UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)10-K
(Mark One)
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| ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| | For the fiscal year ended December 31, 2015. |
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| 2018 |
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| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| | For the transition period from _____________________to ____________________________________ to _______________ |
Commission File No. 1-13998
Insperity, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 76-0479645 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 19001 Crescent Springs Drive | | |
| Kingwood, Texas | | 77339 |
| (Address of principal executive offices) | | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code:Code): (281) 358-8986
Securities Registered Pursuant to Section 12(b) of the Act:
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Common Stock, parPar value $0.01 per share | | New York Stock Exchange |
Rights to Purchase Series A Junior Participating Preferred Stock | | New York Stock Exchange |
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| (Title of class) | | (Name of Exchange on Which Registered) |
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data Filefile required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Itemitem 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. ýo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer xý | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of April 15, 2016, 21,386,048February 4, 2019, 40,937,606 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, 20152018 closing price of the common stock as reported by the New York Stock Exchange) was approximately $966 million.$3.6 billion.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part III information is incorporated by reference from the proxy statement for the 2019 annual meeting of stockholders, which the registrant intends to file within 120 days of the end of the fiscal year.
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| Part I |
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| Item S-K 401(b). | | |
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PART IIIPart II |
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PARTPart IV |
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| | Item 16. | |
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EXPLANATORY NOTEPART I
Insperity, Inc. (together with its direct and indirect subsidiaries,Unless otherwise indicated, “Insperity,” “we,” “us,“our” and “us” are used in this annual report to refer to Insperity, Inc. and its consolidated subsidiaries. This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify such forward-looking statements by the words “expects,” “our”“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, from time to time, we may issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other operating results. We base the “Company”forward-looking statements on our current expectations, estimates and projections. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements in this annual report, or elsewhere, could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this annual report, including, without limitation, factors discussed in Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 1. Business.
General
We provide an array of human resources (“HR”) and business solutions designed to help improve business performance. Since our formation in 1986, we have evolved from being solely a professional employer organization (“PEO”), an industry we pioneered, to our current position as a comprehensive business performance solutions provider.
Our long-term strategy is filing this Amendment No. 1 (this “Amendment”to provide the best small and medium-sized businesses in the United States with our specialized human resources service offering and to leverage our buying power and expertise to provide additional valuable services to clients. Our most comprehensive HR services offerings are provided through our Workforce Optimization® and Workforce SynchronizationTM solutions (together, our “PEO HR Outsourcing solutions”), which encompass a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services, along with our cloud-based human capital management platform, our Insperity PremierTM solution. Our Workforce Optimization solution is our most comprehensive HR outsourcing solution and is our primary offering. Our Workforce Synchronization solution, which generally is offered only to our middle market client segment, is a lower cost offering with a typically longer commitment that includes the same compliance and administrative services as our Workforce Optimization solution and allows those clients to select, for an additional fee, from the strategic HR products and organizational development services that are included with our Workforce Optimization solution.
In addition to our PEO HR Outsourcing solutions, we offer Workforce Acceleration, a comprehensive human capital management and payroll service solution. We also offer a number of other business performance solutions, including Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management Services, Retirement Services and Insurance Services, many of which are offered as a cloud-based software solution. These other products and services are offered separately or along with our PEO HR Outsourcing solutions or our Workforce Acceleration solution.
Our PEO HR Outsourcing solutions are designed to improve the productivity and profitability of small and medium-sized businesses. These solutions relieve business owners and key executives of many employer-related administrative and regulatory burdens, which enable them to focus on the core competencies of their businesses. Our PEO HR Outsourcing solutions also promote employee performance through human resources management techniques designed to improve employee satisfaction. We enter into a Client Service Agreement (“CSA”) towith each of our PEO HR Outsourcing solutions clients under which we and our client act as co-employers of the employees who work at the client’s worksite (“WSEE”). Under the CSA, we assume responsibility for personnel administration and assist our clients in complying with employment-related governmental regulations, while the client retains the employees’ services in its Annual Report onbusiness 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 year ended WSEEs of the client. The comprehensive service fee consists of the payroll of our WSEEs plus an additional amount reflected as a percentage of the payroll cost of the WSEEs.
We accomplish the objectives of our PEO HR Outsourcing solutions through a “high-touch/high-tech” approach to service delivery. In advisory areas, such as recruiting, employee performance management and employee training, we employ a high-touch approach designed to ensure that our clients receive the personal attention and expertise needed to create a customized human resources solution. We utilize a variety of information technology capabilities to deliver our PEO HR Outsourcing solutions, including Insperity Premier, our cloud-based human capital management platform, which provides an online platform through which we, along with our clients and WSEEs, manage worksite employee information, payroll, benefits and retirement solutions, creating efficiencies for all parties.
As of December 31, 2015, originally filed2018, we had 73 offices, including 67 sales offices in 33 markets. In addition, we had four regional service centers along with human resources and client service personnel located in a majority of our 33 sales markets, which serviced an average of 221,809 WSEEs per month in the fourth quarter of 2018. Our service centers coordinate PEO HR Outsourcing solutions for clients on a regional basis and localized face-to-face human resources services.
We were organized as a corporation in 1986. 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 www.insperity.com. Our stock is traded on the New York Stock Exchange under the symbol “NSP.” We file or furnish periodic reports with the Securities and Exchange Commission (the “SEC”(“SEC”), including our annual reports on February 12, 2016 (the “Original Filing”).
This Amendment amends Part III of the Original Filing to include information previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced itemsquarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to be incorporated into the Form 10-K by reference from our definitive proxy statement if such statement isthose reports filed no later than 120 days after our fiscal year-end. We no longer intendor furnished pursuant to file our definitive proxy statement containing such information within 120 days after the endSection 13(a) or 15(d) of the fiscal year covered by the Original Filing. The reference on the cover of the Original Filing to the incorporation by reference of our definitive proxy statement into Part III of the Annual Report has been deleted.
As required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934,1934. Through the investor relations section of our website, we make available electronic copies of the documents that we file or furnish to the SEC, the charters of the standing committees of our Board of Directors and other documents related to our corporate governance, including our Code of Conduct. Access to these electronic filings is available free of charge as amended (the “Exchange Act”soon as reasonably practicable after filing or furnishing them to the SEC. Printed copies of our committee charters and other governance documents and filings can be requested by writing to our corporate secretary at the address above.
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
the significant costs, time and specialized knowledge required to purchase or develop the technology infrastructure to administer benefits, HR and payroll processing on an integrated basis
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”), new certificationshave worked with the relevant
governmental entities for the establishment of a regulatory framework that protects clients and employees, discourages unscrupulous and financially unsound PEOs, and promotes further development of the industry. Currently, 42 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 employer/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 of these states. The cost of compliance with these regulations is not material to our financial position or results of operations.
In 2014, the Small Business Efficiency Act (“SBEA”) was enacted. The SBEA created a federal regulatory framework for the payment of wages to WSEEs and the reporting and remittance of federal payroll taxes on those wages paid by PEOs certified under the statute (“CPEOs”). We actively supported the enactment of this law. The SBEA clarifies that a CPEO, rather than the client, is treated as the employer for purposes of reporting and remitting payroll taxes. It also clarifies that a CPEO is treated as a successor employer for purposes of the wage base of WSEEs on which federal payroll taxes are applied. In addition, the law clarifies that clients of a CPEO remain eligible for specified tax credits for which they would have been eligible absent the CPEO relationship. Following the establishment of the certification program by the Company’s principal executive officerInternal Revenue Service of the United States (“IRS”) and principal financial officerTreasury Department, our PEO subsidiary, Insperity PEO Services, L.P., received its designation as a CPEO from the IRS effective as of January 1, 2017.
Service Offerings
PEO HR Outsourcing Solutions
We serve small and medium-sized businesses by providing our PEO HR Outsourcing solutions, which encompass a broad range of services. Both of our PEO HR Outsourcing solutions offer the following:
benefits and payroll administration
health and workers’ compensation insurance programs
personnel records management
employer liability management
assistance with government compliance
general HR advice
access to Insperity Premier for employees, managers and client owners
401(k) retirement plan sponsored by us
Our Workforce Optimization solution also provides additional services that our Workforce Synchronization clients can purchase for an additional fee, including the following:
employee recruiting and support
employee performance management
training and development services
Our PEO HR Outsourcing solutions are fileddesigned 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:
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| • | Internal Revenue Code (the “Code”) | • | The Family and Medical Leave Act (FMLA) |
| • | Federal Income Contribution Act (FICA) | • | Genetic Information Nondiscrimination Act of 2008 |
| • | Federal Unemployment Tax Act (FUTA) | • | Drug-Free Workplace Act |
| • | Fair Labor Standards Act (FLSA) | • | Occupational Safety and Health Act (OSHA) |
| • | Employee Retirement Income Security Act, as amended (ERISA) | • | Worker Adjustment and Retraining Notification Act (WARN) |
| • | Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) | • | Uniformed Services Employment and Reemployment Rights Act (USERRA) |
| • | Immigration Reform and Control Act (IRCA) | • | State unemployment and employment security laws |
| • | Title VII (Civil Rights Act of 1964) | • | State workers’ compensation laws |
| • | Health Insurance Portability and Accountability Act (HIPAA) | • | Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”) |
| • | Age Discrimination in Employment Act (ADEA) | • | Patient Protection and Affordable Care Act (PPACA) |
| • | Americans with Disabilities Act (ADA) | • | State and local law equivalents of the foregoing |
These laws and regulations are complex, and in some instances overlapping. We assist our PEO HR Outsourcing solutions clients in complying with these laws and regulations by providing services in the categories set forth below:
Administrative Functions. Administrative functions encompass a wide variety of processing and recordkeeping tasks, mostly related to payroll administration and regulatory compliance. Specific examples include:
payroll processing
payroll tax deposits
quarterly payroll tax reporting
employee file maintenance
unemployment claims processing
workers’ compensation claims reporting and monitoring
Benefit Plans Administration. We maintain several benefit plans for eligible WSEEs including the following:
a group health plan
a health savings account program
a health care flexible spending account plan
an educational assistance program
an adoption assistance program
group term life insurance
group universal life insurance
accidental death and dismemberment insurance
short-term and long-term disability insurance
a 401(k) retirement plan
cafeteria plans for group health and health savings account contributions
The group health plan includes medical, dental, vision and prescription drug coverage, as exhibitswell as a work-life program. All benefit plans are provided to eligible employees based on the specific eligibility provisions of each plan. We are the policyholder responsible for the costs and premiums associated with any group insurance policies that provide benefits under these plans, and we act as plan sponsor and administrator of the plans. We negotiate the terms and costs of the plans, maintain the plans in accordance with applicable federal and state regulations and serve as liaison for the delivery of these benefits to WSEEs and corporate employees. COBRA coverage is extended to eligible terminated WSEEs and other eligible individuals in accordance with applicable law. We believe that the variety and comprehensive nature of our benefit plan offerings are generally not available to employees in our small and medium-sized business target market and are usually offered only by larger companies that can spread program costs over a much larger group of employees. As a result, we believe the availability of these benefit plans provides our clients with a competitive advantage that small and medium-sized businesses are typically unable to attain on their own.
Insperity Premier. Insperity Premier is our cloud-based human capital management platform for our PEO HR Outsourcing solutions and is available to our clients with almost no implementation effort or cost. It is designed to provide our service providers with insight into client and worksite employee HR information to better support their needs. Insperity Premier provides role-based access to a wide range of human capital management functions, along with personalized content to the managers, owners and WSEEs of our PEO HR Outsourcing solutions clients, including:
For managers and client owners:
WebPayroll for the submission, approval and reporting of payroll data
tools to manage the onboarding of new employees
employee administration functions such as viewing or changing information about employees
access to client-specific compliance-related information relevant to many HR areas, including the Affordable Care Act
a reporting and analytics tool to create, view, save and export reports and data about employees
ability to manage employee time and attendance information, absences and paid time off
access to talent management tools in the areas of recruiting, performance management and learning management
access to a library of online human resources forms
access to a wide range of best-practices human resources management content
mobile access to review and approve payroll transactions and employee time entry
For WSEEs:
access to view, edit and change a range of employee profile information
online check stubs, pay history reports and W-2s
employee-specific benefits content, including summary plan descriptions, enrollment status and tools to assist with benefits selection
access to 401(k) retirement plan information
e-Learning web-based training
links to benefits providers and other key vendors
performance management tools including self-reviews and review history
ability to submit time and attendance information, absences and paid time off requests
mobile access to view a wide range of employee-specific information such as pay stub, insurance coverage and ID card, 401(k) balances and other commonly accessed data
Personnel Management. In addition to the services that we deliver through Insperity Premier, we provide a wide variety of personnel management services that give our clients access to HR advisors and additional resources normally found only in the human resources departments of large companies. All PEO HR Outsourcing solutions clients have access to our advice concerning personnel policies and practices, including recruiting, discipline and termination procedures. Other personnel management services we provide include:
drafting and reviewing personnel policies and employee handbooks
designing job descriptions
performing prospective employee screening and background investigations
designing performance appraisal processes and forms
professional development and issues-oriented training
employee counseling
substance abuse awareness training
outplacement services
compensation guidance
Employer Liability Management. Under the CSA, we assume many of the employment-related responsibilities associated with the administrative functions, benefit plans administration and personnel management services we provide. For many of those employment-related responsibilities that are the responsibility of the client or of both the client and us, we may assist our clients in managing and limiting liability. This assistance may include safety-related risk management reviews as well as the implementation by our clients 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 we assist with termination decisions when consulted 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 who specialize in several areas of employment law, have broad experience in disputes concerning the employer/employee relationship and provide support to our internal human resources professionals. As part of our comprehensive service, we also maintain employment practice liability insurance coverage for ourselves and our clients, monitor developments in HR-related laws and regulations, and notify clients of the potential effect of such changes on employer liability.
MarketPlaceSMprovided by Insperity®. Through our many alliances with best-of-class providers, Insperity’s MarketPlace is an e-commerce portal that brings a wide range of products and services to our clients, WSEEs and their families. Through MarketPlace, which is provided through Insperity Premier, our clients also have the opportunity to offer their products and services to other clients and WSEEs.
Middle Market Solutions. We believe the middle market sector, which we generally define as those companies with employees ranging from approximately 150 to 5,000 WSEEs, has historically been under-served by the PEO industry. Currently, we have a dedicated sales management, service personnel and consulting staff who concentrate solely on the middle market sector. Our average number of WSEEs per month in our middle market sector increased 19.2% over 2017, representing approximately 24.6% of our total paid WSEEs during 2018.
Other Product and Services Offerings
We offer other product and services offerings on a stand-alone basis and to our PEO HR Outsourcing solutions clients. We also strive to leverage our relationships with our customers to enable cross-selling of our various products and services.
During 2018 and 2017, revenues from our other products and services offerings as a percentage of our total revenues were 1.1% and 1.3%, respectively.
Following are the key components of our other products and services, which are offered separately or as a bundle:
Traditional Payroll and Human Capital Management. Our Insperity Workforce Acceleration solution is a comprehensive human capital management and payroll services solution for clients that do not choose our PEO HR Outsourcing solutions. This solution combines a cloud-based human resources software suite that provides integrated payroll, HR administration and employee onboarding, benefits administration, performance management, and time and attendance functionality with HR guidance and tools, as well as reporting and analytics. In addition, through a strategic partner, Workforce Acceleration clients have access to a national, licensed insurance brokerage that specializes in the insurance needs of small businesses.
Time and Attendance. Our Time and Attendance products and services provide small to medium-sized businesses with software, hardware and services to track, allocate, and analyze employee resources and provide inputs into clients’ payroll processing and accounting systems. The service is primarily delivered as a cloud-based solution, including Insperity Premier for our PEO HR Outsourcing solutions clients.
Performance Management. Our Performance Management products and services provide human resources software offerings including Insperity® PerformSmart® a performance management cloud-based offering. Insperity PerformSmart is available to both our Workforce Optimization and Workforce Synchronization clients. For customers utilizing PerformSmart in conjunction with our PEO HR Outsourcing solutions, we provide access through Insperity Premier. Performance Management products are sold through online subscription arrangements and through various reseller arrangements.
Organizational Planning. Organizational Planning offers cloud-based software used by companies to facilitate the creation, management and communication of detailed organizational management charts. For customers utilizing OrgPlus RealTime in conjunction with our PEO HR Outsourcing solutions, we provide access through Insperity Premier.
Recruiting Services. Our Recruiting Services offer 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.
Employment Screening. Our Employment Screening services offer a customized approach to background-check reporting for companies. Services include criminal records checks; verification of employment history or education; driving record, civil record and credit history checks; and confirmation of extraordinary credentials.
Expense Management. Our Expense Management product 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 as a cloud-based solution.
Retirement Services. Our Retirement Services solutions deliver comprehensive 401(k) retirement plan recordkeeping and administrative services to small and medium-sized businesses, primarily in connection with a 401(k) retirement plan we sponsor for our PEO HR Outsourcing solutions clients. Services include employee education and enrollment, participant communications, elective deferral withholding and transmission, matching contribution calculation, loan and distribution processing, regulatory filing preparation and nondiscrimination testing.
Insurance Services. Our Insurance Services solutions offer assistance through our licensed insurance agency to small and medium-sized businesses throughout the United States to secure affordable, customizable business insurance packages and life, health and disability insurance policies. Insurance Services also assists individuals in obtaining insurance coverages.
Client Service Agreement
All PEO HR Outsourcing solutions clients execute a CSA with us. The CSA provides for an ongoing relationship between Insperity and the PEO HR Outsourcing solutions client. For most clients, the CSA generally is an annual contract subject to earlier termination by Insperity or the client upon 30 days’ written notice or upon shorter notice in the event of default. CSAs for our middle market clients are generally two-year contracts, subject to earlier termination by clients upon payment of a termination fee or otherwise by the parties upon an 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 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 us with our 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.
The CSA also establishes the division of responsibilities between us and the client as co-employers. Pursuant to the CSA, we are responsible for personnel administration and 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 WSEEs 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. Instead, as a result of our employment relationship with each of our WSEEs, we are liable for payment of salary and wages to the WSEEs 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 assumed by both Insperity and the client where such concurrent responsibility is appropriate. The specific division of applicable responsibilities under our CSAs generally is 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 by Insperity), as well as monitoring changes in other governmental laws and regulations governing the employer/employee relationship and updating the client when necessary
Offering benefits under Insperity-sponsored employee benefit plans that comply with PPACA requirements
Employee benefits administration of plans sponsored solely by Insperity
Client
Payment, through Insperity, of commissions, bonuses, vacations, paid time off, sick pay, paid leaves of absence, and severance payments
Payment and related tax reporting and remittance of non-qualified deferred compensation and equity-based compensation
Ownership and protection of all client intellectual property rights
Compliance with OSHA regulations, EPA regulations, FLSA, FMLA, WARN, USERRA, and state and local equivalents and compliance with government contracting provisions
Compliance with federal, state, and local pay or play health care mandates and all such other similar federal, state and local legislation
Compliance with the National Labor Relations Act (“NLRA”), including all organizing efforts and expenses related to a collective bargaining agreement and related benefits
Professional licensing requirements, fidelity bonding, and professional liability insurance
Products produced and/or services provided
COBRA, HIPAA, PPACA, the Code and ERISA compliance for client-sponsored benefit plans
Concurrent
Implementation of policies and practices relating to the employee/employer relationship
Compliance with all federal, state and local employment laws, including 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. Our incurred costs in excess of annual premiums with respect to this Amendment.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. Our CSA ordinarily 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 WSEEs 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.
PEO HR Outsourcing Solutions Clients
Insperity’s PEO HR Outsourcing solutions provide value-added, full-service human resources solutions we believe are most suitable to a specific segment of the small and medium-sized business community. We target successful businesses with approximately 10 to 5,000 employees that recognize the advantage in the strategic use of high-performance human resources practices. We have set a long-term goal to serve approximately 10% of the overall small and medium-sized business community in terms of WSEEs. We serve clients and WSEEs located throughout the United States.
By region, our revenue distribution for the year ended December 31, 2018, were as follows:
Please read Note 1 “Accounting Policies,” to the Consolidated Financial Statements for additional information related to the change in revenues by region.
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All prospective PEO HR Outsourcing solutions clients are evaluated on the basis of a comprehensive analysis of employer-related risks entailing many factors, including industry and operations, workplace safety and workers’ compensation, unemployment history, operating stability, group medical information, human resources practices and other employer risks. As part of our client selection strategy, we strive to minimize offering our PEO HR Outsourcing solutions to businesses falling within certain specified NAICS (North American Industry Classification System) codes for those industries that we believe present a higher employer risk such as set forth herein,employee injury, high turnover or litigation.
Our PEO HR Outsourcing solutions client base is broadly distributed throughout a wide variety of industries including:
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 2018 and 2017, our retention rate was approximately 86% and 85%, respectively. For all PEO HR Outsourcing solutions clients, the average annual retention rate over the last five years was approximately 84%. Client attrition is attributable to a variety of factors, including: (1) client non-renewal due to price or service factors; (2) client business failure, sale, merger, or disposition; (3) our termination of the CSA resulting from the client’s non-compliance or inability to make timely payments; and (4) competition from other PEOs or business services firms.
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| 2018 Form 10-K |
Marketing and Sales
As of December 31, 2018, we had 67 PEO HR Outsourcing solutions sales offices located in 33 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:
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| Market | Sales Offices | | Initial Entry Date |
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| Houston | 7 | | 1986 |
| San Antonio | 1 | | 1989 |
| Austin | 1 | | 1989 |
| Orlando | 1 | | 1989 |
| Dallas/Fort Worth | 5 | | 1993 |
| Atlanta | 3 | | 1994 |
| Phoenix | 1 | | 1995 |
| Chicago | 4 | | 1995 |
| Washington D.C. | 2 | | 1995 |
| Denver | 2 | | 1996 |
| Los Angeles | 6 | | 1997 |
| Charlotte | 1 | | 1997 |
| St. Louis | 1 | | 1998 |
| San Francisco | 3 | | 1998 |
| New York | 5 | | 1999 |
| Baltimore | 2 | | 2000 |
| Newark | 2 | | 2000 |
| San Diego | 1 | | 2001 |
| Boston | 3 | | 2001 |
| Minneapolis | 2 | | 2002 |
| Raleigh | 1 | | 2006 |
| Kansas City | 1 | | 2007 |
| Columbus | 1 | | 2010 |
| Nashville | 1 | | 2011 |
| Philadelphia | 2 | | 2012 |
| Seattle | 1 | | 2015 |
| Indianapolis | 1 | | 2016 |
| Fort Lauderdale | 1 | | 2017 |
| Milwaukee | 1 | | 2017 |
| Oklahoma City | 1 | | 2018 |
| Pittsburgh | 1 | | 2018 |
| San Jose | 1 | | 2018 |
| Stamford | 1 | | 2018 |
We identify markets 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 weighs various criteria that, based on our experience, we believe are reliable predictors of successful penetration. Among the factors we consider are:
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| 2018 Form 10-K |
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
We develop a mix of national and local advertising media and a placement strategy tailored to each individual market. After selecting a market and developing our marketing mix, but prior to entering the market, we engage in an organized media and public relations campaign to prepare the market for our entry and to begin the process of generating sales leads. We market our services through various business promotions and a broad range of media outlets, including the Internet, television, radio, newspapers, periodicals and direct mail. We employ public relations firms for most of our markets as well as advertising consultants to coordinate and implement our marketing campaigns. We have developed an inventory of television, radio and newsprint advertisements, which are utilized in this Amendmenteffort.
We routinely seek to develop new marketing approaches and campaigns to capitalize on changes in the competitive landscape for our human resources services and to more successfully reach our target market. We have an agreement with the Professional Golf Association Champions Tour to be the title sponsor of the annual Insperity Invitational™ presented by UnitedHealthcare® professional golf tournament held annually in The Woodlands, Texas (a suburb of Houston). In addition, we have an arrangement with Jim Nantz, a sports commentator, to serve as our national spokesperson. Our marketing campaigns use this event and the relationship with 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, third-party channel programs, referrals, marketing alliances, and the Internet. These leads result in initial presentations to prospective PEO HR Outsourcing solutions clients, and ultimately, prospective PEO HR Outsourcing solutions client business profiles. A prospective PEO HR Outsourcing solutions client’s business profile reflects information gathered by the BPA about the prospect’s employees, including base compensation, level of benefits coverage options, job classification, state of employment and workers’ compensation classification. This information is used to generate a bid from our customized bid system, which applies Insperity’s proprietary pricing model to the census data. Concurrent with this process, we evaluate prospective clients through the previously described comprehensive employer risk analysis. Upon completion of a favorable employer risk evaluation, the BPA presents the bid and attempts to complete the sale and enroll the prospect. Our selling process typically takes approximately 90 days for clients with less than 150 employees, and 180 days or longer for middle market clients. The process can be extended during economic downturns.
We have implemented cross-selling channels between our PEO HR Outsourcing solutions business and our other products and services. This cross-selling strategy focuses on using our PEO HR Outsourcing solutions to increase market penetration in each of our other products and services and using our other product and service offerings as a source of leads for our PEO HR Outsourcing solutions. The cross-selling channels attempt to reduce barriers to selling our products and services and allow us to tailor service packages to better meet the specific needs of the business.
Competition
We provide a value-added, full-service human resources solution through our PEO HR Outsourcing solutions, 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 WSEEs (the “staff support ratio”) that is higher than average for the PEO industry.
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Based on an analysis of the 2015 through 2017 annual NAPEO surveys of the PEO industry, we have successfully leveraged our full-service approach into significantly higher returns for Insperity on a per WSEE per month basis. During the three-year period from 2015 through 2017, our staff support ratio averaged 53% higher than the PEO industry average. During the same three-year period, our gross profit per WSEE and operating income per WSEE exceeded industry averages by 140% and 183%, 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; however, other PEOs may offer their PEO services at lower prices than we 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 for our PEO HR Outsourcing solutions 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 the PEO divisions of large business services companies such as Automatic Data Processing, Inc. and Paychex, Inc., and other national PEOs, such as TriNet Group, Inc. In addition, we also face competition from: (1) fee-for-service providers such as payroll processors and human resources consultants; (2) human resources technology solution companies; and (3) large regional PEOs in certain areas of the country. As Insperity and other large PEOs expand nationally, we expect that competition may intensify.
Vendor Relationships
Insperity provides benefits to its WSEEs under arrangements with a variety of vendors. We consider our contracts with UnitedHealthcare (“United”) and the Chubb Group of Insurance Companies (“Chubb”) to be the most significant elements of our employee benefits package, as they would be the most difficult to replace.
We provide group health insurance coverage to our WSEEs through a national network of carriers including United, UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii and Tufts, all of which provide fully insured policies or service contracts. The health insurance contract with United provides approximately 86% of our health insurance coverage and expires on December 31, 2022, 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 “Chubb Program”) has been provided through an arrangement with Chubb (formerly ACE American Insurance Company) since 2007. The Chubb Program is a fully insured program whereby Chubb has the responsibility to pay all claims incurred under the policies regardless of whether we satisfy our responsibilities. For additional discussion of the Chubb 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 PEO HR Outsourcing solutions and business performance improvement services to its clients and WSEEs and for its own administrative and management information requirements.
Insperity’s PEO HR Outsourcing solutions information systems, which include Insperity Premier, are a proprietary mix of applications that includes both internally developed and licensed software applications. These systems manage a wide range of transactions and information specific to our PEO HR Outsourcing solutions, to Insperity and to our clients and WSEEs, including:
WSEE enrollment
human resources management and employee administration
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benefits and defined contribution plan administration
time and attendance collection and administration
payroll processing
client invoicing and collection
management information and reporting
sales bid calculations
Central to these systems are transaction processing capabilities that allow us to process a high volume of employee enrollment, employee administration, 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 PEO HR Outsourcing solutions clients and WSEEs through Insperity Premier. We utilize commercially available software for other business functions such as finance and accounting, sales force activity management and customer relationship management.
Our products and services utilize a variety of owned and licensed software applications to deliver business performance improvement services to our clients, including to some of our PEO HR Outsourcing solutions clients.
Insperity has hosting facilities located at two separate leased facilities, located in Bryan, Texas and The Woodlands, Texas. These facilities host the majority of our business applications, telecommunications equipment, information security infrastructure and network equipment. Each hosting facility houses a mix of primary production applications, disaster recovery, replication and back-up applications, and pre-production environments, with the Bryan facility acting as our primary data center for all mission-critical applications. Both hosting facilities have the capacity 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. We have an active Business Continuity Plan, which includes information technology capabilities and we utilize a variety of measures to ensure our Business Continuity Plan remains effective and available.
Our network infrastructure is designed to ensure appropriate connectivity exists among all of our facilities and employees and provides appropriate Internet connectivity to conduct business with our clients and WSEEs. 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 our data centers and network environment; best practice security policies and procedures; and a variety of measures designed to control access to sensitive and private information.
Industry Regulations
The operations for our PEO HR Outsourcing solutions are affected by numerous federal and state laws relating to tax, insurance and employment matters. By entering into a co-employer relationship with our WSEEs, 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, 42 states have passed laws that recognize PEOs or require licensing, registration or certification requirements for PEOs, and several others are considering such regulation. The SBEA, which was enacted in 2014, established a certification program and created a federal regulatory framework for the payment of wages to WSEEs and for the reporting and remittance of federal payroll taxes on those wages paid by CPEOs. In 2016, our PEO subsidiary, Insperity PEO Services, L.P., received its designation as a CPEO from the IRS effective as of January 1, 2017. Please read Item 1. “Business – PEO Industry” for further information.
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| 2018 Form 10-K |
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 WSEEs. These plans include:
a group health plan, which includes medical, dental, vision and prescription drug coverage, as well as a work-life program
a 401(k) retirement plan
cafeteria plans under Code Section 125
a health savings account program
a welfare benefits plan, which includes life, disability, and accidental death and dismemberment coverage
a health care flexible spending account plan
an educational assistance program
an adoption assistance program
a commuter benefits program
Generally, employee benefit plans are subject to provisions of the Code, ERISA, and COBRA. The number and complex nature of federal and state regulations relating to employer-sponsored health plans has continued to increase over time. 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 in their efforts to comply with governmental regulations due to limited resources and a lack of expertise. As a co-employer in the PEO relationship, we assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental laws and regulations. Historically, we believe that 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.
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
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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 WSEEs 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 WSEEs, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulations as well as to claims based upon state common laws. Even if such a finding were made, we believe we would not be materially adversely affected because we would endeavor to make available similar benefits at comparable costs.
In addition to ERISA and the Code, issues related to the relationship between Insperity and its WSEEs may also arise under other federal laws, including other federal income tax laws.
Patient Protection and Affordable Care Act. The PPACA was signed into law on March 23, 2010. The PPACA was subsequently amended on March 30, 2010, by the Reconciliation Act. The PPACA and the Reconciliation Act (collectively the “Act”) entail sweeping health care reforms with original staggered effective dates from 2010 through 2018, some of which were subsequently extended until as late as 2020. While the Act did not have a material adverse impact on our results of operations in 2018, the future impact of the following provisions or changes to the provisions, including any changes or a repeal that may be proposed by this Congressional session, is unknown at this time.
Beginning in 2014, the Act provided for the establishment of state insurance exchanges (“Exchanges”) to make health insurance available to individuals and small employers (initially defined as 100 employees or less). States had the option of building a state-based exchange, entering into a state-federal partnership exchange or accepting the federally-facilitated exchange. States that accept the federally-facilitated exchange can transition to a state-based exchange at a later date. The Exchanges provide consumers with educational services and information on available options and offer a variety of health plans. Small business tax credits and subsidies are available to qualifying businesses and individuals who purchase health insurance through the Exchanges. As part of the Tax Cuts and Jobs Act enacted in December 2017, the requirements that individuals maintain health insurance coverage or pay a penalty, which was known as the individual mandate, was effectively eliminated beginning in 2019. At this time, the Exchanges, tax credits, and subsidies have not had a material impact on our operations, but the impact of future changes to these provisions is unknown.
Additionally in 2014, the Act ushered in a number of insurance market reforms for the small group and individual markets. The reforms required guaranteed issue and renewability of coverage, eliminated certain underwriting practices by issuers, consolidated the number of risk pools in each state and restricted the permissible factors and variable ranges of those factors that can be considered in determining health insurance premiums. Transition relief permitted states to delay the effective date of some of these reforms. At this time, we are unable to determine whether the insurance market reforms 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.
The health insurance industry became subject to additional excise taxes in 2014, and reinsurance taxes were imposed on insurers and third-party administrators for the purpose of helping to offset the cost for insurance covering high-risk individuals. As the policyholder, all or a portion of these increased costs were passed on to us by our carriers. At this time, these taxes have not had a material impact on our operations, but the impact of future changes to these provisions is unknown.
Effective January 1, 2015, “pay or play” requirements applied to large employers with at least 50 full-time and full-time equivalent employees in the prior calendar year (“Applicable Large Employers” or “ALEs”). ALEs who fail to offer “minimum essential coverage” satisfying minimum value and affordability requirements may be subject to a penalty if a full-time employee obtains coverage from an Exchange and receives a subsidy or tax credit for such coverage. While clients are responsible for employer pay or play health care mandates under the CSA, the Insperity Group Health Plan qualifies as minimum essential coverage and is designed to satisfy the minimum value and affordability requirements. Clients are not required to use the affordability safe harbor utilized by us.
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 if pay or play penalties may be assessed against a PEO for coverage provided to WSEEs under a PEO sponsored plan.
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The effective date of the rules imposing excise taxes on employers and insurers who offer excessive health benefits under so-called “Cadillac plans” has been delayed until 2022. We anticipate taking appropriate steps to avoid, to the extent necessary and possible, benefits under our group health plan from triggering such excise taxes, which our carrier may pass on to us in the form of increased premiums. At this time, we are unable to determine the effect that the excise taxes will have on our ability to match pricing with any increased costs.
401(k) Retirement Plans. Our 401(k) Retirement Plan for WSEEs 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 WSEEs. This guidance provides qualification standards for PEO plans that, 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 WSEEs. There are essentially three types of federal employment tax obligations included in Subtitle C - Employment Taxes of the Code:
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.
The SBEA provides that a CPEO shall be treated as the employer under Subtitle C – Employment Taxes of the Code, and shall be responsible for reporting federal employment taxes rather than the CPEO clients. Insperity PEO Services, L.P. received its designation as a CPEO from the IRS effective as of January 1, 2017.
For any client CSA that is not a CPEO contract, 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. Code Section 3401(d)(1) states that if the person for whom services are rendered does not amend or otherwise update any other informationhave 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 Code 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 several courts have examined Code Section 3401(d)(1), 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 WSEEs, in the Original Filingevent 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. 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.
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State Regulation
While some states do not explicitly regulate PEOs, 42 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. We believe that we are in compliance with the material requirements in all 42 states that have such laws. 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 3,200 corporate employees as of December 31, 2018. We believe our relations with our corporate employees are good. None of our corporate employees are covered by a collective bargaining agreement.
Intellectual Property
Insperity currently has registered trademarks, copyrights and other intellectual property. We believe that our trademarks as a whole are of considerable importance to our business.
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| 2018 Form 10-K |
Item 1A. Risk Factors.
The statements in this section describe the known material risks to our business and should be considered carefully.
Adverse economic conditions could negatively affect our industry, business, and results of operations.
The small and medium-sized business market is sensitive to changes in economic activity levels as well as the credit markets. As a result, the demand for the outsourced HR services we provide clients could be adversely impacted by weak economic conditions or difficulty obtaining credit. Current and prospective clients may respond to such conditions by reducing employment levels, compensation levels, employee benefit levels and outsourced HR services. In addition, during periods of weak economic conditions, current clients may have difficulty meeting their financial obligations to us and may select alternative HR services at more competitive rates than we offer. Such developments could adversely impact our financial condition, results of operations and future growth rates.
We assume liability for WSEE 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 WSEEs and assume the obligations to pay the salaries, wages and related benefits costs and payroll taxes of such WSEEs. 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 WSEEs, 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 WSEEs even if our costs to provide such benefits exceed the fees the client pays us
If a client does not reflect events occurring afterpay us, or if the filingcosts of benefits we provide to WSEEs exceed the fees a client pays us, our ultimate liability for WSEE payroll and benefits costs could have a material adverse effect on our financial condition or results of operations.
Increases in health insurance costs or inability to secure replacement contracts on competitive terms could have a material adverse effect on our financial condition or results of operations.
Maintaining health insurance plans that cover WSEEs is a significant part of our business. Our primary health insurance contract expires on December 31, 2022, subject to cancellation by either party upon 180 days’ notice. In the event we are unable to secure replacement contracts on competitive terms, significant disruption to our business could occur.
Health insurance costs are in part determined by our claims experience and comprise a significant portion of our direct costs. If we experience an increase in the number or severity of claims, our health insurance costs could increase. Claim activity levels and costs are impacted by a number of factors, including, but not limited to, macro-economic changes, proposed and enacted regulatory changes and medical outbreaks. Contractual arrangements with our clients limit or delay our ability to incorporate increases in costs into our 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 Act entails sweeping health care reforms with original staggered effective dates from 2010 through 2018, some of which were subsequently extended out as far as 2022. Some provisions in the Act still require the issuance of additional guidance from the U.S. Department of Health and Human Services (“HHS”) and the states.
Beginning in 2014, a number of key provisions of the Original Filing.Act took effect, including the Exchanges, insurance market reforms and the imposition of excise taxes on the health insurance industry and reinsurance taxes on insurers and third-party administrators. Additionally, the pay or play penalties on Applicable Large Employers were fully phased-in by 2016. As part
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| 2018 Form 10-K |
ITEM 10. DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE.Generalof the Tax Cuts and Jobs Act enacted in December 2017, the requirements that individuals maintain health insurance coverage or pay a penalty, which was known as the individual mandate, was effectively eliminated beginning in 2019. In January 2018, the excise tax for offering “Cadillac Plans” was further delayed until 2022. In addition, supporters in various states are advocating for adoption of healthcare-related reforms at the state level. Collectively, these items have the potential to significantly change the insurance marketplace for small and medium sized businesses and how employers provide insurance to employees. In addition, as a co-employer in the PEO relationship, we assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental regulations. Generally, the Act and subsequently issued guidance by the IRS and HHS have not addressed or in some instances are unclear as to their application in the PEO relationship or whether such provisions should be applied at the PEO or client level.
Although we do not believe that the Act has had a material adverse effect on our benefit plans, business model, or operations to date, the elimination of the penalty associated with the individual mandate and subsequent changes resulting from action that may be taken at the federal or state level, including repeal or repeal and replacement of the Act as has been advocated by Congressional leaders and the administration of President Trump, may impact our benefit plans, business model and future results of operations. In future periods, 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 the Act, please read Item 1. “Business - Industry Regulations - Patient Protection and Affordable Care Act.” We are currently unable to determine whether potential future changes to the Act or other regulatory action, including at the state level, may adversely affect our business or market conditions.
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 Chubb (formerly ACE American Insurance Company) since 2007. Under our current arrangement with Chubb, we have a financial responsibility to Chubb for the first $1 million layer of claims per occurrence and for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed the first $1 million. Chubb bears the financial responsibility for all claims in excess of these levels. The Chubb Program is a fully insured program whereby Chubb has the responsibility to pay all claims incurred under the policies regardless of whether we satisfy our responsibilities. For additional discussion of our policy with Chubb, please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Workers’ Compensation Costs.”
Workers’ compensation costs are a significant portion of our direct costs. If we were to experience an unexpected large increase in the number or severity of claims, our workers’ compensation costs could increase, which could have a material adverse effect on our results of operations or financial condition.
The Company’s Certificatecurrent workers’ compensation coverage with Chubb expires on September 30, 2019. 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. SUI tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of Incorporationfinal tax rate notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received for purposes of pricing. In a period of adverse economic conditions state unemployment funds may experience a significant increase in the number of unemployment claims. Accordingly, SUI tax rates would likely increase substantially. Some states have the ability under law to increase SUI tax rates retroactively to cover deficiencies in the unemployment fund. In addition, FUTA 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 statutory tax 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 Bylaws providecollect such increases over the remaining term of the clients’ 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.
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Many of our contracts for our PEO HR Outsourcing solutions may be canceled on short notice. Our inability to renew client contracts or attract new clients could materially and adversely affect our financial conditions or results of operations.
Our standard CSA can generally be canceled by us or the client with 30 days’ notice. Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by existing PEO HR Outsourcing Solution clients, which could materially and adversely affect our financial condition or results of operations. In addition, in the event we have a high proportion of terminating clients from our middle market client base (which are generally subject to CSAs with two-year terms), the financial impact of such an event could be significant due to the number of WSEEs involved and the longer time it takes to replace middle market clients. Also, 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 14% in 2018. There can be no assurance that the number of directorscontract cancellations will continue at these levels and such cancellations may increase in the future due to various factors, including economic conditions in the markets we operate. Clients electing to purchase our services or electing an alternative solution often do so at the beginning of the calendar year. As a result, we typically experience our largest concentration of new client additions and attrition in the first quarter of each year.
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 WSEEs, including questions concerning the ultimate liability for violations of employment, payroll, discrimination, and workplace safety 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, payroll, discrimination, and workplace safety laws despite these contractual provisions, even if we do not participate in such violations. Although the CSA generally requires the client to indemnify us for certain liabilities 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, WSEEs may be deemed to be our agents, which may subject us to liability for the actions of such WSEEs.
Competition and other developments in the HR services industry may impact our growth and/or profitability.
The human resources services industry, including the PEO industry, is highly fragmented. Many PEOs have limited operations and fewer than 1,000 WSEEs, but there are several industry participants that are comparable to our size or larger. We also encounter competition from “fee for service” companies such as payroll processing firms, insurance companies, human resources consultants and human resources technology solutions as well as cloud-based self-service bundled human resources offerings. Our competitors include the PEO divisions of large business services companies, such as Automatic Data Processing, Inc. and Paychex, Inc., and other national PEOs such as TriNet Group, Inc. In many cases, these competitors offer a reduced service PEO offering at a lower price than our PEO HR Outsourcing solutions. 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. In addition, competitors may be able to offer or develop new technology-based lower service models that may require us to make substantial investments in order to effectively compete.
We offer a lower priced reduced service level PEO offering referred to as Workforce Synchronization in response to certain middle market client needs and the evolving PEO marketplace. As of December 2018, approximately 14% of our WSEEs were co-employed by Workforce Synchronization clients. In the event we were to experience a significant increase in the number of clients using the Workforce Synchronization offering or increased pricing pressures in the PEO marketplace without corresponding reductions in operating costs, our operating margins may decline, which could have a material adverse impact on our financial condition or results of operations.
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| 2018 Form 10-K |
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 current 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 despite the SBEA having provided clarification under federal employment tax laws for CPEOs. 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 or PEO health insurance plans. Any adverse application of, or adverse legislative/regulatory response to, new or existing federal or state laws to the PEO relationship with our WSEEs and client companies could have a material adverse effect on our results of operations or financial condition.
While some states do not explicitly regulate PEOs, 42 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. In addition, the SBEA provides certain benefits for companies that qualify as a CPEO. 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 or that we will be able to maintain our CPEO designation.
Geographic market concentration makes our results of operations vulnerable to regional economic factors.
Our New York, California and Texas markets accounted for approximately 10%, 16% and 22% (including 10% in Houston), respectively, of our WSEEs for the year ended December 31, 2018. 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, statutory, and regulatory factors specific to New York, California and Texas.
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 WSEEs. 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. The SBEA clarifies that a CPEO is treated as the employer for purposes of federal payroll taxes on wages it pays to WSEEs. Most states impose similar employment tax obligations on the Boardemployer. While the CSA provides that we have sole legal responsibility for making these tax contributions, the 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 Directors (the “Board”) shall be fixedthis issue may discourage clients from time to time byenrolling in the Board but shall not be less than three nor more than 15 persons. The numberfuture.
Failure of members constituting the Board is currently fixed at nine.our information technology systems, including from cyber attacks and data breaches, could damage our reputation, materially disrupt our business operations, and increase our costs and cause losses.
In accordance with the Certificate of IncorporationMany of the Company, the membersHR services offerings we provide to clients are conducted through a technology infrastructure using both internally developed and purchased commercial software, a wide variety of the Board are divided into three classes.hardware infrastructure technologies, and a multi-carrier wide area network. The Certificateprocessing of Incorporation also provides that such classes shall be as nearly equal in number as possible. The terms of office of the Class I, Class IIpayroll, benefits and Class III directors expire at the Annual Meeting of Stockholders in 2017, 2018 and 2016, respectively.other transactions is dependent upon this complex
On March 21, 2015, the Company entered into an Agreement (the “Agreement”) with Starboard Value LP and certain of its affiliates named therein (collectively, “Starboard”). The following is a summary of the material terms of the Agreement. The summary does not purport to be complete and is qualified in its entirety by reference to the Agreement, a copy |
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infrastructure, some of which is attached as Exhibit 10.1provided by third-party vendors. Hardware or applications we develop or procure from third-party vendors may contain defects in design or other problems that could unexpectedly compromise the confidentiality, integrity or availability of data or our systems. Any delays or failures caused by network outages, software or hardware failures, or other data processing disruptions, could result in our inability to timely process transactions. If such failures cause us to not meet client service expectations, we may lose existing clients and may have difficulty attracting new clients.
In connection with our HR services offerings, we collect, use, transmit and store large amounts of personal and business information about our WSEEs and clients, including payroll information, personal and business financial data, social security numbers, bank account numbers, tax information and other sensitive personal and business information. Attacks on information technology systems continue to grow in frequency and sophistication, and we and our third-party vendors are targeted by unauthorized parties using malicious tactics, code and viruses. Because the techniques used to obtain unauthorized access and disable or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party vendors may be unable to anticipate these techniques or implement adequate preventive measures. As these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. While our technology infrastructure is designed to safeguard and protect personal and business information, we do not have the ability to monitor the implementation of similar safeguards by our vendors, clients or WSEEs.
Any cyber-attack, unauthorized intrusion, malicious software infiltration, network disruption, corruption of data, or theft of private or other sensitive information, or inadvertent acts by our own employees, could result in the disclosure or misuse of confidential or proprietary information, and could have a material adverse effect on our business operations or that of our clients, result in liability or regulatory sanction, or cause a loss of confidence in our ability to serve clients. The impact of a data security incident could have a material adverse effect on our business, results of operations and financial condition.
We are also subject to various federal and state laws, rules and regulations relating to the Company’s Current Reportcollection, use, transmission and security and privacy of personal and business information. Most states and the District of Columbia have enacted notification rules that may require notification to regulators, clients or employees in the event of a privacy breach. In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs. It is possible that these federal and states 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 adverse effect on Form 8-K filedour 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 future enactment of more restrictive laws, rules or regulations could have a material adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in regulatory penalties and significant liability. Additionally, any failure by us to comply with these laws and regulations, including as a result of a security or privacy breach, could result in significant penalties and liabilities for us.
The failure of our insurance carriers or financial institutions could have a material adverse effect on us.
As part of our PEO HR Outsourcing solutions, we contract with various insurance carriers to provide insurance coverage including health insurance, workers’ compensation insurance and employment practices liability insurance. In addition, we obtain insurance coverage for various commercial risks in our business such as property insurance, errors and omissions insurance, cyber liability insurance, general liability insurance, fiduciary liability insurance, automobile liability insurance, and directors’ and officers’ liability insurance. The failure of any insurance carrier providing such coverage could leave us exposed to uninsured risk and could have a material adverse effect on our business.
In conjunction with providing services to clients, we rely on financial institutions to electronically transfer funds for the SECcollection of our comprehensive service fee as well as the payment of 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.
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| 2018 Form 10-K |
New and higher federal, state and local taxes could have a material adverse impact on March 23, 2015our financial condition and results of operations.
In times of economic slowdowns, states and municipalities in which we operate may experience reductions in tax revenues and corresponding budget deficits. In response to budget shortfalls, many states and municipalities have in the past and may in the future increase or enact new taxes on businesses operating within their tax jurisdiction, including business activity taxes and income taxes. In addition, federal, state and local taxing agencies may increase their audit activity in an effort to identify additional tax revenues. New tax assessments on our operations could result in increased costs. Our ability to adjust our service fees and incorporate additional tax assessments into our billing system could be limited. As a result, such higher taxes could have a material adverse impact on our financial condition or results of operations.
Failure to integrate or realize the expected return on our acquisitions and investments could have a material adverse impact on our financial condition or results of operations.
We have adopted a strategy to market and sell additional products and services within and outside of traditional PEO HR Outsourcing solutions. As part of this strategy, periodically we make strategic long-term decisions to invest in and/or acquire new companies, business units or assets. Acquiring new businesses involves a number of risks such as over-valuation of the acquired companies, entering markets or businesses in which we have no prior experience, integrating the technology, operations, and personnel, diversion of management’s attention from other business concerns and litigation resulting from the activities of the acquired company. The occurrence of one or more of these events could result in the loss of existing or prospective clients or employees, not achieving anticipated revenues or profitability, or impairment of acquired assets. Such developments could have a material impact to our financial condition, results of operations and future growth rates. Based on market conditions or changes in operating plans, the fair value of our other acquired businesses could decline, requiring us to record impairment charges for all or portions of the investments.
Our business could be disrupted as a result of actions of certain stockholders.
If any of our stockholders commence a proxy contest, advocate for change, make public statements critical of our performance or business, or engage in other similar activities, then our business could be adversely affected because we may have difficulty attracting and retaining clients due to perceived uncertainties as to our future direction and negative public statements about our business; responding to proxy contests and other similar actions by stockholders is likely to result in us incurring substantial additional costs and significantly divert the attention of management and our employees; and, if individuals are elected to our Board with a specific agenda, the execution of our strategic plan may be disrupted or a new strategic plan altogether may be implemented, which could have a material adverse impact on our business, financial condition or results of operations. Further, any of these matters or any such actions by stockholders may impact and result in volatility of the price of our common stock.
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| 2018 Form 10-K |
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
We believe our current real estate and facilities are adequate for the purposes for which they are intended and provide for further expansion to accommodate our long-term growth and expansion goals. We believe that short-term leased facilities are readily available if needed to accommodate near-term needs if they arise. We will continue to evaluate the need for additional facilities based on the extent of our product and service offerings, the rate of client growth, the geographic distribution of our client base and our long-term service delivery requirements.
Corporate Facilities
Our corporate headquarters is located in Kingwood, Texas, in a campus-style facility. This 33-acre company-owned office campus includes 430,000 square feet of office space and approximately 9 acres of undeveloped land for future expansion. Development and support operations are located in the Kingwood facility. In February 2019, we executed a contract to construct a 270,000 square foot office facility to be located on our corporate campus. Please read Item 9B. “Other Information” for additional information.
We have hosting facilities, totaling approximately 2,000 square feet, located at two separate leased facilities. The hosting facilities house the majority of our business applications, telecommunications equipment and network equipment. The facilities, located in Bryan, Texas and The Woodlands, Texas, are under lease until 2024 and 2022, respectively.
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 34% of our worksite employee base, is located in a 40,500 square foot facility under lease until 2023.
The Dallas service center, which currently services approximately 23% of our worksite employee base, is located in a 42,500 square foot facility under lease until 2023. In addition to the service center operations, the facility also contains sales operations.
The Houston service center, which currently services approximately 21% of our worksite employee base, is located on our corporate campus.
The Los Angeles service center, which currently services approximately 22% of our worksite employee base, is located in a 39,000 square foot facility under lease until 2029.
Sales and Service Offices
As of December 31, 2018, we had sales and service personnel in 59 facilities located in 33 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, 2018, we had 67 sales offices in these 33 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 client service personnel in sales markets as a critical mass of clients is attained in each market.
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Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings other than ordinary routine litigation incidental to our business that we believe would not have a material adverse effect on our financial condition or results of operations, except as discussed in Note 12 to the Consolidated Financial Statements, “Commitments and Contingencies,” which is incorporated herein by reference.
Pursuant to the Agreement, the Company appointed (a) Peter A. Feld and Michelle McKenna-Doyle as Class I directors; and
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| 2018 Form 10-K |
Item S-K 401 (b) Norman R. Sorensen as a Class II director. In addition, pursuant to the Agreement, the Company nominated for election at the 2015 Annual Meeting of Stockholders (a) Carol Kaufman, Paul Sarvadi and Norman R. Sorensen for election to the Board as Class II directors with terms expiring at the 2018 Annual Meeting of Stockholders; and (b) Austin Young as a Class I director with a term expiring at the 2017 Annual Meeting of Stockholders. In addition, Starboard voted its shares. Executive Officers of the Company’s common stock (“Common Stock”) forRegistrant.
The following table sets forth the electionnames, ages (as of eachFebruary 4, 2019) and positions of Ms. Kaufman and Messrs. Sarvadi, Sorensen and Young at the 2015 Annual Meeting of Stockholders. Substantially concurrently with the adjournment of the 2015 Annual Meeting, Eli Jones and Michael Brown resigned as Class I directors with terms expiring at the 2017 Annual Meeting of Stockholders and were immediately reappointed by the Board as Class III directors with terms expiring at the 2016 Annual Meeting of Stockholders.
If Mr. Feld or Ms. McKenna-Doyle (or any replacement director) is unable or unwilling to serve, resigns or is removed as a director prior to the 2017 Annual Meeting of Stockholders, or if Mr. Sorensen (or any replacement director) is unable or unwilling to serve, resigns or is removed as a director prior to the 2018 Annual Meeting of Stockholders, and at such time Starboard beneficially owns in the aggregate at least the lesser of (a) 3% of the Company’s then outstanding shares of Common Stock; and (b) 764,983 shares of Common Stock (the “Minimum Ownership Threshold”), Starboard has the ability to recommend a replacement director in accordance with the terms of the Agreement.
Pursuant to the Agreement, Starboard obtained from Mr. Feld an irrevocable resignation letter pursuant to which he shall resign from the Board and all applicable committees and subcommittees of the Board if, at any time, Starboard’s aggregate beneficial ownership
Insperity’s executive officers:
of Common Stock decreases to less than the Minimum Ownership Threshold. Mr. Feld has also entered into a confidentiality agreement with the Company and Starboard.
Directors
Class III Directors (Terms Expiring at the 2016 Annual Meeting)
Michael W. Brown.Mr. Brown, age 70, joined the Company as a director in November 1997. He is a member of the Company’s Compensation Committee and the Nominating and Corporate Governance Committee and was a member of the Independent Advisory Committee. Mr. Brown is the past chairman of the NASDAQ Stock Market Board of Directors and a past governor of the National Association of Securities Dealers. Mr. Brown joined Microsoft Corporation in 1989 as its treasurer and became its chief financial officer in 1993, in which capacity he served until his retirement in July 1997. Prior to joining Microsoft, Mr. Brown spent 18 years with Deloitte & Touche LLP. Mr. Brown is also a director of EMC Corporation (NYSE: EMC), Stifel Financial Corporation (NYSE: SF) and VMware, Inc. (NYSE: VMW). He serves on the audit and finance committees of EMC Corporation; audit and compensation committees of VMware, Inc.; and risk management/corporate governance committee of Stifel Financial Corporation. Mr. Brown also serves or has served as a director, trustee or advisor of several private businesses, civic and charitable organizations. Mr. Brown holds a Bachelor of Science degree in Economics from the University of Washington in Seattle.
Mr. Brown brings to the Board substantial expertise that includes an extensive knowledge of the complex financial and operational issues affecting large companies, and a deep understanding of accounting principles and financial reporting rules and regulations. His prior experience in public accounting and as a chief financial officer of a global technology company brings an important perspective to the Board. Mr. Brown also serves on the boards, as well as the audit committees and compensation committees, of multiple publicly traded companies in both the technology and financial services sectors, which provides us with valuable insight on technological and strategic issues affecting the Company. Mr. Brown’s prior service as chairman of the Nasdaq Stock Market Board of Directors and as a past governor of the National Association of Securities Dealers provides experience with issues affecting a publicly traded company as well as demonstrating Mr. Brown’s leadership and business acumen.
Eli Jones. Dr. Jones, age 54, joined the Company as a director in April 2004. Dr. Jones has announced that he will not stand for re-election to the Board and will retire from the Board when his term expires at the 2016 Annual Meeting of Stockholders. He is chairperson of the Company’s Compensation Committee and a member of the Nominating and Corporate Governance Committee. Since July 2015, Dr. Jones has served as the Dean of the Mays Business School at Texas A&M University. Prior to his current position, from 2012, he was the Dean of the Sam M. Walton College of Business at the University of Arkansas and holder of the Sam M. Walton Leadership Chair in Business. Prior to joining the faculty at the University of Arkansas, he was Dean of the E. J. Ourso College of Business and Ourso Distinguished Professor of Business at Louisiana State University (“LSU”) from 2008 to 2012; Professor of Marketing and Associate Dean at the C.T. Bauer College of Business at the University of Houston from 2007 to 2008; an Associate Professor of Marketing from 2002 to 2007; and an assistant professor from 1997 until 2002. He taught at Texas A&M University for several years before joining the faculty of the University of Houston. Dr. Jones served as the executive director of the Program for Excellence in Selling and the founding director of the Sales Excellence Institute at the University of Houston from 1997 to 2007. Before becoming a professor, he worked in sales and sales management for three Fortune 100 companies: Quaker Oats, Nabisco and Frito-Lay. He received his Bachelor of Science degree in Journalism in 1982, his MBA in 1986, and his Ph.D. in 1997, all from Texas A&M University.
Dr. Jones brings to the Board significant experience and cutting-edge knowledge and expertise. He is considered a “sales scientist” in that he conducts and publishes cutting-edge research in sales, sales management, marketing strategy, leadership and customer relationship management based on data from organizations world-wide, which are areas critical to the Company. Dr. Jones is able to draw upon his research to provide the Board knowledge with respect to the Insperity sales force. Dr. Jones’ prior service as Dean of the E. J. Ourso College of Business and Ourso Distinguished Professor of Business at LSU and as Dean of the Sam M. Walton College of Business at the University of Arkansas and holder of the Sam M. Walton Leadership Chair in Business, as well as his new role as Dean of the Mays Business School at Texas A&M University, demonstrate his leadership and broad-based business acumen.
Richard G. Rawson. Mr. Rawson, age 67, President of the Company and the majority of its subsidiaries, has been a director of the Company since 1989. He has been President of the Company 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 Company since 1989. Prior to joining the Company in 1989, Mr. Rawson served as a senior financial officer and controller for several companies in the manufacturing and seismic data processing industries. He has served NAPEO as president, first vice president, second vice president and treasurer, as well as chairman of the Accounting Practices Committee. Mr. Rawson has a Bachelor of Business Administration degree in Finance from the University of Houston and currently serves as a member of the board for the C.T. Bauer College of Business.
Mr. Rawson brings financial and operational experience to the Board. His lengthy service as president of the Company, as well as his prior service as chief financial officer and treasurer of the Company, provide in-depth knowledge and insight of Company operations and financial matters to the Board.
Class I Directors (Terms Expiring at the 2017 Annual Meeting)
Peter A. Feld. Mr. Feld, age 37, joined the Company as a director in March 2015 following his nomination by Starboard pursuant to the Agreement. He is a member of the Company’s Compensation Committee and the Nominating and Corporate Governance Committee, and served as chair of the Independent Advisory Committee. Mr. Feld is a Managing Member and Head of Research of Starboard Value LP, a New York-based investment adviser with a focused and fundamental approach to investing in publicly traded U.S. companies, a position he has held since April 2011. From November 2008 to April 2011, Mr. Feld served as a Managing Director of Ramius LLC and a Portfolio Manager of Ramius Value and Opportunity Master Fund Ltd. From February 2007 to November 2008, Mr. Feld served as a Director at Ramius LLC. Since January 2016, he has served as a member of the board of directors of The Brink’s Company, a global leader in security-related services. Mr. Feld previously served as a member of the boards of directors of Darden Restaurants, Inc. (NYSE: DRI), a full service restaurant company from October 2014 to September 2015; Tessera Technologies, Inc. (Nasdaq: TSRA), which develops, invests in, licenses and delivers innovative miniaturization technologies and products for next-generation electronic devices, from June 2013 to April 2014; Integrated Device Technology, Inc. (Nasdaq: IDTI), a company which designs, develops, manufactures and markets a range of semiconductor solutions for the advanced communications, computing and consumer industries, from June 2012 to February 2014; Unwired Planet, Inc. (Nasdaq: UPIP) f/k/a Openwave Systems, Inc., a company with a portfolio of patents many of which are considered foundational to mobile communications, and span smart devices, cloud technologies and unified messaging, from July 2011 to March 2014 and as chairman from September 2011 to July 2013; and SeaChange International, Inc. (Nasdaq: SEAC), a leading global multi-screen video software company, from December 2010 to January 2013. Mr. Feld has also served as a member of the audit, compensation and nominating and corporate governance committees of several of the boards of directors on which he has served. Mr. Feld received a BA in economics from Tufts University.
Mr. Feld’s extensive knowledge of the capital markets and corporate governance practices as a result of his investment and private equity background makes him a valuable asset to the Board.
Michelle McKenna-Doyle. Ms. McKenna-Doyle, age 50, joined the Company as a director in April 2015 following her nomination by Starboard pursuant to the Agreement. She is a member of the Company’s Finance, Risk Management and Audit Committee. Since October 2012, Ms. McKenna-Doyle has served as the Senior Vice President (“SVP”) and Chief Information Officer (“CIO”) of the NFL, a professional American football league. Prior to joining the NFL, from May 2011 to October 2012, she served as CIO at Constellation Energy Group, Inc., an energy supplier, where she implemented major technology strategic initiatives and led the company’s integration with Exelon in connection with the merger of the two companies. Ms. McKenna-Doyle served as the President of Vision Interactive Media Group, a global digital interactive media solutions nonprofit company, from September 2010 to June 2011. From May 2007 to May 2010, she served as SVP and CIO at Universal Orlando Resort, a theme park resort owned by NBCUniversal, and from April 2006 to May 2007, she served as CIO of Centex Destination Properties, a division of Centex Corporation, a home builder. She previously spent more than 13 years at the Walt Disney World Company, an American diversified multinational mass media corporation, where she held senior leadership positions in finance, marketing and information technology. In March 2015, Ms. McKenna-Doyle was appointed to the board of directors of RingCentral, Inc. (NYSE: RNG), where she serves on the audit and compensation committees. Ms. McKenna-Doyle received a Bachelor of Science degree in Accounting from Auburn University and an MBA from the Crummer Graduate School of Business, Rollins College. She was formerly licensed as a certified public accountant in the State of Georgia. She has extensive experience in the media and entertainment industry.
Ms. McKenna-Doyle brings to the Board extensive experience with technology management and senior leadership, including at service-related businesses, as well as financial and accounting acumen. Her background with information technology and data security further provides the Board with a key perspective on such matters that are increasingly important to the Company.
Austin P. Young. Mr. Young, age 75, joined the Company as a director in January 2003. He is the Company’s Lead Independent Director, chair of the Company’s Finance, Risk Management and Audit Committee and a member of the Company’s Nominating and Corporate Governance Committee. He was also a member of the Company’s Independent Advisory Committee. Mr. Young served as senior vice president, chief financial officer and treasurer of CellStar Corporation from 1999 to December 2001, when he retired. From 1996 to 1999, he served as executive vice president - finance and administration of Metamor Worldwide, Inc. Mr. Young also held the position of senior vice president and chief financial officer of American General Corporation for over eight years and was a partner in the Houston and New York offices of KPMG before joining American General. Mr. Young has served as a director of Amerisafe, Inc. (Nasdaq: AMSF) since November 2005, where he is also chairman of the audit committee. He served as a director and chairman of the audit committees of Tower Group International, Ltd. (former Nasdaq-listed company) and its predecessor company from 2004 until September 2014. He is a member of the Houston and State Chapters of the Texas Society of CPAs, the American Institute of CPAs, and the Financial Executives International. He holds an accounting degree from The University of Texas.
Mr. Young brings extensive financial and accounting experience to the Board. His prior experience as a partner in an international accounting firm, as a senior financial officer of large companies, and his service on the audit committees of publicly traded companies provide Mr. Young with a thorough understanding of generally accepted accounting principles and financial statements. Additionally, Mr. Young’s prior experience provides a solid background for him to advise and consult with the Board on financial and audit-related matters as chairperson of the Finance, Risk Management and Audit Committee, and to serve as the designated audit committee financial expert of the Finance, Risk Management and Audit Committee. Mr. Young’s service on other boards and his extensive knowledge of the Company and its business provide us with additional valuable perspective on issues affecting the Company.
Class II Directors (Terms Expiring at the 2018 Annual Meeting)
Carol R. Kaufman. Ms. Kaufman, age 66, joined the Company as a director in November 2013. She is chair of the Company’s Nominating and Corporate Governance Committee and a member of the Company’s Finance, Risk Management and Audit Committee. Ms. Kaufman is the executive vice president, secretary, chief administrative officer and chief governance officer of The Cooper Companies, Inc., a global medical device company, where she has served since October 1995, including as vice president of legal affairs beginning in March 1996, senior vice president beginning in October 2004 and her current position beginning in July 2011. From January 1989 through September 1995, she served as vice president, secretary and chief administrative officer of Cooper Development Company, a former affiliate of The Cooper Companies, Inc. Beginning in 1971, Ms. Kaufman held several financial positions, including deputy corporate controller, with Cooper Laboratories, Inc., the former parent of The Cooper Companies, Inc. Ms. Kaufman served as a director of Chindex, Inc. (former Nasdaq-listed company) from November 2000 until September 2014, serving on its audit and compensation committees and as chair of its governance and nominating committee. Ms. Kaufman earned a Bachelor of Science degree in Mathematics in 1971 from Boston University.
Ms. Kaufman brings extensive financial, accounting and business experience, including in corporate governance, to the Board. Her varied roles within The Cooper Companies, Inc. provide the Board with additional expertise on accounting and controls, and on evaluating and executing strategic initiatives.
|
| | | | |
| Name | | Age | | Position |
| | | | |
| Paul J. Sarvadi | | 62 | | Chairman of the Board and Chief Executive Officer |
| A. Steve Arizpe | | 61 | | Executive Vice President of Client Services and Chief Operating Officer |
| Jay E. Mincks | | 65 | | Executive Vice President of Sales and Marketing |
| Douglas S. Sharp | | 57 | | Senior Vice President of Finance, Chief Financial Officer and Treasurer |
| Daniel D. Herink | | 52 | | Senior Vice President of Legal, General Counsel and Secretary |
| James D. Allison | | 50 | | Senior Vice President of Gross Profit Operations |
Paul J. Sarvadi. Mr. Sarvadi age 59,has served as Chairman of the Board and Chief Executive Officer since August 2003. Mr. Sarvadi co-founded Insperity in 1986 and co-founderserved as Vice President and Treasurer of the Company andInsperity from its subsidiaries, has been a director since the Company’s inception in 1986. He has also served1986 through April 1987, as the Chairman of the BoardVice President from April 1987 through 1989 and as President and Chief Executive Officer of the Company since 1989 and as president of the Company from 1989 to August 2003. He attended Rice UniversityPrior to founding Insperity, Mr. Sarvadi started and the University of Houston prior to starting and operatingoperated several small companies.businesses. Mr. Sarvadi has served as presidentPresident of the National Association of Professional Employer Organizations (“NAPEO”)NAPEO and was a member of its Board of Directors for five years. In 2001, Mr. Sarvadi was selected as the 2001 National Ernst & Young Entrepreneur of theOf 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.
Mr. Sarvadi brings substantial business and operational experience to the Board, including an extensive knowledge of sales, customer relationships, and issues affecting small to medium-sized businesses. Mr. Sarvadi’s role as a co-founder of the Company and lengthy service as chief executive officer of the Company provide to the Board extensive knowledge and insight of our operations and issues affecting the Company as well as the broader professional employer organization (“PEO”) industry. Mr. Sarvadi’s previous experience starting and operating several small businesses, as well as his frequent interaction with the Company’s clients, provide valuable insight to the challenges facing small to medium-sized businesses, which is a principal focus of the Company.
Norman R. Sorensen. Mr. Sorensen, age 70, joined the Company as a director in March 2015 following his nomination by Starboard pursuant to the Agreement. Mr. Sorensen is a member of the Company’s Finance, Risk Management and Audit Committee and was a member of the Independent Advisory Committee. Mr. Sorensen formerly served as Chairman of the International Insurance Society, Inc., a professional organization for the insurance industry, from January 2010 to June 2013. Mr. Sorensen has served as a director of the International Insurance Society, Inc. since January 2005. Previously, from November 2011 until December 2012, he was Chairman of the International Advisory Council of Principal Financial Group, Inc., a global financial investment management company. He was Chairman of Principal International, Inc., from June 2011 to October 2012, and President and CEO of International Asset Management and Accumulation of Principal International, Inc., from January 2001 to June 2011. Mr. Sorensen has served as a director of Encore Capital Group, Inc. (Nasdaq: ECPG), a consumer banking company, since November 2011. Mr. Sorensen also served as a director of Sara Lee Corporation (former NYSE-listed company), an American consumer-goods company, from January 2007 to November 2011. HeA. Steve Arizpe has served as Executive Vice President of both Principal Financial Group, Inc.Client Services and Principal Life Insurance Company,Chief Operating Officer since August 2003. He joined Insperity in 1989 and has served in a life insurance company, since January 2007,variety of roles, including Houston Sales Manager, Regional Sales Manager and held a numberVice President of other seniorSales. Prior to joining Insperity, Mr. Arizpe served in sales and sales management positions since 1998. Mr. Sorensen also served as Chairman of the U.S. Coalition of Service Industries, a leading forumroles for the services sector, from January 2003 to March 2005. Mr. Sorensen served as a senior executive of American International Group, Inc., an insurance services company, from 1989 to December 1998. He also formerly served as ChairmanNCR Corporation and director of DE Master Blenders 1753, a Dutch NYSE/Euronext-listed consumer goods company, from December 2011 until September 2013.
Mr. Sorensen’s qualifications include his experience as an executive officer of an international financial services and asset management company, with responsibility over international operations and oversight over asset management and financial services functions and multiple divisional chief financial officers.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 executive officerAudit Manager for Ernst & Young LLP. Mr. Sharp has served as a member of several publicly traded companies.the Accounting Practices Committee of NAPEO. Mr. Sharp is also a certified public accountant.
Daniel D. Herink has served as Senior Vice President of Legal, General Counsel and Secretary since May 2008. Mr. Herink joined Insperity in 2000 as Assistant General Counsel and was promoted to Associate General Counsel in 2002. He was promoted and elected to Vice President of Legal, General Counsel and Secretary in May 2007. Mr. Herink previously served as an attorney at Rodriguez, Colvin & Chaney, L.L.P. and McGinnis, Lochridge & Kilgore, L.L.P. He earned his Bachelor of Science degree in business administration from the University of Nebraska and a Doctorate of Jurisprudence from The University of Texas School of Law, where he was a member of the Texas Law Review and The Order of the Coif. Mr. Herink is also a certified public accountant.
James D. Allison has served as Senior Vice President of Gross Profit Operations since May 2018. Mr. Allison joined Insperity in 1997 and has held positions of increased responsibility, including Manager of Financial Reporting, Director of Accounting, Managing Director of Planning and Analysis, Managing Director of Finance, and Senior Vice President of Pricing and Cost Analysis. Mr. Allison has served on the Accounting Practices Committee of NAPEO and, prior to joining Insperity, he worked in the audit practice of Ernst & Young LLP. Mr. Allison earned his Bachelor of Business Administration and Master in Professional Accounting degrees from the University of Texas and is a certified public accountant.
|
| | |
| Insperity | 29
| 2018 Form 10-K |
PART II
CommitteesItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “NSP.” As of February 4, 2019, there were 411 holders of record of our common stock. This number does not include stockholders for whom shares were held in “nominee” or “street name.”
Dividend Policy
The payment of dividends is made at the discretion of our Board and depends upon our operating results, financial condition, capital requirements, general business conditions and such other factors as our Board 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, 2018:
|
| | | | | | | | | | | | |
| Period | Total Number of Shares Purchased(1)(2) | | 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) |
| 10/01/2018 – 10/31/2018 | 186,000 |
| | $ | 107.06 |
| | 186,000 |
| | 2,411,564 |
|
| 11/01/2018 – 11/30/2018 | 394,000 |
| | 100.63 |
| | 394,000 |
| | 2,017,564 |
|
| 12/01/2018 – 12/31/2018 | 406,458 |
| | 92.33 |
| | 406,409 |
| | 1,611,155 |
|
| Total | 986,458 |
| | $ | 98.42 |
| | 986,409 |
| | |
| |
(1) | Our Board has approved a program to repurchase shares of our outstanding common stock. During the three months ended December 31, 2018, 986,409 shares were repurchased under the program. As of December 31, 2018, we were authorized to repurchase an additional 1,611,155 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all the shares authorized for repurchase under the repurchase program. |
| |
(2) | During the three months ended December 31, 2018, 49 shares of restricted stock were withheld to satisfy tax-withholding obligations arising in conjunction with the vesting of restricted stock. The required withholding is calculated using the closing sales price reported by the New York Stock Exchange on the date prior to the applicable vesting date. These shares are not subject to the repurchase program described above. |
|
| | |
| Insperity | 30
| 2018 Form 10-K |
Performance Graph
The following graph compares our cumulative total stockholder return since December 31, 2013, with the S&P Smallcap 600 Index, the S&P Midcap 400 Index and the S&P 1500 Composite Human Resources and Employment Services Index. The graph assumes that the value of the Boardinvestment in our common stock and each index (including reinvestment of Directorsdividends) was $100 on December 31, 2013.
The Board has appointed three standing committees:COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Insperity, Inc., the Finance, Risk Management S&P Smallcap 600 Index, the S&P Midcap 400 Index,
and Audit Committee;S&P 1500 Composite Human Resource and Employment Services Index
*$100 invested on 12/31/13 in Insperity stock or in the Compensation Committee; and the Nominating and Corporate Governance Committee. The chartersspecified index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
|
| | | | | | | | | | | | |
| | 12/13 |
| 12/14 |
| 12/15 |
| 12/16 |
| 12/17 |
| 12/18 |
|
| | | | | | | |
| Insperity, Inc. | 100.00 |
| 102.09 |
| 147.64 |
| 220.80 |
| 367.89 |
| 604.10 |
|
| S&P Smallcap 600 | 100.00 |
| 105.76 |
| 103.67 |
| 131.20 |
| 148.56 |
| 135.96 |
|
| S&P Midcap 400 | 100.00 |
| 109.77 |
| 107.38 |
| 129.65 |
| 150.71 |
| 134.01 |
|
| S&P 1500 Composite Human Resource and Employment Services | 100.00 |
| 104.57 |
| 108.13 |
| 119.90 |
| 153.45 |
| 129.80 |
|
This graph shall not be deemed “filed” for eachpurposes of Section 18 of the three standing committees, which have been adopted by the Board, contain a detailed descriptionSecurities and Exchange Act of the respective standing committee’s duties and responsibilities and are available on the Company’s website at www.insperity.com in the Corporate Governance section under the Investor Relations tab. The Board also created a new, temporary Independent Advisory Committee pursuant1934, as amended (the “Exchange Act”), or otherwise subject to the Agreement. The Board has reviewedliabilities of that section, nor shall it be deemed incorporated by reference in any filing under the applicable legal and NYSE standards for independence for membersSecurities Act of each1933 or the Exchange Act, regardless of Finance, Risk Management and Audit Committee; the Compensation Committee; and the Nominating and Corporate Governance Committee as well as the Company's independence standards forany general incorporation language in such Committees and has determined that the members of each of those Committees of the Board is “independent” under such requirements.filing.
Nominating and Corporate Governance Committee
|
| | |
| Insperity | 31
| 2018 Form 10-K |
Item 6. Selected Financial Data.
The members of the Nominating and Corporate Governance Committee currently are: Ms. Kaufman, who serves as chairperson, Messrs. Brown, Feld and Young, and Dr. Jones. The Nominating and Corporate Governance Committee: (i) identifies individuals qualified to become Board members, consistentselected consolidated financial data set forth below should be read in conjunction with the criteria for selection approved by the Board; (ii) recommends to the Board a slate of director nominees to be elected by the stockholders at the next annual meeting of stockholdersConsolidated Financial Statements and when appropriate, director appointees to take office between annual meetings; (iii) developsaccompanying Notes and recommends to the Board a set of corporate governance guidelines for the Company; and (iv) oversees the evaluation of the Board.
Finance, Risk Management and Audit Committee
The members of this Committee currently are Mr. Young, who serves as chairperson, Ms. Kaufman, Ms. McKenna-Doyle and Mr. Sorensen. The Board has determined that Mr. Young is an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K promulgated by the SEC. The Finance, Risk Management and Audit Committee assists the Board in fulfilling its responsibility to oversee the financial affairs, risk management, accounting and financial reporting processes, and audits of financial statements of the Company by reviewing and monitoring: (i) the financial affairs of the Company; (ii) the integrity of the Company’s financial statements and internal controls; (iii) the Company’s compliance with legal and regulatory requirements; (iv) the independent auditor’s qualifications, independence and performance; (v) the performance of the personnel responsible for the Company’s internal audit function and the independent auditors; and (vi) the Company’s policies and procedures with respect to risk management, as well as other matters that may come before it as directed by the Board.
Compensation Committee
The members of the Compensation Committee currently are Dr. Jones, who serves as chairperson, and Messrs. Brown and Feld. The Compensation Committee: (i) oversees and administers the Company’s compensation policies, plans and practices; (ii) reviews and discusses with management the Compensation7. “Management’s Discussion and Analysis required by SEC Regulation S-K, of Financial Condition and Results of Operations.”
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share and statistical data) | Year Ended December 31, | |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
| | | |
| Income Statement Data: | |
Revenues(1) | $ | 3,828,549 |
| | $ | 3,300,223 |
| | $ | 2,941,347 |
| | $ | 2,603,614 |
| | $ | 2,357,788 |
| |
| Gross profit | 681,909 |
| | 572,731 |
| | 491,610 |
| | 437,867 |
| | 403,805 |
| |
| Operating income | 179,036 |
| | 129,941 |
| | 106,306 |
| | 65,699 |
| (2) | 47,474 |
| (3) |
| Net income | 135,413 |
|
| 84,402 |
| | 65,991 |
| | 39,390 |
| | 28,004 |
| |
| Diluted EPS | 3.22 |
| | 2.01 |
| (4) | 1.54 |
| (4) | 0.79 |
| (4) | 0.53 |
| (4)(5) |
| | | | | | | | | | | |
Non-GAAP Financial Measures(6): | | | | | | | | | |
| Adjusted net income | $ | 157,536 |
| | $ | 103,005 |
| | $ | 76,718 |
| | $ | 54,519 |
| | $ | 36,734 |
| |
| Adjusted EPS | 3.75 |
| | 2.45 |
| (4) | 1.79 |
| (4) | 1.10 |
| (4) | 0.72 |
| (4) |
| Adjusted EBITDA | 239,601 |
| | 177,681 |
| | 141,183 |
| | 110,014 |
| | 84,124 |
| |
| | | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | | |
| Working capital | $ | 94,204 |
| | $ | 54,206 |
| | $ | 39,364 |
| | $ | 54,337 |
| | $ | 66,742 |
| |
| Total assets | 1,191,816 |
| | 1,063,695 |
| | 907,174 |
| | 784,912 |
| | 792,595 |
| |
| Total debt | 144,400 |
| | 104,400 |
| | 104,400 |
| | — |
| | — |
| |
| Total stockholders’ equity | 77,676 |
| | 66,321 |
| | 60,525 |
| | 172,455 |
| | 204,096 |
| |
| Cash dividends per share | 0.80 |
| | 1.58 |
| (4)(7) | 0.49 |
| (4) | 0.43 |
| (4) | 1.37 |
| (4)(7) |
| | | | | | | | |
| Average WSEEs paid | 209,123 |
| | 182,696 |
| | 165,850 |
| | 145,830 |
| | 130,718 |
| |
| | | | | | | | | | | |
Statistical Data (per WSEE per month): | | | | | | | |
Revenues(8) | $ | 1,526 |
| | $ | 1,505 |
| | $ | 1,478 |
| | $ | 1,488 |
| | $ | 1,503 |
| |
| Gross profit | 272 |
| | 261 |
| | 247 |
| | 250 |
| | 257 |
| |
| Operating income | 71 |
| | 59 |
| | 53 |
| | 38 |
| | 30 |
| |
Adjusted EBITDA(6) | 95 |
| | 81 |
| | 71 |
| | 63 |
| | 54 |
| |
| |
(1) | Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| Gross billings | $ | 23,830,731 |
| | $ | 20,173,812 |
| | $ | 17,932,857 |
| | $ | 15,806,178 |
| | $ | 14,186,921 |
|
| Less: WSEE payroll cost | 20,002,182 |
| | 16,873,589 |
| | 14,991,510 |
| | 13,202,564 |
| | 11,829,133 |
|
| Revenues | $ | 3,828,549 |
| | $ | 3,300,223 |
| | $ | 2,941,347 |
| | $ | 2,603,614 |
| | $ | 2,357,788 |
|
| |
(2) | Includes non-cash impairment and other charges in the first and second quarters of 2015 of $9.8 million and $1.3 million, respectively, partially offset by a reduction of $0.6 million in the fourth quarter of 2015. |
| |
(3) | Includes a non-cash impairment charge in the second quarter of 2014 of $2.5 million. Also includes a non-cash charge in 2014 of $1.2 million. |
| |
(4) | Adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 as a stock dividend. |
| |
(5) | Includes the impact of dividends exceeding earnings under the two-class method, resulting in a $0.03 earnings per share decrease in 2014. |
|
| | |
| Insperity | 32
| 2018 Form 10-K |
| |
(6) | These are non-GAAP measures used by management to analyze Insperity’s performance. Please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. |
| |
(7) | Includes a $1.00 per share special dividend paid in both the fourth quarters of 2017 and 2014. |
| |
(8) | Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (per WSEE per month) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Gross billings | $ | 9,496 |
| | $ | 9,202 |
| | $ | 9,011 |
| | $ | 9,032 |
| | $ | 9,044 |
|
| Less: WSEE payroll cost | 7,970 |
| | 7,697 |
| | 7,533 |
| | 7,544 |
| | 7,541 |
|
| Revenues | $ | 1,526 |
| | $ | 1,505 |
| | $ | 1,478 |
| | $ | 1,488 |
| | $ | 1,503 |
|
|
| | |
| Insperity | 33
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 402;7. Management’s Discussion and (iii) preparesAnalysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this annual report. Historical results are not necessarily indicative of trends in operating results for any future period.
The statements contained in this annual report required by the rulesthat are not historical facts are forward-looking statements that involve a number of risks and uncertainties. The actual results of the SEC on executive compensation for inclusionfuture events described in the Company’ssuch forward-looking statements in this annual report on Form 10-K or proxy statement forcould differ materially from those stated in such forward-looking statements. Among the annual meeting of stockholders. To carry out these purposes,factors that could cause actual results to differ materially are the Compensation Committee: (i) evaluatesrisks and uncertainties discussed in Item 1A. Risk Factors and the performance of and determines the compensation for senior management, taking into consideration recommendations made by the CEO; (ii) administers the Company’s compensation programs; and (iii) performs such other duties as mayuncertainties set forth from time to time in our other public reports and filings and public statements.
Executive Summary
Overview
Our long-term strategy is to provide the best small and medium-sized businesses in the United States with our specialized human resources service offering and to leverage our buying power and expertise to provide additional valuable services to clients. Our most comprehensive HR services offerings are provided through our Workforce Optimization® and Workforce SynchronizationTM solutions (together, our PEO HR Outsourcing solutions), which encompass a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management and training and development services. Our overall operating results can be directedmeasured in terms of revenues, gross profit or adjusted EBITDA per WSEE per month. We often use the average number of WSEEs paid during a period as our unit of measurement in analyzing and discussing our results of operations.
In addition to our PEO HR Outsourcing solutions, we offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration. We also offer a number of other business performance solutions, including Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management, Retirement Services, and Insurance Services, many of which are primarily offered via cloud-based delivery models. These other products or services are offered separately or with our other solutions.
2018 Highlights
Our results for 2018 reflect the impact of continued worksite employee (“WSEE”) growth and effective management of gross profit and operating costs contributing to our significant earnings growth. We ended 2018 averaging 221,809 paid WSEEs, which represents a 17.0% increase over fourth quarter 2017. We expect the average number of paid WSEEs per month to be between 224,000 and 226,000 in the first quarter 2019.
2018 Compared to 2017
Average number of WSEEs paid per month increased14.5% to 209,123, driving a 19.1% gross profit increase
Net income and diluted earnings per share (“Diluted EPS”) increased 60.4% and 60.2% to $135.4 million and $3.22, respectively
Adjusted EBITDA increased 34.8% to $239.6 million
Adjusted net income increased 52.9% to $157.5 million
Adjusted EPS increased53.1% to $3.75
Approximately 24.6% and 23.6% of our average paid WSEEs were in our middle market sector for the years ended December 31, 2018 and 2017, respectively, which is generally defined as companies with 150 to 5,000 WSEEs.
Our average gross profit per worksite employee per month was $272 in 2018 and $261 in 2017.
|
| | |
| Insperity | 34
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Operating expenses increased 13.6% in 2018 to $502.9 million. On a per worksite employee per month basis, operating expenses decreased from $202 in 2017 to $201 in 2018.
Adjusted operating expenses increased 12.0% in 2018 to $493.6 million. On a per worksite employee per month basis, adjusted operating expenses decreased from $201 in 2017 to $197 in 2018.
Net income in 2018 was $135.4 million, a 60.4% increase compared to 2017.
Our adjusted EBITDA per worksite employee per month increased 17.3% from $81 in 2017 to $95 in 2018.
We ended 2018 with working capital of $94.2 million.
During 2018, we paid $33.4 million in dividends and repurchased 1.2 million shares of our common stock at a cost of $113.3 million.
Please read “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA, adjusted net income, adjusted EPS and adjusted operating expenses to their most directly comparable financial measures calculated and presented in accordance with GAAP.
Revenues
We account for our revenues in accordance with Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Our PEO HR Outsourcing solutions 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 WSEEs. Revenues, which exclude the payroll cost component of gross billings, and therefore, consist solely of the markup, are recognized ratably over the payroll period as WSEEs perform their service at the client worksite. This markup includes pricing components associated with our estimates of payroll taxes, benefits and workers’ compensation costs, plus a separate component related to our HR services. 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 WSEEs paid each period and the number of WSEEs enrolled in our benefit plans. Because our total markup is computed as a percentage of payroll cost, certain revenues are also affected by the Board.payroll cost of WSEEs, 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.
PursuantDirect Costs
The primary direct costs associated with revenue-generating activities for our PEO HR Outsourcing solutions are:
employment-related taxes (“payroll taxes”)
costs of employee benefit plans
workers’ compensation costs
Payroll taxes consist of the employer’s portion of Social Security and Medicare taxes under FICA, federal unemployment taxes and state unemployment taxes. Payroll taxes are generally paid as a percentage of payroll cost. The federal unemployment tax rates are defined by federal regulations. State unemployment tax rates are subject to claim histories and vary from state to state.
Employee benefits costs are comprised primarily of health insurance premiums and claims costs (including dental and pharmacy costs), but also include costs of other employee benefits such as life insurance, vision care, disability insurance, education assistance, adoption assistance, a flexible spending account program and a work-life program.
Workers’ compensation costs include administrative and risk charges paid to the insurance carrier, and claims costs, which are driven primarily by the frequency and severity of claims.
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| Insperity | 35
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 PEO HR Outsourcing solutions clients, which are subject to pricing 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 (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional incentive compensation. Our corporate employees include client services, sales and marketing, benefits, legal, finance, information technology, administrative support personnel and those associated with our other products and services.
Stock-based compensation – Our stock-based compensation relates to the recognition of non-cash compensation expense over the vesting period of restricted stock and long-term incentive plan awards.
Commissions – Commissions expense consists primarily of amounts paid to sales managers and BPAs as well as channel referral fees. Commissions are based on new accounts sold and a percentage of revenue generated by such personnel.
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| • | Advertising – Advertising expense primarily consists of media advertising and other business promotions in our current and anticipated sales markets, including the Insperity Invitational™ presented by UnitedHealthcare® sponsorship. |
General and administrative expenses – Our general and administrative expenses primarily include:
rent expenses related to our service centers and sales offices
outside professional service fees related to legal, consulting, and accounting services
administrative costs, such as postage, printing, and supplies
employee travel and training expenses
technology expenses
facility repairs and maintenance costs
Depreciation and amortization – Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices, software development, technology infrastructure and that associated with our acquisitions.
Impairment charges and other – Impairment charges and other consist of non-cash expense associated with the decline in fair value of long-lived and intangible assets, including goodwill. Please read Note 1 “Accounting Policies,” to the Consolidated Financial Statements for additional information.
Other Income (Expense)
Other income (expense) includes interest charges incurred in connection with borrowings under our credit facility and interest income earned on our cash, cash equivalents and marketable securities. Please read “—Liquidity and Capital Resources” for additional information.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”) was signed into law. The 2017 Tax Reform Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% beginning in 2018. As a result, we remeasured our deferred tax assets at the new lower corporate income tax rate and recorded a non-cash tax charge of $2.5 million in 2017. Our provision for income taxes typically differs from the U.S. statutory rate of 21%, due primarily to state income taxes, non-deductible expenses and
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| Insperity | 36
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
various tax credits. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant items resulting in deferred income taxes include prepaid assets, accruals for workers’ compensation expenses, stock-based compensation, software development costs, accrued incentive compensation and depreciation. Changes in these items are reflected in our financial statements through a deferred income tax provision. Please read Note 7 to the Consolidated Financial statements, “Income Taxes,” for additional information.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to health and workers’ compensation insurance claims experience, client bad debts, income taxes, property and equipment, goodwill and other intangibles, and contingent liabilities. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following accounting policies are critical and/or require significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
Benefits costs – We provide group health insurance coverage to our WSEEs through a national network of carriers including United, UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii 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: (1) the level of claims processed during the quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.
Additionally, since the plan’s inception, under the terms of the Insperity, Inc. 2001 Incentivecontract, 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 amendedlong-term prepaid insurance. As of December 31, 2018, Plan Costs were more than the premiums paid and owed to United by $6.3 million. As this amount is less than the agreed-upon $9.0 million surplus maintenance level, the $15.3 million difference is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets. In addition, the premiums owed to United at December 31, 2018, were $15.2 million, which is also included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.
We believe that recent claims activity is representative of incurred and paid trends during the reporting period. The estimated completion rate and annual trend used to compute incurred but not reported claims involves a significant level of judgment. Accordingly, an increase (or decrease) in the completion rate or annual trend used to estimate the incurred claims would result in an increase (or decrease) in benefits costs and net income would decrease (or increase) accordingly.
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| Insperity | 37
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following table illustrates the sensitivity of changes in the completion rate and annual trend on our estimate of total benefit costs of $1.7 billion in 2018:
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| | | | | | | | |
Change in Completion Rate and Annual Trend | | Change in Benefits Costs
(in thousands) | | Change in Net Income
(in thousands) |
| | | | | |
| (2.5)% | | $ | (21,170 | ) | | $ | 15,729 |
|
| (1.0)% | | (8,468 | ) | | 6,292 |
|
| 1.0% | | 8,468 |
| | (6,292 | ) |
| 2.5% | | 21,170 |
| | (15,729 | ) |
Workers’ compensation costs – Since 2007, our workers’ compensation coverage has been provided through our arrangement with Chubb. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program, we have financial responsibility to Chubb for the first $1 million layer of claims per occurrence and, for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1 million.
Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.
We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs’ job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the years ended December 31, 2018 and 2017, we reduced accrued workers’ compensation costs by $18.8 million and $16.3 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 “2001 Incentive Plan”average discount rate was 2.6% in 2018 and 1.6% in 2017) 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 $86.0 million in 2018:
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| | | | | | | | |
| Change in Loss Development Rate | | Change in Workers’ Compensation Costs
(in thousands) | | Change in Net Income
(in thousands) |
| | | | | |
| (5.0)% | | $ | (4,044 | ) | | $ | 3,005 |
|
| (2.5)% | | (2,022 | ) | | 1,502 |
|
| 2.5% | | 2,022 |
| | (1,502 | ) |
| 5.0% | | 4,044 |
| | (3,005 | ) |
At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”),. The level of claim funds is primarily based upon anticipated worksite employee payroll levels and expected
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| Insperity | 38
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits, a long-term asset in our Consolidated Balance Sheets. In 2018, we received $19.4 million for the return of excess claim funds related to the workers’ compensation program, which decreased deposits. As of December 31, 2018, we had restricted cash of $42.2 million and deposits of $166.5 million. We have estimated and accrued $229.6 million in incurred workers’ compensation claim costs as of December 31, 2018. Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities 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 Insperity, Inc. 2012 Incentive Plan (the “2012 Incentive Plan”potential range of such losses. If such evaluation were to determine that a loss was probable and togetherthe 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. In 2018, we finalized certain tax positions when we filed our 2017 federal tax return, and concluded no further adjustments were required to our net deferred tax asset balance of $8.8 million as of December 31, 2018 related to the remeasurement of our deferred tax assets under the 2017 Tax Reform Act.
Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients 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 PEO HR Outsourcing solutions clients to pay their comprehensive service fees no later than one day prior to the applicable payroll date. In addition, we generally maintain the right to terminate the CSA and associated WSEEs 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 client 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
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| Insperity | 39
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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. Please read Note 1 to the Consolidated Financial Statements, “Accounting Policies,” for additional information.
Goodwill and other intangibles – Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and is written down when impaired. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which ranges from three to 10 years. Please read Note 1 to the Consolidated Financial Statements, “Accounting Policies,” for additional information.
New Accounting Pronouncements
We believe that we have implemented the accounting pronouncements with a material impact on our financial statements and do not believe there are any new or pending pronouncements that will materially impact our financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires recognition of lease assets and lease liabilities for leases previously classified as operating leases. The guidance is effective for fiscal years beginning after December 15, 2018. We expect the lease commitments discussed in Note 11, to the Consolidated Financial Statements, “Leases” to appear on our Consolidated Balance Sheets in the form of a lease asset and a lease liability. Such amounts are based on the present value of such commitments using our incremental borrowing rate. We plan to utilize the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. We do not plan to elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets.
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| Insperity | 40
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations
The following table summarized our key financial and statistical information related to our results of operations:
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| (in thousands, except per share and statistical data) | Year Ended December 31, | | % Change |
| 2018 | | 2017 | | 2016 | | 2018 v 2017 | 2017 v 2016 |
| | | |
| Financial data: | | | | | | | | |
Revenues(1) | $ | 3,828,549 |
| | $ | 3,300,223 |
| | $ | 2,941,347 |
| | 16.0 | % | 12.2 | % |
| Gross profit | 681,909 |
| | 572,731 |
| | 491,610 |
| | 19.1 | % | 16.5 | % |
| Operating expenses | 502,873 |
| | 442,790 |
| | 385,304 |
| | 13.6 | % | 14.9 | % |
| Operating income | 179,036 |
| | 129,941 |
| | 106,306 |
| | 37.8 | % | 22.2 | % |
| Other income (expense) | 3,324 |
| | 200 |
| | (1,129 | ) | | — |
| — |
|
| Net income | 135,413 |
| | 84,402 |
| | 65,991 |
| | 60.4 | % | 27.9 | % |
| Diluted EPS | 3.22 |
| | 2.01 |
| (2) | 1.54 |
| (2) | 60.2 | % | 30.5 | % |
| | | | | | | | | |
Non-GAAP financial measures(3): | | | | | | | | |
| Adjusted net income | $ | 157,536 |
| | $ | 103,005 |
| | $ | 76,718 |
| | 52.9 | % | 34.3 | % |
| Adjusted EBITDA | 239,601 |
| | 177,681 |
| | 141,183 |
| | 34.8 | % | 25.9 | % |
| Adjusted EPS | 3.75 |
| | 2.45 |
| (2) | 1.79 |
| (2) | 53.1 | % | 36.9 | % |
| | | | | | | | | |
| Average WSEEs paid | 209,123 |
| | 182,696 |
| | 165,850 |
| | 14.5 | % | 10.2 | % |
| | | | | | | | | |
Statistical data (per WSEE per month): | | | | | | | | |
Revenues(4) | $ | 1,526 |
| | $ | 1,505 |
| | $ | 1,478 |
| | 1.4 | % | 1.8 | % |
| Gross profit | 272 |
| | 261 |
| | 247 |
| | 4.2 | % | 5.7 | % |
| Operating expenses | 201 |
| | 202 |
| | 194 |
| | (0.5 | )% | 4.1 | % |
| Operating income | 71 |
| | 59 |
| | 53 |
| | 20.3 | % | 11.3 | % |
| Net income | 54 |
| | 38 |
| | 33 |
| | 42.1 | % | 15.2 | % |
Adjusted EBITDA(3) | 95 |
| | 81 |
| | 71 |
| | 17.3 | % | 14.1 | % |
(1)Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows: |
| | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Gross billings | $ | 23,830,731 |
| $ | 20,173,812 |
| $ | 17,932,857 |
|
| Less: WSEE payroll cost | 20,002,182 |
| 16,873,589 |
| 14,991,510 |
|
| Revenues | $ | 3,828,549 |
| $ | 3,300,223 |
| $ | 2,941,347 |
|
| |
(2) | Adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 in the form of a stock dividend. |
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(3) | Please read “—Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP. |
(4)Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows: |
| | | | | | | | | |
| | Year Ended December 31, |
| (per WSEE per month) | 2018 | 2017 | 2016 |
| Gross billings | $ | 9,496 |
| $ | 9,202 |
| $ | 9,011 |
|
| Less: WSEE payroll cost | 7,970 |
| 7,697 |
| 7,533 |
|
| Revenues | $ | 1,526 |
| $ | 1,505 |
| $ | 1,478 |
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| Insperity | 41
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Key Operating Metrics
We monitor certain key metrics to measure our performance, including:
WSEEs
Adjusted EBITDA
Adjusted EPS
Our growth in the number of WSEEs paid is affected by three primary sources: new client sales, client retention and the net change in existing clients through WSEE new hires and layoffs.
During 2018, the number of WSEEs paid from new client sales increased 27.0% over 2017 on a 16.2% increase in the average number of Business Performance Advisors (“BPAs”). In addition, the net change in existing clients and client retention improved compared to 2017.
During 2017, the number of WSEEs paid from new client sales increased 10.1% over 2016 on an 11.7% increase in the average number of BPAs. In addition, the net change in existing clients and client retention declined compared to 2016.
Revenues
2018 Compared to 2017
Our revenues for 2018 were $3.8 billion, an increase of 16.0%, primarily due to the following:
Average WSEEs paid increased 14.5%
Revenues per WSEE per month increased 1.4%, or $21
2017 Compared to 2016
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| Insperity | 42
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our revenues for 2017 were $3.3 billion, an increase of 12.2%, primarily due to the following:
Average WSEEs paid increased 10.2%
Revenues per WSEE per month increased 1.8%, or $27
We provide our PEO HR Outsourcing solutions to small and medium-sized businesses in strategically selected markets throughout the United States. PEO HR Outsourcing solutions revenue distribution by region follows:
PEO HR Outsourcing Solutions Revenue by Region
(in thousands)
The percentage of total PEO HR Outsourcing solutions revenues in our significant markets include the following:
Significant Markets
Gross Profit
In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, our gross profit per WSEE and our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings.
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| Insperity | 43
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our gross billings charged to our PEO Outsourcing solutions clients are subject to pricing arrangements that are typically renewed annually. We use gross profit per WSEE per month as our principal measurement of relative performance at the gross profit level.
2018 Compared to 2017
Our pricing objectives attempt to achieve a level of revenue per WSEE that matches or exceeds changes in primary direct costs and operating expenses. The net decrease in costs between 2018 and 2017 due to changes in cost estimates for benefits and workers compensation totaled $5.0 million as discussed below. The primary direct cost components changed as follows:
Benefits costs
The cost of group health insurance and related employee benefits increased $6 per WSEE per month, or 2.2%, on a per covered employee basis.
Changes in estimated claims run-off related to prior periods was a reduction of $1.3 million, or $1 per WSEE per month, in 2018 compared to an increase of $1.2 million, or $1 per worksite employee per month, in 2017.
The percentage of WSEEs covered under our health insurance plan was 68.0% in 2018 and 68.8% in 2017.
Please read “—Critical Accounting Policies and Estimates—Benefits Costs” for a discussion of our accounting for health insurance costs.
Workers’ compensation costs
Our continued discipline around our client selection, safety and claims management contributed to the reduction in our cost per WSEE and, as a result, has allowed for claims within our policy periods to be closed out at amounts below our original costs estimates.
Workers’ compensation costs increased 6.2%, but decreased $3 on a per WSEE per month basis, in 2018 compared to 2017.
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| Insperity | 44
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $18.8 million, or 0.11% of non-bonus payroll costs, in 2018 compared to a reduction of $16.3 million, or 0.11% of non-bonus payroll costs, in 2017. The 2018 period costs include the impact of a 2.6% discount rate used to accrue workers’ compensation loss claims, compared to a 1.6% discount rate used in the 2017 period.
As a percentage of non-bonus payroll cost, workers’ compensation costs in 2018 were 0.49% compared to 0.54% in 2017.
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 15.8%, or $6 per WSEE per month, due primarily to an 18.5% increase in payroll costs offset by lower unemployment tax rates in 2018.
Payroll taxes as a percentage of payroll cost were 6.7% in 2018 compared to 6.9% in 2017.
2017 Compared to 2016
The net decrease in costs between 2017 and 2016 due to changes in cost estimates for benefits and workers compensation totaled $9.3 million as discussed below. The primary direct cost components changed as follows:
Benefits costs
The cost of group health insurance and related employee benefits increased $4 per WSEE per month, or 1.2%, on a per covered employee basis.
Changes in estimated claims run-off related to prior periods was an increase of $1.2 million, or $1 per WSEE per month, in 2017 compared to $5.1 million, or $3 per worksite employee per month, in 2016.
The percentage of WSEEs covered under our health insurance plan was 68.8% in 2017 and 69.2% in 2016.
Please read “—Critical Accounting Policies and Estimates—Benefits Costs” for a discussion of our accounting for health insurance costs.
Workers’ compensation costs
Our continued discipline around our client selection, safety and claims management contributed to the reduction in our cost per WSEE and, as a result, has allowed for claims within our policy periods to be closed out at amounts below our original costs estimates.
Workers’ compensation costs increased 2.2%, but decreased $3 on a per WSEE per month basis, in 2017 compared to 2016.
As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $16.3 million, or 0.11% of non-bonus payroll costs, in 2017 compared to $10.9 million, or 0.08% of non-bonus payroll costs, in 2016. The 2017 period costs include the impact of a 1.6% discount rate used to accrue workers’ compensation loss claims, compared to a 1.1% discount rate used in the 2016 period.
As a percentage of non-bonus payroll cost, workers’ compensation costs in 2017 were 0.54% compared to 0.59% in 2016.
Please read “—Critical Accounting Policies and Estimates—Workers’ Compensation Costs” for a discussion of our accounting for workers’ compensation costs.
Payroll tax costs
|
| | |
| Insperity | 45
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Payroll taxes increased 12.6% primarily due to a 12.6% increase in payroll costs, or $12 on a per WSEE per month basis.
Payroll taxes as a percentage of payroll cost were 6.9% in 2017 compared to 6.8% in 2016.
Operating Expenses
2018 Compared to 2017
The following table presents certain information related to our operating expenses:
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | $ | | WSEE |
| (in thousands, except per WSEE) | 2018 | 2017 | % Change | | 2018 | 2017 | % Change |
| | | | | | | | |
| Salaries | $ | 301,027 |
| $ | 259,531 |
| 16.0 | % | | $ | 120 |
| $ | 118 |
| 1.7 | % |
| Stock-based compensation | 20,425 |
| 24,345 |
| (16.1 | )% | | 8 |
| 11 |
| (27.3 | )% |
| Commissions | 28,957 |
| 22,773 |
| 27.2 | % | | 12 |
| 10 |
| 20.0 | % |
| Advertising | 18,554 |
| 16,686 |
| 11.2 | % | | 7 |
| 8 |
| (12.5 | )% |
| General and administrative | 111,068 |
| 101,273 |
| 9.7 | % | | 45 |
| 46 |
| (2.2 | )% |
| Depreciation and amortization | 22,842 |
| 18,182 |
| 25.6 | % | | 9 |
| 9 |
| — |
|
| Total operating expenses | $ | 502,873 |
| $ | 442,790 |
| 13.6 | % | | $ | 201 |
| $ | 202 |
| (0.5 | )% |
Operating expenses for 2018 increased 13.6% to $502.9 million compared to $442.8 million in 2017. Operating expenses per WSEE per month for 2018 decreased 0.5% to $201 compared to $202 in 2017.
Salaries of corporate and sales staff increased 16.0% to $301.0 million, or $2 per WSEE per month, compared to 2017. The increase was primarily due to a $9.3 million charge related to a one-time tax reform bonus paid to corporate employees, a 10.7% increase in headcount, including a 16.2% increase in BPAs in 2018, and additional incentive compensation expense as a result of stronger operating results.
Stock-based compensation decreased 16.1% to $20.4 million, or $3 per WSEE per month, compared to 2017. This decrease was primarily due to the acceleration of restricted stock awards and associated expense into the fourth quarter of 2017 that were originally scheduled to vest in the first quarter of 2018. Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the Consolidated Financial Statements for additional information.
Commissions expense increased 27.2% to $29.0 million, or $2 per WSEE per month, compared to 2017. Commissions are primarily due to commissions associated with the 2001growth in our PEO HR Outsourcing solutions including an increase in the amount of sales channel referral fees paid in 2018.
Advertising expense increased11.2% to $18.6 million, but decreased$1 on a per WSEE per month basis, compared to 2017. The increase was due to additional spending on sponsorships, promotional items and billboard advertising.
General and administrative expenses increased 9.7% to $111.1 million, but decreased $1 on a per WSEE per month basis, compared to 2017. The increase was due to increased travel and training expenses associated with the increase in BPAs, professional services, technology costs, rent and office expenses, partially offset by the non-recurrence of charitable contributions made in 2017 related to Hurricane Harvey relief efforts.
Depreciation and amortization expense increased 25.6% to $22.8 million, but remained flat on a per WSEE per month basis, compared to 2017. The increase was primarily due to increased capital expenditures related to software development costs.
|
| | |
| Insperity | 46
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
2017 Compared to 2016
The following table presents certain information related to our operating expenses:
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | $ | | WSEE |
| (in thousands, except per WSEE) | 2017 | 2016 | % Change | | 2017 | 2016 | % Change |
| | | | | | | | |
| Salaries | $ | 259,531 |
| $ | 229,589 |
| 13.0 | % | | $ | 118 |
| $ | 115 |
| 2.6 | % |
| Stock-based compensation | 24,345 |
| 16,643 |
| 46.3 | % | | 11 |
| 8 |
| 37.5 | % |
| Commissions | 22,773 |
| 19,288 |
| 18.1 | % | | 10 |
| 10 |
| — |
|
| Advertising | 16,686 |
| 16,447 |
| 1.5 | % | | 8 |
| 8 |
| — |
|
| General and administrative | 101,273 |
| 86,693 |
| 16.8 | % | | 46 |
| 44 |
| 4.5 | % |
| Depreciation and amortization | 18,182 |
| 16,644 |
| 9.2 | % | | 9 |
| 9 |
| — |
|
| Total operating expenses | $ | 442,790 |
| $ | 385,304 |
| 14.9 | % | | $ | 202 |
| $ | 194 |
| 4.1 | % |
Operating expenses for 2017 increased 14.9% to $442.8 million compared to $385.3 million in 2016. Operating expenses per WSEE per month for 2017 increased 4.1% to $202 compared to $194 in 2016.
Salaries of corporate and sales staff for 2017 increased 13.0% to $259.5 million, or $3 per WSEE per month, compared to 2016. The increase was primarily due to an 8.3% rise in headcount, including an 11.7% increase in BPAs in 2017 and additional incentive compensation as a result of stronger operating results.
Stock-based compensation for 2017 increased 46.3% to $24.3 million, or $3 per WSEE per month, compared to 2016. This increase was primarily due to awards issued under our Long-Term Incentive Plan,Program established in 2015 and the “Incentive Plans”),acceleration of restricted stock awards that were scheduled to vest in the Board or the Compensation Committee may delegate authorityfirst quarter of 2018 in order to maximize our tax deduction on certain restricted stock vestings, which would have been limited under the Incentive2017 Tax Reform Act. Stock-based compensation expense represents amortization of restricted stock and long-term incentive awards granted to employees and the annual stock grant made to non-employee directors. Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the ChairmanConsolidated Financial Statements for additional information.
Commissions expense for 2017 increased 18.1% to $22.8 million, but remained flat on a per WSEE per month basis, compared to 2016. Commissions are primarily associated with compensation to our sales force for sales of our PEO HR Outsourcing solutions.
General and administrative expenses for 2017 increased 16.8% to $101.3 million, or $2 per WSEE per month , compared to 2016. Included in 2017 is a $2.0 million donation to Hurricane Harvey relief efforts. The remaining increase was due to increased travel, meals and training on a higher level of corporate employee, event expenses associated with a new client referral program, technology maintenance costs and office costs.
Depreciation and amortization expense for 2017 increased 9.2% to $18.2 million, but remained flat on a per WSEE per month basis, compared to 2016. The increase was primarily due to $1.1 million of depreciation and amortization expense related to the new facility opened on our corporate campus in early 2017.
Other Income (Expense)
Other income (expense), net was income of $3.3 million in 2018, income of $0.2 million in 2017 and expense of $1.1 million in 2016. The 2018 increase in income was primarily due to interest income earned on our investments. Please read Note 2 to the Consolidated Financial Statements, “Cash, Cash Equivalents and Marketable Securities,” for additional information.
Income Tax Expense
Our effective income tax rate was 25.7% in 2018, 35.1% in 2017 and 37.3% in 2016.
|
| | |
| Insperity | 47
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
During 2018 we incurred federal and state income tax expense of $46.9 million on pre-tax income of $182.4 million. Our provision for income taxes differed from the U.S. statutory rate of 21% primarily due to state income taxes and non-deductible expenses, offset by a $2.7 million tax benefit associated wtih equity compensation.
During 2017 we incurred federal and state income tax expense of $45.7 million on pre-tax income of $130.1 million. Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses, including a non-cash tax charge of $2.5 million related to the enactment of the Board2017 Tax Reform Act offset by $6.2 million of tax benefits associated with equity compensation.
During 2016 we incurred federal and state income tax expense of $39.2 million on pre-tax income of $105.2 million. Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses. In addition, during 2016, as a result of our adoption of Accounting Standard Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting, we recognized income tax benefits of $1.5 million related to the vesting of restricted stock awards and exercise of non-qualified stock options.
Please read Note 1 “Accounting Policies” and Note 7 “Income Taxes,” to the Consolidated Financial Statements for additional information.
Non-GAAP Financial Measures
Non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used to their most directly comparable GAAP financial measures as provided in the tables below.
|
| | |
| Insperity | 48
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
| | |
| Non-GAAP Measure | Definition | Benefit of Non-GAAP Measure |
| Non-bonus payroll cost | Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus payrolls paid to our WSEEs.
Bonus payroll cost varies from period to period, but has no direct impact to our ultimate workers’ compensation costs under the current program. | Our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our workers’ compensation costs.
We include these non-GAAP financial measures because we believe they are useful to investors in allowing for greater transparency related to the costs incurred under our current workers’ compensation program. |
| Adjusted cash, cash equivalents and marketable securities | Excludes funds associated with: • federal and state income tax withholdings, • employment taxes, • other payroll deductions, and • client prepayments. | We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior periods, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because they allow investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. Adjusted EBITDA is used by our lenders to assess our leverage and ability to make interest payments. |
| |
| Adjusted operating expense | Represents operating expenses excluding the impact of the following: • costs associated with a one-time tax reform bonus paid to corporate employees and • charitable donations to Hurricane Harvey relief efforts. |
| |
| EBITDA | Represents net income computed in accordance with GAAP, plus: • interest expense, • income tax expense, and • depreciation and amortization expense. |
| |
| Adjusted EBITDA | Represents EBITDA plus: • non-cash stock based compensation, • costs associated with a one-time tax reform bonus paid to corporate employees, and • charitable donations to Hurricane Harvey relief efforts. |
| |
| Adjusted net income | Represents net income computed in accordance with GAAP, excluding: • non-cash stock based compensation, • costs associated with a one-time tax reform bonus paid to corporate employees, and • charitable donations to Hurricane Harvey relief efforts. |
| |
| Adjusted EPS | Represents diluted net income per share computed in accordance with GAAP, excluding: • non-cash stock based compensation, • costs associated with a one-time tax reform bonus paid to corporate employees, and • charitable donations to Hurricane Harvey relief efforts. |
Following is a committeereconciliation of onepayroll cost (GAAP) to non-bonus payroll costs (non-GAAP):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands, except per WSEE per month) | 2018 | | 2017 | | 2016 |
| $ | WSEE | | $ | WSEE | | $ | WSEE |
| | | | | | | | | |
| Payroll cost | $ | 20,002,182 |
| $ | 7,971 |
| | $ | 16,873,589 |
| $ | 7,697 |
| | $ | 14,991,510 |
| $ | 7,533 |
|
| Less: Bonus payroll cost | 2,498,875 |
| 996 |
| | 1,959,053 |
| 894 |
| | 1,648,936 |
| 829 |
|
| Non-bonus payroll cost | $ | 17,503,307 |
| $ | 6,975 |
| | $ | 14,914,536 |
| $ | 6,803 |
| | $ | 13,342,574 |
| $ | 6,704 |
|
| % Change year over year | 17.4 | % | 2.5 | % | | 11.8 | % | 1.5 | % | | 15.1 | % | 1.2 | % |
|
| | |
| Insperity | 49
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Following is a reconciliation of EBITDA (GAAP) and adjusted EBITDA (non-GAAP):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per WSEE per month) | Year Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| $ | WSEE | | $ | WSEE | | $ | WSEE | | $ | WSEE | | $ | WSEE |
| | | | | | | | | | | | | | | |
| Net income | $ | 135,413 |
| $ | 54 |
| | $ | 84,402 |
| $ | 38 |
| | $ | 65,991 |
| $ | 33 |
| | $ | 39,390 |
| $ | 23 |
| | $ | 28,004 |
| $ | 18 |
|
| Income tax expense | 46,947 |
| 19 |
| | 45,739 |
| 21 |
| | 39,186 |
| 19 |
| | 26,229 |
| 14 |
| | 19,623 |
| 13 |
|
| Interest expense | 4,668 |
| 2 |
| | 3,213 |
| 1 |
| | 2,396 |
| 1 |
| | 459 |
| — |
| | 370 |
| — |
|
| Depreciation and amortization | 22,842 |
| 9 |
| | 18,182 |
| 9 |
| | 16,644 |
| 9 |
| | 18,565 |
| 11 |
| | 21,387 |
| 14 |
|
| EBITDA | 209,870 |
| 84 |
| | 151,536 |
| 69 |
| | 124,217 |
| 62 |
| | 84,643 |
| 48 |
| | 69,384 |
| 45 |
|
| Impairment charges and other | — |
| — |
| | — |
| — |
| | — |
| — |
| | 10,480 |
| 6 |
| | 3,687 |
| 2 |
|
| Stock-based compensation | 20,425 |
| 8 |
| | 24,345 |
| 11 |
| | 16,643 |
| 8 |
| | 13,345 |
| 8 |
| | 11,053 |
| 7 |
|
| One-time tax reform bonus | 9,306 |
| 3 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
| Charitable donations to Hurricane Harvey relief efforts | — |
| — |
| | 2,000 |
| 1 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
| Other | — |
| — |
| | (200 | ) | — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
| Stockholder advisory expenses | — |
| — |
| | — |
| — |
| | 323 |
| 1 |
| | 1,546 |
| 1 |
| | — |
| — |
|
| Adjusted EBITDA | $ | 239,601 |
| $ | 95 |
| | $ | 177,681 |
| $ | 81 |
| | $ | 141,183 |
| $ | 71 |
| | $ | 110,014 |
| $ | 63 |
| | $ | 84,124 |
| $ | 54 |
|
| % Change year over year | 34.8 | % | 17.3 | % | | 25.9 | % | 14.1 | % | | 28.3 | % | 12.7 | % | | 30.8 | % | 16.7 | % | | (8.9 | )% | (10.0 | )% |
Following is a reconciliation of cash, cash equivalents and marketable securities (GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP) to adjusted cash, cash equivalents and marketable securities (non-GAAP):
|
| | | | | | | |
| | December 31, |
| (in thousands) | 2018 | | 2017 |
| | |
| Cash, cash equivalents and marketable securities | $ | 387,554 |
|
| $ | 356,220 |
|
| Less: | | | |
| Amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions | 224,487 |
|
| 271,547 |
|
| Client prepayments | 34,177 |
|
| 23,603 |
|
| Adjusted cash, cash equivalents and marketable securities | $ | 128,890 |
|
| $ | 61,070 |
|
|
| | |
| Insperity | 50
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Following is a reconciliation of operating expenses (GAAP) to adjusted operating expenses (non-GAAP):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands, except per WSEE per month) | 2018 | | 2017 | | 2016 |
| $ | WSEE | | $ | WSEE | | $ | WSEE |
| | | |
| Operating expenses | $ | 502,873 |
| $ | 201 |
| | $ | 442,790 |
| $ | 202 |
| | $ | 385,304 |
| $ | 194 |
|
| Less: | | | | | | | | |
| One-time tax reform bonus | 9,306 |
| 4 |
| | — |
| — |
| | — |
| — |
|
| Charitable donations to Hurricane Harvey relief efforts | — |
| — |
| | 2,000 |
| 1 |
| | — |
| — |
|
| Stockholder advisory expenses | — |
| — |
| | — |
| — |
| | 323 |
| 1 |
|
| Adjusted operating expenses | $ | 493,567 |
| $ | 197 |
| | $ | 440,790 |
| $ | 201 |
| | $ | 384,981 |
| $ | 193 |
|
| % Change year over year | 12.0 | % | (2.0 | )% | | 14.5 | % | 4.1 | % | | 6.9 | % | (6.3 | )% |
Following is a reconciliation of net income (GAAP) to adjusted net income (non-GAAP):
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | |
| Net income | $ | 135,413 |
| | $ | 84,402 |
| | $ | 65,991 |
| | $ | 39,390 |
| | $ | 28,004 |
|
| Non-GAAP adjustments: | | | | | | | | | |
Impairment charges and other(1) | — |
| | — |
| | — |
| | 10,480 |
| | 3,687 |
|
| Stock-based compensation | 20,425 |
| | 24,345 |
| | 16,643 |
| | 13,345 |
| | 11,053 |
|
| One-time tax reform bonus | 9,306 |
| | — |
| | — |
| | — |
| | — |
|
| Charitable donations to Hurricane Harvey relief efforts | — |
| | 2,000 |
| | — |
| | — |
| | — |
|
| Other | — |
| | (200 | ) | | — |
| | — |
| | — |
|
| Stockholder advisory expenses | — |
| | — |
| | 323 |
| | 1,546 |
| | — |
|
| Total non-GAAP adjustments | 29,731 |
| | 26,145 |
| | 16,966 |
| | 25,371 |
| | 14,740 |
|
| Tax effect of non-GAAP adjustments | (7,608 | ) | | (9,354 | ) | | (6,239 | ) | | (10,242 | ) | | (6,010 | ) |
| Enactment of the 2017 Tax Reform Act | — |
| | 2,481 |
| | — |
| | — |
| | — |
|
| Disaster relief tax credit | — |
| | (669 | ) | | — |
| | — |
| | — |
|
| Adjusted net income | $ | 157,536 |
| | $ | 103,005 |
| | $ | 76,718 |
| | $ | 54,519 |
| | $ | 36,734 |
|
| % Change year over year | 52.9 | % | | 34.3 | % | | 40.7 | % | | 48.4 | % | | (13.1 | )% |
| |
(1) | Includes impairment and other charges of $10. 5 million related to the sale of two aircraft in 2015, a $2.5 million charge associated with the Employment Screening reporting unit in 2014 and a $1.2 million non-cash charge related to a revision in our office consolidation plans in 2014. |
|
| | |
| Insperity | 51
| 2018 Form 10-K |
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Following is a reconciliation of diluted EPS (GAAP) to adjusted EPS (non-GAAP)(1):
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (amounts per share) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| Diluted EPS | $ | 3.22 |
| | $ | 2.01 |
| | $ | 1.54 |
| | $ | 0.79 |
| | $ | 0.53 |
|
| Non-GAAP adjustments: | | | | | | | | | |
| Impairment charges and other | — |
| | — |
| | — |
| | 0.21 |
| | 0.07 |
|
| Stock-based compensation | 0.49 |
| | 0.58 |
| | 0.39 |
| | 0.27 |
| | 0.21 |
|
| One-time tax reform bonus | 0.22 |
| | — |
| | — |
| | — |
| | — |
|
| Charitable donations to Hurricane Harvey relief efforts | — |
| | 0.05 |
| | — |
| | — |
| | — |
|
| Other | — |
| | (0.01 | ) | | — |
| | — |
| | — |
|
| Stockholder advisory expenses | — |
| | — |
| | 0.01 |
| | 0.03 |
| | — |
|
| Impact of dividends exceeding earnings | — |
| | — |
| | — |
| | — |
| | 0.03 |
|
| Total non-GAAP adjustments | 0.71 |
| | 0.62 |
| | 0.40 |
| | 0.51 |
| | 0.31 |
|
| Tax effect of non-GAAP adjustments | (0.18 | ) | | (0.22 | ) | | (0.15 | ) | | (0.20 | ) | | (0.12 | ) |
| Enactment of the 2017 Tax Reform Act | — |
| | 0.06 |
| | — |
| | — |
| | — |
|
| Disaster relief tax credit | — |
| | (0.02 | ) | | — |
| | — |
| | — |
|
| Adjusted EPS | $ | 3.75 |
| | $ | 2.45 |
| | $ | 1.79 |
| | $ | 1.10 |
| | $ | 0.72 |
|
| % Change year over year | 53.1 | % | | 36.9 | % | | 62.7 | % | | 52.8 | % | | (13.3 | )% |
| |
(1) | Per share amounts for the years 2017, 2016, 2015 and 2014 have been adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 as a stock dividend. |
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of, among other things, our expansion plans, stock repurchases, potential acquisitions, debt service requirements and other operating cash needs. To meet short-term liquidity requirements, which are primarily the payment of direct costs and operating expenses, we rely primarily on cash from operations. Longer-term projects, large stock repurchases or more Board members, respectively, pursuantsignificant acquisitions may be financed with debt or equity. We may seek to such conditions and limitations as each may establish, except that neither may delegate to any person the authority to make awards,raise additional capital or take other action,steps to increase or manage our liquidity and capital resources. We had $387.6 million in cash, cash equivalents and marketable securities at December 31, 2018, of which approximately $224.5 million was payable in early January 2019 for withheld federal and state income taxes, employment taxes and other payroll deductions, and $34.2 million were client prepayments that were payable in January 2019. At December 31, 2018, we had working capital of $94.2 million compared to $54.2 million at December 31, 2017. The increase in working capital reflects, in part, cash flow from operations and borrowings under our facility, offset by share repurchases, dividends and capital expenditures. We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our credit facility will be adequate to meet our liquidity requirements for 2019. We intend to rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs.
We have a credit facility with a syndicate of financial institutions. In December 2018, we borrowed $40.0 million under the Incentive Plans with respectcredit facility, which was used for general corporate purposes. In January 2016, we borrowed $104.4 million under the credit facility, which we used to participants whofund a portion of the purchase price for our modified Dutch auction tender offer. In February 2018, the credit facility was increased from $200 million to $350 million. The credit facility, which may be increased to $400 million based on the terms and subject to Section 16the conditions set forth in the agreement related to the facility, is available for working capital and general corporate purposes, including acquisitions. At December 31, 2018, we had outstanding letters of credit and borrowings totaling $145.4 million under the Exchange Act .credit facility. Please read Note 6 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Independent Advisory CommitteeCash Flows from Operating Activities
The Independent Advisory Committee,Our net cash flows from operating activities in 2018 were $184.5 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our PEO HR Outsourcing solutions clients. Cash and cash equivalents, and thus our reported cash flows from operating activities, are significantly impacted by various external and internal factors, which was formedare reflected in 2015 pursuantpart by the changes in our balance sheet accounts. These include the following:
Timing of client payments / payroll taxes – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to the Agreement, reviewedpayment of worksite employee payrolls and associated payroll taxes. Therefore, the Company’slast business day of a reporting period has a substantial impact on our reporting of operating cash flows. For example, many WSEEs are paid on Fridays and made recommendations to the Board regarding capital allocation, expenses and targeted ranges for Adjusted EBITDA margins, while taking into consideration the Company’s risk profile and the potential impact of any recommendations on the Company’s business model and strategic plan. Pursuant to the terms of its charter, the Independent Advisory Committee was dissolved in February 2016. The members of the Independent Advisory Committee were Mr. Feld, who served as chairperson, and Messrs. Brown, Sorensen and Young.
Executive Officers
Please see “Item S-K 401(b) - Executive Officers of the Registrant”at month-end; therefore, operating cash flows decrease in the Original Filing.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and officers and persons who own more than 10% of the Common Stock to file initial reports of ownership and reports of changes in ownership (Forms 3, 4, and 5) of Common Stock with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all such formsreporting periods that they file.
Based solelyend on review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all Section 16(a) reports with respect toa Friday. In the year ended December 31, 2015, applicable2018, the last business day of the reporting period ended on a Monday, client prepayments were $34.2 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $224.5 million. In the period ended December 31, 2017, which ended on a Friday, client prepayments were $23.6 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $271.5 million.
Workers’ compensation plan funding – In 2018 and 2017, we received $19.4 million and $22.7 million, respectively, for the return of excess claim funds related to its officers, directorsthe workers’ compensation program, which increased working capital.
Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are determined solely by United based primarily upon recent claim history and greateranticipated cost trends, also have a significant impact on our operating cash flows. As of December 31, 2018, Plan Costs were more than 10% beneficial ownersthe net premiums paid and owed to United by $6.3 million, which is $15.3 million less than our agreed-upon $9.0 million surplus maintenance level. The $15.3 million difference is therefore reflected as a current liability and $9.0 million is reflected as a long-term asset on our Consolidated Balance Sheets at December 31, 2018. In addition, the premiums owed to United at December 31, 2018, were timely filed.$15.2 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.
Operating results – Our net income has a significant impact on our operating cash flows. Our net income increased 60.4% to $135.4 million in 2018 from $84.4 million in 2017. Please read “Results of Operations.”
Cash Flows from Investing Activities
Our net cash flows used in investing activities were $94.1 million during 2018, primarily due to $59.0 million in purchases of marketable securities, net of maturities and dispositions, and $35.3 million in property and equipment purchases.
Cash Flows from Financing Activities
Our net cash flows used in financing activities were $104.5 million during 2018. We repurchased $113.3 million in stock and paid $33.4 million in dividends, offset by borrowings of $40.0 million under our Facility. Please read Note 6 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information.
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| Insperity | 53
| 2018 Form 10-K |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of December 31, 2018, and the effect they are expected to have on our liquidity and capital resources:
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| | | | | | | | | | | | | | | |
| (in thousands) | Total |
| 2019 |
| 2020-2021 |
| 2022-2023 |
| Thereafter |
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| | | | | | |
| Non-cancelable operating leases | $ | 93,851 |
| $ | 16,542 |
| $ | 30,257 |
| $ | 23,414 |
| $ | 23,638 |
|
Purchase obligations(1) | 54,990 |
| 16,535 |
| 29,276 |
| 8,479 |
| 700 |
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| Long-term debt | 144,400 |
| — |
| — |
| 144,400 |
| — |
|
| Other long-term liabilities: | | | | | |
Accrued workers’ compensation claim costs(2) | 229,639 |
| 42,227 |
| 52,118 |
| 39,444 |
| 95,850 |
|
| Total contractual cash obligations | $ | 522,880 |
| $ | 75,304 |
| $ | 111,651 |
| $ | 215,737 |
| $ | 120,188 |
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(1) | The table includes purchase obligations associated with non-cancelable contracts individually greater than $100,000 and one year. |
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(2) | Accrued workers’ compensation claim costs include the short and long-term amounts. For more information, please read, “—Critical Accounting Policies and Estimates—Workers’ Compensation Costs.” |
Seasonality, Inflation and Quarterly Fluctuations
Our quarterly earnings are impacted by the seasonal nature of our medical claims costs and payroll taxes. Typically, medical claims costs tend to increase throughout the year with the fourth quarter being the period with the highest costs, which has a negative impact on our fourth quarter earnings. This trend is primarily the result of many WSEEs’ medical plan deductibles being fully met by the fourth quarter, which increases our liability with respect to those claims. We have also experienced variability on a quarterly basis in medical claims costs based on the unpredictable nature of large claims. Payroll taxes and associated billings are computed based on an employee’s annual taxable wage base. The annual payroll tax wage bases are frequently met in the first two quarters of each year depending on the employee’s compensation levels. As a result, the gross profit contribution from payroll taxes is typically higher in the first two quarters and declines in the latter half of each year. These historical trends may change and other seasonal trends may develop in the future. For further information related to our health insurance costs, please read “—Critical Accounting Policies and Estimates—Benefits Costs.”
We believe the effects of inflation have not had a significant impact on our results of operations or financial condition.
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| Insperity | 54
| 2018 Form 10-K |
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QUANTITIVE AND QUALITATIVE DISCLOSURES
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash equivalent short-term investments and our available-for-sale marketable securities. In addition, borrowings under our credit facility bear interest at a variable market rate. As of December 31, 2018, we had outstanding letters of credit and borrowings totaling $145.4 million under the credit facility. Please read Note 6 to the Consolidated Financial Statements, “Long-Term Debt,” for additional information. Our cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments. Our available-for-sale marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates.
We attempt to limit our exposure to interest rate risk primarily through diversification and low investment turnover. Our investment policy is designed to maximize after-tax interest income while preserving our principal investment. As a result, our marketable securities consist of tax-exempt short and intermediate-term debt securities, which are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. Government Securities.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is contained in a separate section of this Annual Report. See “Index to Consolidated Financial Statements.”
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| Insperity | 55
| 2018 Form 10-K |
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DISCLOSURE CONTROLS AND PROCEDURES
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.
Design and Evaluation of Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Ernst & Young LLP, our independent registered public accounting firm, also audited our internal control over financial reporting. Management’s report and the independent registered public accounting firm’s audit report are included in our 2018 Consolidated Financial Statements under the captions entitled “Management’s Report on Internal Control” and “Report of Independent Registered Public Accounting Firm,” and are incorporated herein by reference.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
Entry into a Material Definitive Agreement
On February 8, 2019, our wholly-owned subsidiary, Insperity Services, L.P. (“Insperity Services”), entered into a Standard Form of Agreement between Owner and Contractor (the “Construction Agreement”) with David E. Harvey Builders, Inc. (the “Contractor”). Under the Construction Agreement, the Contractor will supervise and direct the construction of a new ten-story office building and parking garage at our headquarters in Kingwood, Texas, which is expected to be completed in 2020. The Construction Agreement includes customary terms and indemnity provisions and contemplates an agreement between Insperity Services and Kirksey Architects, Inc., the project architect. Insperity Services will pay the Contractor an amount equal to the cost of work plus a fee equal to a percentage of the cost of work, with payments being made in installments based on the progress of the project. The aggregate amount under the Construction Agreement is expected to be between $65 million and $75 million, including the initial work order.
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| Insperity | 56
| 2018 Form 10-K |
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MANAGEMENT AND CERTAIN SECURITY HOLDERS
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Some of the information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Insperity Proxy Statement”).
Code of Business Conduct and Ethics
TheOur Board has adopted aour Code of Business Conduct and Ethics (the “Code”) governing the conduct“Code of the Company’s directors, officers and employees. The Code,Ethics”), which meets the requirements of Rule 303A.10 of the NYSENew York Stock Exchange Listed Company Manual and Item 406 of Regulation S-K, is intended to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure in the Company’s public filings, compliance with laws and the prompt internal reporting of violations of the Code.S-K. You can access theour Code of Ethics on the Company’sCorporate Governance page of our website at www.insperity.com in the Corporate Governance section under the Investor Relations tab. insperity.com. Changes in and waivers to the Code of Ethics for the Company’sour directors, executive officers and certain senior financial officers will be posted on the Company’sour Internet website within fourfive business days of being approved and maintained for at least 12 months. If you wish to raise a question or concern or report a violation to the Finance, Risk Management and Audit Committee, you should visit www.ethicspoint.com or call the Ethicspoint toll-free hotline at 1-866-384-4277.
ITEMItem 11. EXECUTIVE COMPENSATION.Executive Compensation.
The information required by this item is incorporated by reference to the information set forth under the captions “Director Compensation” and “Executive Compensation” in the Insperity Proxy Statement.
Compensation DiscussionItem 12. Security Ownership of Certain Beneficial Owners and Analysis
This Compensation DiscussionManagement and Analysis (“CD&A”) explains our compensation philosophy, objectives and strategies and the underlying elements of our compensation programs for the Company’s named executive officers (“NEOs”). This CD&A also summarizes decisions the Compensation Committee of our Board of Directors (“Compensation Committee”) made regarding these programs and the factors considered in making those decisions. The following individuals comprised our NEOs for 2015:
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Name | | Title |
Paul J. Sarvadi | | Chief Executive Officer and Chairman of the Board |
Douglas S. Sharp | | Chief Financial Officer, SVP of Finance and Treasurer |
Richard G. Rawson | | President |
A. Steve Arizpe | | Chief Operating Officer and EVP of Client Services |
Jay E. Mincks | | EVP of Sales and Marketing |
Performance HighlightsRelated Stockholder Matters.
The Company’s financial performance in 2015 was stronginformation required by this item is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and continued to reflect our commitment to unit growthManagement” in the number of paid worksite employees (“WSEE”), effectively managing our pricing and direct costs, controlling operating expenses and enhancing total return for our stockholders.
For 2015, we continued to execute on our strategy to accelerate unit growth in WSEE, achieving double-digit growth of 11.6% on a year-over-year basis. We believe that WSEE is a key metric for measuring our sales success and client retention efforts.
Note: Adjusted EBITDA is a non-GAAP financial measure used by management to analyze the Company’s performance. Please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures” in our Original Filing for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.
For 2015, our adjusted EBITDA was $110.0 million, representing a 30.8% increase compared to 2014. Adjusted EBITDA represents EBITDA (earnings before interest, taxes, depreciation and amortization) plus non-cash impairments, stockholder advisory expenses and stock-based compensation. We believe that this overall increase in adjusted EBITDA demonstrates our ability to execute on our plan to grow sales, retain existing clients, effectively manage our pricing and direct costs and control operating costs.
* Excludes a special dividend of $2.00 per share paid in the fourth quarter of 2014.
On May 29, 2015, the Company announced a 16% increase to its quarterly cash dividend from $0.19 per share ($0.76 annualized) to $0.22 per share ($0.88 annualized), reflecting our continued confidence in our strategy and the significant free cash flow generated by our business. This is the second increase to our quarterly dividend since 2013, in addition to the $2.00 per share special dividend that we paid in December 2014.
Our Pay-for-Performance Compensation Philosophy
Insperity’s overall compensation philosophy is one of pay-for-performance. The objectives of our compensation plans are to attract, retain and motivate high performing individuals to achieve the Company’s annual and long-term business and strategic goals. A substantial portion of each executive officer’s total compensation package consists of long-term incentive components and a variable annual compensation component. The goal of these compensation components is to align the interests of the executive officers with those of the stockholders by tying a meaningful portion of executive compensation to our financial performance and stock price. In order to remain competitive for talent within the market, total compensation includes a fixed base salary, as well as an element of supplemental benefits and perquisites. We also design our compensation plans to motivate executives to maximize stockholder value over time, without encouraging excessive risk-taking that could adversely impact stockholder value.
The Compensation Committee has historically established a variety of annual performance goals designed to create a strong alignment between executive and stockholder interests. The Compensation Committee selects corporate performance goals that they believe have a direct influence on achieving the Company’s business objectives, contribute to the overall success of the Company and favorably impact stockholder value. Each corporate performance goal is intended to have a challenging achievement level that must be reached before triggering a payout for employees.
Based upon stockholder feedback and following input from our outside compensation consultants on corporate compensation trends and institutional investor preferences for performance-based long-term compensation, the Compensation Committee implemented a performance-based long-term equity incentive program beginning in 2015, as further described under “Elements of
Compensation - Long-Term Equity Incentive Compensation.” The Compensation Committee believes that the corporate performance goals that must be achieved for the performance-based awards to vest will align the value that executives could receive from these awards with the value that is created for stockholders. The implementation of a performance-based long-term equity incentive program, in combination with our other compensation elements, supports our pay-for-performance philosophy.
Compensation Objectives
We are committed to attracting, motivating, retaining and encouraging long-term employment of individuals with a demonstrated commitment to integrity and exemplary personal standards of performance. Our culture is based upon the value of and respect for each individual, encouraging personal and professional growth, rewarding outstanding individual and corporate performance and achieving excellence through a high-energy, collegial work environment. We are convinced these elements contribute to our vision of being an “employer of choice,” which increases our value to clients, employees, stockholders, and the communities where we live and work.
Our compensation objectives for our NEOs are based on the same principles that we employ in establishing all of our compensation programs. For our executive officers, our compensation programs are designed to:
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| • | | attract and retain key executive officers responsible for our success; and |
| • | | motivate management both to achieve short-term business goals and to enhance long-term stockholder value. |
Compensation Strategies
To accomplish our compensation objectives, we adhere to the following strategies:
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| • | | Promote a performance-driven culture that encourages growth by recognizing and rewarding employees who meet and exceed the Company’s business objectives. |
| • | | Maintain competitive base salaries that compensate employees based upon job responsibilities, level of experience, individual performance, comparisons to the market, internal comparisons and other relevant factors. |
| • | | Motivate and reward individual, departmental and corporate performance through variable pay programs. These programs directly support our business objectives, encourages leadership of departmental units and encourages collaboration and teamwork across the Company. As employees progress to higher levels in the Company, an increasing proportion of their compensation is linked to Company-wide and departmental performance. |
| • | | Alignment of interests among executive officers, employees and stockholders through the use of long-term equity and performance-based incentive compensation opportunities. |
| • | | Provide a competitive benefits package that recognizes and encourages work-life balance and fosters a long-term commitment to the Company. |
Insperity’s Best Practice Features
We have embedded in our overall compensation programs features aligned with the objectives of our business and designed to strengthen the link between the interests of our executive officers and those of our stockholders. Following is a summary of practices related to compensation that we have adopted and pay practices that we avoid:
What Insperity Has
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ü | | Stock ownership guidelines, for the CEO, three times base salary and for non-employee directors, three times the annual cash retainer |
ü | | Clawback policy for incentive compensation paid to any employee, including NEOs and other executive officers |
ü | | Minimum vesting period of three years for grants of restricted stock, stock options and phantom shares |
ü | | Double trigger requirement for early vesting of NEO equity awards in the event of a change in control |
ü | | Hedging policy prohibits employees and directors from engaging in hedging transactions involving shares of Common Stock |
ü | | Pledging policy prohibits employees and directors from engaging in pledging transactions involving shares of Common Stock that would be considered significant by the Board |
ü | | Established a lead independent director position |
ü | | Compensation Committee composed entirely of outside, independent directors |
ü | | Independent compensation consultant hired by and reporting directly to the Compensation Committee |
What Insperity Does Not Have
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û | | Employment agreements with NEOs or other executive officers |
û | | Executive pension or other similar retirement or supplemental benefits |
û | | Single trigger change in control agreements for NEOs |
û | | Tax gross-ups in the event of a change in control |
û | | Medical coverage for retirees |
û | | Excessive benefits and perquisites |
Summary of Compensation Elements
As previously described, one of the important values and objectives of our compensation programs is to provide our executive officers with a mixture of pay linked to Company and individual performance. The major elements of our 2015 annual compensation package for executive officers are summarized in the following chart.
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| Compensation Element | | Form of Compensation | | Purpose |
| | | | | |
Fixed | Base Salary | | Cash | | Provides fixed level of compensation to attract and retain talent |
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Variable and at Risk | Variable Cash Compensation (Insperity Annual Incentive Program) | | Cash | | Rewards executive officers for achieving annual Company, departmental and individual performance goals |
Long-Term Equity Incentives | | Restricted Stock and Performance Shares | | Supports long-term focus on creating stockholder value and provides strong retention incentive with multi-year vesting |
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Benefits | Retirement Benefits | | 401(k) Plan | | Provides competitive retirement benefits as part of comprehensive pay package |
Health & Welfare Benefits | | Medical, Dental, Life and Disability Benefits | | Provides competitive health and welfare benefits as part of comprehensive pay package |
Elements of Compensation
Base Salary
Base salary is intended to provide fixed annual compensation to attract and retain talented executive officers. Annual adjustments to base salary are based upon the annual performance evaluation, market data and other relevant considerations. Annual performance appraisals are completed through our talent management system, which evaluates the executive officer’s annual performance based on pre-established competencies and the achievement of specific individual performance goals. Competencies for executive officers include business ethics, continuous learning, integrity, managing customer focus, strategic thinking and visionary leadership.
Variable Cash Compensation
Variable cash compensation places a significant portion of executive compensation at risk and tied to corporate, departmental and individual performance. Variable compensation for all executive officers is paid through the Insperity Annual Incentive Program (“IAIP”), a non-equity incentive program under the stockholder-approved 2012 Incentive Plan. The IAIP embodies our pay-for-performance philosophy and helps align executive officers’ compensation to the Company’s overall performance, as well as to their respective individual performance and the performance of the departments under their respective supervision.
Long-Term Equity Incentive Compensation
Long-term equity incentives align the interests of the executive officers with those of the stockholders. We believe that long-term incentives enhance retention while rewarding executive officers for their service. Long-term equity incentive awards are made under the stockholder-approved 2012 Incentive Plan. The objectives of the 2012 Incentive Plan are to:
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| • | | provide incentives to attract and retain persons with training, experience and ability to serve as our employees; |
| • | | promote the interests of the Company by encouraging employees to acquire or increase their equity interest in the Company; |
| • | | provide a means by which employees may develop a sense of proprietorship and personal involvement in the development and financial success of the Company; and |
| • | | encourage employees to remain with, and devote their best efforts to the business of, the Company, thereby advancing the interests of the Company and its stockholders. |
Awards granted under the 2012 Incentive Plan may be in the form of restricted stock, restricted stock units, stock options, phantom shares, performance shares or units, bonus stock or other incentive awards. In recent years, including 2015, incentive awards have been made in the form of restricted stock or performance shares rather than stock options, as we believe the current accounting treatment of these award types more closely reflects the economic value of the award to the employees.
Following an executive compensation study by the Compensation Committee’s independent compensation consultant and based upon stockholder feedback and market compensation trends, including institutional investor preferences for performance-based long-term compensation, the Compensation Committee in March 2015 implemented a performance-based long-term equity incentive program, or LTIP, under the 2012 Incentive Plan. In deciding to add a performance-based long-term component to our compensation elements, the Compensation Committee determined that the LTIP further aligns the Company’s compensation structure with stockholder interests, provides an opportunity to subject a greater percentage of a recipient’s compensation to the achievement of long-term Company growth, creation of shareholder value and aids retention efforts. LTIP awards are tied to achieving increased levels of adjusted EBITDA and, in 2016, a portion is also tied to relative total shareholder return. Awards granted under the LTIP have a three-year performance period with any payout occurring after the conclusion of the performance period in the form of Common Stock. Under terms of the LTIP, the Compensation Committee determines each calendar year whether to make LTIP awards, which executives will participate, the performance goals and the payout opportunities.
Except in the case of a qualifying termination in connection with a change in control, or a termination due to death or disability, a participant in the LTIP must be continuously employed by the Company or its subsidiaries throughout the performance period and on the date such award is paid after the conclusion of the performance period to receive a payout of an award. Awards are granted in the form of phantom shares and will be paid in shares of Common Stock, and may include the right to dividend equivalents.
The 2012 Incentive Plan provides that awards granted to NEOs include a “double trigger” requirement in the case of a “change in control” of the Company as defined under the 2012 Incentive Plan. The imposition of a double trigger means that awards granted to NEOs do not immediately vest following a change in control. Under the double trigger, the conditions and/or restrictions that must be met with respect to vesting or exercisability of future awards granted to NEOs will lapse only after a “qualifying
termination” within a prescribed number of months following a change in control. All outstanding equity awards held by NEOs include the double trigger requirement.
In February 2015, the Company amended the 2012 Incentive Plan to require a minimum vesting period of three years for all grants of restricted stock and stock options that are time-vested awards. The Compensation Committee may grant awards with a shorter vesting schedule as an inducement to recruit a new employee, for an award granted in lieu of salary or bonus, or by reason of death, disability or change in control. Under the three year minimum vesting schedule, pro rata vesting is permissible. We anticipate continuing to utilize restricted stock awards with a three-year vesting schedule with no additional holding period required beyond the vesting date.
All equity grants to executive officers are approved solely by the Compensation Committee or the independent directors at regularly scheduled meetings, or in limited cases involving key recruits or promotions, by a special committee, special meeting, or unanimous written consent. If an award is made at a meeting, the grant date is the meeting date or a fixed, future date specified at the time of the grant, such as the first business day of a subsequent calendar month or the date that the grant recipient commences employment. If an award is approved by unanimous written consent, the grant date is a fixed, future date on or after the date the consent is effective under applicable corporate law (or, if later, the date the grant recipient starts employment). Restricted stock and performance awards are valued in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation. For stock options, the exercise price cannot be less than the closing price of Common Stock on the grant date and stock options may not be re-priced or exchanged for a cash buy-out or settlement with a lower exercise price, without prior stockholder approval.
Retirement Benefits
We do not provide pension arrangements or nonqualified defined contribution or other deferred compensation plans for our executive officers. Our executive officers are eligible to participate in the Company’s corporate 401(k) plan. Each payroll period, we contribute on behalf of each participant a matching contribution equal to 50% of the first 6% of compensation contributed to the 401(k) plan by the participant (subject to applicable limitations under the Internal Revenue Code). Effective January 1, 2016, the matching contribution increased to 100% of the first 6% of compensation contributed for all participating employees.
Supplemental Benefits, Including Management Perquisites
Executive compensation also includes supplemental benefits and a limited number of perquisites that enhance our ability to attract and retain talented executive officers. We believe that perquisites assist in the operation of business, allowing executive officers more time to focus on business objectives. Supplemental benefits and perquisites include the following:
Automobile
We provide automobiles to executive officers for both business and personal use. The executive officers are taxed for their personal use of the automobiles.
Supplemental Executive Disability Income Program
We maintain a supplemental executive disability income program for executive officers. The supplemental executive disability income program targets replacement of 75% of total cash compensation up to $20,000 per month. The program recognizes the significant variable pay at the senior levels in the Company and the benefit limitations of our basic long-term disability plan, which provides replacement of 60% of base salary only up to $10,000 per month.
Executive Wellness Program
We offer an Executive Wellness Program to the executive officers to assist them in maintaining their health. The program pays for wellness services, which allow the executive officers an opportunity to have a clear understanding of their current physical condition, risk factors, and ways to improve their health.
Chairman’s Trip
An annual Chairman’s Trip is held for employees recognized during the year for their outstanding service, and for sales representatives meeting a certain sales target and the spouses of those employees and representatives. We believe that executive officers should be part of the trip to recognize these outstanding employees of the Company. We strongly encourage executive officers to bring their spouses to further our vision of being an employer of choice and to build relationships that contribute to retention. We pay the associated income taxes related to the trip on behalf of the employees and the executive officers.
Club Membership
During 2015, the Company determined to discontinue paying country club memberships for executive officers, effective January 1, 2016. For 2015, the executive officers are taxed on membership dues.
Aircraft
During the first quarter of 2015, we entered into a plan to sell our aircraft and completed the sale in July 2015. In connection with the sale, perquisites relating to personal use of the aircraft and commuting on the aircraft were discontinued. Prior to the sale, the aircraft were used primarily for business purposes and for third party chartering, which helped to offset costs, and we provided access to the CEO, the president, the chief operating officer, and the executive vice president of sales and marketing for personal use. These individuals were required to reimburse the Company for the incremental cost associated with their personal use. The incremental cost was calculated by multiplying the number of hours of personal use by the average incremental cost per hour. Additionally, the CEO was not required to reimburse the Company for commuting between his primary residence in the greater Dallas area and a second residence in Arkansas and the Company’s headquarters in Houston, Texas and travel to Georgia where the Company has conference facilities. The cost of the CEO’s use of the aircraft for commuting has been included in his total compensation and was considered by the Compensation Committee when determining his compensation. Further, the CEO and other executives have responsibility for paying any income taxes associated with their personal use of the formerly owned aircraft.
Stockholder Advisory Votes
At our 2011 Annual Meeting, the stockholders, on an advisory basis, voted in favor of an annual advisory vote on the frequency of holding future votes to approve the compensation of the Company’s NEOs. In accordance with the stockholders’ preference, the Board has determined that the Company will hold an advisory vote on executive compensation every year.
At our 2015 Annual Meeting, the stockholders approved, in a non-binding advisory vote, the compensation of the Company’s NEOs, with over 88% of the votes cast in favor of such compensation. The Compensation Committee values the opinions expressed by our stockholders and considered input from stockholders, including the vote outcome, when it made compensation decisions for the executive officers for fiscal year 2016.
Role of Management in Setting Compensation
The recommendations of the CEO play a significant role in the Compensation Committee’s determination of compensation matters related to the executive officers reporting directly to the CEO. On an annual basis, the CEO makes recommendations to the Compensation Committee regarding such components as salary adjustments, target annual incentive opportunities and the value of long-term incentive awards. In making his recommendations, the CEO reviews the performance of each of our other executive officers based upon the core competencies of business ethics, continuous learning, integrity, managing customer focus, strategic thinking and visionary leadership, market data for similar positions and other factors deemed relevant in reviewing each executive officer’s performance. The Compensation Committee takes the CEO’s recommendation under advisement, but makes all final decisions regarding such individual’s compensation. The CEO does not make a recommendation with respect to his own compensation. Our CEO typically attends Compensation Committee meetings, but he is excused from any meeting when the Compensation Committee deems it advisable to meet in executive session or when the Compensation Committee meets to discuss items that would impact the CEO’s compensation. Our CEO’s compensation is reviewed and discussed by the Compensation Committee and his performance is evaluated at least annually. The Compensation Committee makes all final compensation decisions for each of our executive officers, including the CEO.
Role of the Compensation Committee in Setting Compensation
The Compensation Committee is responsible for designing, implementing and administering our executive compensation programs and, in doing so, the Compensation Committee is guided by the compensation philosophy stated above. The Compensation Committee reviews and approves total compensation for our executive officers through a comprehensive process that includes:
|
| | |
• | | selecting and engaging an external, independent consultant; |
• | | reviewing and selecting companies to be included in our peer group; |
• | | reviewing market data on all major elements of executive compensation; |
• | | reviewing alignment of executive compensation and incentive goals with stockholder value; and |
• | | reviewing performance results against corporate, departmental and individual goals. |
When reviewing and setting compensation for executive officers, the Compensation Committee also reviewed tally sheets setting forth all components of compensation for each executive officer for the previous three years. Tally sheets included dollar values for the three previous years’ salary, cash incentive awards, perquisites (cash and in-kind), long-term stock-based awards, benefits and dividends paid on unvested long-term stock-based awards. Tally sheets were used to assist the Compensation Committee in determining current compensation decisions in view of executive officers’ historical and cumulative pay.
A complete listing of our Compensation Committee’s responsibilities is included in the Compensation Committee’s charter, which is available for review on our corporate website at www.insperity.com in the Corporate Governance section under the Investor Relations tab.
Role of the Compensation Consultants in the Compensation Process
The Compensation Committee’s charter provides that it has the sole authority to retain and terminate any compensation consultant to assist in maintaining compensation practices in alignment with our compensation goals. The Compensation Committee believes that outside consultants are an efficient way to keep current on executive compensation trends and stay abreast of competitive compensation practices. The Compensation Committee has periodically engaged Pearl Meyer & Partners (“PM&P”) to conduct executive compensation studies and engaged Meridian Compensation Partners LLC (“Meridian��) for the first time in August 2015 for similar purposes. Neither PM&P nor Meridian received any remuneration from the Company, directly or indirectly, other than for advisory services rendered to, or at the direction of, the Compensation Committee or the Board. The Compensation Committee has reviewed PM&P’s independence and determined that PM&P is an independent advisor with no conflicts of interest with us (as determined under Rule 10C-1(b)(4)(i) of the Exchange Act). The Compensation Committee has also reviewed Meridian’s independence and determined that Meridian is an independent advisor with no conflicts of interest with us (as determined under Rule 10C-1(b)(4)(i) of the Exchange Act).
Assessing External Market Compensation Practices
At the direction of the Compensation Committee, we periodically conduct an executive compensation study that compares each executive officer’s compensation to market data for similar positions. The Compensation Committee determines whether the study is to be performed internally by Insperity or by an outside consulting firm that is directly engaged by the Compensation Committee. While the Compensation Committee does not target our executives’ pay to any particular level (such as a target percentile) of comparative market data contained in executive compensation studies, such data help to inform and influence pay decisions and are considered by the Compensation Committee in meeting our compensation program objectives as described above.
Compensation Peer Group
Selecting a peer group to benchmark compensation for our executives presents certain challenges, including the limited number of publicly-traded PEOs and the Company’s unique business model. As one of the largest PEO service providers in the United States, our direct PEO service competitors include TriNet Group, Inc., a national PEO, and the PEO divisions of Automatic Data Processing, Inc. and Paychex, Inc., which are significantly larger business service companies. The delivery of our PEO services and strategic business unit services requires a variety of professional services, information technology services and software. These areas represent important components of our overall service offerings, and we compete for talent with many companies offering similar services or products. Our peer group includes a number of these companies. Consistent with our historical position, the Company does not view traditional staffing companies as competitors for business or talent and has not included such companies in our compensation peer group. We do not provide leased employees or staffing employees to clients, and in 2010 incurred significant expense and undertook significant re-branding efforts to change our name to Insperity in part to avoid any confusion with traditional staffing companies.
In 2014, PM&P was engaged by the Compensation Committee to conduct an executive compensation study (the “ Study”) as part of the process of determining 2015 compensation. In connection with the Study, PM&P identified a peer group consisting of publicly traded companies that provide human resources and other business products and services and whose average trailing 12 months of sales revenue equated to approximately $2.3 billion (the “Compensation Peer Group”). The selection process for the Compensation Peer Group took into account multiple factors, including: industry (with an emphasis on outsourced human resources services, including the PEO competitors of the Company), comparable revenue range, comparability in terms of complexity and business risk, and the extent to which each company may compete with Insperity for executive talent. The Compensation Peer Group is periodically reviewed and may be modified based on these and other relevant criteria. For 2015, the Compensation Peer Group included the following companies:
|
| | | |
| Company Name | | Company Ticker |
| | | |
Providers of PEO Services | Automatic Data Processing, Inc. | | ADP |
Paychex, Inc. | | PAYX |
TriNet Group, Inc. | | TNET |
| | | |
IT Services and Software | Concur Technologies, Inc.* | | CNQR* |
Cognizant Technology Solutions Corporation | | CTSH |
Convergys Corporation | | CVG |
Gartner, Inc. | | IT |
Genpact Limited | | G |
Intuit, Inc. | | INTU |
Paycom Software, Inc. | | PAYC |
The Ultimate Software Group, Inc. | | ULTI |
Web.com Group, Inc. | | WWWW |
| | | |
Professional Services | CBIZ, Inc. | | CBZ |
Korn/Ferry International | | KFY |
Resources Connection, Inc. | | RECN |
Towers Watson & Company | | TW |
* Concur Technologies, Inc. was subsequently acquired by SAP SE in December 2014.
The Study examined market compensation data for executive positions based on a combination of proxy data of the Compensation Peer Group and benchmark position compensation survey data. Survey sources included PM&P’s proprietary general executive compensation databases and other independent surveys. In addition to the Study conducted by PM&P, internal factors are also an important consideration when determining each executive officer’s compensation. These factors include:
|
| | | |
| • | | the executive officer’s performance review conducted by either the Compensation Committee (for the CEO) or the CEO (for all other executive officers); |
| • | | the CEO’s recommendations regarding the other executive officers; |
| • | | the executive officer’s tenure with the Company, industry experience and ability to influence stockholder value; and |
| • | | the importance of the executive officer’s position to the Company in relation to the other executive officer positions within the Company. |
2015 Executive Compensation Decisions
Base Salary Changes
The Company awarded merit salary increases during the first quarter of 2015 to the NEOs as follows:
|
| | | | | |
| | 2014 | | 2015 | | 2015 |
| | Base Salary | | Base Salary | | Increase |
| Chief Executive Officer and Chairman of the Board | $850,000 | | $850,000 | | — |
| Chief Financial Officer, SVP of Finance and Treasurer | $396,000 | | $408,000 | | 3.0% |
| President | $482,000 | | $494,000 | | 2.5% |
| Chief Operating Officer and EVP of Client Services | $482,000 | | $494,000 | | 2.5% |
| EVP of Sales & Marketing | $460,000 | | $472,000 | | 2.6% |
The average salary increase for the NEOs in 2015 was 2.1%. The increases in base salary were based on the annual performance reviews, the findings of the Study and other factors deemed relevant by the Compensation Committee, such as Company performance and general economic conditions.
IAIP Target Bonus Percentage
The Compensation Committee approved the target bonus percentage for each executive officer (other than the CEO) based on the CEO’s recommendations. His recommendations took into account the executive officer’s level of responsibility, market conditions and internal equity considerations. The Compensation Committee also evaluated the foregoing factors in determining the CEO’s target bonus percentage. Because executive officers are in a position to directly influence the overall performance of the Company, and in alignment with our pay-for-performance philosophy, we believe that a significant portion of their total cash compensation should be at risk. The CEO, the individual with the greatest overall responsibility for Company performance, was granted a larger incentive opportunity in comparison to his base salary in order to weight his overall pay mix more heavily towards performance-based compensation than the overall pay mix of the other executive officers. The CFO, who had less responsibility for overall Company operating performance relative to other NEOs, was granted a smaller incentive opportunity in comparison to his base salary in order to weight his overall pay mix less heavily towards performance-based compensation than the overall pay mix of the other NEOs. For 2015, the Compensation Committee set the annual incentive targets as a percentage of each NEO’s base salary as follows:
|
| | |
| Target Bonus Percentage under IAIP |
Chief Executive Officer and Chairman of the Board | 130% |
Chief Financial Officer, SVP of Finance and Treasurer | 85% |
President | 100% |
Chief Operating Officer and EVP of Client Services | 100% |
EVP of Sales & Marketing | 100% |
Calculation and Weighting of Performance Components
For 2015, the targeted variable compensation under the IAIP for the CEO was based on corporate and individual performance components and for all other executive officers was based on corporate, departmental and individual performance components. As described in further detail below, corporate performance goals for 2015 were based on operating income (“OI”), year-over-year growth in the number of paid worksite employees (“PWEE Growth”) and operating expense management (“OEM”). For the CEO, variable compensation was heavily weighted toward corporate performance to align his IAIP bonus with Company-wide performance. For all executive officers, 20% was weighted toward individual performance to reflect their individual performance during the year, as determined through the annual performance appraisal process as discussed above. A departmental component was included in the IAIP bonus of each executive officer (other than the CEO) to encourage him to provide effective leadership to the departments under his supervision, as well as to align the interests of the executive with those of the employees that he supervises. Each performance component is determined separately and is not dependent on the other components, except that if an executive officer’s individual performance rating is below the threshold, then he receives no IAIP bonus, regardless of corporate and departmental performance. Each executive officer’s IAIP bonus is the sum of the result of each performance component.
Each performance component was weighted for each NEO as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Corporate Performance | | | | | | | |
| | | OI | | | PWEE Growth | | | OEM | | | Departmental | | | Individual | | |
| Chief Executive Officer and Chairman of the Board | | 32 | % | | | 32 | % | | | 16 | % | | | 0 | % | | | | 20 | % | | |
| Chief Financial Officer, SVP of Finance and Treasurer | | 20 | % | | | 20 | % | | | 10 | % | | | 30 | % | | | | 20 | % | | |
| President | | 24 | % | | | 24 | % | | | 12 | % | | | 20 | % | | | | 20 | % | | |
| Chief Operating Officer and EVP of Client Services | | 24 | % | | | 24 | % | | | 12 | % | | | 20 | % | | | | 20 | % | | |
| EVP of Sales & Marketing | | 24 | % | | | 24 | % | | | 12 | % | | | 20 | % | | | | 20 | % | | |
2015 Corporate Performance Goals
OI Corporate Component
We have consistently included a measure of operating income as one of our corporate performance goals because we believe it is a key indicator of our overall productivity; effective management of pricing, direct costs and operating expenses; and ability to grow the business while favorably balancing profitability. We also believe that this metric reflects the combined contribution of all departments and encourages collaboration across the organization because each department within the Company can have a direct impact on corporate performance as measured according to this metric. The formula for measuring the OI corporate performance component of the IAIP bonus for each NEO was determined as follows:
|
| | | | | | | | | | | | | | | | | |
Annual
Salary ($)
| | X | | Target
Bonus (%)
| | X | | Individual
Weighting of OI
Corporate
Component (%)
| | X | | OI Corporate
Performance
Modifier
(0%-150%)
| | = | | OI Corporate
Component
Payout ($)
| |
The OI Corporate Performance Modifier was determined as follows:
|
| | | | |
Performance Level | | 2015 OI | | OI Corporate
Performance Modifier
|
Below Threshold | | Less than $80.1 million | | 0% |
Threshold | | $80.1 million | | 50% |
Target | | $85.9 million | | 100% |
Stretch | | $91.0 million | | 125% |
Maximum | | $97.2 million | | 150% |
If 2015 OI (excluding total incentive compensation expense, operating expenses related to acquisition activity in 2015 and extraordinary, unusual or infrequent items, if applicable) was below the threshold, then the OI Corporate Performance Modifier would be 0%, resulting in an OI corporate component payout of $0. The OI Corporate Performance Modifier would be interpolated if actual performance fell in between the threshold, target, stretch or maximum performance level.
The Company’s 2015 OI, plus (i) incentive compensation expense; and (ii) non-cash impairment charges of $10.5 million, was $99.7 million. Based on this performance, the Compensation Committee determined the OI Corporate Performance Modifier to be 150% for each NEO.
PWEE Growth Corporate Component
We also chose the year-over-year growth percentage in the number of paid worksite employees, as a 2015 corporate performance goal. We included this as a component in order to focus all of our employees on growing our business. Increasing the number of paid worksite employees is a key metric for measuring the success of our sales operations and client retention efforts and is a significant driver in our overall growth and performance. This performance goal also encouraged collaboration among all Company employees to increase the number of paid worksite employees.
The formula for measuring the PWEE Growth corporate performance component of the IAIP bonus for each NEO was determined as follows:
|
| | | | | | | | | | | | | | | | | |
Annual
Salary
($)
| | X | | Target
Bonus (%)
| | X | | Individual
Weighting of PWEE
Growth Corporate
Component (%)
| | X | | PWEE Growth Corporate Performance
Modifier
(0%-150%)
| | = | | PWEE Growth
Corporate Component
Payout ($)
| |
The PWEE Growth corporate component of IAIP bonuses consisted of three different metrics with the final payout amount being based upon the metric that produced the greatest percentage payout of the target bonus.
|
| | | | | | | | | | |
| PWEE Growth Metric 1 |
Performance Level | |
Q1 Year-over-Year Growth Percentage | |
Q2 Year-over-Year Growth Percentage | |
Q3 Year-over-Year Growth Percentage | |
Q4 Year-over-Year Growth Percentage | | PWEE Growth Corporate Performance Modifier |
| Threshold | | 8.7% | | 9.3% | | 9.5% | | 9.5% | | 50% |
| Target | | 9.7% | | 10.3% | | 10.6% | | 10.6% | | 100% |
| Stretch | | 10.7% | | 11.3% | | 11.7% | | 11.7% | | 125% |
| Maximum | | 11.6% | | 12.4% | | 12.7% | | 12.7% | | 150% |
The calculation of PWEE Growth for purposes of Metric 1 was determined each calendar year quarter, by taking the three (3) month average of the number of paid worksite employees for each calendar year quarter, and calculating the year-over-year growth in the number of paid worksite employees, expressed as a percentage. Each calendar year quarter for 2015 had a 25% weighting towards the Metric 1 percentage payout of target bonus.
|
| | | | |
| PWEE Growth Metric 2 |
| Performance Level | |
Calendar Year Year-over-Year Growth Percentage | | PWEE Growth Corporate Performance Modifier |
| Threshold | | 9.0% | | 50% |
| Target | | 10.0% | | 100% |
| Stretch | | 12.0% | | 125% |
| Maximum | | 14.0% | | 150% |
The calculation of PWEE Growth for purposes of Metric 2 was determined by calculating the year-over-year growth in the number of paid worksite employees for calendar year 2015, expressed as a percentage.
|
| | | | |
| PWEE Growth Metric 3 |
| Performance Level | | January 31, 2016 Year-over-Year Growth Percentage | | PWEE Growth Corporate Performance Modifier |
| Threshold | | 9.0% | | 50% |
| Target | | 10.0% | | 100% |
| Stretch | | 12.0% | | 125% |
| Maximum | | 14.0% | | 150% |
The calculation of PWEE Growth for purposes of Metric 3 was determined by calculating the year-over-year growth in the number of paid worksite employees in January 2016, expressed as a percentage. For PWEE Growth Metric 3, we include the number of paid worksite employees for January 2016 in the performance period to reflect the results of our annual Fall Sales Campaign and significant year-end client renewal period.
If the number of worksite employees calculated as described above was below the threshold for all three metrics, then the PWEE Growth Corporate Performance Modifier would be 0%, resulting in a PWEE Growth corporate component payout of $0. The PWEE Growth Corporate Performance Modifier would be interpolated if actual performance for one of the metrics fell in between the threshold, target, stretch or maximum performance level.
During the performance period, the year-over-year growth percentage in the number of worksite employees was highest for PWEE Growth Metric 3 and was 14%. Based on this performance, the Compensation Committee determined the PWEE Growth Corporate Performance Modifier to be 150% for each NEO.
OEM Corporate Component
We also included OEM as a 2015 corporate performance goal. While OEM is a factor in the calculation of operating income (OI Corporate Component), we believed that a heightened focus on financial stewardship throughout the entire Company was warranted, and that successful achievement of this goal would require the combined focus and effort of employees across all departments and help create value for our stockholders.
The formula for measuring the OEM corporate performance component of the IAIP bonus for each NEO was determined as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Annual
Salary
($)
| | X | | Target
Bonus
(%)
| | X | | Individual
Weighting of OEM
Corporate Component
(%)
| | X | | OEM
Corporate Performance
Modifier
(0%-150%)
| | = | | OEM
Corporate
Component
Payout ($)
| |
The OEM Corporate Performance Modifier was determined as follows:
|
| | | | |
Performance Level | | Operating Expenses | | OEM Corporate
Performance Modifier
|
Above Threshold | | In excess of $353.6 million | | 0% |
Threshold | | $353.6 million | | 50% |
Target | | $352.6 million | | 100% |
Stretch | | $351.6 million | | 125% |
Maximum | | $351.1 million | | 150% |
If 2015 operating expenses (excluding total incentive compensation expense, operating expenses related to acquisition activity in 2015, and extraordinary, unusual or infrequent items, if applicable, including non-cash impairment charges, stock-based compensation expense, professional advisory fees for stockholder matters, litigation settlements and the associated legal fees, and changes in statutory tax rates and assessments) were above the threshold, the OEM Corporate Performance Modifier would be 0%, resulting in an OEM Corporate Component payout of $0. The OEM Corporate Performance Modifier would be interpolated if actual performance fell in between the threshold, target, stretch or maximum performance levels.
The Company’s 2015 operating expenses, excluding (i) incentive compensation expense; (ii) non-cash impairment charges of $10.5 million; and (iii) stockholder advisory expenses of $1.5 million, were $338.2 million. Because operating expenses were less than the maximum performance threshold of $351.1 million, the Compensation Committee approved an OEM Corporate Performance Modifier of 150% for each NEO.
Departmental Component
The formula for measuring the departmental performance component of the IAIP bonus for each executive officer (other than the CEO who has no departmental component included in his IAIP bonus) was as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Annual
Salary
($)
| | X | | Target
Bonus
(%)
| | X | | Individual
Weighting of
Departmental
Component (%)
| | X | | Departmental
Performance
Modifier
(0%-100%)
| | = | | Departmental
Component
Payout ($)
| |
The goals were developed by each department and were designed to encourage employees to work together to continue making business improvements and to increase efficiency, productivity and collaboration across the organization. All departmental goals were approved by the CEO. As part of our continued focus on managing operating expenses, we did not include a stretch goal or maximum performance level for 2015; therefore, the target level also constituted the maximum level achievable for IAIP bonus purposes. The Departmental Performance Modifier for all executive officers can range from 0% to 100% based on the achievement of departmental goals. If departmental performance was below the threshold, the Departmental Performance Modifier would be 0%, resulting in a departmental component payout of $0. The nature of the departmental goals and objectives for each NEO was as follows:
|
| | | |
| | Nature of Goals and Objectives | |
| | |
Chief Financial Officer,
SVP of Finance
and Treasurer
| | Effective management of operating expenses; implementation of Company real estate strategy including effective and efficient management of Company occupancy; timely due diligence and integration of acquisitions; successful completion of internal audit projects; quality of internal controls; and successful credit management efforts. | |
| | |
President | | Effective client pricing and renewal activities; effective operating expense management; successful negotiation of certain insurance policies and third party contracts; development and implementation of health care reform initiatives; achievement of strategic business unit financial metrics; effective process and technology enhancements; and successful implementation of certain pricing initiatives. | |
| | |
Chief Operating Officer and
EVP of Client Services
| | Effective client satisfaction and retention; achievement of strategic business unit financial metrics; development of Company training and leadership programs; effective operating expense management; successful implementation of information technology initiatives; and development, implementation and rollout of certain data management and strategic business unit initiatives. | |
| | |
EVP of Sales & Marketing | | Effective marketing initiatives; successful new sales results; effective operating expense management; expansion of sales force; successful implementation of training and sales programs; and effective Company community involvement. | |
In light of the CEO’s assessment of the other NEOs’ performance against the achievement of their departmental goals, the average Departmental Performance Modifier for the other NEOs in 2015 was 95.5%.
Individual Component
The formula for measuring the individual performance component of the IAIP bonus for each executive officer was as follows:
|
| | | | | | | | | | | | | | | | | |
Annual
Salary ($)
| | X | | Target
Bonus (%)
| | X | | Weighting of
Individual
Component (%)
| | X | | Individual
Performance
Modifier
(0%-150%)
| | = | | Individual
Component
Payout ($)
| |
The Individual Performance Modifier for all executive officers can range from 0% to 150% based on the executive officer’s individual performance rating resulting from the annual performance appraisal process, as described under “- Base Salary.” Based on the NEOs’ individual performance ratings, the average Individual Performance Modifier for the NEOs was 136%.
The Compensation Committee reserves the right to pay discretionary bonuses to executive officers outside of the IAIP. While the Compensation Committee may exercise such discretion in appropriate circumstances, no discretionary bonuses have been awarded to NEOs in recent years.
2015 Equity Grants
The award size and recipients of awards were determined by the degree to which a particular position in the Company has the ability to influence stockholder value, as well as competitive information provided in benchmarking studies. In February 2015, the CEO presented to the Compensation Committee his recommendations for awards of restricted stock for the other executive officers. His recommendations as to the amount of awards to be granted were based on a number of factors, including, the importance of each executive officer’s role in the Company’s future business operations, equity pay practices of competitor companies, annual expense to the Company of equity awards and the Company’s own past practices in granting equity awards. The Compensation Committee then determined and approved the awards for the executive officers, including the CEO, based upon the above noted factors. For 2015, NEOs were granted the following restricted stock awards:
|
| | | |
| Name | Shares of Restricted Stock | Grant Date Value of Restricted Stock* |
| Paul J. Sarvadi | 20,400 |
| $1,051,416 |
| Douglas S. Sharp | 8,000 |
| $412,320 |
| Richard G. Rawson | 14,000 |
| $721,560 |
| A. Steve Arizpe | 14,000 |
| $721,560 |
| Jay E. Mincks | 14,000 |
| $721,560 |
* The fair market value of one share of the Common Stock on the grant date was $51.54.
The restricted stock awards are all subject to a three-year ratable annual vesting schedule and all NEO grants include a “double trigger” requirement in the case of a “change in control” of the Company.
In March 2015, the Compensation Committee decided to grant awards under the LTIP (“2015 LTIP Awards”) to the NEOs and certain other officers. In granting the 2015 LTIP Awards, the Compensation Committee determined that long-term incentive compensation awards would be allocated between performance awards and time-vested restricted stock on approximately a 60% and 40% basis for the CEO, a 35% and 65% basis for the CFO, and a 45% and 55% basis for the remaining NEOs. The performance period for the 2015 LTIP Awards includes calendar years 2015-2017, with each year being equally weighted for one-third of the target opportunity. The 2015 LTIP Awards are payable in shares of Common Stock and include dividend equivalents, payable in additional shares of Common Stock, with respect to the number of phantom shares actually earned pursuant to the 2015 LTIP Awards if and to the extent dividends are paid on Common Stock during the performance period.
The aggregate number of 2015 LTIP Awards granted by the Compensation Committee to each NEO if all of the annual target performance metrics are achieved was as follows:
|
| | | | | |
| | | Aggregate Number of Performance Shares (at Target) | | Grant Date Value of Performance Shares1 (at Target) |
| Chief Executive Officer and Chairman of the Board | | 30,350 |
| | $1,602,480 |
| Chief Financial Officer, SVP of Finance and Treasurer | | 5,300 |
| | $279,840 |
| President | | 11,350 |
| | $599,280 |
| Chief Operating Officer and EVP of Client Services | | 11,350 |
| | $599,280 |
| EVP of Sales & Marketing | | 11,350 |
| | $599,280 |
1 The 2015 LTIP Awards do not have an exercise price. The fair market value of one share of the Common Stock on the grant date was $52.80. The grant date fair value of the 2015 LTIP Awards assuming achievement of the maximum level of performance are: Mr. Sarvadi - $3,204,960; Mr . Sharp - $559,680; Mr. Rawson - $1,198,560; Mr. Arizpe - $1,198,560; and Mr. Mincks - $1,198,560.
The performance metric for the 2015 LTIP Awards is tied to achieving increased levels of EBITDA, taking into account certain pre-defined adjustments during the performance period, with vesting occurring at the end of the three-year performance period. The Company’s EBITDA performance metric will be measured annually against performance levels established at the time of grant. Recipients can earn 50% of the target number of phantom shares if the threshold performance level is achieved and can earn up to 200% of the target number of phantom shares if the maximum performance level is achieved. The first year of the 2015 LTIP Awards is subject to achievement of the EBITDA performance metrics and corresponding performance level payout percentages as follows:
|
| | | | |
| Performance Level | | 2015 EBITDA Performance Objective (in millions) | | Payout Percentage |
| Below Threshold | | Less Than $101 | | 0% |
| Threshold | | $101 | | 50% |
| Target | | $103 | | 100% |
| Maximum | | $118 | | 200% |
If the EBITDA performance metric for a performance period falls below the threshold level, no performance shares will be credited for the performance period. If actual performance results fall between the threshold, target and maximum performance levels, the number of performance shares earned will be determined by interpolation between the applicable performance levels. For purposes
of the 2015 LTIP performance metric, EBITDA was adjusted for non-cash impairment charges, stock-based compensation expense, professional advisory fees for stockholder matters, litigation settlements and the associated legal fees, and changes in statutory tax rates and assessments. EBITDA was also adjusted to exclude the impact of any divestitures, acquisitions or change in accounting pronouncement that occurs during the performance period.
For purposes of the 2015 LTIP Awards, the Compensation Committee certified adjusted EBITDA of $110.0 million for the 2015 performance period. After interpolation, the Compensation Committee determined the LTIP performance modifier to be 145% for the first one-third tranche of the 2015 LTIP Award. To receive the awards, the recipients must remain continuously employed throughout the entire three-year performance period and as of the date the Compensation Committee certifies the final results, with limited exceptions for death, disability or change in control.
2016 Equity Grants
In March 2016, the Compensation Committee granted awards under the LTIP (“2016 LTIP Awards”) to the NEOs and certain other officers. In granting the 2016 LTIP Awards, the Compensation Committee further decreased the long-term incentive weighting of the time vested restricted stock and increased the weighting assigned to performance awards for the recipients of those awards. For 2016, the long-term incentive compensation awards were allocated between performance awards and time-vested restricted stock on approximately a 70% and 30% basis for the CEO, a 50% and 50% basis for the CFO, and a 60% and 40% basis for the remaining NEOs. In establishing the performance metrics for the 2016 LTIP Awards, the Compensation Committee retained a metric tied to achieving increased levels of EBITDA with certain pre-defined adjustments, but also added a relative total shareholder return metric (“RTSR”) to further align the long-term financial interests of the executive officers and the Company’s shareholders. RTSR will be measured over the entire 2016-2018 performance period against the performance of 21 peer companies that the Compensation Committee designated as the Company’s 2016 compensation peer group. The 2016 LTIP Awards are weighted at 60% for the EBITDA performance metric and 40% for the RTSR performance metric. The performance period for the EBITDA portion of the 2016 LTIP Awards includes calendar years 2016-2018, with each year being equally weighted for one-third of the target opportunity. The 2016 LTIP Awards are payable in shares of Common Stock and include dividend equivalents, payable in additional shares of Common Stock, with respect to the number of phantom shares actually earned pursuant to the 2016 LTIP Awards if and to the extent dividends are paid on Common Stock during the performance period.
The aggregate number of 2016 LTIP Awards granted by the Compensation Committee to each NEO if all of the target performance metrics are achieved was as follows:
|
| | | | | |
| | Aggregate Number of Performance Shares 1
(at Target)
| |
Chief Executive Officer and Chairman of the Board | | 36,345 |
| | |
Chief Financial Officer, SVP of Finance and Treasurer | | 6,580 |
| | |
President | | 11,880 |
| | |
Chief Operating Officer and EVP of Client Services | | 11,880 |
| | |
EVP of Sales & Marketing | | 11,880 |
| | |
1 The 2016 LTIP Awards do not have an exercise price.
Recipients can earn 50% of the target number of phantom shares if the threshold performance level is achieved and can earn up to 200% of the target number of phantom shares if the maximum performance level is achieved. If the performance metric for a performance period falls below the threshold level, no performance shares will be credited for the performance period. If actual performance results fall between the threshold, target and maximum performance levels, the number of performance shares earned will be determined by interpolation between the applicable performance levels.
Other Policies
Stock Ownership Guidelines
To further align the interests of the CEO and non-employee directors with those of our stockholders, the Board has adopted stock ownership guidelines for the Company. The stock ownership guidelines provide that the CEO is required to own three times his annual base salary in Common Stock and all non-employee directors are required to own three times their annual cash retainer in Common Stock. Stock ownership includes direct stock ownership but does not include unvested stock awards or unexercised stock options. The Company annually monitors and calculates the stock ownership level of each individual, and each individual has five years to meet the applicable ownership requirements. The CEO is in compliance and each non-employee director is in compliance or is expected to be in compliance within the applicable time period.
Employment Agreements, Post-Employment and Change in Control Compensation
Our executive officers are employed at will and none have an employment agreement. In 2015, no NEOs departed from the Company. We do not provide the executive officers with any kind of contractual severance. Equity awards granted to executive officers do not automatically accelerate upon a change in control. Rather such awards contain a “double trigger” requiring a qualifying termination within a prescribed number of months following the change in control in order to accelerate vesting. All outstanding equity awards held by NEOs are subject to the double trigger requirement.
Incentive Compensation Recoupment Policy (“Clawback Policy”)
In February 2014, the Board adopted a recoupment policy for incentive compensation paid to executive officers and other employees. The Clawback Policy authorizes the Company to recover excess incentive compensation paid to an executive officer who engaged in, or was aware of and failed to report, fraud or misconduct which results in a restatement of the Company’s financial statements. Incentive compensation paid under the IAIP and LTIP is subject to the Clawback Policy.
Risk Assessment
The Company conducted an assessment of our compensation programs and practices for its employees and determined that there are no risks arising from such compensation programs and practices that are reasonably likely to have a material adverse effect on the Company.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the Company’s principal executive officer or any of the Company’s three other most highly compensated executive officers employed as of the end of the year (other than the principal executive officer or the principal financial officer). This limitation does not apply to compensation that is paid only if the executive officer’s performance meets pre-established objective goals based on performance criteria approved by stockholders. We strive to take action, where possible and considered appropriate, to preserve the deductibility of compensation paid to the Company’s executive officers. We have also awarded compensation that might not be fully tax deductible when such grants were nonetheless in the best interest of the Company and its stockholders. Subject to the requirements of Section 162(m), the Company generally will be entitled to take tax deductions relating to compensation that is performance-based, which may include cash incentives, stock options and other performance-based awards.Proxy Statement.
Compensation Committee Report
We have reviewed and discussed the Compensation Discussion and Analysis contained in this Amendment with management. Based on such review, we recommended to the Board that the Compensation Discussion and Analysis be included in this Amendment for filing with the SEC.
The foregoing report is provided by the following directors, who are members of the Compensation Committee:
COMPENSATION COMMITTEE
Eli Jones, Chairperson
Michael W. Brown
Peter Feld
Compensation Committee Interlocks and Insider Participation
During 2015, Dr. Jones and Messrs. Brown and Feld served on the Compensation Committee. None of the members of the Compensation Committee is currently or has been at any time one of our officers or employees. None of our executive officers currently serves, or has served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Board or the Compensation Committee.
Summary Compensation Table
The table below summarizes the total compensation paid or earned by the Company’s CEO, chief financial officer and each of the three other most highly compensated executive officers of the Company for services rendered in all capacities to the Company during 2015, 2014 and 2013. The Company has not entered into any employment agreements with any of the NEOs.
The compensation plans under which the grants in the following tables were made are generally described in the Compensation Discussion and Analysis section, and include the IAIP, a non-equity incentive plan, the 2001 Incentive Plan and the 2012 Incentive Plan, which provide for, among other things, restricted stock grants and LTIP performance awards.
|
| | | | | | | | | | | | | | | | | |
Name and
Principal Position | | Year | | Salary
($) | | Stock
Awards ($) 1 | | Non-Equity Incentive
Plan Compensation ($) 2 | | All Other Compensation ($) 3 | | Total
($) |
| Paul J. Sarvadi, | | 2015 | | 850,000 |
| | 2,653,896 |
| | 1,657,500 |
| | 240,522 |
| | 5,401,918 |
|
| CEO and Chairman of the Board | | 2014 | | 850,000 |
| | 1,096,000 |
| | 988,637 |
| | 497,445 |
| | 3,432,082 |
|
| | 2013 | | 816,300 |
| | 1,167,600 |
| | 283,815 |
| | 570,406 |
| | 2,838,121 |
|
| Douglas S. Sharp, | | 2015 | | 408,000 |
| | 692,160 |
| | 455,705 |
| | 78,204 |
| | 1,634,069 |
|
| CFO, SVP of Finance and Treasurer | | 2014 | | 396,000 |
| | 383,600 |
| | 331,572 |
| | 124,805 |
| | 1,235,977 |
|
| | 2013 | | 378,000 |
| | 408,660 |
| | 181,352 |
| | 79,018 |
| | 1,047,030 |
|
| Richard G. Rawson, | | 2015 | | 494,000 |
| | 1,320,840 |
| | 678,188 |
| | 109,064 |
| | 2,602,092 |
|
| President | | 2014 | | 482,000 |
| | 657,600 |
| | 464,087 |
| | 237,696 |
| | 1,841,383 |
|
| | | 2013 | | 464,000 |
| | 700,560 |
| | 220,948 |
| | 159,464 |
| | 1,544,972 |
|
| A. Steve Arizpe, | | 2015 | | 494,000 |
| | 1,320,840 |
| | 672,282 |
| | 113,514 |
| | 2,600,636 |
|
| COO and EVP of Client Services | | 2014 | | 482,000 |
| | 657,600 |
| | 467,921 |
| | 224,498 |
| | 1,832,019 |
|
| | 2013 | | 464,000 |
| | 700,560 |
| | 208,059 |
| | 126,649 |
| | 1,499,268 |
|
| Jay E. Mincks, | | 2015 | | 472,000 |
| | 1,320,840 |
| | 615,902 |
| | 81,965 |
| | 2,490,707 |
|
| EVP of Sales & Marketing | | 2014 | | 460,000 |
| | 657,600 |
| | 437,296 |
| | 211,367 |
| | 1,766,263 |
|
| | 2013 | | 442,000 |
| | 700,560 |
| | 173,570 |
| | 107,908 |
| | 1,424,038 |
|
| |
1
| The amounts in this column represent the aggregate grant date fair value of awards granted in the year indicated and includes time-vested restricted stock and the 2015 LTIP Awards. The grant value of the 2015 LTIP Awards is shown at target. Actual awards may range from 0% to 200% of the target number of phantom shares if the maximum performance level is achieved. The grant date fair value of the 2015 LTIP Awards assuming achievement of the maximum level of performance are: Mr. Sarvadi - $3,204,960; Mr. Sharp - $559,680; Mr. Rawson - $1,198,560; Mr. Arizpe - $1,198,560; and Mr. Mincks - $1,198,560. For additional information, refer to Note 10, “Incentive Plans,” in the Notes to Consolidated Financial Statements included in the Original Filing. See the Grants of Plan-Based Awards Table for information on awards made in 2015. These amounts do not correspond to the actual value that will be realized by the NEO. |
| |
2
| Represents variable cash compensation earned and awarded by the Compensation Committee under the IAIP. A description of the IAIP is included in “Elements of Compensation - Variable Cash Compensation” in the Compensation Discussion and Analysis, and the determination of performance-based bonuses for fiscal year 2015 is contained in “2015 Executive Compensation Decisions - IAIP Target Bonus Percentage” of the Compensation Discussion and Analysis. |
| |
3
| All other compensation in 2015 includes the following: Company-provided automobiles; country club memberships; 401(k) matching contributions; premiums for executive disability insurance; costs associated with the Chairman’s Trip and other travel and associated federal income taxes. The federal income taxes associated with the Chairman’s Trip and other travel paid by the Company on behalf of the executives during 2015 totaled $10,681 each. The 401(k) matching contributions made by |
the Company during 2015 for the NEOs totaled $7,950 each. The incremental cost of Messrs. Arizpe, Mincks and Sharp’s use of a Company-leased vehicle was $38,085, $30,431 and $30,702, respectively. The incremental cost of Messrs. Sarvadi and Rawson’s country club memberships was $25,230 and $26,500, respectively. The Company owned aircraft that were used by its executives for business and, on occasion, personal travel. In addition, Mr. Sarvadi used the Company’s aircraft to commute to his residences and certain other business related entertainment travel for which he was not required to reimburse the Company. The total incremental cost of such travel for Mr. Sarvadi, including lost income tax deductions, was $156,947. In the instances where the aircraft are used for personal travel, the executive was required to reimburse the Company for the associated incremental costs. The incremental cost for personal use of Company aircraft is calculated at an hourly rate that takes into account variable costs incurred as a result of the personal flight activity, including fuel, communications and travel expenses for the flight crew. It excludes non-variable costs, such as regularly scheduled inspections and maintenance that would have been incurred regardless of whether there was any personal use of the aircraft. During 2015, Messrs. Sarvadi and Rawson reimbursed the Company $45,882 and $33,230, respectively, for personal travel costs.
Grants of Plan-Based Awards Table
The following table provides information about equity and non-equity awards granted to the NEOs in 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Grant Date | | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards 1 | | Estimated Possible Payouts Under Equity Incentive Plan Awards 2 | | All Other Stock Awards: Number of Shares of Stock or Units (#) 3 | | Grant Date Fair Value of Stock and Option Awards ($) 4 |
Threshold
($) | | Target
($) | | Maximum
($) | | Threshold
(#) | | Target
(#) | | Maximum
(#) |
| |
| Paul J. Sarvadi | | N/A | | 552,500 |
| | 1,105,000 |
| | 1,657,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 2/19/2015 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20,400 |
| | 1,051,416 |
|
| | 3/30/2015 | | — |
| | — |
| | — |
| | 15,175 |
| | 30,350 |
| | 60,700 |
| | — |
| | 1,602,480 |
|
| Douglas S. Sharp | | N/A | | 173,400 |
| | 346,800 |
| | 468,180 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 2/19/2015 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,000 |
| | 412,320 |
|
| | 3/30/2015 | | — |
| | — |
| | — |
| | 2,650 |
| | 5,300 |
| | 10,600 |
| | — |
| | 279,840 |
|
| Richard G. Rawson | | N/A | | 247,000 |
| | 494,000 |
| | 691,600 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 2/19/2015 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,000 |
| | 721,560 |
|
| | 3/30/2015 | | — |
| | — |
| | — |
| | 5,675 |
| | 11,350 |
| | 22,700 |
| | — |
| | 599,280 |
|
| A. Steve Arizpe | | N/A | | 247,000 |
| | 494,000 |
| | 691,600 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 2/19/2015 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,000 |
| | 721,560 |
|
| | 3/30/2015 | |
| |
| |
| | 5,675 |
| | 11,350 |
| | 22,700 |
| | — |
| | 599,280 |
|
| Jay E. Mincks | | N/A | | 236,000 |
| | 472,000 |
| | 660,800 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | 2/19/2015 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,000 |
| | 721,560 |
|
| | 3/30/2015 | | — |
| | — |
| | — |
| | 5,675 |
| | 11,350 |
| | 22,700 |
| | — |
| | 599,280 |
|
| |
1
| These amounts represent the threshold, target and maximum amounts payable to each executive under the IAIP for 2015. If the threshold is not achieved, the payout is zero. The amounts earned by our NEOs under the IAIP in 2015 are reflected in the Summary Compensation Table. |
| |
2
| These amounts represent the threshold, target and maximum amount of shares payable to each executive under the LTIP. |
| |
3
| These amounts represent the number of shares of restricted stock and phantom stock granted to each executive under the 2012 Incentive Plan during 2015. |
| |
4
| These amounts represent the aggregrate grant date fair value of restricted stock and phantom stock granted to each executive during 2015. For restricted stock, fair value is calculated using the closing price of the Company’s Common Stock on the NYSE on the date of grant. The grant value of the 2015 LTIP Awards is shown at target. Actual awards may range from 0% to 200% of the target number of phantom shares if below threshold level is not achieved or the maximum performance level is achieved. The grant date fair value of the 2015 LTIP Awards assuming achievement of the maximum level of performance are: Mr. Sarvadi - $3,204,960; Mr. Sharp - $559,680; Mr. Rawson - $1,198,560; Mr. Arizpe - $1,198,560; and Mr. Mincks - $1,198,560. For the relevant assumptions used to determine the valuation of our stock awards, refer to Note 10, “Incentive Plans,” in the Notes to Consolidated Financial Statements included in our Original Filing. The terms of the restricted stock awards provide for three-year vesting and the payment of dividends on all unvested shares. The 2015 LTIP Awards are payable in shares of Common Stock and include dividend equivalents, payable in additional shares of Common Stock, with respect to the number of phantom shares actually earned pursuant to the 2015 LTIP Awards if and to the extent dividends are paid on Common Stock during the performance period. |
NEO’S Outstanding Equity Awards Table At 2015 Fiscal Year End
|
| | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) 1 | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) 5 | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Unites or Other Rights That Have Not Vested ($) 1 |
| Paul J. Sarvadi | — | | — | | — | | 60,401 |
| 2 | 2,908,308 | | 35,413 | | 1,705,136 |
| | | | | | | | | | | | | | |
| Douglas S. Sharp | — | | — | | — | | 22,001 |
| 3 | 1,059,348 | | 6,185 | | 297,808 |
| | | | | | | | | | | | | | |
| Richard G. Rawson | — | | — | | — | | 38,000 |
| 4 | 1,829,700 | | 13,246 | | 637,795 |
| | | | | | | | | | | | | | |
| A. Steve Arizpe | — | | — | | — | | 38,000 |
| 4 | 1,829,700 | | 13,246 | | 637,795 |
| | | | | | | | | | | | | | |
| Jay E. Mincks | — | | — | | — | | 38,000 |
| 4 | 1,829,700 | | 13,246 | | 637,795 |
| | | | | | | | | | | | | | |
| |
1
| Based on the closing price of $48.15 of the Company’s Common Stock on the NYSE on December 31, 2015. |
| |
2
| Includes time-vested restricted stock. Stock awards are scheduled to vest as follows provided the officer continues to be employed by Insperity on the applicable vesting date: 13,333 on February 18, 2016; 20,134 on February 19, 2016; 13,334 on February 18, 2017; 6,800 on February 19, 2017 and 6,800 on February 19, 2018. |
| |
3
| Includes time-vested restricted stock. Stock awards are scheduled to vest as follows provided the officer continues to be employed by Insperity on the applicable vesting date: 4,667 on February 18, 2016; 4,667 on February 19, 2016; 7,333 on February 18, 2017; 2,667 on February 19, 2017 and 2,667 on February 19, 2018. |
| |
4
| Includes time-vested restricted stock. Stock awards are scheduled to vest as follows provided the officer continues to be employed by Insperity on the applicable vesting date: 8,000 on February 18, 2016; 12,666 on February 19, 2016; 8,000 on February 18, 2017; 4,667 on February 19, 2017 and 4,667 on February 19, 2018. |
| |
5
| Includes LTIP awards scheduled to vest (assuming target results for performance periods not yet complete and actual results for performance periods completed) and includes an estimate of dividend equivalents for the dividends declared since the date of grant. These awards will vest provided the officer continues to be employed by Insperity on the applicable vesting date. |
NEO Option Exercises and Stock Vested Table for Fiscal Year 2015
|
| | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) 1 |
| Paul J. Sarvadi | — |
| | — |
| | 38,400 |
| | 1,942,225 |
| |
| Douglas S. Sharp | — |
| | — |
| | 13,333 |
| | 674,283 |
| |
| Richard G. Rawson | — |
| | — |
| | 23,500 |
| | 1,188,960 |
| |
| A. Steve Arizpe | — |
| | — |
| | 23,500 |
| | 1,188,960 |
| |
| Jay E. Mincks | — |
| | — |
| | 23,500 |
| | 1,188,960 |
| |
| |
1
| Represents the value of the shares on the vesting date based on the last reported closing price of the Company’s Common Stock on the NYSE immediately preceding the vesting date. |
Director Compensation
The Company uses a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on the Board. Non-employee directors of the Company were compensated for 2015 as shown in the table below and are also reimbursed for reasonable expenses incurred in serving as a director. All compensation, except for reimbursement of actual expenses, can be taken in cash or Common Stock, at the director’s option. Directors who are employees of the Company receive no additional compensation for serving on the Board.
|
| | | | | | | | | | | | | |
| | Board | | Compensation Committee | | Finance, Risk Management and Audit Committee | | Nominating and Corporate Governance Committee | | Lead Independent Director |
| Annual Retainers | $61,000 | | $10,000 | | $15,000 | | None | | | $ | 9,000 |
| 1 |
| | | | | | | | | | | | |
| Annual Committee Chair Fees | N/A | | $12,000 | | $21,000 | | $10,000 | 1 | | None |
| |
|
| |
_________________________
|
1
| Effective October 1, 2015, the Board established a $9,000 annual retainer for the Lead Independent Director and reduced the annual fee for the chair of the Nominating and Corporate Governance Committee from $15,000 to $10,000. Previously, the Lead Independent Director also served as chair of the Nominating and Corporate Governance Committee. |
Each person who is initially appointed or elected as a director of the Company receives an initial director award comprised of a grant of shares of restricted Common Stock on the date of election or appointment with an aggregate fair market value, determined based on the closing price of the Common Stock on the date prior to the date of grant, of $75,000, rounded up to the next higher whole share amount in the case of a fractional share amount, and such restricted Common Stock vests as to one-third of the shares on each anniversary of its grant date. If a director terminates his or her service as a member of the Board, his or her unvested portion of such restricted stock award, if any, shall terminate immediately on such termination date, unless such termination of service is due to death or disability, in which event the unvested portion of such restricted stock award shall become 100% vested on such termination date. Pursuant to the Agreement, each of Mr. Feld, Ms. McKenna-Doyle and Mr. Sorensen received an initial director award effective as of the date of the 2015 Annual Meeting of Stockholders.
In addition, on the date of each annual meeting of stockholders, each non-employee director receives an annual director award comprised of either a grant of unrestricted shares of Common Stock with an aggregate fair market value determined based on the closing price of the Common Stock on the date prior to the date of grant, of $90,000, or an immediately vested and exercisable option to purchase a number of shares of Common Stock that had an aggregate value, determined on the date prior to the date of grant, of $90,000, calculated using the valuation methodology most recently utilized by the Company for purposes of financial statement reporting. In 2015, all non-employee directors elected to receive unrestricted shares of Common Stock. The awards were rounded up to the next higher whole share amount in the case of a fractional share amount. Pursuant to the Agreement, neither Mr. Feld, Ms. McKenna-Doyle nor Mr. Sorensen received an annual director award on the date of the 2015 Annual Meeting of Stockholders.
After consulting with PM&P and after considering market trends, the Compensation Committee recommended, and in February 2015, the Board approved, an amendment to the Company’s Directors Compensation Plan that eliminated meeting fees and stock options as an optional form of payment for the annual director award, and that adjusted the annual Board and committee retainers accordingly based on the average of the meeting fees paid over the prior three years. These adjustments were intended to be cost neutral. For further information, please see the Company’s Current Report on Form 8-K filed with the SEC on February 25, 2015. Pursuant to the Agreement and the amended directors compensation plan, each of Mr. Feld, Ms. McKenna-Doyle and Mr. Sorensen received prorated retainer fees for 2015 from the date of their respective appointment.
Director Compensation Table
The table below summarizes the compensation paid by the Company to non-employee directors during the fiscal year ended December 31, 2015.
|
| | | | | | | |
| | Fees Earned or Paid in Cash | Stock Awards | Option Awards | All Other Compensation | Total |
| Name | ($) | ($) 2 | ($) | ($) 3 | ($) |
| Michael W. Brown |
|
|
|
| |
|
| 66,500 | 89,578 | — | 1,146 |
| | 157,223 |
| Peter Feld |
|
|
|
|
| |
|
| 37,640 | 74,665 | — | 955 |
| 4 | 113,260 |
Jack M. Fields, Jr.1 |
|
|
|
|
| |
|
| 44,849 | — | — | — |
| | 44,849 |
| Eli Jones |
|
|
|
|
| |
|
| 78,500 | 89,578 | — | 1,146 |
| | 169,223 |
| Carol Kaufman |
|
|
|
|
| |
|
| 85,750 | 89,578 | — | 2,103 |
| 4 | 177,430 |
Paul S. Lattanzio1 |
|
|
|
|
| |
|
| 47,574 | — | — | — |
| | 47,574 |
| Michelle McKenna-Doyle |
|
|
|
|
| |
|
| 32,013 | 74,665 | — | 955 |
| 4 | 107,634 |
| Norman Sorensen |
|
|
|
|
| |
|
| 40,290 | 74,665 | — | 955 |
| 4 | 115,910 |
| Austin P. Young |
|
|
|
|
| |
|
| 90,250 | 89,578 | — | 1,146 |
| | 180,973 |
_________________________
| |
1
| Mr. Fields and Mr. Lattanzio resigned from the Board on June 10, 2015. |
| |
2
| Represents the dollar amount recognized for financial statement reporting purposes with respect to 2015 for the fair value of stock awards made to directors during 2015, based on the closing price of the Company’s Common Stock on the date of grant. In the case of annual director equity awards that do not contain vesting or other restrictions, Insperity recognizes the entire fair value for financial statement reporting purposes in the year that the grant is made. In the case of initial director equity awards that contain vesting restrictions, Insperity recognizes the fair value for financial statement reporting purposes over the vesting period. |
| |
3
| All Other Compensation represents dividends paid on stock awards granted in 2015. |
4 Also includes dividends paid on unvested restricted stock awards of: Mr. Feld - $955; Ms. Kaufman - $957; Ms. McKenna-Doyle - $955; and Mr. Sorensen - $955.
Potential Payments upon Termination or Change in Control
We have no employment agreements or severance policies in place for our executive officers. There are no unvested outstanding stock options and none have been granted to executive officers since 2004. All awards granted to named executive officers include a “double trigger” requirement in the case of a change in control of the Company as defined under the 2012 Incentive Plan. Effective with awards granted in 2016, the Company amended the terms of award agreements to provide that future awards granted to any recipient under the 2012 Incentive Plan will include a double trigger requirement in the case of a change in control of the Company as defined under the 2012 Incentive Plan. The directors first appointed to the Board pursuant to the Agreement are not considered members of the “Incumbent Board” for the purposes of determining whether a change in control has occurred with respect to outstanding awards granted prior to 2016 under the 2012 Incentive Plan. Under the terms of an amendment to the 2012 Incentive Plan that was adopted by the Company in March 2016, however, each of those directors first appointed pursuant to the Agreement are considered members of the Incumbent Board for all awards granted after that amendment, which includes all awards granted in 2016. The imposition of the double trigger means that awards subject to the double trigger requirement will no longer immediately vest following a change in control (please read “Item 11. Executive Compensation” for additional information). All outstanding awards to NEOs are subject to a double trigger and all awards under the LTIP are also subject to a double trigger requirement.
Our Incentive Plans provide for immediate vesting (at least in part) of restricted stock upon termination due to disability or death, provided the holder has been in continuous employment since the award date, or for awards granted prior to March 2016, upon a change in control, for employees who are not NEOs. Unvested shares of restricted stock are forfeited upon termination for any reason other than disability or death. The number of shares and market value of the restricted stock that would automatically vest for each NEO upon termination due to death or disability, or for a qualifying termination following a change in control, based on the closing price of
the Company’s Common Stock on December 31, 2015, is set forth in “Item 11. Executive Compensation - NEO’s Outstanding Equity Awards Table at 2015 Fiscal Year End”, under the captions “Number of Shares or Units of Stock That Have Not Vested” and “Market Value of Shares or Units of Stock That Have Not Vested.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership
The table below sets forth, as of April 15, 2016, certain information with respect to the shares of Common Stock beneficially owned by: (i) each person known by the Company to beneficially own 5% or more of the Company’s Common Stock; (ii) each director of the Company; (iii) each of the executive officers of the Company identified in the Summary Compensation Table; and (iv) all directors and executive officers of the Company as a group.
|
| | | | | | | | |
| Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership1 | | Percent of Class | |
| Michael W. Brown | | 36,846 |
| | | * |
| |
| Peter A. Feld | | 3,338,886 |
| 2 | | 15.61 | % | |
| Eli Jones | | 7,026 |
| | | * |
| |
| Carol R. Kaufman | | 10,627 |
| | | * |
| |
| Michelle McKenna-Doyle | | 1,447 |
| | | * |
| |
| Richard G. Rawson | | 681,977 |
| 3 | | 3.19 | % | |
| Paul J. Sarvadi | | 1,611,797 |
| 4 | | 7.54 | % | |
| Norman R. Sorensen | | 2,646 |
| | | * |
| |
| Austin P. Young | | 41,042 |
| | | * |
| |
| A. Steve Arizpe | | 110,408 |
| 5 | | * |
| |
| Jay E. Mincks | | 52,213 |
| | | * |
| |
| Douglas S. Sharp | | 34,875 |
| | | * |
| |
| Starboard Value LP | | 3,335,976 |
| 6 | | 15.60 | % | |
| BlackRock Fund Advisors | | 2,008,678 |
| 7 | | 9.39 | % | |
| The Vanguard Group, Inc. | | 1,564,844 |
| 8 | | 7.32 | % | |
| Executive Officers and Directors as a Group (13 Persons) | | 5,976,649 |
| | | 27.95 | % | |
_________________________
* Represents less than 1%.
| |
1
| Except as otherwise indicated, each of the stockholders has sole voting and investment power with respect to the securities shown to be owned by such stockholder. The address for each officer and director is in care of Insperity, Inc., 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802. |
The number of shares of Common Stock beneficially owned by each person includes options exercisable on April 15, 2016, or within 60 days after April 15, 2016, and excludes options not exercisable within 60 days after April 15, 2016 (currently there are no unvested stock options). The number of shares of Common Stock beneficially owned by each person also includes unvested shares of restricted stock as of April 15, 2016 and excludes LTIP shares that are not available within 60 days after April 15, 2016. Each owner of restricted stock has the right to vote his or her shares but may not transfer them until they have vested.
|
| | | | | | | | | | |
| | Options | | | |
Name of Beneficial Owner | | Exercisable | | Not Exercisable | | Unvested Restricted Stock | |
| | | | | | | |
Michael W. Brown | | 20,513 |
| | — |
| | — |
| |
Peter A. Feld | | — |
| | — |
| | 1,447 |
| |
Eli Jones | | — |
| | — |
| | — |
| |
Carol R. Kaufman | | — |
| | — |
| | 647 |
| |
Michelle McKenna-Doyle | | — |
| | — |
| | 1,447 |
| |
Norman R. Sorensen | | — |
| | — |
| | 1,447 |
| |
Austin P. Young | | 7,813 |
| | — |
| | — |
| |
A. Steve Arizpe | | — |
| | — |
| | 25,254 |
| |
Jay E. Mincks | | — |
| | — |
| | 25,254 |
| |
Richard G. Rawson | | — |
| | — |
| | 25,254 |
| |
Paul J. Sarvadi | | — |
| | — |
| | 42,509 |
| |
Douglas S. Sharp | | — |
| | — |
| | 16,581 |
| |
| |
2
| Based on a Schedule 13D/A filed with the SEC on March 15, 2016. Mr. Feld reported shared voting and dispositive power with respect to 3,335,976 shares and 2,910 shares held directly. See footnote 8 below for further information. |
| |
3
| Includes 283,676 shares owned by the RDKB Rawson LP, 249,512 shares owned by the R&D Rawson LP, and 350 shares owned by Dawn M. Rawson (spouse). Mr. Rawson shares voting and investment power over all such shares with his wife, except for 350 shares owned by his wife. |
| |
4
| Includes 917,396 shares owned by Our Ship Limited Partnership, Ltd., 453,069 shares owned by the Sarvadi Children’s Limited Partnership, 16,651 shares owned by Paul J. Sarvadi and Vicki D. Sarvadi (spouse), JT WROS and 19,644 shares owned by six education trusts established for the benefit of the children of Paul J. Sarvadi. Mr. Sarvadi shares voting and investment power over all such shares with his spouse. Also includes 220,000 shares pledged to banks as collateral for loans. The Board determined the amount of shares pledged by Mr. Sarvadi was insignificant under the Company’s pledging policy. |
| |
5
| Includes 3,139 shares owned by A. Steve Arizpe and Charissa Arizpe (spouse). Mr. Arizpe shares voting and investment power over all such shares with his wife. |
| |
6
| Based on a Schedule 13D/A filed with the SEC on March 15, 2016, pursuant to which (a) each of Starboard Value LP, Starboard Value GP LLC, Starboard Principal Co LP and Starboard Principal Co GP LLC reported sole voting and dispositive power with respect to 3,335,976 shares; (b) Starboard Value and Opportunity Master Fund LTD reported sole voting and dispositive power with respect to 1,986,958 shares; (c) Starboard Value and Opportunity S LLC reported sole voting and dispositive power with respect to 444,820 shares; (d) each of Starboard Value and Opportunity C LP, Starboard Value R LP and Starboard Value R GP LLC reported sole voting and dispositive power with respect to 241,324 shares; (e) each of Jeffrey C. Smith and Mark R. Mitchell reported shared voting and dispositive power with respect to 3,335,976 shares and (f) Peter A. Feld reported sole voting and dispositive power with respect to 1,120 shares and shared voting and dispositive power with respect to 3,335,976 shares. The address of the reporting persons is 777 Third Avenue, 18th Floor, New York, NY 10017. |
| |
7
| Based on a Schedule 13G/A filed with the SEC on January 26, 2016. BlackRock, Inc. reported sole voting power with respect to 1,944,675 shares and sole dispositive power with respect to 2,008,678 shares. The address of BlackRock, Inc. is 40 East 52nd Street, New York, NY 10022.
|
| |
8
| Based on a Schedule 13G/A filed with the SEC on February 10, 2016. The Vanguard Group reported sole voting power with respect to 43,000 shares; sole dispositive power with respect to 1,522,844 shares and shared dispositive power with respect to 42,000 shares with Vanguard Fiduciary Trust Company. The address of the Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355. |
Securities Reserved for Issuance Under Equity Compensation Plans Table
The following table sets forth information about the Company’s Common Stock that was available for issuance under all of the Company’s existing equity compensation plans as of December 31, 2015:
|
| | | | | | | | | | | |
| | | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance | |
| Plan Category | | (# in thousands) | | ($) | | (# in thousands) | |
Equity compensation plans approved by security holders 1 | | 214 |
| 2 | 29.56 |
| 3 |
| 2,172 |
| 4 |
| Equity compensation plan not approved by security holders | | — |
| | — |
| | — |
| |
| Total | | 214 |
| | 29.56 |
| | 2,172 |
| |
| |
1
| The 2001 Incentive Plan, the 2012 Incentive Plan and the Insperity, Inc. 2008 Employee Stock Purchase Plan (the “ESPP”) have been approved by the Company’s stockholders. The ESPP is intended to qualify for favorable tax treatment under Section 423 of the Internal Revenue Code. |
| |
2
| Includes 185,947 shares subject to issuance under the LTIP as of December 31, 2015 assuming maximum results for performance periods not yet complete and actual results for completed performance periods and associated dividends equivalents. |
| |
3
| Weighted average exercise price does not take into account shares to be issued under the LTIP. |
| |
4
| This includes 1,260,069 shares available under the ESPP and 912,045 shares available under the 2012 Incentive Plan. As of April 15, 2016, 1,252,205 shares and 559,616 shares (assuming maximum results for performance periods not yet complete and actual results for performance periods completed) were available for issuance under the ESPP and the 2012 Incentive Plan, respectively. The securities remaining available for issuance under the 2012 Incentive Plan may be issued in the form of stock options, performance awards, stock awards (including restricted stock), phantom stock awards, stock appreciation rights, and other stock-based awards. |
ITEMItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions, and Director Independence.
The Finance, Risk Management and Audit Committee has adopted a statement of policy and procedures with respect to related party transactions covering the review, approval or ratification of transactions involving the Company and “Related Parties” (generally, directors and executive officers and their immediate family members and 5% stockholders). The policy currently covers transactions in which the Company and any Related Party are participants and in which the Related Party has a material interest, other than transactions involving an amount equal to or less than $50,000 (individually or when aggregated with all similar transactions) and not involving non-employee directors. The policy generally requires that such transactions be approvedinformation required by the Finance, Risk Management and Audit Committee in advance of the consummation or material amendment of the transaction. Under the policy, prior to entering into a related party transaction, full disclosure of all of the facts and circumstances relatingthis item is incorporated by reference to the transaction must be made toinformation set forth under the Finance, Risk Managementcaption “Certain Relationships and Audit Committee, which will approve such transaction only if it isRelated Transactions” in or is not inconsistent with, the best interests of the Company and its stockholders. In the event a transaction is not identified as a related party transaction in advance, it will be submitted promptly to the Finance, Risk Management and Audit Committee or the chairperson thereof, and such committee or chairperson, as the case may be, will evaluate the transaction and evaluate all options, including but not limited to ratification, amendment or termination of the transaction.
A significant component of our marketing strategy is the title sponsorship of the Insperity InvitationalTM golf tournament, a Champions PGA tour event held annually in The Woodlands, Texas, a suburb of Houston. Consistent with other PGA golf tournaments, the Insperity Invitational golf tournament benefits and is managed by a non-profit organization, Greater Houston Golf Charities (“GHGC”). In connection with the Company’s sponsorship, Mr. Jay E. Mincks, Executive Vice President of Sales and Marketing, serves as chairman of GHGC, a non-compensatory position. During 2015, the Company paid GHGC $3.5 million in sponsorship and tournament related expenses, as well as an additional $0.9 million in other event sponsorships and charitable contributions.
We provide PEO-related services to certain entities that are owned by, or have board members that are, Related Parties. These Related Parties include Mr. Richard G. Rawson, Mr. Paul J. Sarvadi and Mr. Jack M. Fields, Jr. or members of their families. The PEO service fees paid by such entities are within the pricing range of other unrelated clients of ours. During 2015, such client companies paid the Company the following service fees, which are presented net of the associated payroll costs:
|
| | | | | | | | |
| Related Party | | Net Service Fees / (Payroll Costs) |
| | | | |
| Mr. Rawson (three client companies) | | $ | 491,238 |
|
| $ | (1,636,797 | ) |
| Mr. Sarvadi (four client companies) | | $ | 334,367 |
|
| $ | (572,818 | ) |
Mr. Fields1 (two client companies) | | $ | 183,907 |
|
| $ | (650,932 | ) |
_________________________
| |
1
| Mr. Fields resigned from the Board on June 10, 2015. |
We made charitable contributions to non-profit organizations for which certain Related Parties serve as members of their board of directors. These Related Parties include Messrs. Sarvadi, Rawson and Mincks. During 2015, certain corporate employees were family members of certain Related Parties. Total salaries, commissions and incentive compensation paid during 2015 to family members of Messrs. Sarvadi, Rawson and and Arizpe were $243,849 (two corporate employees), $163,180 (one corporate employee) and $370,050 (five corporate employees), respectively.
Pursuant to the Agreement with Starboard, the Company reimbursed Starboard’s legal fees of $276,765.Proxy Statement.
Director Independence
Under rules of the New York Stock Exchange (the “NYSE”), the Company must have a majority of independent directors. No director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). In evaluating each director’s independence, the Board considered all relevant factsItem 14. Principal Accounting Fees and circumstances, and relationships and transactions between each director, her or his family members or any business, charity or other entity in which the director has an interest on the one hand, and the Company, its affiliates, or the Company’s senior management on the other. As a result of this review, at its meeting held on February 19, 2016, the Board affirmatively determined that all of the Company’s directors are independent from the Company and its management, with the exception of Messrs. Sarvadi and Rawson, both of whom are members of the senior management of the Company.Services.
The Board has considered what types of disclosure should be made relatinginformation required by this item is incorporated by reference to the process of determining director independence. To assist the Board in making disclosures regarding its determinations of independence, in 2004, the Board adopted categorical standards as contemplatedinformation set forth under the listing standardscaption “Ratification and Appointment of the NYSE then in effect. Under the rules then in effect, relationships that were within the categorical standards were not required to be disclosed and their impact on independence was not required to be separately discussed, although the categorical standards, by themselves, did not determine the independence of a particular director. The Board considers all relevant facts and circumstances in determining whether a director is independent. A relationship satisfies the categorical standards adopted by the Board if it:
|
| | | |
| • | | is not a relationship that would preclude a determination of independence under Section 303A.02(b) of the NYSE Listed Company Manual; |
| • | | consists of charitable contributions made by Insperity to an organization where a director is an executive officer and does not exceed the greater of $1 million or 2% of the organization’s gross revenue in any of the last three years; and |
| • | | is not required to be, and it is not otherwise, disclosed herein. |
In the course of the Board’s determination regarding the independence of directors other than Messrs. Sarvadi and Rawson, it considered all transactions, relationships and arrangements in which such directors and Insperity were participants. The Board also considered any transactions amongst the directors, even if they did not involve Insperity. In particular, with respect to each of the most recent three fiscal years, the Board evaluated, with respect to Dr. Jones, its long-time employment of an individual who became Dr. Jones’ son-in-law. The Board has determined that this relationship is not material. In making this determination with respect to Dr. Jones, the Board considered that Dr. Jones’ son-in-law was employed as a manager of lead generation, held such position for several years prior to becoming a member of Dr. Jones’ family, and his salary was between the 25th and 75th percentile for the position.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Public Accountants – Fees of Ernst & Young LLP
Ernst & Young’s fees for professional services totaled $1,154,300 in 2015LLP” and $1,096,610 in 2014. During 2015 and 2014, Ernst & Young’s fees for professional services included the following:
Audit Fees — fees for audit services, which relate to the consolidated audit, internal control audit in compliance with Sarbanes-Oxley Section 404, quarterly reviews, subsidiary audits and related matters, were $930,880 in 2015 and $875,850 in 2014.
Audit-Related Fees — fees for audit-related services, which consisted primarily of the SOC 1 Report, the retirement plan audits, and quarterly agreed-upon procedures, were $220,920 in 2015 and $218,360 in 2014.
•Tax Fees — there were no fees for tax services in 2015 or in 2014.
All Other Fees — there were fees of $2,500 in 2015 and $2,400 in 2014, which were annual subscription fees for Insperity’s use of Ernst and Young’s online research databases and other research tools.
The Finance, Risk Management and Audit Committee reviewed the non-audit services provided to the Company and considered whether Ernst & Young’s provision of such services was compatible with maintaining its independence.
“—Finance, Risk Management and Audit Committee Pre-Approval Policy for Audit and Non-Audit Services
The Finance, Risk Management and Audit Committee has established a policy that requires pre-approval ofServices” in the audit and non-audit services performed by the independent auditor. Unless a service proposed to be provided by the independent auditors has been pre-approved by the Finance, Risk Management and Audit Committee under its pre-approval policies and procedures, it will require specific pre-approval of the engagement terms by the Finance, Risk Management and Audit Committee. Under the policy, pre-approved service categories are generally provided for up to 12 months and must be detailed as to the particular services provided and sufficiently specific and objective so that no judgments by management are required to determine whether a specific service falls within the scope of what has been pre-approved. In connection with any pre-approval of services, the independent auditor is required to provide detailed back-up documentation concerning the specific services to be provided.
The Finance, Risk Management and Audit Committee may delegate pre-approval authority to one or more of its members, including a subcommittee of the Finance, Risk Management and Audit Committee. The member or members to whom such authority is delegated shall report any pre-approval actions taken by them to the Finance, Risk Management and Audit Committee at its next scheduled meeting. The Finance, Risk Management and Audit Committee does not delegate to management any of its responsibilities to pre-approve services performed by the independent auditor.
None of the services related to the Audit-Related Fees or Other Fees described above was approved by the Finance, Risk Management and Audit Committee pursuant to the waiver of pre-approval provisions set forth in applicable rules of the SEC.Insperity Proxy Statement.
|
| | |
| Insperity | 57
| 2018 Form 10-K |
|
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
PART IV
ITEMItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements of the Company
The Consolidated Financial Statements listed by the Registrant on the Index to Consolidated Financial Statements accompanying the Original Filing are filed as part of the Original Filing.
(a) 2.Exhibits, Financial Statement Schedules
The required information is included in the Consolidated Financial Statements or Notes thereto in the Original Filing.
(a) 3. List of ExhibitsSchedules.
|
| | |
| (a) | 1. | Financial Statements of the Company |
| | Exhibit No. | | Description |
| | 3.1 | The Consolidated FInancial Statements listed by the Registrant on the accompanying Index to Consolidated FInancial Statements are filed as part of this Annual Report. |
| | |
| (a) | 2. | Financial Statement Schedules |
| | |
| | The required information is included in the Consolidated Financial Statements or Notes thereto. |
| | |
| (a) | 3. | List of Exhibits |
|
| |
| Exhibit No. | Exhibit |
| 3.1 | |
| 3.2 | | Certificate of Ownership and Merger dated March 3, 2011 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2011). |
| 3.3 | | |
| 3.4 | | Certificate of Designation of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock (included as Exhibit A to the Rights Agreement). |
| 4.1 | | |
| 4.2 | | Rights Agreement dated as of November 13, 2007 between Insperity, Inc. and Mellon Investor Services, LLC, as Rights Agent (the “Rights Agreement”) (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 16, 2007). |
| 4.3 | | Form of Rights Certificate (included as Exhibit B to the Rights Agreement). |
| 10.1† | | |
| 10.2† | | |
| 10.3† | | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K for the year ended December 31, 2004). |
| 10.4† | | |
| 10.4† | 10.5† | | |
| 10.5† | 10.6† | | |
| 10.6† | 10.7† | | |
| 10.7† | 10.8† | | |
| 10.8† | 10.9† | | |
| 10.9† | 10.10† | | |
| 10.10† | 10.11† | | |
| 10.11† | |
| 10.12† | |
| 10.13† | |
| 10.14† | |
|
| | |
| Insperity | 58
| 2018 Form 10-K |
|
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
| |
| Exhibit No. | Exhibit |
| 10.15† | |
| 10.16† | |
| 10.17† | |
| 10.18† | |
| 10.19† | |
| 10.20† | 10.13† | | |
|
| 10.21† | | | |
| 10.14† | | |
| 10.22† | 10.15† | | |
| 10.23† | 10.16 |
| 10.24 | | |
| 10.25 | 10.17 | | |
| 10.26 | 10.18 | | |
| 10.27 | 10.19 | | |
| 10.28 | 10.20 |
| 10.29 | |
| 10.30 | |
| 10.21(+10.31(+) | | Amendment to Various Agreements |
| 10.32(+) | 10.22 | | Houston Service Center Operating Lease Amendment |
| 10.23(+10.33(+) | | |
| 10.24(+10.34(+) | | |
| 10.25(+10.35(+) | | |
|
| 10.26(+ | |
| Insperity | 59
| 2018 Form 10-K |
|
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
| |
| Exhibit No. | Exhibit |
| 10.36(+) | | |
| 10.27(+10.37(+) | | |
| 10.28(+10.38(+) | | |
| 10.29(+) | | Letter Agreement, dated September 2, 2014, by and between Insperity Holdings, Inc. and
UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended September 30, 2014).
|
| 10.30(+10.39(+) | | Letter Agreement, dated August 28, 2015, by and between Insperity Holdings, Inc. and
UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended September 30, 2015).
|
| 10.31(+) | | and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and UnitedHealthcare Insurance Company, effective as of January 1, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant'sRegistrant’s Form 10-Q for the quarter ended September 30, 2014). |
| 10.32(+10.40(+) | | 1,January1, 2011, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and
UnitedHealthcare Insurance Company, effective as of January 1, 2013 (incorporated (incorporated by reference to Exhibit 10.3 to the Registrant'sRegistrant’s Form 10-Q for the quarter ended September 30, 2014).
|
| 10.41(+) | 10.33 |
| 10.42(+) | |
| 10.43(+) | Exchange |
| 10.44(+) | |
| 10.45 | 10.34 | | |
| 10.35 | | Amendment No. 1 to the Credit Agreement dated December 7, 2012 (incorporated by reference to Exhibit 10.32 to the Registrant’s Form 10-K for the year ended December 31, 2012). |
| 10.36 | | Amendment No. 2 to the Credit Agreement dated December 1, 2014. |
|
| | | |
| 10.37 | | Amendment No. 3 to the Credit Agreement dated February 6, 2015. |
| 10.38 | | Agreement, dated as of March 21, 2015, by and among Insperity, Inc. and Starboard Value LP and certain of its affiliates (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on on March 31, 2015). |
| 21.1* | | |
| 23.1* | | |
| 24.1* | | |
| 31.1* | 31.1** | | |
| 31.2* | 31.2** | | |
| 32.1*** | | |
| 32.2*** | | |
| 101.INS* | | XBRL Instance Document.Document(1). |
| 101.SCH* | | XBRL Taxonomy Schema Document. |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | | XBRL Extension Definition Linkbase Document. |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| |
| * | Previously filed as an exhibit to the Original Filing. |
| Filed herewith. |
| ** | Filed herewith. |
| |
*** | Previously furnished as an exhibit to the Original Filing. |
| Furnished with this report. |
| † | Management contract or compensatory plan or arrangement.arrangement required to be filed as an exhibit to this Form 10-K. |
|
| | |
| Insperity | 60
| 2018 Form 10-K |
|
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
| |
| Exhibit No. | Exhibit |
| (+) | Confidential treatment has been requested for this exhibit and confidential portions have been filed with the Securities and Exchange Commission. |
| |
(1) | Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016; (2) the Consolidated Balance Sheets at December 31, 2018 and 2017; (3) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016; (4) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016; and (5) the Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016. |
ITEM 16. FORM 10-K SUMMARY.
None.
|
| | |
| Insperity | 61
| 2018 Form 10-K |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Insperity, Inc. has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized, on April 28, 2016.
February 11, 2019.
|
| | |
| | INSPERITY, INC. |
| | | |
| | By: | /s/ Douglas S. Sharp |
| | | Douglas S. Sharp |
| | | Senior Vice President of Finance |
| | | Chief Financial Officer and Treasurer |
|
| | |
| Insperity | 62
| 2018 Form 10-K |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Insperity, Inc. in the capacities indicated on February 11, 2019:
|
| | |
| Signature | | Title |
| | |
| | |
| /s/ Paul J. Sarvadi | | Chairman of the Board, Chief Executive Officer |
| Paul J. Sarvadi | | and Director |
| | (Principal Executive Officer) |
| | |
| /s/ Douglas S. Sharp | | Senior Vice President of Finance |
| Douglas S. Sharp | | Chief Financial Officer and Treasurer |
| | (Principal Financial Officer) |
| | |
| * | | Director |
| Timothy Clifford | | |
| | |
| * | | Director |
| Carol R. Kaufman | | |
| | |
| * | | Director |
| Ellen H. Masterson | | |
| | |
| * | | Director |
| Randall Mehl | | |
| | |
| * | | Director |
| John Morphy | | |
| | |
| * | | Director |
| Richard G. Rawson | | |
| | |
| /s/ Austin P. Young | | Director |
| Austin P. Young | | |
| | |
| *By: /s/ Daniel D. Herink | | |
| Daniel D. Herink, attorney-in-fact | | |
|
| | |
| Insperity | 63
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
| Insperity | F-1
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Insperity, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Insperity, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “ consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1991.
Houston, Texas
February 11, 2019
|
| | |
| Insperity | F-2
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
MANAGEMENT’S REPORT ON INTERNAL CONTROL
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 framework). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by the Company’s independent registered public accounting firm, as stated in their report that is included herein.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in the COSO 2013 framework.
|
| | |
| /s/ Paul J. Sarvadi | | /s/ Douglas S. Sharp |
| Paul J. Sarvadi | | Douglas S. Sharp |
| Chairman of the Board and | | Senior Vice President of Finance |
| Chief Executive Officer | | Chief Financial Officer and Treasurer |
|
| | |
| Insperity | F-3
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Insperity, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Insperity, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Insperity, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated February 11, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Houston, Texas
February 11, 2019
|
| | |
| Insperity | F-4
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS |
| | | | | | |
| (in thousands, except per share amounts) | December 31, 2018 | December 31, 2017 |
| | | |
| Assets | | |
| Cash and cash equivalents | $ | 326,773 |
| $ | 354,260 |
|
| Restricted cash | 42,227 |
| 41,137 |
|
| Marketable securities | 60,781 |
| 1,960 |
|
| Accounts receivable, net | 400,623 |
| 333,981 |
|
| Prepaid insurance | 8,411 |
| 10,782 |
|
| Other current assets | 27,721 |
| 26,991 |
|
| Income taxes receivable | — |
| 9,824 |
|
| Total current assets | 866,536 |
| 778,935 |
|
| Property and equipment, net | 117,213 |
| 95,659 |
|
| Prepaid health insurance | 9,000 |
| 9,000 |
|
| Deposits | 172,674 |
| 159,515 |
|
| Goodwill and other intangible assets, net | 12,726 |
| 12,762 |
|
| Deferred income taxes, net | 8,816 |
| 4,283 |
|
| Other assets | 4,851 |
| 3,541 |
|
| Total assets | $ | 1,191,816 |
| $ | 1,063,695 |
|
|
| | | | | | |
| Liabilities and stockholders’ equity | | |
| Accounts payable | $ | 10,622 |
| $ | 6,447 |
|
| Payroll taxes and other payroll deductions payable | 261,166 |
| 303,247 |
|
| Accrued worksite employee payroll cost | 329,979 |
| 267,402 |
|
| Accrued health insurance costs | 35,153 |
| 26,075 |
|
| Accrued workers’ compensation costs | 45,818 |
| 42,974 |
|
| Accrued corporate payroll and commissions | 60,704 |
| 52,595 |
|
| Other accrued liabilities | 28,890 |
| 25,989 |
|
| Total current liabilities | 772,332 |
| 724,729 |
|
| Accrued workers’ compensation costs | 187,412 |
| 166,493 |
|
| Long-term debt | 144,400 |
| 104,400 |
|
| Other accrued liabilities | 9,996 |
| 1,752 |
|
| Total noncurrent liabilities | 341,808 |
| 272,645 |
|
| Commitments and contingencies |
|
|
|
|
| Stockholders’ equity: | | |
| Preferred stock ($0.01 per share par value; 20,000 shares authorized; no shares issued and outstanding) | — |
| — |
|
| Common stock ($0.01 per share par value; 60,000 shares authorized; 55,489 shares issued and outstanding) | 555 |
| 555 |
|
| Additional paid-in capital | 36,752 |
| 25,337 |
|
| Treasury stock, at cost (14,555 and 14,009 shares held in treasury) | (357,569 | ) | (256,363 | ) |
| Accumulated other comprehensive income, net of tax | (9 | ) | (5 | ) |
| Retained earnings | 397,947 |
| 296,797 |
|
| Total stockholders’ equity | 77,676 |
| 66,321 |
|
| Total liabilities and stockholders’ equity | $ | 1,191,816 |
| $ | 1,063,695 |
|
See accompanying notes.
|
| | |
| Insperity | F-5
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands, except per share amounts) | 2018 | 2017 | 2016 |
| | | | |
Revenues(1) | $ | 3,828,549 |
| $ | 3,300,223 |
| $ | 2,941,347 |
|
| Payroll taxes, benefits and workers’ compensation costs | 3,146,640 |
| 2,727,492 |
| 2,449,737 |
|
| Gross profit | 681,909 |
| 572,731 |
| 491,610 |
|
| Salaries, wages and payroll taxes | 301,027 |
| 259,531 |
| 229,589 |
|
| Stock-based compensation | 20,425 |
| 24,345 |
| 16,643 |
|
| Commissions | 28,957 |
| 22,773 |
| 19,288 |
|
| Advertising | 18,554 |
| 16,686 |
| 16,447 |
|
| General and administrative expenses | 111,068 |
| 101,273 |
| 86,693 |
|
| Depreciation and amortization | 22,842 |
| 18,182 |
| 16,644 |
|
| Total operating expenses | 502,873 |
| 442,790 |
| 385,304 |
|
| Operating income | 179,036 |
| 129,941 |
| 106,306 |
|
| Other income (expense): | | | |
| Interest income | 7,992 |
| 3,413 |
| 1,267 |
|
| Interest expense | (4,668 | ) | (3,213 | ) | (2,396 | ) |
| Income before income tax expense | 182,360 |
| 130,141 |
| 105,177 |
|
| Income tax expense | 46,947 |
| 45,739 |
| 39,186 |
|
| Net income | $ | 135,413 |
| $ | 84,402 |
| $ | 65,991 |
|
| Less distributed and undistributed earnings allocated to participating securities | (1,875 | ) | (1,517 | ) | (1,496 | ) |
| Net income allocated to common shares | $ | 133,538 |
| $ | 82,885 |
| $ | 64,495 |
|
| | | | |
| Net income per share of common stock | | | |
| Basic | $ | 3.24 |
| $ | 2.02 |
| $ | 1.55 |
|
| Diluted | $ | 3.22 |
| $ | 2.01 |
| $ | 1.54 |
|
| |
(1) | Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows: |
|
| | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Gross billings | $ | 23,830,731 |
| $ | 20,173,812 |
| $ | 17,932,857 |
|
| Less: WSEE payroll cost | 20,002,182 |
| 16,873,589 |
| 14,991,510 |
|
| Revenues | $ | 3,828,549 |
| $ | 3,300,223 |
| $ | 2,941,347 |
|
See accompanying notes.
|
| | |
| Insperity | F-6
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Net income | $ | 135,413 |
| $ | 84,402 |
| $ | 65,991 |
|
| Other comprehensive loss: | | | |
| Unrealized loss on available-for-sale securities, net of tax | (4 | ) | (2 | ) | (3 | ) |
| Comprehensive income | $ | 135,409 |
| $ | 84,400 |
| $ | 65,988 |
|
See accompanying notes.
|
| | |
| Insperity | F-7
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Common Stock Issued | | Additional Paid In Capital | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
| Shares | | Amount | |
| | | | | | | | | | | | | | |
| Balance at December 31, 2015 | 61,517 |
| | $ | 617 |
| | $ | 144,392 |
| | $ | (205,325 | ) | | $ | — |
| | $ | 232,771 |
| | $ | 172,455 |
|
| Purchase of treasury stock, at cost | — |
| | — |
| | — |
| | (31,669 | ) | | — |
| | — |
| | (31,669 | ) |
| Repurchase of common stock | (6,028 | ) | | (62 | ) | | (144,201 | ) | | — |
| | — |
| | — |
| | (144,263 | ) |
| Exercise of stock options | — |
| | — |
| | (27 | ) | | 625 |
| | — |
| | — |
| | 598 |
|
| Stock-based compensation expense | — |
| | — |
| | 8,156 |
| | 8,487 |
| | — |
| | — |
| | 16,643 |
|
| Other | — |
| | — |
| | 642 |
| | 730 |
| | — |
| | — |
| | 1,372 |
|
| Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | (20,599 | ) | | (20,599 | ) |
| Unrealized loss on marketable securities, net of tax | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 65,991 |
| | 65,991 |
|
| Balance at December 31, 2016 | 55,489 |
| | $ | 555 |
| | $ | 8,962 |
| | $ | (227,152 | ) | | $ | (3 | ) | | $ | 278,163 |
| | $ | 60,525 |
|
| Purchase of treasury stock, at cost | — |
| | — |
| | — |
| | (38,735 | ) | | — |
| | — |
| | (38,735 | ) |
| Stock-based compensation expense | — |
| | — |
| | 15,508 |
| | 8,837 |
| | — |
| | — |
| | 24,345 |
|
| Other | — |
| | — |
| | 867 |
| | 687 |
| | — |
| | — |
| | 1,554 |
|
| Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | (65,768 | ) | | (65,768 | ) |
| Unrealized loss on marketable securities, net of tax | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 84,402 |
| | 84,402 |
|
| Balance at December 31, 2017 | 55,489 |
| | $ | 555 |
| | $ | 25,337 |
| | $ | (256,363 | ) | | $ | (5 | ) | | $ | 296,797 |
| | $ | 66,321 |
|
| Purchase of treasury stock, at cost | — |
| | — |
| | — |
| | (113,327 | ) | | — |
| | — |
| | (113,327 | ) |
| Stock-based compensation expense | — |
| | — |
| | 9,696 |
| | 11,584 |
| | — |
| | (855 | ) | | 20,425 |
|
| Other | — |
| | — |
| | 1,719 |
| | 537 |
| | — |
| | — |
| | 2,256 |
|
| Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | (33,408 | ) | | (33,408 | ) |
| Unrealized loss on marketable securities, net of tax | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 135,413 |
| | 135,413 |
|
| Balance at December 31, 2018 | 55,489 |
| | $ | 555 |
| | $ | 36,752 |
| | $ | (357,569 | ) | | $ | (9 | ) | | $ | 397,947 |
| | $ | 77,676 |
|
See accompanying notes.
|
| | |
| Insperity | F-8
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Cash flows from operating activities | | | |
| Net income | $ | 135,413 |
| $ | 84,402 |
| $ | 65,991 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 22,842 |
| 18,182 |
| 16,644 |
|
| Amortization of marketable securities | 137 |
| 80 |
| 90 |
|
| Stock-based compensation | 20,425 |
| 24,345 |
| 16,643 |
|
| Deferred income taxes | (4,533 | ) | 9,742 |
| 2,951 |
|
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (66,642 | ) | (63,697 | ) | (69,619 | ) |
| Prepaid insurance | 2,371 |
| 4,259 |
| (7,624 | ) |
| Other current assets | (730 | ) | (7,465 | ) | (2,391 | ) |
| Other assets | (2,005 | ) | (2,496 | ) | (1,465 | ) |
| Accounts payable | 4,175 |
| 2,258 |
| (1,192 | ) |
| Payroll taxes and other payroll deductions payable | (42,081 | ) | 55,481 |
| 42,373 |
|
| Accrued worksite employee payroll expense | 62,577 |
| 52,188 |
| 53,297 |
|
| Accrued health insurance costs | 9,078 |
| (285 | ) | 12,717 |
|
| Accrued workers’ compensation costs | 23,763 |
| 23,945 |
| 21,723 |
|
| Accrued corporate payroll, commissions and other accrued liabilities | 8,941 |
| 17,138 |
| 3,150 |
|
| Income taxes payable/receivable | 10,749 |
| (4,875 | ) | (7,920 | ) |
| Total adjustments | 49,067 |
| 128,800 |
| 79,377 |
|
| Net cash provided by operating activities | 184,480 |
| 213,202 |
| 145,368 |
|
| | | | |
| Cash flows from investing activities | | | |
| Marketable securities: | | | |
| Purchases | (87,887 | ) | (1,752 | ) | (1,049 | ) |
| Proceeds from maturities | 12,625 |
| 1,561 |
| 1,715 |
|
| Proceeds from dispositions | 16,299 |
| — |
| 7,268 |
|
| Property and equipment: | | | |
| Purchases | (35,328 | ) | (33,337 | ) | (33,994 | ) |
| Proceeds from dispositions | 151 |
| 278 |
| 43 |
|
| Net cash used in investing activities | (94,140 | ) | (33,250 | ) | (26,017 | ) |
|
| | |
| Insperity | F-9
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
| | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Cash flows from financing activities | | | |
| Purchase of treasury stock | $ | (113,327 | ) | $ | (38,735 | ) | $ | (31,669 | ) |
| Repurchase of common stock | — |
| — |
| (144,263 | ) |
| Dividends paid | (33,408 | ) | (65,768 | ) | (20,599 | ) |
| Borrowings under long-term debt agreement | 40,000 |
| — |
| 124,400 |
|
| Principal repayments | — |
| — |
| (20,000 | ) |
| Proceeds from the exercise of stock options | — |
| — |
| 598 |
|
| Other | 2,257 |
| 1,554 |
| 1,373 |
|
| Net cash used in financing activities | (104,478 | ) | (102,949 | ) | (90,160 | ) |
| Net increase (decrease) in cash and cash equivalents | (14,138 | ) | 77,003 |
| 29,191 |
|
| Cash, cash equivalents and restricted cash at beginning of year | 549,612 |
| 472,609 |
| 443,418 |
|
| Cash, cash equivalents and restricted cash at end of year | $ | 535,474 |
| $ | 549,612 |
| $ | 472,609 |
|
| | | | |
| Supplemental schedule of cash, cash equivalents and restricted cash | | | |
| Cash and cash equivalents | $ | 354,260 |
| $ | 286,034 |
| $ | 269,538 |
|
| Restricted cash | 41,137 |
| 42,637 |
| 37,418 |
|
| Deposits - workers’ compensation | 154,215 |
| 143,938 |
| 136,462 |
|
| Cash, cash equivalents and restricted cash beginning of year | $ | 549,612 |
| $ | 472,609 |
| $ | 443,418 |
|
| | | | |
| Supplemental schedule of cash, cash equivalents and restricted cash | | | |
| Cash and cash equivalents | $ | 326,773 |
| $ | 354,260 |
| $ | 286,034 |
|
| Restricted cash | 42,227 |
| 41,137 |
| 42,637 |
|
| Deposits - workers’ compensation | 166,474 |
| 154,215 |
| 143,938 |
|
| Cash, cash equivalents and restricted cash end of year | $ | 535,474 |
| $ | 549,612 |
| $ | 472,609 |
|
| | | | |
| Supplemental disclosures of cash flow information | | | |
| Income taxes, net | $ | 40,730 |
| $ | 40,872 |
| $ | 44,148 |
|
| Interest expense | $ | 4,668 |
| $ | 3,213 |
| $ | 2,396 |
|
See accompanying notes.
|
| | |
| Insperity | F-10
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Description of Business
Insperity, Inc. (“Insperity” or “we”, “our”, and “us”) provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Since our formation in 1986, we have evolved from being solely a professional employer organization (“PEO”), an industry we pioneered, to our current position as a comprehensive business performance solutions provider. We were organized as a corporation in 1986 and have provided PEO services since inception.
Our most comprehensive HR services offerings are provided through our Workforce Optimization® and Workforce SynchronizationTM solutions (together, our “PEO HR Outsourcing solutions”), which encompass a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management and training and development services, along with our cloud-based human capital management platform, Insperity PremierTM.
In addition to our PEO HR Outsourcing solutions, we also offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration. We also offer a number of other business performance solutions, including Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management, Retirement Services and Insurance Services, many of which are offered via desktop applications and cloud-based delivery models. These other products or services are offered separately or with our other solutions.
We provide our PEO HR Outsourcing solutions by entering into a co-employment relationship with our clients, under which Insperity and its clients each take responsibility for certain portions of the employer-employee relationship. Insperity and its clients designate each party’s responsibilities through its Client Service Agreement (“CSA”), under which Insperity becomes an employer of the employees who work at the client’s location (“WSEE”) for most administrative and regulatory purposes.
As a co-employer of its WSEEs, we assume many of the rights and obligations associated with being an employer. We enter into an employment agreement with each WSEE, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the right to evaluate employee qualifications or performance, and the right to establish employee compensation levels. Typically, Insperity only exercises these rights in consultation with its clients or when necessary to ensure regulatory compliance. The responsibilities associated with our role as employer include the following obligations with regard to our WSEEs: (1) to compensate its WSEEs through wages and salaries; (2) to pay the employer portion of payroll-related taxes; (3) to withhold and remit (where applicable) the employee portion of payroll-related taxes; (4) to provide employee benefit programs; and (5) to provide workers’ compensation insurance coverage.
In addition to our assumption of employer status for our WSEEs, our PEO HR Outsourcing solutions also include other human resources functions for our clients to support the effective and efficient use of personnel in their business operations. To provide these functions, we maintain a significant staff of professionals trained in a wide variety of human resources functions, including employee training, employee recruiting, employee performance management, employee compensation and employer liability management. These professionals interact and consult with clients on a daily basis to help identify each client’s service requirements and to ensure that we are providing appropriate and timely personnel management services.
Revenue and Direct Cost Recognition
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective approach. Under this method, the guidance is applied only to the most current period presented in the financial statements. ASU No. 2014-09 outlines a single comprehensive revenue recognition model for revenue arising from contracts with customers and superseded most of the previous revenue recognition guidance, including industry-specific guidance. Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Our revenue recognition policies remained substantially
|
| | |
| Insperity | F-11
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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unchanged as a result of the adoption of ASU No. 2014-09 and we did not have any significant changes in our business processes or systems.
We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally have a term of 12 months, but are cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms.
Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but not invoiced represent unbilled accounts receivable included in accounts receivable, net on our Consolidated Balance Sheets.
Pursuant to the practical expedients provided under ASU No 2014-09, we expense sales commissions when incurred because the terms of our contracts are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations.
Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Northeast | $ | 996,541 |
| $ | 854,629 |
| $ | 750,748 |
|
| Southeast | 447,584 |
| 379,874 |
| 318,185 |
|
| Central | 637,779 |
| 543,486 |
| 467,297 |
|
| Southwest | 895,243 |
| 767,207 |
| 689,334 |
|
| West | 797,942 |
| 702,619 |
| 664,308 |
|
| | 3,775,089 |
| 3,247,815 |
| 2,889,872 |
|
| Other revenue | 53,460 |
| 52,408 |
| 51,475 |
|
| Total revenue | $ | 3,828,549 |
| $ | 3,300,223 |
| $ | 2,941,347 |
|
Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of its WSEEs; and (2) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its WSEEs. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup, are recognized ratably over the payroll period as WSEEs perform their service at the client worksite.
In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings.
Consistent with our revenue recognition policy, our direct costs do not include the payroll cost of our WSEEs. Our direct costs associated with our revenue generating activities are primarily comprised of all other costs related to our WSEEs, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.
Segment Reporting
We operate one reportable segment under ASC 280, Segment Reporting.
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| | |
| Insperity | F-12
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Principles of Consolidation
The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that could potentially subject us to concentration of credit risk include accounts receivable and marketable securities.
Cash, Cash Equivalents and Marketable Securities
We invest our excess cash in federal government and municipal-based money market funds and debt instruments of U.S. municipalities. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Liquid investments with stated maturities of greater than three months are classified as marketable securities in current assets.
We account for marketable securities in accordance with ASC 320, Investments – Debt and Equity Securities. We determine the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time ofpurchase, and re-evaluate such classification as of each balance sheet date. At December 31, 2018 and 2017, all of our investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. We use the specific identification method of determining the cost basis in computing realized gains and losses on the sale of our available-for-sale securities. Realized gains and losses are included in other income.
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| | |
| Insperity | F-13
| 2018 Form 10-K |
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|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Property and Equipment
Property and equipment are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method.
Property and equipment, net consisted of the following:
|
| | | | | | |
| (in thousands) | December 31, 2018 |
| December 31, 2017 |
|
| | | |
| Land | $ | 6,215 |
| $ | 6,215 |
|
| Buildings and improvements | 112,308 |
| 95,615 |
|
| Computer hardware and software | 115,259 |
| 105,060 |
|
| Software development costs | 71,332 |
| 60,568 |
|
| Furniture, fixtures and other | 45,694 |
| 42,891 |
|
| | 350,808 |
| 310,349 |
|
| Accumulated depreciation and amortization | (233,595 | ) | (214,690 | ) |
| Total property and equipment, net | $ | 117,213 |
| $ | 95,659 |
|
The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:
|
| |
| Useful Life |
| Buildings and improvements | 5-30 years |
| Computer hardware and software | 2-5 years |
| Software development costs | 3-5 years |
| Furniture, fixtures and other | 5-7 years |
Software development costs relate primarily to software code development, systems integration and testing of our proprietary professional employer information systems and are accounted for in accordance with ASC 350-40, Internal Use Software. Capitalized software development costs are amortized using the straight-line method over the estimated useful lives of the software, generally three years. We recognized $6.0 million, $4.1 million and $3.0 million in amortization of capitalized computer software costs in 2018, 2017 and 2016, respectively. Unamortized software development costs were $19.6 million and $14.9 million in 2018 and 2017, respectively.
We account for our software products in accordance with ASC 985-20, Costs of Software to be Sold. This Topic establishes standards of financial accounting and reporting for the costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, whether internally developed and produced or purchased.
We periodically evaluate our long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we may record an impairment loss to the extent that the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.
Goodwill and Other Intangible Assets
Our goodwill is not amortized, but is tested for impairment on an annual basis or when there is an indication that there has been a potential decline in the fair value of a reporting unit. Annually, we perform a qualitative analysis to determine if it is more likely than not that the fair value has declined below its carrying value. This analysis considers various qualitative factors. Due to the nature of our business, all of our goodwill is associated with one reporting unit. We perform our annual impairment testing during the fourth quarter. Based on the results of our analysis, no impairment loss was recognized in 2018, 2017 or 2016.
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| | |
| Insperity | F-14
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
At December 31, 2018 and 2017, we had an aggregate carrying amount of goodwill acquired of $21.2 million, which has been reduced by cumulative impairment charges of $8.5 million. Accordingly our goodwill balance at December 31, 2018 and 2017 was $12.7 million.
Health Insurance Costs
We provide group health insurance coverage to our WSEEs through a national network of carriers including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii and Tufts, all of which provide fully insured policies or service contracts.
The policy with United provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the cost of the United portion of the plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense, a component of direct costs, in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (1) the level of claims processed during each quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.
Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $6.0 million as of December 31, 2018, and is reported as a long-term asset. As of December 31, 2018, Plan Costs were more than the net premiums paid and owed to United by $6.3 million. As this amount is less than the agreed-upon $9.0 million surplus maintenance level, the $15.3 million difference is also included in accrued health insurance costs, a current liability, in our Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at December 31, 2018, were $15.2 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets. Our benefits costs incurred included a reduction of $1.3 million in 2018, an increase of $1.2 million in 2017 and an increase of $5.1 million in 2016 for changes in estimated run-off related to prior periods.
Workers’ Compensation Costs
Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program, we have financial responsibility to Chubb for the first $1 million layer of claims per occurrence and, for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1 million. Chubb bears the financial responsibility for all claims in excess of these levels.
Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.
We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs’ job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the years ended December 31, 2018, 2017 and 2016, we reduced accrued workers’ compensation costs by $18.8 million, $16.3 million and $10.9 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’
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| | |
| Insperity | F-15
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate was 2.6% in 2018 and 1.6% in 2017) are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.
The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:
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| | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 |
| | | |
| Beginning balance | $ | 207,630 |
| $ | 183,928 |
|
| Accrued claims | 72,066 |
| 68,194 |
|
| Present value discount | (7,829 | ) | (4,308 | ) |
| Paid claims | (42,228 | ) | (40,184 | ) |
| Ending balance | $ | 229,639 |
| $ | 207,630 |
|
| | | |
| Current portion of accrued claims | $ | 42,227 |
| $ | 41,137 |
|
| Long-term portion of accrued claims | 187,412 |
| 166,493 |
|
| Total accrued claims | $ | 229,639 |
| $ | 207,630 |
|
The current portion of accrued workers’ compensation costs at December 31, 2018 and 2017 includes $3.6 million and $1.8 million, respectively, of workers’ compensation administrative fees.
The undiscounted accrued workers’ compensation costs were $247.4 million as of December 31, 2018 and $219.9 million as of December 31, 2017.
At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits, a long-term asset in our Consolidated Balance Sheets. In 2018, we received $19.4 million for the return of excess claim funds related to the workers’ compensation program, which decreased deposits. As of December 31, 2018, we had restricted cash of $42.2 million and deposits of $166.5 million.
Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in noncurrent liabilities on our Consolidated Balance Sheets.
Stock-Based Compensation
At December 31, 2018, we have one stock-based employee compensation plan under which we may issue awards. We account for this plan under the recognition and measurement principles of ASC 718, Compensation – Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
We generally make annual grants of restricted and unrestricted stock under our stock-based incentive compensation plan to our non-employee directors, officers and other management. Restricted stock grants to officers and other management generally vest over a period of three years from the date of grant. Shares of restricted stock are valued based on the fair value on date of grant and the associated expense, net of estimated forfeitures, is recognized over the vesting period. Commencing in 2017, stock grants issued to non-employee directors upon their initial appointment to the board are 100% vested on the grant date. Annual stock grants issued to non-employee directors are 100% vested on the grant date.
Our Insperity Long-Term Incentive Program (the “LTIP”) provides for performance based long-term compensation awards in the form of performance units to certain employees based on the achievement of pre-established performance goals. Each performance unit represents the right to receive one common share at a future date based on our performance
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| | |
| Insperity | F-16
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
against certain targets. Performance units have a vesting schedule of three years. Commencing in 2016, a portion of the LTIP grant to employees was considered a market-based performance award that vests at the end of a three-year period assuming continued employment and achievement of market-based performance goals. The fair value of each performance unit is the market price of our common stock on the date of grant. The fair value of each market-based performance unit was determined through use of the Monte Carlo simulation method. The compensation expense for such awards is recognized on a straight line basis over the vesting term. Over the performance period the number of shares expected to be issued is adjusted upward or downward based on the probability of achievement of the performance target.
Company-Sponsored 401(k) Retirement Plans
Under our 401(k) retirement plan for corporate employees (the “Corporate Plan”), we matched 100% of eligible corporate employees’ contributions, up to 6% of the employees’ eligible compensation in 2018, 2017 and 2016. Matching contributions under the Corporate Plan are immediately vested. During 2018, 2017 and 2016, we made matching contributions on behalf of corporate employees to the Corporate Plan of $10.3 million, $8.7 million and $8.0 million, respectively, and is included in salaries, wages and payroll taxes in our Consolidated Statements of Operations.
Under our separate 401(k) retirement plan for WSEEs (the “Worksite Employee Plan”), the match percentage for WSEEs ranges from 0% to 6%, as determined by each client company. Matching contributions under the Worksite Employee Plan are immediately vested. During 2018, 2017 and 2016, we made matching contributions on behalf of WSEEs to the Worksite Employee Plan of $165.5 million, $129.0 million and $108.3 million, respectively.
Advertising
We expense all advertising costs as incurred.
Income Taxes
We use the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”) was signed into law. The 2017 Tax Reform Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% beginning in 2018. Please read Note 7, “Income Taxes,” for additional information.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2018 presentation.
New Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires recognition of lease assets and lease liabilities for leases previously classified as operating leases. The guidance is effective for fiscal years beginning after December 15, 2018. While our technical analysis is ongoing, we do not expect the new standard to have a material impact to our Consolidated Statements of Operations. We expect the lease commitments discussed in Note 11, “Leases” to appear on our Consolidated Balance Sheets in the form of a lease asset and a lease liability. Such amounts are based on the present value of such commitments using our incremental borrowing rate. We plan to utilize the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. We do not plan to elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets.
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| Insperity | F-17
| 2018 Form 10-K |
|
|
CONSOLIDATED FINANCIAL STATEMENTS
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|
| |
| 2. | Cash, Cash Equivalents and Marketable Securities |
The following table summarizes our investments in cash equivalents and marketable securities held by investment managers and overnight investments:
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| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| (in thousands) | Cash & Cash Equivalents | Marketable Securities | Total | | Cash & Cash Equivalents | Marketable Securities | Total |
| | | | | | | | |
| Overnight holdings | $ | 311,158 |
| $ | — |
| $ | 311,158 |
| | $ | 338,112 |
| $ | — |
| $ | 338,112 |
|
| Investments holdings | 16,711 |
| 60,781 |
| 77,492 |
| | 22,634 |
| 1,960 |
| 24,594 |
|
| Cash in demand accounts | 33,207 |
| — |
| 33,207 |
| | 26,700 |
| — |
| 26,700 |
|
| Outstanding checks | (34,303 | ) | — |
| (34,303 | ) | | (33,186 | ) | — |
| (33,186 | ) |
| Total | $ | 326,773 |
| $ | 60,781 |
| $ | 387,554 |
| | $ | 354,260 |
| $ | 1,960 |
| $ | 356,220 |
|
Our cash and overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the cash balance as of December 31, 2018 and December 31, 2017, are $224.5 million and $271.5 million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions, as well as $34.2 million and $23.6 million, respectively, in client prepayments.
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| |
| 3. | Fair Value Measurements |
We account for our financial assets in accordance with ASC 820, Fair Value Measurement. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:
Level 1 - quoted prices in active markets using identical assets
Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs
Level 3 - significant unobservable inputs
Fair Value of Instruments Measured and Recognized at Fair Value
The following tables summarize the levels of fair value measurements of our financial assets:
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| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| (in thousands) | Total | Level 1 | Level 2 | | Total | Level 1 | Level 2 |
| | | | | | | | |
| Money market funds | $ | 327,869 |
| $ | 327,869 |
| $ | — |
| | $ | 360,746 |
| $ | 360,746 |
| $ | — |
|
| U.S. Treasury bills | 50,147 |
| — |
| 50,147 |
| | — |
| — |
| — |
|
| Municipal bonds | 10,634 |
| — |
| 10,634 |
| | 1,960 |
| — |
| 1,960 |
|
| Total | $ | 388,650 |
| $ | 327,869 |
| $ | 60,781 |
| | $ | 362,706 |
| $ | 360,746 |
| $ | 1,960 |
|
The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. Government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.
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| | |
| Insperity | F-18
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The following is a summary of our available-for-sale marketable securities:
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| | | | | | | | | | | | |
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value |
| | | | | |
| December 31, 2018 | | | | |
| U.S. Treasury bills | $ | 50,150 |
| $ | — |
| $ | (3 | ) | $ | 50,147 |
|
| Municipal bonds | 10,640 |
| 1 |
| (7 | ) | 10,634 |
|
| | | | | |
| December 31, 2017 | | | | |
| U.S. Treasury bills | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Municipal bonds | 1,965 |
| — |
| (5 | ) | 1,960 |
|
As of December 31, 2018, the contractual maturities of all marketable securities in our portfolio were less than one year.
Fair Value of Other Financial Instruments
The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments.
At December 31, 2018, the carrying value of our borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 6, "Long-Term Debt," for additional information.
Accounts receivable, net consisted of the following:
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| | | | | | | |
| | December 31, |
| (in thousands) | 2018 | | 2017 |
| | | | |
| Trade | $ | 10,015 |
| | $ | 12,292 |
|
| Unbilled | 385,567 |
| | 318,431 |
|
| Other | 5,041 |
| | 3,258 |
|
| Accounts receivable, net | $ | 400,623 |
| | $ | 333,981 |
|
Our accounts receivable is primarily composed of trade receivables and unbilled receivables. Our trade receivables, which represent outstanding gross billings to clients, are reported net of allowance for doubtful accounts of $1.0 million and $0.6 million as of December 31, 2018 and 2017, respectively. We establish an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making a general provision for other potentially uncollectible amounts.
We make an accrual at the end of each accounting period for our obligations associated with the earned but unpaid wages of our WSEEs and for the accrued gross billings associated with such wages. These accruals are included in accrued WSEE payroll cost and unbilled accounts receivable; however, these amounts are presented net in the Consolidated Statements of Operations. We generally require clients to pay invoices for service fees no later than one day prior to the applicable payroll date. As such, we generally do not require collateral. Client prepayments directly attributable to unbilled accounts receivable have been netted against such receivables as the gross billings have been earned and the payroll cost has been incurred, thus we have the legal right of offset for these amounts. Unbilled accounts receivable consisted of the following:
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| | |
| Insperity | F-19
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| | | | | | | |
| | December 31, |
| (in thousands) | 2018 | | 2017 |
| | | | |
| Accrued worksite employee payroll cost | $ | 329,979 |
| | $ | 267,402 |
|
| Unbilled revenues | 89,765 |
| | 74,632 |
|
| Customer prepayments | (34,177 | ) | | (23,603 | ) |
| Unbilled accounts receivable | $ | 385,567 |
| | $ | 318,431 |
|
Deposits consisted of the following:
|
| | | | | | | |
| | December 31, |
| (in thousands) | 2018 | | 2017 |
| | | | |
| Deposits – health insurance | $ | 6,200 |
| | $ | 5,300 |
|
| Deposits – workers’ compensation | 166,474 |
| | 154,215 |
|
| Deposits | $ | 172,674 |
| | $ | 159,515 |
|
The contractual arrangement with United for health insurance coverage requires us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid health insurance. Please read Note 1, “Accounting Policies,” for a discussion of our accounting policies for health insurance costs and workers’ compensation costs.
We have a revolving credit facility which is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. In February 2018, the revolving credit facility was increased from $200 million to $350 million and the expiration date was extended from February 2020 to February 2023 (the “Facility”). Borrowings may be increased to $400 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). Our obligations under the Facility are secured by 65% of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. In addition, as of December 31, 2018, we had an outstanding $1.0 million letter of credit issued under the Facility. As of December 31, 2018, our outstanding balance on the Facility was $144.4 million.
The Facility matures on February 6, 2023. Borrowings under the Facility bear interest at an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from 1.50% to 2.25% and (2) in the case of alternate base rate loans, from 0.00% to 0.50%. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50% and (3) the 30-day LIBOR rate plus 2.00%. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25%. The average interest rate during 2018 was 3.5%. Interest expense and unused commitment fees are recorded in other income (expense).
The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. In November 2017 and December 2014, the Credit Agreement was amended to modify the interest coverage ratio covenant to exclude the impact of special dividends paid of $41.7 million and $50.7 million, respectively. We were in compliance with all financial covenants under the Credit Agreement at December 31, 2018.
|
| | |
| Insperity | F-20
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”) was signed into law. The 2017 Tax Reform Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% beginning in 2018. As a result, we remeasured our deferred tax assets at the new lower corporate income tax rate and recorded a non-cash tax charge of $2.5 million in 2017. During 2018, we finalized certain tax positions when we filed our 2017 federal tax return, and determined no further adjustments were required to our net deferred tax asset balance of $8.8 million as of December 31, 2018.
Significant components of the net deferred tax assets as reflected on the Consolidated Balance Sheets are as follows:
|
| | | | | | |
| | December 31, |
| (in thousands) | 2018 | 2017 |
| | |
| Deferred tax liabilities | | |
| Prepaid assets | $ | (3,306 | ) | $ | (3,957 | ) |
| Depreciation | (3,918 | ) | (2,021 | ) |
| Software development costs | (4,950 | ) | (3,732 | ) |
| Intangibles | (474 | ) | — |
|
| Total deferred tax liabilities | (12,648 | ) | (9,710 | ) |
| | | |
| Deferred tax assets | | |
| Accrued incentive compensation | 8,612 |
| 3,510 |
|
| Net operating loss carryforward | 709 |
| 774 |
|
| Workers’ compensation accruals | 4,739 |
| 4,586 |
|
| Accrued rent | 918 |
| 676 |
|
| Stock-based compensation | 6,183 |
| 4,233 |
|
| Minority investment impairment | 676 |
| 667 |
|
| Other | 305 |
| 216 |
|
| Total deferred tax assets | 22,142 |
| 14,662 |
|
| Valuation allowance | (678 | ) | (669 | ) |
| Total net deferred tax assets | 21,464 |
| 13,993 |
|
| | | |
| Net deferred tax assets | $ | 8,816 |
| $ | 4,283 |
|
|
| | |
| Insperity | F-21
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The components of income tax expense are as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Current income tax expense | | | |
| Federal | $ | 40,347 |
| $ | 30,009 |
| $ | 31,045 |
|
| State | 11,133 |
| 5,988 |
| 5,190 |
|
| Total current income tax expense | 51,480 |
| 35,997 |
| 36,235 |
|
| | | | |
| Deferred income tax (benefit) expense | | | |
| Federal | (3,398 | ) | 9,549 |
| 2,641 |
|
| State | (1,135 | ) | 193 |
| 310 |
|
| Total deferred income tax (benefit) expense | (4,533 | ) | 9,742 |
| 2,951 |
|
| Total income tax expense | $ | 46,947 |
| $ | 45,739 |
| $ | 39,186 |
|
In the first quarter of 2016, we prospectively adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting for calendar year 2016. We recognized an income tax benefit of $2.7 million in 2018, $6.8 million in 2017 and $1.5 million in 2016 related to excess tax benefits from the vesting of long-term incentive awards, restricted stock awards and non-qualified stock options.
The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense from continuing operations is as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Expected income tax expense at 21%, 35% and 35%, respectively | $ | 38,296 |
| $ | 45,549 |
| $ | 36,812 |
|
| State income taxes, net of federal benefit | 7,660 |
| 4,085 |
| 3,684 |
|
| Nondeductible expenses | 4,831 |
| 2,649 |
| 1,669 |
|
| Section 199 benefits | — |
| (875 | ) | (686 | ) |
| Equity compensation | (2,737 | ) | (6,218 | ) | (1,338 | ) |
| Research and development credit | (856 | ) | (634 | ) | (751 | ) |
| Disaster employee retention credit | — |
| (669 | ) | — |
|
| Enactment of the 2017 Tax Reform Act | — |
| 2,559 |
| — |
|
| Other, net | (247 | ) | (707 | ) | (204 | ) |
| Reported total income tax expense | $ | 46,947 |
| $ | 45,739 |
| $ | 39,186 |
|
At December 31, 2018, we have net operating loss carryforwards totaling $2.8 million that expire from 2023 to 2030 related to an acquisition that occurred in 2010.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018, 2017 and 2016, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 2015 through 2017 remain open to examination by the Internal Revenue Service of the United States. The tax years 2014 through 2017 remain open to examination by various state tax authorities.
|
| | |
| Insperity | F-22
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Two-for-One Stock Split
On December 18, 2017, we effected a two-for-one stock split in the form of a 100% stock dividend. Share and per share amounts for 2017 and 2016 presented in these financial statements have been retroactively restated to reflect this change in our capital structure.
Repurchase Program
Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions or other factors. We repurchased 1,066,409 shares under the Repurchase Program during 2018. In addition, 132,021 shares were withheld during 2018 to satisfy minimum tax withholding obligations for the vesting of restricted stock awards, which are not subject to the Repurchase Program. During 2017, we repurchased 594,974 shares under the Repurchase Program and 305,828 shares were withheld to satisfy minimum tax withholding obligations for the vesting of restricted stock awards. At December 31, 2018, we were authorized to repurchase an additional 1,611,155 shares under the Repurchase Program. Shares repurchased under the Repurchase Program are recorded in treasury.
Withheld Shares
During 2018, 132,021 shares were withheld to satisfy minimum tax withholding obligations for the vesting of long-term incentive and restricted stock awards. Shares withheld to satisfy minimum tax withholding obligations for the vesting of long-term incentive and restricted stock awards are recorded in treasury.
Tender Offer for Common Stock
In December 2015, we commenced a modified Dutch auction tender offer to purchase up to $125 million in value of our common stock at a price not less than $21.75 per share and not more than $25.00 per share. In January 2016, we exercised our right to increase the size of the tender offer by up to 2.0% of our outstanding common stock. The tender offer period expired on January 7, 2016 and on January 13, 2016, we purchased 6,027,062 shares of our common stock at a per share price of $23.75 and an aggregate price of $143.1 million, excluding $1.1 million of transaction costs. The shares were immediately canceled and retired.
The tender offer was funded through borrowings of $104.4 million under the Facility and the remainder with cash on hand.
Dividends
The Board declared quarterly dividends as follows:
|
| | | | | | | | |
| (amounts per share) | 2018 |
| | 2017 |
| |
| | | | | |
| First quarter | $ | 0.20 |
| | $ | 0.125 |
| |
| Second quarter | 0.20 |
| | 0.150 |
| |
| Third quarter | 0.20 |
| | 0.150 |
| |
| Fourth quarter | 0.20 |
| | 1.150 |
| (1) |
| |
(1) | Includes a $1.00 per share special dividend. |
During 2018 and 2017, we paid a total of $33.4 million and $65.8 million, respectively in dividends. The dividends paid in 2017 includes a special dividend of $41.7 million.
Preferred Stock
At December 31, 2018, 20 million shares of preferred stock were authorized. The Series A Junior Participating Preferred Stock that was previously reserved for issuance under our Share Purchase Rights Plan expired on November 13, 2017.
|
| | |
| Insperity | F-23
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The Insperity, Inc. 2001 Incentive Plan, as amended, and the 2012 Incentive Plan, as amended, (collectively, the “Incentive Plans”) provide for options and other stock-based awards that have been and may be granted to eligible employees and non-employee directors of Insperity or its subsidiaries. The 2012 Incentive Plan is currently the only plan under which new stock-based awards may be granted. The Incentive Plans are administered by the Compensation Committee of the Board of Directors (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares and all of the terms of the awards. The Board may at any time amend or terminate the Incentive Plans. However, no amendment that would impair the rights of any participant, with respect to outstanding grants, can be made without the participant’s prior consent. Stockholder approval of amendments to the Incentive Plans is necessary only when required by applicable law or stock exchange rules. At December 31, 2018, 2,680,666 shares of common stock were available for future grants under the 2012 Incentive Plan. The 2001 Incentive Plan only has outstanding nonqualified stock options. The 2012 Incentive Plan permits stock options, including nonqualified stock options and options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, stock awards, phantom stock awards, stock appreciation rights, performance units, and other stock-based awards and cash awards, all of which may or may not be subject to the achievement of one or more performance objectives. The purpose of the Incentive Plan generally is to retain and attract persons of training, experience and ability to serve as employees of Insperity and its subsidiaries and to serve as non-employee directors of Insperity, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of Insperity and its subsidiaries.
We also maintain the Insperity, Inc. Long-Term Incentive Program (“LTIP”) under the 2012 Incentive Plan. The LTIP provides for performance-based long-term compensation awards in the form of performance units to certain employees based on the achievement of pre-established performance goals. We granted performance units under the LTIP to our named executive officers and certain other officers in 2016, 2017 and 2018.
We recognized $20.4 million, $24.3 million and $16.6 million of compensation expense associated with the restricted stock and the LTIP awards in 2018, 2017 and 2016, respectively. Included in 2017, is $2.3 million of stock-based compensation associated with the acceleration of restricted stock awards from the first quarter of 2018 to December 2017 in order to maximize our tax deduction, which would have been limited under the 2017 Tax Reform Act. We recognized $5.3 million, $8.5 million and $6.2 million of tax benefits associated with stock-based compensation in 2018, 2017 and 2016, respectively.
Stock Option Awards
The following is a summary of stock option award activity for 2018:
|
| | | | | | | | | | | | |
| | Shares (in thousands) | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in thousands) |
| | | | | | | | |
| Outstanding - December 31, 2017 | 16 |
| | $ | 15.30 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | — |
| | — |
| | | | |
| Canceled | — |
| | — |
| | | | |
| Outstanding - December 31, 2018 | 16 |
| | $ | 15.30 |
| | 2.5 | | $ | 1,220 |
|
| Exercisable - December 31, 2018 | 16 |
| | $ | 15.30 |
| | 2.5 | | $ | 1,220 |
|
|
| | |
| Insperity | F-24
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Restricted Stock Awards
Restricted common shares, under equity plan accounting, are generally measured at fair value on the date of grant based on the number of shares granted, estimated forfeitures and the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period, three to five years for our shares currently outstanding. The total fair value of shares vested during the years ended December 31, 2018, 2017, and 2016 was $1.2 million, $46.0 million and $16.2 million, respectively. The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2018, 2017 and 2016 was $65.98, $42.15 and $26.33, respectively. As of December 31, 2018, unrecognized compensation expense associated with the unvested shares outstanding was $18.4 million and is expected to be recognized over a weighted average period of 22 months.
The following is a summary of restricted stock award activity for 2018:
|
| | | | | | |
| | Shares (in thousands) | | Weighted Average Grant Date Fair Value |
| | | | |
| Non-vested - December 31, 2017 | 343 |
| | $ | 35.29 |
|
| Granted | 290 |
| | 65.98 |
|
| Vested | (14 | ) | | 66.28 |
|
| Canceled/Forfeited | (37 | ) | | 41.37 |
|
| Non-vested - December 31, 2018 | 582 |
| | $ | 49.48 |
|
Long-Term Incentive Program Awards
Each performance unit represents the right to receive common shares at a future date based on our performance against specified targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets, which can range from 0% to 200% of the targeted amounts. A performance unit may be comprised of either a performance based award or a market-based award. For performance based awards, performance units have a vesting schedule of three years and compensation expense is recognized based on the number of common shares expected to be issued and the market price per common share on the date of grant. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon the probability of achievement of the performance targets. For market-based awards, performance units vest at the end of a three-year period assuming continued employment and achievement of market-based performance goals. The fair value of market-based performance awards was determined through the use of the Monte Carlo simulation method. The compensation expense for the LTIP awards is recognized on a straight-line basis over the vesting terms.
The following is a summary of LTIP award activity, at 100% of targeted amount, for 2018:
|
| | | | | | |
| | Number of Performance Units (in thousands) | | Weighted Average Grant Date Fair Value |
| | | | |
| Unvested at December 31, 2017 | 570 |
| | $ | 32.90 |
|
| Granted | 100 |
| | 81.51 |
|
| Vested | (196 | ) | | 26.40 |
|
| Canceled | (48 | ) | | 41.90 |
|
| Unvested at December 31, 2018 | 426 |
| | $ | 46.35 |
|
The determination of achievement results and corresponding vesting of the 2015 LTIP awards occurred in February 2018 resulting in the recipients receiving 371,000 shares of common stock with a fair value $24.2 million. As of December 31, 2018, we estimate that approximately 345,000, 202,000 and 176,000 shares will vest with $0.4 million, $3.4 million and $8.6 million in unamortized compensation expense related to the 2016, 2017 and 2018 LTIP grants, respectively.
|
| | |
| Insperity | F-25
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Employee Stock Purchase Plan
Our employee stock purchase plan (the “ESPP”) enables employees to purchase shares of Insperity stock at a 5% discount. The ESPP is a non-compensatory plan under generally accepted accounting principles of stock-based compensation. As a result, no compensation expense is recognized in conjunction with this plan. Approximately 30,000, 38,000 and 34,000 shares were issued from treasury under the ESPP during fiscal years 2018, 2017 and 2016, respectively.
We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.
The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2018 | 2017 | 2016 |
| | | | |
| Net income | $ | 135,413 |
| $ | 84,402 |
| $ | 65,991 |
|
| Less distributed and undistributed earnings allocated to participating securities | (1,875 | ) | (1,517 | ) | (1,496 | ) |
| Net income allocated to common shares | $ | 133,538 |
| $ | 82,885 |
| $ | 64,495 |
|
| | | | |
| Weighted average common shares outstanding | 41,217 |
| 41,067 |
| 41,668 |
|
| Incremental shares from assumed conversions of common stock options and LTIP awards | 289 |
| 204 |
| 94 |
|
| Adjusted weighted average common shares outstanding | 41,506 |
| 41,271 |
| 41,762 |
|
| | | | |
| Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect | — |
| — |
| — |
|
|
| | |
| Insperity | F-26
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
We lease various office facilities, equipment and vehicles under operating lease arrangements, some of which contain rent escalation clauses. Most of the leases contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $15.4 million, $15.4 million and $15.0 million in 2018, 2017 and 2016, respectively. At December 31, 2018, future minimum rental payments under noncancelable operating leases are as follows: |
| | | |
| (in thousands) | Operating Leases |
| | |
| 2019 | $ | 16,542 |
|
| 2020 | 16,325 |
|
| 2021 | 13,932 |
|
| 2022 | 12,791 |
|
| 2023 | 10,623 |
|
| Thereafter | 23,638 |
|
| Total minimum lease payments | $ | 93,851 |
|
|
| |
| 12. | Commitments and Contingencies |
We enter into fixed purchase and service obligations in the ordinary course of business. These arrangements primarily consist of, advertising commitments and service contracts. At December 31, 2018, future purchase and service obligations greater than $100,000 and one year were as follows (in thousands):
|
| | | |
| 2019 | $ | 16,535 |
|
| 2020 | 16,782 |
|
| 2021 | 12,494 |
|
| 2022 | 6,525 |
|
| 2023 | 1,954 |
|
| Thereafter | 700 |
|
| Total obligations | $ | 54,990 |
|
Worksite Employee 401(k) Retirement Plan Class Action Litigation
In December 2015, a class action lawsuit was filed against us and the third-party discretionary trustee of the Insperity 401(k) retirement plan that is available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division, on behalf of Plan participants. The suit generally alleges that Insperity’s third-party discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries, and by making imprudent investment choices. The parties filed a stipulation concerning class certification that defined the class as “all participants and beneficiaries of the Insperity 401(k) Plan from December 22, 2009 through September 30, 2017.” In November 2017, the court approved the class certification stipulation and denied the plaintiffs’ request for a jury trial. A date for the bench trial has not yet been set. Discovery is complete. On June 8, 2018, we filed a motion for summary judgment seeking dismissal of all claims. Briefing on that motion was completed in September 2018, which motion is now awaiting a ruling by the court. We believe we have meritorious defenses, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying consolidated financial statements.
Other Litigation
We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with
|
| | |
| Insperity | F-27
| 2018 Form 10-K |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.
|
| |
| 13. | Quarterly Financial Data (Unaudited) |
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| (in thousands, except per share amounts) | March 31 | | June 30 | | Sept. 30 | | Dec. 31 |
| | |
| 2018 | | | | | | | |
| Revenues | $ | 1,014,372 |
| | $ | 922,295 |
| | $ | 925,126 |
| | $ | 966,756 |
|
| Gross profit | 199,720 |
| | 154,544 |
| | 166,054 |
| | 161,591 |
|
| Operating income | 64,703 |
| | 33,581 |
| | 48,133 |
| | 32,619 |
|
| Net income | 49,991 |
| | 24,560 |
| | 36,207 |
| | 24,655 |
|
| Basic net income per share | 1.20 |
| | 0.59 |
| | 0.86 |
| | 0.59 |
|
| Diluted net income per share | 1.18 |
| | 0.58 |
| | 0.86 |
| | 0.59 |
|
| | | | | | | | |
| 2017 | | | | | | | |
| Revenues | $ | 882,664 |
| | $ | 795,552 |
| | $ | 795,513 |
| | $ | 826,494 |
|
| Gross profit | 159,346 |
| | 130,553 |
| | 139,966 |
| | 142,866 |
|
| Operating income | 53,492 |
| | 22,938 |
| | 29,799 |
| | 23,712 |
|
| Net income | 35,628 |
| | 14,018 |
| | 19,202 |
| | 15,554 |
|
Basic net income per share(1) | 0.85 |
| | 0.34 |
| | 0.46 |
| | 0.36 |
|
Diluted net income per share(1) | 0.85 |
| | 0.33 |
| | 0.46 |
| | 0.36 |
|
| |
(1) | Adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 as a stock dividend. |
|
| | |
| Insperity | F-28
| 2018 Form 10-K |
