UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2011.2012.
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 x 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 x
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 x 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 x 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 x
As of February 7, 2012, 25,740,4724, 2013, 25,679,598 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, 2011,2012, closing price of the common stock as reported by the New York Stock Exchange) was approximately $690$619 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 15, 2012,14, 2013, which the registrant intends to file within 120 days of the end of the fiscal year.
| Part I | ||
| Item 1. | 2 | |
| Item 1A. | 19 | |
| Item 1B. | 24 | |
| Item 2. | 24 | |
| Item 3. | ||
| Item S-K 401(b). | ||
| Part II | ||
| Item 5. | ||
| Item 6. | ||
| Item 7. | ||
| Item 7A. | 44 | |
| Item 8. | 45 | |
| Item 9. | 45 | |
| Item 9A. | 45 | |
| Item 9B. | 45 | |
| Part III | ||
| Item 10. | 46 | |
| Item 11. | 46 | |
| Item 12. | 46 | |
| Item 13. | 46 | |
| Item 14. | 46 | |
| Part IV | ||
| Item 15. | 47 | |
PART I
Unless otherwise indicated, “Insperity,” “we,” “our” and “us” are used in this annual report to refer to the businesses of 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 aspects of 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.”
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 25 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 continues to be aggregatingproviding the best small and medium-sized businesses in the United States onwith the common platform ofopportunity to participate in our unique human resources service offering, thereby leveraging 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 OptimizationTM 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 MidMarket SolutionsTM, PerformanceHuman Capital Management, Expense Management,Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Business 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 (“Bundle Plus”).Optimization.
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.
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 our employee training, we employ a high-touch approach designed to ensure that our clients receive the personal attention and expertise needed to create a 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, 2011,2012, we had 48 Workforce Optimization sales offices in 2425 markets. Our long-term strategy is to operate approximately 90 sales offices located in 40 strategically selected markets.
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, 3741 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 3741 of these states. The cost of compliance with these regulations is not material to our financial position or results of operations.
Service Offerings
Workforce OptimizationTM Solution
We serve small and medium-sized businesses by providing our Workforce Optimization solution, which encompasses a broad range of services, including the following as of December 31, 2011:2012:
| · | 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:
| · | Internal Revenue Code (the “Code”) | · | The Family and Medical Leave Act (FMLA)* |
| · | Federal Income Contribution Act (FICA) | · | Health Insurance Portability and |
| · | Federal Unemployment Tax Act (FUTA) | Accountability Act (HIPAA) | |
| · | Fair Labor Standards Act (FLSA)* | · | Drug-Free Workplace Act* |
| · | Employee Retirement Income Security Act, as amended (ERISA) | · | Occupational Safety and Health Act (OSHA)* |
| · | Consolidated Omnibus Budget | · | Worker Adjustment and Retraining Notification Act (WARN)* |
| · | Immigration Reform and Control Act (IRCA) | · | Uniformed Services Employment and Reemployment Rights Act (USERRA) |
| · | Title VII (Civil Rights Act of 1964)* | · | State unemployment and employment security laws |
| · | Americans with Disabilities Act (ADA)* | State workers’ compensation laws | |
| · | Age Discrimination in Employment Act (ADEA)* | · | Health Care and Education Reconciliation Act of 2010 (the |
| · | Patient Protection and Affordable Care Act (PPACA) | ||
| · | Genetic Information Nondiscrimination Act of 2008 |
* And similar state laws
While these regulations are complex, and in some instances overlapping, we assist our clients in achieving compliance with these 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 |
| · |
| · | employee file maintenance |
| · | unemployment claims processing |
| · | workers’ compensation claims reporting |
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 |
| · |
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 human resources 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 regulations and notify clients of the potential effect of such changes on employer liability.
Employee Service Center.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:
| · | WebPayrollSM 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 acknowledgements 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 InsperityTM |
| · | 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 InsperityTM. 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 SolutionsTM. We believe the mid-market sector, which we 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 15%17% of our total paid worksite employees during 2011,2012, increased 22%25% over 2010.2011.
Adjacent Business Unit Offerings
In 2010, we initiated an Adjacent Business Unit (“ABU”) strategy, which seeks to expand the type and number of business performance improvement services available to our current and prospective client base and to provide the ability to offer these products and services outside of our Workforce Optimization solution. Insperity looksWe also intend to leverage the existing customer relationships of the ABUs to cross sell our Workforce Optimization solution and various ABU services. Execution of this ABU strategy has included the acquisition of certain human resources technology companies that provide services through a SaaS delivery model. During 2011both 2012 and 2010,2011, total ABU revenues unrelated to our Workforce Optimization solution were 1.2% and 0.6% of our total revenues respectively.and 4.3% of our gross profit. The following are the key components of our ABU services:
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 both as a SaaS solution or as an “on-premise” client-server solution. Custom interfaces exist between our Time and asAttendance products and our Workforce Optimization technologies for those customers utilizing both services.
Performance Management. Our Performance Management business provides human resources software offerings including a suite of desktop products: InsperityTM Descriptions Now®, InsperityTM Policies Now®, InsperityTM Performance Now®, and InsperityTM Ultimate Employer®; along with a SaaS offering for Performance Management and InsperityTM PerformSmartTM. Insperity PerformSmart has been integrated into our Workforce Optimization solution and we will continue to sell to both Workforce Optimization and non-Workforce Optimization small business customers through online subscription arrangements, packaged software product.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 OrgPlusTM 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, OrgPlusTM RealtimeTM. 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. Beginning in early 2012, certainThese services will not be included in the comprehensiveare provided to both Workforce Optimization offering for new clients but will be offered separately to Workforcecustomers and non-Workforce Optimization clients as part of our Bundle Plus strategy. In addition, these services are offered outside of our Workforce Optimization solution.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 InsperityTM Financial Services. This suite of financial management tools and solutions for small to medium-sized companies provides business owners with financial intelligence and an alternative source for capital to help drive business performance. The core products and services include Insperity RevealTM , a Web-based financial dashboard and toolset; an outsourced, online bookkeeping and controller service offered through an alliance with a third party; and an online receivables marketplace, also provided 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. Beginning in early 2012, these services will not be included in the comprehensive Workforce Optimization offering for new clients but will be offered separately to Workforce Optimization clients as part of our Bundle Plus strategy. In addition, these services are offered outside of our Workforce Optimization solution.
Client Service Agreement
All Workforce Optimization clients execute an Insperity CSA. 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 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 regulations governing the employer/employee relationship and updating the client when necessary |
| · | 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 state and local pay or play health care mandates and all such other similar 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 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 150 to 2,000 employees as mid-market clients. These clients, which represented approximately 15%17% of our total client base as of December 31, 2011,2012, 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 20112012 revenue change compared to 20102011 and revenue distribution for the year ended December 31, 2011,2012, was as follows:
| Revenue Change | % of Total Revenues | |||||||
| Northeast | 24.5 | % | 26.3 | % | ||||
| Southeast | 4.3 | % | 9.9 | % | ||||
| Central | 12.2 | % | 14.5 | % | ||||
| Southwest | 7.5 | % | 28.9 | % | ||||
| West | 19.7 | % | 20.4 | % | ||||
- 9 -
| Revenue Change | % of Total Revenues | |||||||
| Northeast | 9.2 | % | 26.3 | % | ||||
| Southeast | 3.1 | % | 9.3 | % | ||||
| Central | 10.6 | % | 14.7 | % | ||||
| Southwest | 6.0 | % | 28.0 | % | ||||
| West | 16.1 | % | 21.7 | % | ||||
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 | ||||
| % | ||||
| Finance, insurance and real estate | 15 | % | ||
| % | ||||
| Wholesale trade | 8 | % | ||
| 7 | % | |||
| Medical services | % | |||
| Retail trade | 5 | % | ||
| Not-for-profit and similar organizations | 5 | % | ||
| Engineering, accounting and legal services | 4 | % | ||
| Construction | 4 | % | ||
| Other | % | |||
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 20112012 and 2010,2011, our retention rate was approximately 82%81% and 80%82%, respectively. Insperity’s client retention record over the last five years reflects that approximately 77%78% of our Workforce Optimization clients remain for more than one year. The average annual retention rate over the last five years was approximately 79%80%. Client attrition is attributable to a variety of factors, including: (i) client non-renewal due to price or service factors; (ii) client business 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, 2011,2012, we had 48 Workforce Optimization sales offices located in 24 markets. Our long-term goal is to operate 90 sales offices in 40 strategically selected25 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 | Initial | |||||||||
| Market | Sales Offices | Entry Date | Sales Offices | Entry Date | ||||||
| Houston | 5 | 1986 | 5 | 1986 | ||||||
| San Antonio | 1 | 1989 | 1 | 1989 | ||||||
| Austin | 1 | 1989 | 1 | 1989 | ||||||
| Orlando | 1 | 1989 | 1 | 1989 | ||||||
| Dallas/Fort Worth | 4 | 1993 | 4 | 1993 | ||||||
| Atlanta | 2 | 1994 | 2 | 1994 | ||||||
| Phoenix | 2 | 1995 | 1 | 1995 | ||||||
| Chicago | 2 | 1995 | 2 | 1995 | ||||||
| Washington D.C. | 3 | 1995 | 3 | 1995 | ||||||
| Denver | 2 | 1996 | 2 | 1996 | ||||||
| Los Angeles | 5 | 1997 | 5 | 1997 | ||||||
| Charlotte | 1 | 1997 | 1 | 1997 | ||||||
| St. Louis | 1 | 1998 | 1 | 1998 | ||||||
| San Francisco | 3 | 1998 | 3 | 1998 | ||||||
| New York | 3 | 1999 | 3 | 1999 | ||||||
| Baltimore | 1 | 2000 | 1 | 2000 | ||||||
| New Jersey | 2 | 2000 | 2 | 2000 | ||||||
| San Diego | 1 | 2001 | 1 | 2001 | ||||||
| Boston | 2 | 2001 | 2 | 2001 | ||||||
| Minneapolis | 2 | 2002 | 2 | 2002 | ||||||
| Raleigh | 1 | 2006 | 1 | 2006 | ||||||
| Kansas City | 1 | 2007 | 1 | 2007 | ||||||
| Columbus | 1 | 2010 | 1 | 2010 | ||||||
| Nashville | 1 | 2011 | 1 | 2011 | ||||||
| Philadelphia | 1 | 2012 | ||||||||
Our existing and futureprospective 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 |
| · | 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 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 ChampionshipTM 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 20082009 through 20102011 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 20082009 through 2010,2011, our staff support ratio averaged 51%56% 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 134%142% and 162%206%, 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 believe we compete favorably in these areas.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 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. In October 2012, we successfully negotiated an additional two-year extension of our health insurance contract with United. The health insurance contract with United provides approximately 90%89% of our health insurance coverage and expires on December 31, 2013,2015, 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 to Workforce Optimization clients and worksite employees and for its own administrative and management information requirements.
Insperity’s information management system is a proprietary Workforce Optimization information system that utilizes both purchased and internally developed 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 |
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 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 allthe 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.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 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, 3741 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 |
| · |
| · | a group health plan, which includes medical, dental, vision and prescription drug coverage, as well as a worklife 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 |
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 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 could continue 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 Patient Protection and Affordable Care Act (“PPACA”)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 2011, and we do not expect the Act to have a material adverse impact on our results of operations in 2012. 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 been issued, we are unable to determine the impact of the Act on our health insurance plan in future periods.
The number and complex nature of federal and state regulations facing employersrelating to employer-sponsored health plans has continued to increase over time, including the enactment of the Act.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 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, currentlygiven 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 are unable to determine whetherdo not believe that this issue will havehas had an adverse effect on our operations or our ability to attract and retain clients.
Beginning in 2011, the Act requiredimposed a number of new mandates foron 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. Insperity previously elected not to claim a grandfathered plan exemption for its group health plan. While we are unable to determine the impact of the required plan changes and grandfathered plan rules 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 provides 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 have 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 are anticipated to provide consumers with educational services and information on available options and offer a variety of health plans. Small business tax credits and subsidies will be 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.
Also in 2014, the Act implementsimposes “pay or play” penalties foron 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 affordabletax credit for such coverage. To qualify as minimum essential coverage, employer plans must satisfy affordability and minimum value tests or be subject to employees. 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.
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 policy holder, 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.
In 2018, the Act implements rules imposing excise taxes on employers who offer excessive health benefits under so-called “Cadillac plans.” We anticipate taking appropriate steps to avoid, to the extent necessary and possible, incurring any such excise taxes. At this time, we are unable to determine the effect the Exchanges, “pay or play” penalties, and excise taxes will have on our costs, our ability to match pricing with any increased costs, our results of operations or our ability to attract and retain clients.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:
| · | 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. Due to the adverse U.S. economic conditions during recent years and the associated reductions in employment levels, the state unemployment funds have experienced a significant increase in the number of unemployment claims. Accordingly, state unemployment tax rates increased substantially over the past few years, but we anticipate certain SUI rates may decline in 2010 and 2011 and further increases are expected in 2012.2013. 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, 3741 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 3741 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 2,1002,200 corporate employees as of December 31, 2011.2012. 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 efforts in 2011, we applied for registration of our new trademarks, several of which are currently pending. We believe that our trademarks as a whole are of considerable importance to our business.
Factors That May Affect Future Results and the Market Price of Common Stock
Continued Effects of the Economic Recession may Adversely Affect our Industry, Business and Results of Operations
Over the past several years, the United States economy has experienced negative economic conditions.conditions and a generally uncertain business environment. Although conditions have moderately improved over the last twothree years, the future economic environment may continue to be less favorable than in years past. In addition, disruptions in national and international credit markets have lead to a scarcity of credit, tighter lending standards and higher interest rates on business loans. The continued effects of the economic recession or a continuing scarcity of creditgenerally uncertain business environment could adversely affect the financial condition and levels of business activity of our clients. Recent economic conditions have had, and may continue to have, a corresponding negative impact on our operating results as some of our clients may suffer business failures, and others may react to worsening conditions by reducing their employee headcount, lowering their wage and bonus levels, lowering their spending on other human resources benefits and services or determining not to outsource those services to us. In addition, economic conditions may impair our ability to attract new clients. These circumstances significantly impacted our 2009 results, resulting in a 7% decline in the number of worksite employees paid per month that year as compared to 2008. Although worksite employee levels have more recently increased, the 116,839The average number of paid worksite employees per month increased 7.5% in 2011 is flat compared2012 to 2008 levels. In addition, we125,650 from 116,839 in 2011. We expect the average number of paid worksite employees per month to be in the range of 121,750123,250 to 122,250123,750 in the first quarter of 2012.2013. Negative economic conditions could continue to have a material adverse effect on our future financial results.
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 Premiums 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, 2013,2015, 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 premiums are in part determined by our claims experience and comprise a significant portion of our direct costs. We employ extensive risk management procedures in an attempt to control our claims incidence and structure our benefits contracts to provide as much cost stability as possible. However, if we experience a sudden and unexpected large increase in claim activity, 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. For example, during 2009 and 2010 we experienced higher claims associated with the American Recovery and Reinvestment Act of 2009 (“ARRA”). 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.
We are currently unable to determine allthe impact of the impactsAct on our benefit plans, business model and future results of the required plan changes and provisions resulting from the Act.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 a sudden and 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, 2012.2013. 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. Due to adverse economic conditions in recent years and the associated reductions in employment levels, the state unemployment funds have experienced a significant increase in the number of unemployment claims. Accordingly, state unemployment tax rates increased substantially in 2010 and 2011. In addition, someover the past few years. 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 1213 to the Consolidated Financial Statements, “Commitments and Contingencies.”
Our Contracts may be Cancelled 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 cancelled 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, 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 18%19% in 2011.2012. 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.
Established Competitors and New Market Entrants may have Greater Resources that Give Thema 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 and human resources consultants. Our competitors include the PEO divisions of large business services companies, such as Automatic Data Processing, Inc. and Paychex, Inc., and other PEOs such as TriNet. The PEO divisions of such large business services companies with substantially greater resources than InsperityOther PEOs may be able to provideoffer 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, 3741 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 Houston, California, and Texas (including Houston), and California markets accounted for approximately 13%, 27%18% and 17%26%, respectively, of our worksite employees for the year ended December 31, 2011.2012. 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 Texas and California.
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.
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
In conjunction with providing Workforce Optimization 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 worksite employees’ wages and associated payroll tax withholdings. 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 MunicipalLocal 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.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 statesfederal, state and municipalitieslocal 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. Insperity’sPlease read Note 13 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information regarding the tax assessment by the State of Massachusetts. Our ability to adjust itsour service fees and incorporate additional tax assessments into itsour 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.
Failure to Integrate or Realize the Expected Return on our new Adjacent Business Strategy, Including Acquisitions 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 a part of this strategy, periodically we make strategic long-term decisions to invest in and/or acquire new companies, business units or assets. New business strategies including the cross-selling of adjacent business offerings to Workforce Optimization clients and the acquisition or development of new businesses involve risk, including those associated with integrating the operations, technologies and personnel. Failure to effectively integrate newly acquired businesses could result in us not achieving anticipated revenues and cost savings. Acquiring new businesses and implementing new selling strategies could also result in the loss of prospective or existing customers, employees or the diversion of management’s attention from other business concerns.
During the fourth quarter of 2012, we recorded an impairment charge of $4.2 million in our Performance Management reporting unit in connection with our annual goodwill impairment assessment. In addition, based on market conditions or changes in operating plans, the fair value of our investmentsother acquired businesses could decline, requiring us to record anadditional impairment chargecharges for all or a portionportions of the investment.investments. The failure to effectively implement new selling strategies, the diversion of management’s attention from other business concerns, failure to integrate new acquisitions or the occurrence of an impairment, could have a material adverse effect on our financial condition or operating results. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information regarding the impairment charge.
None.
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 28-acre30-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%32% of our worksite employee base, is located in a 40,000 square foot facility under lease until 2014.
The Dallas service center, which currently services approximately 19% of our worksite employee base, is located in a 47,50048,600 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 23%24% of our worksite employee base, is located in a 60,600 square foot facility under lease until 2014. In addition to the service center operations, the facility also contains corporate support operations.
The Los Angeles service center, which currently services approximately 25% of our worksite employee base, is located in a 45,00038,000 square foot facility under lease until 2019.
Sales Offices
As of December 31, 2011,2012, we had Workforce Optimization sales and service personnel in 3833 facilities located in 2425 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, 2011,2012, we had 48 Workforce Optimization sales offices in these 2425 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.
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. Please readoperations, except as discussed in Note 1213 to the Consolidated Financial Statements, “Commitments and Contingencies,” which is incorporated herein by reference.
The following table sets forth the names, ages (as of February 7, 2012)4, 2013) and positions of Insperity’s executive officers:
| Name | Age | Position |
| Paul J. Sarvadi | Chairman of the Board and Chief Executive Officer | |
| Richard G. Rawson | President | |
| A. Steve Arizpe | Executive Vice President of Client Services and Chief Operating Officer | |
| Jay E. Mincks | Executive Vice President of Sales and Marketing | |
| Douglas S. Sharp | Senior Vice President of Finance, Chief Financial Officer and Treasurer | |
| Daniel D. Herink | 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 the CompanyInsperity and most of its subsidiaries, a Class III director, and has been a director of the CompanyInsperity 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 the CompanyInsperity since 1989. Prior to joining the CompanyInsperity 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.Houston and currently serves as Chairman of the Dean’s Advisory Board for 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 two large corporations.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.
Dan 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 further promotedelected to Vice President of Legal, General Counsel and Secretaryhis current position in May 2007. HeMr. 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.
PART II
Price Range of Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “NSP.” As of February 7, 2012,4, 2013, there were 365370 holders of record of theour 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.
2012 | High | Low | Dividends per Share | |||||||||||||||||||||
| 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) | ||||||||||||||||||||
2011 | High | Low | Dividends per Share | |||||||||||||||||||||
| First Quarter | $ | 30.42 | $ | 25.13 | $ | 0.15 | $ | 30.42 | $ | 25.13 | $ | 0.15 | ||||||||||||
| Second Quarter | 32.38 | 28.47 | 0.15 | 32.38 | 28.47 | 0.15 | ||||||||||||||||||
| Third Quarter | 32.26 | 19.88 | 0.15 | 32.26 | 19.88 | 0.15 | ||||||||||||||||||
| Fourth Quarter | 27.55 | 20.91 | 0.15 | 27.55 | 20.91 | 0.15 | ||||||||||||||||||
| 2010 | ||||||||||||||||||||||||
| First Quarter | $ | 25.16 | $ | 16.46 | $ | 0.13 | ||||||||||||||||||
| Second Quarter | 27.52 | 21.05 | 0.13 | |||||||||||||||||||||
| Third Quarter | 29.15 | 20.74 | 0.13 | |||||||||||||||||||||
| Fourth Quarter | 29.72 | 25.07 | 0.13 | |||||||||||||||||||||
| (1) | Includes a $1.00 per share special dividend. |
Dividend Policy
During 20112012 and 2010,2011, we paid dividends of $42.7 million and $15.7 million, and $13.5respectively, including a special cash dividend of $25.7 million respectively.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, 2011:2012:
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) | ||||||||||||
| 10/01/2011 – 10/31/2011 | — | $ | — | 13,147,911 | 1,352,089 | |||||||||||
| 11/01/2011 – 11/30/2011 | 115,217 | 22.74 | 13,263,128 | 1,236,872 | ||||||||||||
| 12/01/2011 – 12/31/2011 | — | — | 13,263,128 | 1,236,872 | ||||||||||||
| Total | 115,217 | $ | 22.74 | 13,263,128 | 1,236,872 | |||||||||||
Period | Total Number of Shares Purchased (1) (2) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs (1) (2) | Maximum Number of Shares that May Yet be Purchased Under the Program (1) | ||||||||||||
| 10/01/2012 –10/31/2012 | — | $ | — | — | 829,472 | |||||||||||
| 11/01/2012 –11/30/2012 | — | — | — | 829,472 | ||||||||||||
| 12/01/2012 –12/31/2012 | 81,048 | 31.00 | 80,983 | 829,472 | ||||||||||||
| Total | 81,048 | $ | 31.00 | 80,983 | 829,472 | |||||||||||
| (1) | Our Board of Directors has |
| (2) | On November 26, 2012, we commenced a tender 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 expired on December 21, 2012, resulting in the repurchase on December 28, 2012, of 80,983 shares at a price of $31.00 per share, excluding transaction costs. |
Performance Graph
The following graph compares our cumulative total stockholder return since December 31, 2006,2007, 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, 2006.2007.
| 12/07 | 12/08 | 12/09 | 12/10 | 12/11 | 12/12 | |||||||||||||||||||
| Insperity, Inc. | 100.00 | 78.32 | 87.23 | 110.88 | 98.16 | 133.47 | ||||||||||||||||||
| S&P Smallcap 600 | 100.00 | 68.93 | 86.55 | 109.32 | 110.43 | 128.46 | ||||||||||||||||||
| S&P 1500 Composite Human Resources and Employment Services | 100.00 | 73.03 | 96.49 | 114.35 | 95.09 | 106.80 |
| 12/06 | 12/07 | 12/08 | 12/09 | 12/10 | 12/11 | |
| Insperity, Inc. | 100.00 | 66.97 | 52.45 | 58.42 | 74.26 | 65.74 |
| S&P Smallcap 600 | 100.00 | 99.70 | 68.72 | 86.29 | 108.99 | 110.10 |
| S&P 1500 Composite Human Resources and Employment Services | 100.00 | 78.31 | 57.18 | 75.56 | 89.55 | 74.46 |
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.
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, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (in thousands, except per share and statistical data) | ||||||||||||||||||||
| Income Statement Data: | ||||||||||||||||||||
Revenues(1) | $ | 1,976,219 | $ | 1,719,752 | $ | 1,653,096 | $ | 1,724,434 | $ | 1,569,977 | ||||||||||
| Gross profit | 351,775 | 298,536 | 287,967 | 343,739 | 305,922 | |||||||||||||||
| Operating income | 57,314 | 37,060 | 27,033 | 64,982 | 62,214 | |||||||||||||||
| Net income | 30,470 | 22,440 | 16,574 | 45,780 | 47,492 | |||||||||||||||
| Diluted net income per share | $ | 1.16 | $ | 0.86 | $ | 0.65 | $ | 1.76 | $ | 1.72 | ||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Working capital | $ | 126,562 | $ | 144,479 | $ | 127,627 | $ | 98,414 | $ | 97,180 | ||||||||||
| Total assets | 712,259 | 659,845 | 576,470 | 616,840 | 560,651 | |||||||||||||||
| Total debt/capital lease obligations | — | — | — | 537 | 1,166 | |||||||||||||||
| Total stockholders’ equity | 245,207 | 240,395 | 223,160 | 208,479 | 198,675 | |||||||||||||||
| Cash dividends per share | $ | 0.60 | $ | 0.52 | $ | 0.52 | $ | 0.48 | $ | 0.44 | ||||||||||
| Statistical Data: | ||||||||||||||||||||
| Average number of worksite employees paid per month during period | 116,839 | 107,014 | 108,736 | 116,957 | 110,291 | |||||||||||||||
Revenues per worksite employee per month(2) | $ | 1,410 | $ | 1,339 | $ | 1,267 | $ | 1,229 | $ | 1,186 | ||||||||||
| Gross profit per worksite employee per month | $ | 251 | $ | 232 | $ | 221 | $ | 245 | $ | 231 | ||||||||||
| Operating income per worksite employee per month | $ | 41 | $ | 29 | $ | 21 | $ | 46 | $ | 47 | ||||||||||
| Year ended December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| (in thousands, except per share and statistical data) | ||||||||||||||||||||
| Income Statement Data: | ||||||||||||||||||||
Revenues(1) | $ | 2,158,824 | $ | 1,976,219 | $ | 1,719,752 | $ | 1,653,096 | $ | 1,724,434 | ||||||||||
| Gross profit | 382,221 | 351,775 | 298,536 | 287,967 | 343,739 | |||||||||||||||
| Operating income | 67,494 | (2) | 57,314 | 37,060 | 27,033 | 64,982 | ||||||||||||||
| Net income | 40,402 | 30,470 | (3) | 22,440 | 16,574 | 45,780 | ||||||||||||||
| Diluted net income per share | $ | 1.56 | $ | 1.16 | $ | 0.86 | $ | 0.65 | $ | 1.76 | ||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Working capital | $ | 115,706 | $ | 126,562 | $ | 144,479 | $ | 127,627 | $ | 98,414 | ||||||||||
| Total assets | 750,200 | 712,259 | 659,845 | 576,470 | 616,840 | |||||||||||||||
| Total debt/capital lease obligations | — | — | — | — | 537 | |||||||||||||||
| Total stockholders’ equity | 240,905 | 245,207 | 240,395 | 223,160 | 208,479 | |||||||||||||||
| Cash dividends per share | $ | 1.66 | (4) | $ | 0.60 | $ | 0.52 | $ | 0.52 | $ | 0.48 | |||||||||
| Statistical Data: | ||||||||||||||||||||
| Average number of worksite employees paid per month during period | 125,650 | 116,839 | 107,014 | 108,736 | 116,957 | |||||||||||||||
Revenues per worksite employee per month(5) | $ | 1,432 | $ | 1,410 | $ | 1,339 | $ | 1,267 | $ | 1,229 | ||||||||||
| Gross profit per worksite employee per month | $ | 253 | $ | 251 | $ | 232 | $ | 221 | $ | 245 | ||||||||||
| Operating income per worksite employee per month | $ | 45 | $ | 41 | $ | 29 | $ | 21 | $ | 46 | ||||||||||
| (1) | Gross billings of $12.992 billion, $11.700 billion, $10.169 billion, $9.856 billion |
| (2) | Includes an 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 $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 13 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the settlement with the State of California. |
| (4) | Includes a $1.00 per share special dividend paid in the fourth quarter of 2012. |
| (5) | Gross billings of $8,617, $8,345, $7,919, $7,553 |
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 continues to be providing the best small and medium-sized businesses in the United States with the opportunity to participate in our unique human resources service offering, thereby leveraging 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 OptimizationTM solution, provideswhich 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 long-term strategy continues to be aggregating the best small and medium-sized businesses in the United States on the common platform of our unique human resources service offering, thereby leveraging our buying power to provide additional valuable services to clients. 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 PerformanceHuman Capital Management, Expense Management,Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Business Insurance Services, (collectively “Adjacent Businesses”), many of which are offered via desktop applications and software as a service (“SaaS”)SaaS delivery models. These other products or services are offered separately, as a bundle, or along with Workforce Optimization (“Bundle Plus”).Optimization.
We ended 20112012 averaging 122,065129,345 paid worksite employees in the fourth quarter, which represents a 9.7%6.0% increase over the fourth quarter of 2010.2011. Approximately 15%17% of our paid worksite employees arewere in our mid-market sector for the year ended December 31, 2012, 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 121,750123,250 to 122,250123,750 in the first quarter of 2012.2013.
Our 20112012 average gross profit per worksite employee per month was $251,$253, a $19$2 increase over 2010.2011. Higher gross profit per worksite employee per month in 20112012 compared to 20102011 was primarily the result of a $13 higher contribution from our direct cost programs and a $6 higher contribution from our ABUs.programs.
Operating expenses increased 13%6.9% in 20112012 to $294.5 million; however, this amount includes approximately $11.8 million, or $8 per worksite employee per month, associated with our rebranding initiative in 2011.$314.7 million. On a per worksite employee per month basis, operating expenses increaseddecreased from $204 in 2010 to $210 in 2011.2011 to $208 in 2012. The 2012 operating expenses included a $4.2 million impairment charge related to our Performance Management reporting unit. Please read Note 5 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets,” for additional information.
Our net income in 20112012 was $30.5$40.4 million, an $8.0a $9.9 million increase compared to 2010. Our net income in 2011 was impacted by a $4.4 million loss related to the exchange of an aircraft and a $3.1 million loss related to a settlement with the Employment Development Department of the State of California (“EDD”) in the third quarter of 2011. Please read Note 12 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the EDD settlement. We ended 20112012 with working capital of $126.6$115.7 million. During 2011,2012, we paid $15.7$42.7 million in dividends and repurchased shares at a cost of $25.1$16.9 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.
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 worklife 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, |
| · | Stock-based compensation – Our stock-based compensation |
| · | 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 ChampionshipTM presented by UnitedHealthcare® sponsorship. In 2011, certain costs incurred as a result of our rebranding initiative 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 |
| · | 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 |
| · | 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
Critical Accounting Policies and 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, 2011,2012, Plan Costs were less than the premiums paid and owed to United by $24.0$18.5 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $15.0$9.5 million balance is included in prepaid insurance, a current asset, on our Consolidated Balance Sheets. The premiums owed to United at December 31, 2011,2012, were $6.1$10.5 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.
We believe the use of recent claims activity is representative of incurred and paid trends during the reporting period. The estimated completion rate used to compute incurred but not reported claims involves a significant level of judgment. Accordingly, an increase (or decrease) in the completion rates 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 rates on our estimate of total benefit costs of $862.1$939.5 million in 2011:2012:
Change in Completion Rate | Change in Benefits Costs (in thousands) | Change in Net Income (in thousands) | Change in Benefits Costs (in thousands) | Change in Net Income (in thousands) | |||||||||||||
| (2.5)% | $ | (14,094 | ) | $ | 8,456 | $ | (18,064 | ) | $ | 7,370 | |||||||
| (1.0)% | (5,637 | ) | 3,382 | (7,226 | ) | 2,948 | |||||||||||
| 1.0% | 5,637 | (3,382 | ) | 7,226 | (2,948 | ) | |||||||||||
| 2.5% | 14,094 | (8,456 | ) | 18,064 | (7,370 | ) | |||||||||||
| · | 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, 20112012 and 2010,2011, Insperity reduced accrued workers’ compensation costs by $11.4$13.1 million and $6.2$11.4 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 2012 and 2011 was 0.6% and 2010 was 1.1% and 1.4%, 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.
The following table illustrates the sensitivity of changes in the loss development rate on our estimate of workers’ compensation costs totaling $47.0$51.6 million in 2011:2012:
Change in Loss Development Rate | Change in Workers’ Compensation Costs (in thousands) | Change in Net Income (in thousands) | Change in Workers’ Compensation Costs (in thousands) | Change in Net Income (in thousands) | |||||||||||||
| (5.0)% | $ | (2,234 | ) | $ | 1,338 | $ | (2,491 | ) | $ | 1,470 | |||||||
| (2.5)% | (1,117 | ) | 669 | (1,246 | ) | 735 | |||||||||||
| 2.5% | 1,117 | (669 | ) | 1,246 | (735 | ) | |||||||||||
| 5.0% | 2,234 | (1,338 | ) | 2,491 | (1,470 | ) | |||||||||||
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 2011,2012, we received $10.0$2.5 million for the return of excess claim funds related to the ACE program, which reduced deposits. As of December 31, 2011,2012, we had restricted cash of $44.7$47.1 million and deposits of $52.3$64.2 million. We have estimated and accrued $104.8$111.7 million in incurred workers’ compensation claim costs as of December 31, 2011.2012. 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 OptimizationTM 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 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 – |
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.operations. In September 2011, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-08,
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Results of Operations
Year Ended December 31, 2012 Compared to determine whether or not it is necessaryYear Ended December 31, 2011.
The following table presents certain information related to apply the traditional two-step quantitative goodwill impairment test in ASC 350, Intangibles – Goodwill and Other. Under ASU 2011-08 companies are no longer required to calculate the fair valueour results of a reporting unit unless it determines, on the basis of qualitative information, that it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for periods ending after December 15, 2011; however, early adoption is permitted for periods ending after September 15, 2011. We adopted ASU 2011-08 in the fourth quarter of 2011. The adoption did not have an impact on our Consolidated Financial Statements.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 an 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 13 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. |
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 | 31,141 | 29,254 | 6.5 | % | ||||||||||||||||
| Total revenue | $ | 2,158,824 | $ | 1,976,219 | 9.2 | % | ||||||||||||||
Other revenue is comprised primarily of revenues generated by our ABUs.
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.
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. |
| · | 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 13 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the settlement with the State of California.
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.
Results of Operations
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010.
The following table presents certain information related to our results of operations:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | % Change | ||||||||||
| (in thousands, except per share and statistical data) | ||||||||||||
| Revenues (gross billings of $11.700 billion and $10.169 billion, less worksite employee payroll cost of $9.724 billion and $8.449 billion, respectively) | $ | 1,976,219 | $ | 1,719,752 | 14.9 | % | ||||||
| Gross profit | 351,775 | 298,536 | 17.8 | % | ||||||||
| Operating expenses | 294,461 | 261,476 | 12.6 | % | ||||||||
| Operating income | 57,314 | 37,060 | 54.7 | % | ||||||||
| Other income (expense) | (6,539 | ) | 961 | (780.4 | )% | |||||||
| Net income | 30,470 | 22,440 | 35.8 | % | ||||||||
| Diluted net income per share of common stock | 1.16 | 0.86 | 34.9 | % | ||||||||
| Statistical Data: | ||||||||||||
| Average number of worksite employees paid per month | 116,839 | 107,014 | 9.2 | % | ||||||||
Revenues per worksite employee per month(1) | $ | 1,410 | $ | 1,339 | 5.3 | % | ||||||
| Gross profit per worksite employee per month | 251 | 232 | 8.2 | % | ||||||||
| Operating expenses per worksite employee per month | 210 | 204 | 2.9 | % | ||||||||
| Operating income per worksite employee per month | 41 | 29 | 41.4 | % | ||||||||
| Net income per worksite employee per month | 22 | 17 | 29.4 | % | ||||||||
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | % Change | ||||||||||
| (in thousands, except per share and statistical data) | ||||||||||||
| Revenues (gross billings of $11.700 billion and $10.169 billion, less worksite employee payroll cost of $9.724 billion and $8.449 billion, respectively) | $ | 1,976,219 | $ | 1,719,752 | 14.9 | % | ||||||
| Gross profit | 351,775 | 298,536 | 17.8 | % | ||||||||
| Operating expenses | 294,461 | 261,476 | 12.6 | % | ||||||||
| Operating income | 57,314 | 37,060 | 54.7 | % | ||||||||
| Other income (expense) | (6,539 | )(1) | 961 | (780.4 | )% | |||||||
| Net income | 30,470 | 22,440 | 35.8 | % | ||||||||
| Diluted net income per share of common stock | 1.16 | 0.86 | 34.9 | % | ||||||||
| Statistical Data: | ||||||||||||
| Average number of worksite employees paid per month | 116,839 | 107,014 | 9.2 | % | ||||||||
Revenues per worksite employee per month(2) | $ | 1,410 | $ | 1,339 | 5.3 | % | ||||||
| Gross profit per worksite employee per month | 251 | 232 | 8.2 | % | ||||||||
| Operating expenses per worksite employee per month | 210 | 204 | 2.9 | % | ||||||||
| Operating income per worksite employee per month | 41 | 29 | 41.4 | % | ||||||||
| Net income per worksite employee per month | 22 | 17 | 29.4 | % | ||||||||
| (1) | 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 13 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the settlement with the State of California. |
| (2) | Gross billings of $8,345 and $7,919 per worksite employee per month, less payroll cost of $6,935 and $6,580 per worksite employee per month, respectively. |
Revenues
Our revenues in 2011, which represent gross billings net of worksite employee payroll cost, increased 14.9% compared to 2010, due to a 5.3%, or $71 increase in revenues per worksite employee per month and a 9.2% increase in the average number of worksite employees paid per month. The 5.3% 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 2010 and distribution for the years ended December 31, 2011 and 2010 were as follows:
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||
| 2011 | 2010 | % Change | 2011 | 2010 | ||||||||||||||||
(in thousands) | (% of total revenue) | |||||||||||||||||||
| Northeast | $ | 513,075 | $ | 412,233 | 24.5 | % | 26.3 | % | 24.2 | % | ||||||||||
| Southeast | 192,116 | 184,223 | 4.3 | % | 9.9 | % | 10.8 | % | ||||||||||||
| Central | 282,503 | 251,756 | 12.2 | % | 14.5 | % | 14.8 | % | ||||||||||||
| Southwest | 561,908 | 522,518 | 7.5 | % | 28.9 | % | 30.7 | % | ||||||||||||
| West | 397,363 | 331,916 | 19.7 | % | 20.4 | % | 19.5 | % | ||||||||||||
| 1,946,965 | 1,702,646 | 14.3 | % | 100.0 | % | 100.0 | % | |||||||||||||
| Other revenue | 29,254 | 17,106 | 71.0 | % | ||||||||||||||||
| Total revenue | $ | 1,976,219 | $ | 1,719,752 | 14.9 | % | ||||||||||||||
Other revenue is comprised primarily of revenues generated by our ABUs, including those generated by recent acquisitions.ABUs.
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 2011, new client sales, client retention and the net change in existing clients all improved as compared to 2010. As a result, our average number of paid worksite employees increased 9.2% in 2011 compared to 2010.
Gross Profit
Gross profit increased 17.8% to $351.8 million compared to 2010. The average gross profit per worksite employee increased 8.2% to $251 per month in 2011 versus $232 in 2010. 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.
While our revenues per worksite employee per month increased 5.3% to $1,410 in 2011 versus 2010, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 4.7% to $1,159 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 $23 per worksite employee per month, or 4.8%, on a per covered employee basis compared to 2010. These results were favorably impacted by a decrease in the number of COBRA participants. The number of participants electing COBRA coverage in the United plan declined from 5.5% in the fourth quarter of 2010 to 3.2% in the fourth quarter of 2011, due primarily to the August 2011 expiration of the 65% federal premium subsidy provided to COBRA eligible participants under the ARRA. Historically, the net costs of COBRA claims per enrollee are approximately double the cost of claims associated with active enrollees. The percentage of worksite employees covered under our health insurance plan was 73.7% in 2011 versus 74.3% in 2010. 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 3.0%, but decreased $2 per worksite employee per month compared to 2010. As a percentage of non-bonus payroll cost, workers’ compensation costs decreased to 0.54% in 2011 from 0.60% in 2010. During 2011, we recorded reductions in workers’ compensation costs of $11.4 million, or 0.13% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $6.2 million, or 0.08% of non-bonus payroll costs in 2010. The 2011 period costs include the impact of a 1.1% discount rate used to accrue workers’ compensation loss claims, compared to a 1.4% discount rate used in the 2010 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 15.7%, or $28 per worksite employee per month compared to 2010. Payroll taxes as a percentage of payroll cost increased from 7.11% in 2010 to 7.15% in 2011. The increase in payroll tax costs was due primarily to a 15.1% increase in total payroll cost in 2011 as compared to 2010. |
Operating Expenses
The following table presents certain information related to our operating expenses:
| Year ended December 31, | Year ended December 31, | ||||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||||
| (in thousands) | (per worksite employee per month) | ||||||||||||||||||||||||
| Salaries, wages and payroll taxes | $ | 155,233 | $ | 146,901 | 5.7 | % | $ | 111 | $ | 115 | (3.5 | )% | |||||||||||||
| Stock–based compensation | 8,601 | 8,126 | 5.8 | % | 6 | 6 | — | ||||||||||||||||||
| Commissions | 13,451 | 11,881 | 13.2 | % | 10 | 9 | 11.1 | % | |||||||||||||||||
| Advertising | 26,613 | 16,447 | 61.8 | % | 19 | 13 | 46.2 | % | |||||||||||||||||
| General and administrative expenses | 75,345 | 63,214 | 19.2 | % | 53 | 49 | 8.2 | % | |||||||||||||||||
| Depreciation and amortization | 15,218 | 14,907 | 2.1 | % | 11 | 12 | (8.3 | )% | |||||||||||||||||
| Total operating expenses | $ | 294,461 | $ | 261,476 | 12.6 | % | $ | 210 | $ | 204 | 2.9 | % | |||||||||||||
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
| (in thousands) | (per worksite employee per month) | |||||||||||||||||||||||
| Salaries, wages and payroll taxes | $ | 155,233 | $ | 146,901 | 5.7 | % | $ | 111 | $ | 115 | (3.5 | )% | ||||||||||||
| Stock–based compensation | 8,601 | 8,126 | �� | 5.8 | % | 6 | 6 | — | ||||||||||||||||
| Commissions | 13,451 | 11,881 | 13.2 | % | 10 | 9 | 11.1 | % | ||||||||||||||||
| Advertising | 26,613 | 16,447 | 61.8 | % | 19 | 13 | 46.2 | % | ||||||||||||||||
| General and administrative expenses | 75,345 | 63,214 | 19.2 | % | 53 | 49 | 8.2 | % | ||||||||||||||||
| Depreciation and amortization | 15,218 | 14,907 | 2.1 | % | 11 | 12 | (8.3 | )% | ||||||||||||||||
| Total operating expenses | $ | 294,461 | $ | 261,476 | 12.6 | % | $ | 210 | $ | 204 | 2.9 | % | ||||||||||||
Operating expenses increased 12.6% to $294.5 million compared to 2010. The 2011 operating expenses included $11.8 million related to our rebranding initiative and $9.2 million associated with acquisitions completed in late 2010 and early 2011. Operating expenses per worksite employee per month increased to $210 in 2011 versus $204 in 2010. The components of operating expenses changed as follows:
| · | Salaries, wages and payroll taxes of corporate and sales staff increased 5.7%, but decreased $4 per worksite employee per month compared to 2010. The overall increase was primarily due to a 7.4% rise in headcount related to our ABU strategy and associated acquisitions, offset by a decrease in incentive compensation. |
| · | Stock-based compensation increased 5.8%, but remained flat on a per worksite employee per month basis compared to 2010, due primarily to an increase in the weighted average market value on the date of grant associated with restricted 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 13.2%, or $1 per worksite employee per month compared to 2010, primarily due to a 9% increase in the average number of worksite employees paid per month and an $0.8 million increase in ABU commissions. |
| · | Advertising costs increased 61.8%, or $6 per worksite employee per month compared to 2010, primarily due to advertising and business promotions related to our rebranding initiative. |
| · | General and administrative expenses increased 19.2%, or $4 per worksite employee per month, primarily due to increased travel and training, costs associated with our rebranding initiative, increased consulting and costs associated with acquisitions made in late 2010 and early 2011. |
| · | Depreciation and amortization expense |
Other Income (Expense)
Other expense was $6.5 million in 2011 compared to other income of $961,000 in 2010, primarily due to a $4.4 million loss related to the exchange of an aircraft and a $3.1 million loss related to a settlement with the EDDState of California in the third quarter of 2011. Please read Note 1213 to the Consolidated Financial Statements, “Commitments and Contingencies,” for additional information on the EDD settlement.settlement with the State of California.
Income Tax Expense
During 2011 we incurred federal and state income tax expense of $20.3 million on pre-tax income of $50.8 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 40.0% in the 2011 period compared to 41.0% in the 2010 period.
Net Income
Net income for 2011 was $30.5 million, or $1.16 per diluted share, compared to $22.4 million, or $0.86 per diluted share in 2010. On a per worksite employee per month basis, net income was $22 in 2011 compared to $17 in 2010.
| Year ended December 31, | ||||||||||||
| 2010 | 2009 | % Change | ||||||||||
| (in thousands, except per share and statistical data) | ||||||||||||
| Revenues (gross billings of $10.169 billion and $9.856 billion, less worksite employee payroll cost of $8.449 billion and $8.203 billion, respectively) | $ | 1,719,752 | $ | 1,653,096 | 4.0 | % | ||||||
| Gross profit | 298,536 | 287,967 | 3.7 | % | ||||||||
| Operating expenses | 261,476 | 260,934 | 0.2 | % | ||||||||
| Operating income | 37,060 | 27,033 | 37.1 | % | ||||||||
| Other income | 961 | 1,616 | (40.5 | )% | ||||||||
| Net income | 22,440 | 16,574 | 35.4 | % | ||||||||
| Diluted net income per share of common stock | 0.86 | 0.65 | 32.3 | % | ||||||||
| Statistical Data: | ||||||||||||
| Average number of worksite employees paid per month | 107,014 | 108,736 | (1.6 | )% | ||||||||
Revenues per worksite employee per month(1) | $ | 1,339 | $ | 1,267 | 5.7 | % | ||||||
| Gross profit per worksite employee per month | 232 | 221 | 5.0 | % | ||||||||
| Operating expenses per worksite employee per month | 204 | 200 | 2.0 | % | ||||||||
| Operating income per worksite employee per month | 29 | 21 | 38.1 | % | ||||||||
| Net income per worksite employee per month | 17 | 13 | 30.8 | % | ||||||||
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||
| 2010 | 2009 | % Change | 2010 | 2009 | ||||||||||||||||
(in thousands) | (% of total revenue) | |||||||||||||||||||
| Northeast | $ | 412,233 | $ | 369,761 | 11.5 | % | 24.2 | % | 22.5 | % | ||||||||||
| Southeast | 184,223 | 182,888 | 0.7 | % | 10.8 | % | 11.1 | % | ||||||||||||
| Central | 251,756 | 248,544 | 1.3 | % | 14.8 | % | 15.2 | % | ||||||||||||
| Southwest | 522,518 | 518,828 | 0.7 | % | 30.7 | % | 31.6 | % | ||||||||||||
| West | 331,916 | 321,935 | 3.1 | % | 19.5 | % | 19.6 | % | ||||||||||||
| 1,702,646 | 1,641,956 | 3.7 | % | 100.0 | % | 100.0 | % | |||||||||||||
| Other revenue | 17,106 | 11,140 | 53.6 | % | ||||||||||||||||
| Total revenue | $ | 1,719,752 | $ | 1,653,096 | 4.0 | % | ||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
| (in thousands) | (per worksite employee per month) | |||||||||||||||||||||||
| Salaries, wages and payroll taxes | $ | 146,901 | $ | 144,086 | 2.0 | % | $ | 115 | $ | 110 | 4.5 | % | ||||||||||||
| Stock–based compensation | 8,126 | 10,064 | (19.3 | )% | 6 | 8 | (25.0 | )% | ||||||||||||||||
| Commissions | 11,881 | 11,800 | 0.7 | % | 9 | 9 | — | |||||||||||||||||
| Advertising | 16,447 | 16,011 | 2.7 | % | 13 | 12 | 8.3 | % | ||||||||||||||||
| General and administrative expenses | 63,214 | 62,381 | 1.3 | % | 49 | 48 | 2.1 | % | ||||||||||||||||
| Depreciation and amortization | 14,907 | 16,592 | (10.2 | )% | 12 | 13 | (7.7 | )% | ||||||||||||||||
| Total operating expenses | $ | 261,476 | $ | 260,934 | 0.2 | % | $ | 204 | $ | 200 | 2.0 | % | ||||||||||||
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, | Year ended December 31, | |||||||||||||||||||||||
2011 | 2010 | % Change | 2012 | 2011 | % Change | |||||||||||||||||||
| (in thousands, except per worksite employee) | (in thousands, except per worksite employee) | |||||||||||||||||||||||
| GAAP to non-GAAP reconciliation: | ||||||||||||||||||||||||
| Payroll cost (GAAP) | $ | 9,723,990 | $ | 8,449,484 | 15.1 | % | $ | 10,832,966 | $ | 9,723,990 | 11.4 | % | ||||||||||||
| Less: bonus payroll cost | 1,059,677 | 839,066 | 26.3 | % | 1,326,442 | 1,059,677 | 25.2 | % | ||||||||||||||||
| Non-bonus payroll cost | $ | 8,664,313 | $ | 7,610,418 | 13.8 | % | $ | 9,506,524 | $ | 8,664,313 | 9.7 | % | ||||||||||||
| Payroll cost per worksite employee (GAAP) | $ | 6,935 | $ | 6,580 | 5.4 | % | $ | 7,185 | $ | 6,935 | 3.6 | % | ||||||||||||
| Less: Bonus payroll cost per worksite employee | 755 | 654 | 15.6 | % | 880 | 755 | 16.6 | % | ||||||||||||||||
| Non-bonus payroll cost per worksite employee | $ | 6,180 | $ | 5,926 | 4.3 | % | $ | 6,305 | $ | 6,180 | 2.0 | % | ||||||||||||