies, Inc. in an effort to expand the sales opportunity of our human resources services as well as the solutions available to our current and prospective clients. The primary assets acquired include time and attendance software solutions, which are delivered through a SaaS model and as a desktop software product, and the associated customer base. We paid $7.4 million upon the closing of the transaction and an additional $1.4 million in each of 2011 and 2012, respectively, based on the terms of the purchase agreement.
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8. | Revolving Credit Facility |
On September 15, 2011, we entered into a four-year, $100 million revolving credit facility (the “Facility”), which may be increased to $150 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, 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. At December 31, 2013, we had not drawn on the Facility.
The Facility matures on September 15, 2015. 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%. Interest expense and unused commitment fees are recorded in other income (expense).
The Facility contains both affirmative and negative covenants, which 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. In December 2012, the Credit Agreement was amended to modify the interest coverage ratio covenant to exclude the impact of the $25.7 million special dividend. We were in compliance with all financial covenants under the Credit Agreement at December 31, 2013.
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9. | Income Taxes |
Deferred 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 components of the net deferred tax assets and net deferred tax liabilities as reflected on the Consolidated Balance Sheets are as follows:
December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Deferred tax liabilities: | ||||||||
Prepaid assets | $ | (5,084 | ) | $ | (6,929 | ) | ||
Depreciation | (8,937 | ) | (8,580 | ) | ||||
Software development costs | (2,739 | ) | (3,104 | ) | ||||
Total deferred tax liabilities | (16,760 | ) | (18,613 | ) | ||||
Deferred tax assets: | ||||||||
Accrued incentive compensation | 3,909 | 4,896 | ||||||
Net operating loss carryforward | 1,773 | 2,057 | ||||||
Workers’ compensation accruals | 5,568 | 5,079 | ||||||
Accrued rent | 1,008 | 1,033 | ||||||
Stock-based compensation | 3,742 | 3,114 | ||||||
Intangibles | 837 | 227 | ||||||
Minority investment impairment | 991 | — | ||||||
Other | 412 | 418 | ||||||
Total deferred tax assets | 18,240 | 16,824 | ||||||
Valuation allowance | (991 | ) | — | |||||
Total net deferred tax assets | 17,249 | 16,824 | ||||||
Net deferred tax assets (liabilities) | $ | 489 | $ | (1,789 | ) | |||
Net current deferred tax assets | $ | 8,185 | $ | 7,211 | ||||
Net noncurrent deferred tax liabilities | (7,696 | ) | (9,000 | ) | ||||
$ | 489 | $ | (1,789 | ) | ||||
The components of income tax expense are as follows:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Current income tax expense: | ||||||||||||
Federal | $ | 20,476 | $ | 29,280 | $ | 16,816 | ||||||
State | 3,512 | 4,351 | 3,535 | |||||||||
Total current income tax expense | 23,988 | 33,631 | 20,351 | |||||||||
Deferred income tax (benefit) expense: | ||||||||||||
Federal | (2,258 | ) | (5,363 | ) | 47 | |||||||
State | (30 | ) | (380 | ) | (93 | ) | ||||||
Total deferred income tax benefit | (2,288 | ) | (5,743 | ) | (46 | ) | ||||||
Total income tax expense | $ | 21,700 | $ | 27,888 | $ | 20,305 | ||||||
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As a result of nonqualified stock option exercises, disqualifying dispositions of certain employee incentive stock options and vesting of restricted stock awards, we had a net income tax benefit of $1.3 million in 2013, $1.8 million in 2012 and $1.7 million in 2011. The income tax benefit is reported as a component of additional paid-in capital.
The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense from continuing operations is as follows:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Expected income tax expense at 35% | $ | 18,806 | $ | 23,901 | $ | 17,770 | ||||||
State income taxes, net of federal benefit | 2,286 | 2,497 | 2,249 | |||||||||
Nondeductible expenses | 1,993 | 1,663 | 904 | |||||||||
Section 199 benefits | (2,531 | ) | — | — | ||||||||
Expense Management non-cash impairment | 797 | — | — | |||||||||
Valuation allowance related to TRE impairment | 938 | — | — | |||||||||
Research and development credit | (534 | ) | — | (558 | ) | |||||||
Other, net | (55 | ) | (173 | ) | (60 | ) | ||||||
Reported total income tax expense | $ | 21,700 | $ | 27,888 | $ | 20,305 | ||||||
We have developed customer facing software that is included as a component of the Workforce Optimization solution. In addition, several ABUs market both software products and software as a service offerings. Prior to 2013, we were not certain that these software offerings met the IRS “Qualified Production Activities Deduction” requirements. As a result, no such tax deduction was taken on the annual tax returns filed with the IRS. However, in 2013, we engaged tax specialists to conduct a study of our various software offerings to assess the qualifications with IRS guidelines. Based on this study, we concluded certain of our software offerings met the IRS requirements, resulting in plans to amend previously filed open year tax returns. Accordingly, in 2013 we recognized $2.0 million in tax benefits for the years 2009 to 2012, and $530,000 in tax benefits for the 2013 tax year.
At December 31, 2013, we have net operating loss carryforwards totaling approximately $4.8 million that expire from 2022 to 2030 related to our acquisition of ExpensAble.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2013, 2012 and 2011, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 2010 through 2012 remain open to examination by the Internal Revenue Service of the United States.
10. | Stockholders’ Equity |
Repurchase Program
Our Board of Directors (the “Board”) has authorized a program to repurchase up to 15,500,000 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 or other factors. We repurchased 479,903 shares under the Repurchase Program during 2013. In addition, 116,931 shares were withheld during 2013 to satisfy tax withholding obligations for the vesting of restricted stock awards. These purchases are not subject to the Repurchase Program. During 2012, we repurchased 407,400 shares under the Repurchase Program and 107,293 shares were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards. As of December 31, 2013, we were authorized to repurchase an additional 1,349,569 shares under the Repurchase Program. Shares repurchased under the Repurchase Program and shares withheld to satisfy tax withholding obligations for the vesting of restricted stock awards are recorded in treasury.
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Dividends
The Board declared quarterly dividends in 2013 and 2012 as follows:
2013 | 2012 | ||||||||
(amounts per share) | |||||||||
First quarter | $ | 0.17 | $ | 0.15 | |||||
Second quarter | 0.17 | 0.17 | |||||||
Third quarter | 0.17 | 0.17 | |||||||
Fourth quarter | 0.17 | 1.17 | (1) | ||||||
____________________________________
(1) Includes a $1.00 per share special dividend
During 2013 and 2012, we paid a total of $17.4 million and $42.7 million, respectively in dividends.
Tender Offer for Common Stock
In November 2012, we commenced a modified “Dutch auction” tender offer to purchase up to $50 million in value of our common stock at a price not less than $27.00 per share and not more than $31.00 per share. The tender offer period expired on December 21, 2012, resulting in the repurchase of 80,983 shares at a per share price of $31.00 and an aggregate price of $3.2 million, including transaction costs. The shares were immediately retired.
Preferred Stock
At December 31, 2013, 20 million shares of preferred stock were authorized, of which 600,000 shares were designated as Series A Junior Participating Preferred Stock that is reserved for issuance on exercise of preferred stock purchase rights under our Share Purchase Rights Plan (the “Rights Plan”). Each issued share of our common stock has one preferred stock purchase right attached to it. No preferred shares have been issued and the rights are not currently exercisable. The Rights Plan expires on November 13, 2017.
11. | Incentive Plans |
The Insperity, Inc. 2001 Incentive Plan, as amended, and the 2012 Incentive Plan, as amended, (collectively, the “Incentive Plans”) provide for options and other stock-based awards that have been and may be granted to eligible employees and non-employee directors of Insperity or its subsidiaries. The 2012 Incentive Plan is currently the only plan under which new stock-based awards may be granted. The Incentive Plans are administered by the Compensation Committee of the Board of Directors (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares and all of the terms of the awards. The Board may at any time amend or terminate the Incentive Plans. However, no amendment that would impair the rights of any participant, with respect to outstanding grants, can be made without the participant’s prior consent. Stockholder approval of amendments to the Incentive Plans is necessary only when required by applicable law or stock exchange rules. At December 31, 2013, 1,499,221 shares of common stock were available for future grants under the 2012 Incentive Plan. The Incentive Plans permit stock options, including nonqualified stock options and options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, stock awards, phantom stock awards, stock appreciation rights, performance units, and other stock-based awards and cash awards, all of which may or may not be subject to the achievement of one or more performance objectives. The purposes of the Incentive Plans generally are to retain and attract persons of training, experience and ability to serve as employees of Insperity and its subsidiaries and to serve as non-employee directors of Insperity, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of Insperity and its subsidiaries.
The Insperity Nonqualified Stock Option Plan (the “Nonqualified Plan”) provided for options to purchase shares of Insperity’s common stock that were granted to employees who were not officers. An aggregate of 3,600,000 shares of common stock of Insperity were authorized to be issued under the Nonqualified Plan. Although there are unissued shares remaining, no new awards may be granted under the Nonqualified Plan. The Committee may at any time terminate or amend the
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Nonqualified Plan, provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options.
We recognized $11.1 million, $9.8 million and $8.6 million of compensation expense associated with the restricted stock awards in 2013, 2012 and 2011, respectively. We recognized $4.5 million, $4.0 million and $3.4 million of tax benefits associated with stock-based compensation in 2013, 2012 and 2011, respectively.
Stock Option Awards
The following is a summary of stock option award activity for 2013:
Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||
(in thousands) | (in years) | (in thousands) | |||||||||||
Outstanding - December 31, 2012 | 152 | $ | 19.30 | ||||||||||
Granted | — | — | |||||||||||
Exercised | (91 | ) | 15.95 | ||||||||||
Canceled | — | — | |||||||||||
Outstanding - December 31, 2013 | 61 | 24.24 | 4.6 | $ | 731 | ||||||||
Exercisable - December 31, 2013 | 61 | 24.24 | 4.6 | $ | 731 | ||||||||
The intrinsic value of options exercised during the year was $1.5 million in 2013, $2.5 million in 2012 and $2.2 million in 2011.
Restricted Stock Awards
Restricted common shares, under equity plan accounting, are generally measured at fair value on the date of grant based on the number of shares granted, estimated forfeitures and the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period, three to five years for our shares currently outstanding. The total fair value of shares vested during the years ended December 31, 2013, 2012, and 2011 was $12.3 million, $11.7 million and $11.1 million, respectively. The weighted average grant date fair value of restricted stock awards during the years ended December 31, 2013, 2012 and 2011 was $29.25, $30.47 and $29.47, respectively. As of December 31, 2013, unrecognized compensation expense associated with the unvested shares outstanding was $12.7 million and is expected to be recognized over a weighted average period of 22 months.
The following is a summary of restricted stock award activity for 2013:
Shares | Weighted Average Grant Date Fair Value | ||||||
(in thousands) | |||||||
Non-vested - December 31, 2012 | 751 | $ | 27.70 | ||||
Granted | 407 | 29.25 | |||||
Vested | (399 | ) | 25.57 | ||||
Canceled/Forfeited | (19 | ) | 29.58 | ||||
Non-vested - December 31, 2013 | 740 | 29.66 | |||||
Employee Stock Purchase Plan
Our employee stock purchase plan (the “ESPP”) enables employees to purchase shares of Insperity stock at a 5% discount. The ESPP is a non-compensatory plan under generally accepted accounting principles of stock-based compensation. As a result, no compensation expense is recognized in conjunction with this plan. Approximately 34 thousand, 37 thousand and 35 thousand shares were issued under the ESPP during fiscal years 2013, 2012 and 2011, respectively.
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12. | 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:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Net income | $ | 32,032 | $ | 40,402 | $ | 30,470 | ||||||
Less distributed and undistributed earnings allocated to participating securities | (916 | ) | (1,224 | ) | (908 | ) | ||||||
Net income allocated to common shares | $ | 31,116 | $ | 39,178 | $ | 29,562 | ||||||
Weighted average common shares outstanding | 24,850 | 25,007 | 25,405 | |||||||||
Incremental shares from assumed conversions of common stock options | 22 | 60 | 92 | |||||||||
Adjusted weighted average common shares outstanding | 24,872 | 25,067 | 25,497 | |||||||||
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect | 8 | 29 | 29 | |||||||||
13. | Leases |
We lease various office facilities, furniture, equipment and vehicles under operating lease arrangements, some of which contain rent escalation clauses. Most of the leases contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $13.9 million, $13.8 million and $14.0 million in 2013, 2012 and 2011, respectively. At December 31, 2013, future minimum rental payments under noncancelable operating leases are as follows:
Operating Leases | ||||
(in thousands) | ||||
2014 | $ | 12,763 | ||
2015 | 11,985 | |||
2016 | 9,776 | |||
2017 | 6,507 | |||
2018 | 5,091 | |||
Thereafter | 5,865 | |||
Total minimum lease payments | $ | 51,987 | ||
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14. | Commitments and Contingencies |
We enter into non-cancelable fixed purchase and service obligations in the ordinary course of business. These arrangements primarily consist of advertising commitments and service contracts. At December 31, 2013, future non-cancelable purchase and service obligations greater than $100,000 and one year were as follows (in thousands):
2014 | $ | 6,448 | ||
2015 | 7,164 | |||
2016 | 5,267 | |||
2017 | 1,758 | |||
2018 | 1,770 | |||
Thereafter | 4,344 | |||
Total obligations | $ | 26,751 | ||
We are a defendant in various 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, except as set forth below, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.
Texas Sales and Use Tax Assessments
In July 2008, we purchased a used aircraft (the “2008 Aircraft”) with the intent to immediately lease it to an aircraft charter service under 14 C.F.R. Part 135 (the “2008 Aircraft Purchase”). In connection with the 2008 Aircraft Purchase, we sought and received a letter ruling from the State of Texas Comptroller’s Tax Policy Division (the “Comptroller’s Ruling”). The Comptroller’s Ruling concluded that the 2008 Aircraft Purchase and lease qualified for the “sale for resale” exemption to sales and use taxes. In 2011, we purchased a used aircraft in a transaction that included the trade-in of the 2008 Aircraft with the intent to immediately lease the newly-purchased aircraft to the same aircraft charter service under Part 135 (“the 2011 Aircraft Purchase”). The structure of the 2011 Aircraft Purchase and lease transaction was patterned after the 2008 Aircraft Purchase. In accordance with the Comptroller’s Ruling, we did not pay sales or use tax on either the 2008 Aircraft Purchase or the 2011 Aircraft Purchase.
The Comptroller’s Office has since changed its view as expressed in the Comptroller’s Ruling and is now asserting that the 2008 Aircraft Purchase and the 2011 Aircraft Purchase are subject to sales and use tax. In May 2012, the Comptroller’s Office issued a notification of examination results regarding the 2008 Aircraft Purchase. It has assessed approximately $782,000 in taxes but waived any claim for interest and did not assess any penalty. In a separate matter regarding the 2011 Aircraft Purchase, the Comptroller’s Office issued its notification of examination results in December 2013 and assessed approximately $933,000 in taxes, penalties and interest.
We have filed requests for redetermination disputing both assessments and are seeking hearings concerning them. We believe the assessments are without merit and intend to vigorously contest them. At this time, we are unable to determine the ultimate outcome of these matters. However, in the event the State of Texas succeeds with enforcement of the assessments, we may be required to pay some or all of the assessments, which would reduce net income in the reported period.
Massachusetts Tax Assessment
During the fourth quarter of 2012, we received assessments of approximately $2.5 million, including interest and penalties, related to the alleged underpayment of corporate income taxes to the State of Massachusetts for tax years 2006 through 2008. In 2009, we received similar assessments of approximately $470,000, including interest and penalties, which covered tax years 2003 through 2005. However, in 2013 Massachusetts withdrew its assessment regarding the 2003 to 2005 periods. We believe the remaining assessments are without merit and intend to vigorously contest them. At this time, we are unable to determine the ultimate outcome of this matter. However, in the event the State of Massachusetts succeeds with enforcement of the assessments, we may be required to pay some or all of the assessments, which would reduce net income and could have a material adverse effect on net income in the reported period.
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Lumbermens Mutual Casualty Company
In 2003, facing continued capital constraints and a series of downgrades from various rating agencies, our former workers’ compensation insurance carrier for the two-year period ended September 2003, Lumbermens Mutual Casualty Company, formerly known as Kemper (“Lumbermens Mutual”), made the decision to substantially cease underwriting operations and voluntarily entered into “run-off.” In July 2012, Lumbermens Mutual announced that an agreed order of rehabilitation had been entered against it in Cook County, Illinois. Under the order, the Director of the Illinois Department of Insurance was vested with control over Lumbermens Mutual property and decision-making. In an order effective May 10, 2013, the Circuit Court of Cook County, Illinois, found that Lumbermens Mutual was insolvent and ordered its liquidation.
The entry of a liquidation order triggered the transition of claim handling responsibilities for Lumbermens Mutual’s open claims to state guaranty associations around the country. Guaranty associations are non-profit organizations created by statute for the purpose of protecting policyholders from severe financial losses and preventing delays in claim payments due to the insolvency of an insurer. They do this by assuming responsibility for the payment of claims that would otherwise have been paid by the insurer had it not become insolvent. Each state has one or more guaranty association(s), with each association handling certain types of insurance. Insurance companies are required to be members of the state guaranty association as a condition of being licensed to do business in the state.
The guaranty associations in some states, including Texas, may assert that state law allows them to recover the amount of benefits paid by the guaranty association along with associated administration and defense costs from an insured with a net worth exceeding certain specified levels or based upon certain other theories of recovery. We intend to vigorously assert our available defenses to any claims made by any guaranty association. We estimate the outstanding amounts that may be subject to claims from state guaranty associations to range from $1.0 million to $2.0 million as of December 31, 2013. In the event state guaranty associations are successful in seeking recovery from us, we would be required to pay such claims and record liabilities for anticipated future claims, which could have an adverse effect on net income in the reported period.
Pennsylvania Sales Taxes
Pennsylvania imposes a sales tax on “help supply services.” The Pennsylvania Department of Revenue (“Department”) had maintained that PEO services constitute help supply services and are subject to the tax. On February 21, 2012, the Pennsylvania Supreme Court affirmed the Appeals Court decision in the matter titled All Staffing vs. Commonwealth of Pennsylvania, which ruled that PEO services are not subject to the Pennsylvania sales tax.
For the period January 1, 2010, through September 30, 2011, we accrued approximately $2.5 million in Pennsylvania sales tax. As we believed our PEO services were not subject to the sales tax, we reduced our accrual for such amounts in the fourth quarter of 2011.
In 2010, we filed refund claims totaling $2.9 million with the Department for the sales taxes paid in error for the period April 1, 2007 through December 31, 2009. In the second quarter of 2012, the Pennsylvania Board of Finance and Revenue approved our refund claims, and we recognized a $2.9 million receivable and a corresponding reduction to payroll tax expense, a component of direct costs. During the third quarter of 2012, we received the $2.9 million refund.
California Unemployment Taxes
As a result of a 2001 corporate restructuring, we filed for a transfer of our state unemployment tax reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved our request for transfer of the reserve account in May 2002 and also notified us of our new contribution rates based upon the approved transfer. In December 2003, we received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the EDD. The Notice stated that the EDD was collapsing the accounts of our subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all of our California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, we filed petitions with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the validity of the Notice, asserting several procedural and substantive defenses.
One procedural defense included in our appeal asserts that the EDD failed to meet the statutory requirement related to serving a proper notice within the stipulated time frame and that all of the statutes of limitations concerning the EDD’s ability to reassess or modify unemployment tax rates for the periods addressed in the Notice had expired (“Notification Defense”). During 2010, a California Circuit Court issued a ruling in favor of the EDD regarding a dispute involving a taxpayer who made arguments similar to our Notification Defense. The Supreme Court of California subsequently denied the
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taxpayer’s petition for review. We subsequently received a statement of account from the EDD indicating taxes, penalties and interest due of approximately $8.1 million.
While still denying all liability, we entered into a written agreement with the EDD in September 2011 to fully and finally settle this dispute (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, we agreed to pay $3.1 million (the “Settlement Amount”) to the EDD. The Settlement Amount of $3.1 million was paid and recorded in other income (expense) during the year ended December 31, 2011.
15. | Quarterly Financial Data (Unaudited) |
Quarter ended | |||||||||||||||||||||
March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||
2013 | |||||||||||||||||||||
Revenues | $ | 611,836 | $ | 547,274 | $ | 539,869 | $ | 557,133 | |||||||||||||
Gross profit | 108,118 | 97,746 | 97,409 | 89,978 | |||||||||||||||||
Operating income | 22,009 | 10,228 | 17,112 | 6,874 | (1) | ||||||||||||||||
Net income | 13,173 | 3,488 | (2) | 10,082 | 5,289 | (3) | |||||||||||||||
Basic net income per share | 0.51 | 0.14 | 0.39 | 0.21 | |||||||||||||||||
Diluted net income per share | 0.51 | 0.14 | 0.39 | 0.21 | |||||||||||||||||
2012 | |||||||||||||||||||||
Revenues | $ | 595,177 | $ | 519,256 | $ | 511,953 | $ | 532,438 | |||||||||||||
Gross profit | 103,004 | 87,294 | (4) | 98,420 | 93,503 | ||||||||||||||||
Operating income | 23,046 | 9,415 | 19,140 | 15,893 | (5) | ||||||||||||||||
Net income | 13,884 | 5,621 | 11,452 | 9,445 | |||||||||||||||||
Basic net income per share | 0.54 | 0.22 | 0.45 | 0.34 | (6) | ||||||||||||||||
Diluted net income per share | 0.54 | 0.22 | 0.45 | 0.34 | (6) | ||||||||||||||||
____________________________________
(1) | Included in the results for the fourth quarter of 2013 is a $3.3 million impairment charge, related to our Expense Management reporting unit. Please read Note 5, “Goodwill and Other Intangible Assets,” for additional information. |
(2) | Includes the impact of a $2.7 million non-cash impairment charge. Please read Note 6 to the Consolidated Financial Statements, “Other Assets,” for additional information. |
(3) | Includes a $2.0 million tax benefit related to tax years 2009 through 2012. Please read Note 9 to the Consolidated Financial Statements, “Income Taxes,” for additional information. |
(4) | Included in the results for the second quarter of 2012 is a $2.9 million reduction to payroll tax expense related to a refund of Pennsylvania sales taxes. Please read Note 14, “Commitments and Contingencies,” for additional information. |
(5) | Included in the results for the fourth quarter of 2012 is a $4.2 million impairment charge, related to our Performance Management reporting unit. Please read Note 5, “Goodwill and Other Intangible Assets,” for additional information. |
(6) | Under the two-class earnings per share method, undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. This resulted in a $0.03 earnings per share decrease in the fourth quarter of 2012. Please read Note 12, “Net Income Per Share,” for additional information. |
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