|
INSPERITY, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion in conjunction with our Consolidated
Financial Statements and related Notes included elsewhere in this annual
report. Historical results are not necessarily indicative of trends in operating
results for any future period.
The statements contained in this annual report that are not historical facts are
forward-looking statements that involve a number of risks and uncertainties. The
actual results of the future events described in such forward-looking statements
in this annual report could differ materially from those stated in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in Item 1A. Risk
Factors and the uncertainties set forth from time to time in our other public
reports and filings and public statements.
Overview
Our Workforce Optimization solution provides a broad range of human resources
functions, including payroll and employment administration, employee benefits,
workers' compensation, government compliance, and training and development
services. Our long-term strategy continues to be aggregating the best small and
medium-sized businesses in the United States on the common platform of our
unique human resources service offering, thereby leveraging our buying power to
provide additional valuable services to clients. Our overall operating results
can be measured in terms of revenues, payroll costs, gross profit or operating
income per worksite employee per month. We often use the average number of
worksite employees paid during a period as our unit of measurement in analyzing
and discussing our results of operations.
In addition to Workforce Optimization, we offer Performance Management, Expense
Management, Time and Attendance, Organizational Planning, Recruiting Services,
Employment Screening, Retirement Services and Business Insurance, (collectively
"Adjacent Businesses"), many of which are offered via desktop applications and
software as a service ("SaaS") delivery models. These other products or services
are offered separately, as a bundle, or along with Workforce Optimization
("Bundle Plus").
We ended 2011 averaging 122,065 paid worksite employees in the fourth quarter,
which represents a 9.7% increase over the fourth quarter of 2010. Approximately
15% of our paid worksite employees are in our mid-market sector, which is
defined as companies with 150 to 2,000 worksite employees. We expect the average
number of paid worksite employees per month to be in the range of 121,750
to 122,250 in the first quarter of 2012.
Our 2011 average gross profit per worksite employee per month was $251, a $19
increase over 2010. Higher gross profit per worksite employee per month in 2011
compared to 2010 was primarily the result of a $13 higher contribution from our
direct cost programs and a $6 higher contribution from our ABUs.
Operating expenses increased 13% in 2011 to $294.5 million; however, this amount
includes approximately $11.8 million, or $8 per worksite employee per month,
associated with our rebranding initiative in 2011. On a per worksite employee
per month basis, operating expenses increased from $204 in 2010 to $210 in 2011.
Our net income in 2011 was $30.5 million, an $8.0 million increase compared to
2010. Our net income in 2011 was impacted by a $4.4 million loss related to the
exchange of an aircraft and a $3.1 million loss related to a settlement with the
Employment Development Department of the State of California ("EDD") in the
third quarter of 2011. Please read Note 12 to the Consolidated Financial
Statements, "Commitments and Contingencies," for additional information on the
EDD settlement. We ended 2011 with working capital of $126.6 million. During
2011, we paid $15.7 million in dividends and repurchased shares at a cost of
$25.1 million.
Revenues
We account for our revenues in accordance with Accounting Standards Codification
("ASC") 605-45, Revenue Recognition. Our Workforce Optimization gross billings
to clients include the payroll cost of each worksite employee at the client
location and a markup computed as a percentage of each worksite employee's
payroll cost. We invoice the gross billings concurrently with each periodic
payroll of our worksite employees. Revenues, which exclude the payroll cost
component of gross billings, and therefore, consist solely of the markup, are
recognized ratably over the payroll period as worksite employees perform their
service at the client worksite. This markup includes pricing components
associated with our estimates of payroll taxes, benefits and workers'
compensation costs, plus a separate component related to our HR services. We
include revenues that have been recognized but not invoiced in unbilled accounts
receivable on our Consolidated Balance Sheets.
- 30 ---------------------------------------------------------------------------------
Table Of Contents
Our revenues are primarily dependent on the number of clients enrolled, the
resulting number of worksite employees paid each period and the number of
worksite employees enrolled in our benefit plans. Because our total markup is
computed as a percentage of payroll cost, certain revenues are also affected by
the payroll cost of worksite employees, which may fluctuate based on the
composition of the worksite employee base, inflationary effects on wage levels
and differences in the local economies of our markets.
Direct Costs
The primary direct costs associated with our Workforce Optimization
revenue-generating activities are:
· employment-related taxes ("payroll taxes")
· costs of employee benefit plans
· workers' compensation costs
Payroll taxes consist of the employer's portion of Social Security and Medicare
taxes under FICA, federal unemployment taxes and state unemployment
taxes. Payroll taxes are generally paid as a percentage of payroll cost. The
federal tax rates are defined by federal regulations. State unemployment tax
rates are subject to claim histories and vary from state to state.
Employee benefits costs are comprised primarily of health insurance premiums and
claims costs (including dental and pharmacy costs), but also include costs of
other employee benefits such as life insurance, vision care, disability
insurance, education assistance, adoption assistance, a flexible spending
account and a worklife program.
Workers' compensation costs include administrative and risk charges paid to the
insurance carrier, and claims costs, which are driven primarily by the frequency
and severity of claims.
Gross Profit
Our gross profit per worksite employee is primarily determined by our ability to
accurately estimate and control direct costs and our ability to incorporate
changes in these costs into the gross billings charged to Workforce Optimization
clients, which are subject to contractual arrangements that are typically
renewed annually. We use gross profit per worksite employee per month as our
principal measurement of relative performance at the gross profit level.
Operating Expenses
· Salaries, wages and payroll taxes - Salaries, wages and payroll taxes are
primarily a function of the number of corporate employees and their associated
average pay and any additional incentive compensation. Our corporate employees
include client services, sales and marketing, benefits, legal, finance,
information technology and administrative support personnel.
· Stock-based compensation - Our stock-based compensation primarily relates to
the recognition of non-cash compensation expense over the vesting period of
restricted stock awards.
· Commissions - Commission expense consists of amounts paid to sales managers and
BPAs. Commissions are based on the number of new accounts sold and a percentage
of revenue generated by such personnel.
· Advertising - Advertising expense primarily consists of media advertising and
other business promotions in our current and anticipated sales markets,
including the Insperity ChampionshipTM presented by UnitedHealthcare®
sponsorship. In 2011, certain costs incurred as a result of our rebranding
initiative are also included in advertising.
- 31 ---------------------------------------------------------------------------------
Table Of Contents
· General and administrative expenses - Our general and administrative expenses
primarily include:
· rent expenses related to our service centers and sales offices
· outside professional service fees related to legal, consulting and accounting
services, and acquisition transaction expenses
· administrative costs, such as postage, printing and supplies
· employee travel expenses
· repairs and maintenance costs
· rebranding initiative costs
· Depreciation and amortization - Depreciation and amortization expense is
primarily a function of our capital investments in corporate facilities,
service centers, sales offices and technology infrastructure.
Income Taxes
Insperity's provision for income taxes typically differs from the U.S. statutory
rate of 35%, due primarily to state income taxes and non-deductible
expenses. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities used for
financial reporting purposes and the amounts used for income tax
purposes. Significant items resulting in deferred income taxes include prepaid
assets, accruals for workers' compensation expenses, stock-based compensation
and depreciation. Changes in these items are reflected in our financial
statements through a deferred income tax provision.
Critical Accounting Policies and Estimates
Insperity's discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of these financial statements requires
our management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate these
estimates, including those related to health and workers' compensation insurance
claims experience, client bad debts, income taxes, property and equipment,
goodwill and other intangibles, and contingent liabilities. We base these
estimates on historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
We believe the following accounting policies are critical and/or require
significant judgments and estimates used in the preparation of our Consolidated
Financial Statements:
· Benefits costs - We provide group health insurance coverage to our worksite
employees through a national network of carriers including UnitedHealthcare
("United"), Kaiser Permanente, Blue Shield of California, HMSA BlueCross
BlueShield of Hawaii, Unity Health Plan and Tufts, all of which provide fully
insured policies or service contracts.
The health insurance contract with United provides the majority of our health
insurance coverage. As a result of certain contractual terms, we have accounted
for this plan since its inception using a partially self-funded insurance
accounting model. Accordingly, we record the costs of the United plan, including
an estimate of the incurred claims, taxes and administrative fees (collectively
the "Plan Costs"), as benefits expense in the Consolidated Statements of
Operations. The estimated incurred claims are based upon: (i) the level of
claims processed during the quarter; (ii) estimated completion rates based upon
recent claim development patterns under the plan; and (iii) the number of
participants in the plan, including both active and COBRA enrollees. Each
reporting period, changes in the estimated ultimate costs resulting from claim
trends, plan design and migration, participant demographics and other factors
are incorporated into the benefits costs.
Additionally, since the plan's inception, under the terms of the contract,
United establishes cash funding rates 90 days in advance of the beginning of a
reporting quarter. If the Plan Costs for a reporting quarter are greater than
the premiums paid and owed to United, a deficit in the plan would be incurred
and we would accrue a liability for the excess costs on our Consolidated Balance
Sheets. On the other hand, if the Plan Costs for the reporting quarter are less
than the premiums paid and owed to United, a surplus in the plan would be
incurred and we would record an asset for the excess premiums on our
Consolidated Balance Sheets. The terms of the arrangement with United require us
to maintain an accumulated cash surplus in the plan of $9.0 million, which is
reported as long-term prepaid insurance. As of December 31, 2011, Plan Costs
were less than the premiums paid and owed to United by $24.0 million. As this
amount is in excess of the agreed-upon $9.0 million surplus maintenance level,
the $15.0 million balance is included in prepaid insurance, a current asset, on
our Consolidated Balance Sheets. The premiums owed to United at December 31,
2011, were $6.1 million, which is included in accrued health insurance costs, a
current liability, on our Consolidated Balance Sheets.
- 32 ---------------------------------------------------------------------------------
Table Of Contents
We believe the use of recent claims activity is representative of incurred and
paid trends during the reporting period. The estimated completion rate used to
compute incurred but not reported claims involves a significant level of
judgment. Accordingly, an increase (or decrease) in the completion rates used to
estimate the incurred claims would result in an increase (or decrease) in
benefits costs and net income would decrease (or increase) accordingly.
The following table illustrates the sensitivity of changes in the completion
rates on our estimate of total benefit costs of $862.1 million in 2011:
Change in Change in
Change in Benefits Costs Net Income
Completion Rate (in thousands) (in thousands)
(2.5)% $ (14,094 ) $ 8,456
(1.0)% (5,637 ) 3,382
1.0% 5,637 (3,382 )
2.5% 14,094 (8,456 )
· Workers' compensation costs - Since October 1, 2007, our workers' compensation
coverage has been provided through our arrangement with the ACE Group of
Companies ("ACE"). Under our arrangement with ACE (the "ACE Program"), we bear
the economic burden for the first $1 million layer of claims per occurrence,
and effective October 1, 2010, we also bear the economic burden for a maximum
aggregate amount of $5 million per policy year for claim amounts that exceed
the first $1 million. ACE bears the economic burden for all claims in excess of
these levels. The ACE Program is a fully insured policy whereby ACE has the
responsibility to pay all claims incurred under the policy regardless of
whether we satisfy our responsibilities. Our coverage from September 1, 2003
through September 30, 2007 was provided through selected member insurance
companies of American International Group, Inc. (the "AIG Program").
Because we bear the economic burden for claims up to the levels noted above,
such claims, which are the primary component of our workers' compensation costs,
are recorded in the period incurred. Workers' compensation insurance includes
ongoing health care and indemnity coverage whereby claims are paid over numerous
years following the date of injury. Accordingly, the accrual of related incurred
costs in each reporting period includes estimates, which take into account the
ongoing development of claims and therefore requires a significant level of
judgment.
We employ a third party actuary to estimate our loss development rate, which is
primarily based upon the nature of worksite employees' job responsibilities, the
location of worksite employees, the historical frequency and severity of
workers' compensation claims, and an estimate of future cost trends. Each
reporting period, changes in the actuarial assumptions resulting from changes in
actual claims experience and other trends are incorporated into our workers'
compensation claims cost estimates. During the years ended December 31, 2011 and
2010, Insperity reduced accrued workers' compensation costs by $11.4 million and
$6.2 million, respectively, for changes in estimated losses related to prior
reporting periods. Workers' compensation cost estimates are discounted to
present value at a rate based upon the U.S. Treasury rates that correspond with
the weighted average estimated claim payout period (the average discount rate
utilized in 2011 and 2010 was 1.1% and 1.4%, respectively) and are accreted over
the estimated claim payment period and included as a component of direct costs
in our Consolidated Statements of Operations.
- 33 ---------------------------------------------------------------------------------
Table Of Contents
Our claim trends could be greater than or less than our prior estimates, in
which case we would revise our claims estimates and record an adjustment to
workers' compensation costs in the period such determination is made. If we were
to experience any significant changes in actuarial assumptions, our loss
development rates could increase (or decrease), which would result in an
increase (or decrease) in workers' compensation costs and a resulting decrease
(or increase) in net income reported in our Consolidated Statements of
Operations.
The following table illustrates the sensitivity of changes in the loss
development rate on our estimate of workers' compensation costs totaling $47.0
million in 2011:
Change in Workers' Change in
Change in Loss Compensation Costs Net Income
Development Rate (in thousands) (in thousands)
(5.0)% $ (2,234 ) $ 1,338
(2.5)% (1,117 ) 669
2.5% 1,117 (669 )
5.0% 2,234 (1,338 )
At the beginning of each policy period, the insurance carrier establishes
monthly funding requirements comprised of premium costs and funds to be set
aside for payment of future claims ("claim funds"). The level of claim funds is
primarily based upon anticipated worksite employee payroll levels and expected
workers' compensation loss rates, as determined by the carrier. Monies funded
into the program for incurred claims expected to be paid within one year are
recorded as restricted cash, a short-term asset, while the remainder of claim
funds are included in deposits, a long-term asset in our Consolidated Balance
Sheets. In 2011, we received $10.0 million for the return of excess claim funds
related to the ACE program, which reduced deposits. As of December 31, 2011, we
had restricted cash of $44.7 million and deposits of $52.3 million. We have
estimated and accrued $104.8 million in incurred workers' compensation claim
costs as of December 31, 2011. Our estimate of incurred claim costs expected to
be paid within one year are recorded as accrued workers' compensation costs and
included in short-term liabilities, while our estimate of incurred claim costs
expected to be paid beyond one year are included in long-term liabilities on our
Consolidated Balance Sheets.
· Contingent liabilities - We accrue and disclose contingent liabilities in our
Consolidated Financial Statements in accordance with ASC 450-10,
Contingencies. GAAP requires accrual of contingent liabilities that are
considered probable to occur and that can be reasonably estimated. For
contingent liabilities that are considered reasonably possible to occur, financial statement disclosure is required, including the range of possible
loss if it can be reasonably determined. From time to time we disclose in our
financial statements issues that we believe are reasonably possible to occur,
although we cannot determine the range of possible loss in all cases. As issues
develop, we evaluate the probability of future loss and the potential range of
such losses. If such evaluation were to determine that a loss was probable and
the loss could be reasonably estimated, we would be required to accrue our
estimated loss, which would reduce net income in the period that such
determination was made.
· Deferred taxes - We have recorded a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, our
ability to realize our deferred tax assets could change from our current
estimates. If we determine that we would be able to realize our deferred tax
assets in the future in excess of the net recorded amount, an adjustment to
reduce the valuation allowance would increase net income in the period that
such determination is made. Likewise, should we determine that we will not be
able to realize all or part of our net deferred tax assets in the future, an
adjustment to increase the valuation allowance would reduce net income in the
period such determination is made.
· Allowance for doubtful accounts - We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
pay their comprehensive service fees. We believe that the success of our
business is heavily dependent on our ability to collect these comprehensive
service fees for several reasons, including:
· the fact that we are at risk for the payment of our direct costs and worksite
employee payroll costs regardless of whether our clients pay their
comprehensive service fees
- 34 ---------------------------------------------------------------------------------
Table Of Contents
· the large volume and dollar amount of transactions we process
· the periodic and recurring nature of payroll, upon which the comprehensive
service fees are based
To mitigate this risk, we have established very tight credit policies. We
generally require our Workforce OptimizationTM clients to pay their
comprehensive service fees no later than one day prior to the applicable payroll
date. In addition, we maintain the right to terminate the CSA and associated
worksite employees or to require prepayment, letters of credit or other
collateral if a client's financial position deteriorates or if the client does
not pay the comprehensive service fee. As a result of these efforts, losses
related to customer nonpayment have historically been low as a percentage of
revenues. However, if our clients' financial conditions were to deteriorate
rapidly, resulting in nonpayment, our accounts receivable balances could grow
and we could be required to provide for additional allowances, which would
decrease net income in the period that such determination was made.
· Property and equipment - Our property and equipment relate primarily to our
facilities and related improvements, furniture and fixtures, computer hardware
and software and capitalized software development costs. These costs are
depreciated or amortized over the estimated useful lives of the assets. If we
determine that the useful lives of these assets will be shorter than we
currently estimate, our depreciation and amortization expense could be
accelerated, which would decrease net income in the periods of such a
determination. In addition, we periodically evaluate these costs for
impairment. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on
the estimated undiscounted future cash flows to be generated from the
applicable asset. In addition, we may record an impairment loss, which would
reduce net income, to the extent that the carrying value of the asset exceeded
the fair value of the asset. Fair value is generally determined using an
estimate of discounted future net cash flows from operating activities or upon
disposal of the asset.
· Goodwill and other intangibles - 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, three to 10 years.
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 September 2011, Financial Accounting Standards Board
("FASB") Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill
and Other (Topic 350) - Testing Goodwill for Impairment was issued. ASU 2011-08
provides companies with a new option to determine whether or not it is necessary
to apply the traditional two-step quantitative goodwill impairment test in ASC
350, Intangibles - Goodwill and Other. Under ASU 2011-08 companies are no longer
required to calculate the fair value of a reporting unit unless it determines,
on the basis of qualitative information, that it is more likely than not (i.e.,
greater than 50%) that the fair value of a reporting unit is less than its
carrying amount. ASU 2011-08 is effective for periods ending after December 15,
2011; however, early adoption is permitted for periods ending after September
15, 2011. We adopted ASU 2011-08 in the fourth quarter of 2011. The adoption did
not have an impact on our Consolidated Financial Statements.
- 35 ---------------------------------------------------------------------------------
Table Of Contents
Results of Operations
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010.
The following table presents certain information related to our results of
operations:
Year ended December 31,
2011 2010 % Change
(in thousands, except per share and statistical data)
Revenues (gross billings of $11.700 billion and
$10.169 billion, less worksite employee payroll
cost of $9.724 billion and $8.449 billion,
respectively) $ 1,976,219 $ 1,719,752 14.9 %
Gross profit 351,775 298,536 17.8 %
Operating expenses 294,461 261,476 12.6 %
Operating income 57,314 37,060 54.7 %
Other income (expense) (6,539 ) 961 (780.4 )%
Net income 30,470 22,440 35.8 %
Diluted net income per share of common stock 1.16 0.86 34.9 %
Statistical Data:
Average number of worksite employees paid per
month 116,839 107,014 9.2 %
Revenues per worksite employee per month(1) $ 1,410 $ 1,339 5.3 %
Gross profit per worksite employee per month 251 232 8.2 %
Operating expenses per worksite employee per month 210 204 2.9 %
Operating income per worksite employee per month 41 29 41.4 %
Net income per worksite employee per month 22 17 29.4 %
_______________
(1) Gross billings of $8,345 and $7,919 per worksite employee per month, less
payroll cost of $6,935 and $6,580 per worksite employee per month,
respectively.
Revenues
Our revenues, which represent gross billings net of worksite employee payroll
cost, increased 14.9% compared to 2010, due to a 5.3%, or $71 increase in
revenues per worksite employee per month and a 9.2% increase in the average
number of worksite employees paid per month. The 5.3% increase in revenues per
worksite employee per month was due primarily to increases in the benefits and
payroll tax pricing to offset increases in these direct costs.
By region, our Workforce Optimization revenue change from 2010 and distribution
for years ended December 31, 2011 and 2010 were as follows:
Year ended December 31, Year ended December 31,
2011 2010 % Change 2011 2010
(in thousands) (% of total revenue)
Northeast $ 513,075 $ 412,233 24.5 % 26.3 % 24.2 %
Southeast 192,116 184,223 4.3 % 9.9 % 10.8 %
Central 282,503 251,756 12.2 % 14.5 % 14.8 %
Southwest 561,908 522,518 7.5 % 28.9 % 30.7 %
West 397,363 331,916 19.7 % 20.4 % 19.5 %
1,946,965 1,702,646 14.3 % 100.0 % 100.0 %
Other revenue 29,254 17,106 71.0 %
Total revenue $ 1,976,219 $ 1,719,752 14.9 %
Other revenue is comprised primarily of revenues generated by our ABUs,
including those generated by recent acquisitions.
- 36 ---------------------------------------------------------------------------------
Table Of Contents
Our growth in the number of worksite employees paid is affected by three primary
sources - new client sales, client retention and the net change in existing
clients through worksite employee new hires and layoffs. During 2011, new client
sales, client retention and the net change in existing clients all improved as
compared to 2010. As a result, our average number of paid worksite employees
increased 9.2% in 2011 compared to 2010.
Gross Profit
Gross profit increased 17.8% to $351.8 million compared to 2010. The average
gross profit per worksite employee increased 8.2% to $251 per month in 2011
versus $232 in 2010. Our pricing objectives attempt to maintain or improve the
gross profit per worksite employee by increasing revenue per worksite employee
to match or exceed changes in primary direct costs and operating expenses.
While our revenues per worksite employee per month increased 5.3% to $1,410 in
2011 versus 2010, our direct costs, which primarily include payroll taxes,
benefits and workers' compensation expenses, increased 4.7% to $1,159 per
worksite employee per month. The primary direct cost components changed as
follows:
· Benefits costs - The cost of group health insurance and related employee
benefits increased $23 per worksite employee per month, or 4.8%, on a per
covered employee basis compared to 2010. These results were favorably impacted
by a decrease in the number of COBRA participants. The number of participants
electing COBRA coverage in the United plan declined from 5.5% in the fourth
quarter of 2010 to 3.2% in the fourth quarter of 2011, due primarily to the
August 2011 expiration of the 65% federal premium subsidy provided to COBRA
eligible participants under the ARRA. Historically, the net costs of COBRA
claims per enrollee are approximately double the cost of claims associated with
active enrollees. The percentage of worksite employees covered under our health
insurance plan was 73.7% in 2011 versus 74.3% in 2010. Please read "-Critical
Accounting Policies and Estimates - Benefits Costs" for a discussion of our
accounting for health insurance costs.
· Workers' compensation costs - Workers' compensation costs increased 3.0%, but
decreased $2 per worksite employee per month compared to 2010. As a percentage
of non-bonus payroll cost, workers' compensation costs decreased to 0.54% in
2011 from 0.60% in 2010. During 2011, we recorded reductions in workers'
compensation costs of $11.4 million, or 0.13% of non-bonus payroll costs, for
changes in estimated losses related to prior reporting periods, compared to
$6.2 million, or 0.08% of non-bonus payroll costs in 2010. The 2011 period
costs include the impact of a 1.1% discount rate used to accrue workers'
compensation loss claims, compared to a 1.4% discount rate used in the 2010
period. Please read "-Critical Accounting Policies and Estimates - Workers'
Compensation Costs" for a discussion of our accounting for workers'
compensation costs.
· Payroll tax costs - Payroll taxes increased 15.7%, or $28 per worksite employee
per month compared to 2010. Payroll taxes as a percentage of payroll cost
increased from 7.11% in 2010 to 7.15% in 2011. The increase in payroll tax
costs was due primarily to a 15.1% increase in total payroll cost in 2011 as
compared to 2010.
Operating Expenses
The following table presents certain information related to our operating
expenses:
Year ended December 31, Year ended December 31,
2011 2010 % Change 2011 2010 % Change
(in thousands) (per worksite employee per month)
Salaries, wages and
payroll taxes $ 155,233 $ 146,901 5.7 % $ 111 $ 115 (3.5 )%
Stock-based
compensation 8,601 8,126 5.8 % 6 6 -
Commissions 13,451 11,881 13.2 % 10 9 11.1 %
Advertising 26,613 16,447 61.8 % 19 13 46.2 %
General and
administrative
expenses 75,345 63,214 19.2 % 53 49 8.2 %
Depreciation and
amortization 15,218 14,907 2.1 % 11 12 (8.3 )%
Total operating
expenses $ 294,461 $ 261,476 12.6 % $ 210 $ 204 2.9 %
Operating expenses increased 12.6% to $294.5 million compared to 2010. The 2011
operating expenses included $11.8 million related to our rebranding initiative
and $9.2 million associated with acquisitions completed in late 2010 and early
2011. Operating expenses per worksite employee per month increased to $210 in
2011 versus $204 in 2010. The components of operating expenses changed as
follows:
- 37 ---------------------------------------------------------------------------------
Table Of Contents
· Salaries, wages and payroll taxes of corporate and sales staff increased 5.7%,
but decreased $4 per worksite employee per month compared to 2010. The overall
increase was primarily due to a 7.4% rise in headcount related to our ABU
strategy and associated acquisitions, offset by a decrease in incentive
compensation.
· Stock-based compensation increased 5.8%, but remained flat on a per worksite
employee per month basis compared to 2010, due primarily to an increase in the
weighted average market value on the date of grant associated with restricted
awards. The stock-based compensation expense represents amortization of
restricted stock awards granted to employees and the annual stock grant made to
non-employee directors. Please read Note 1 to the Consolidated Financial
Statements, "Accounting Policies," for additional information.
· Commissions expense increased 13.2%, or $1 per worksite employee per month
compared to 2010, primarily due to a 9% increase in the average number of
worksite employees paid per month and an $0.8 million increase in ABU
commissions.
· Advertising costs increased 61.8%, or $6 per worksite employee per month
compared to 2010, primarily due to advertising and business promotions related
to our rebranding initiative.
· General and administrative expenses increased 19.2%, or $4 per worksite
employee per month, primarily due to increased travel and training, costs
associated with our rebranding initiative, increased consulting and costs
associated with acquisitions made in late 2010 and early 2011.
· Depreciation and amortization expense increased 2.1%, but decreased $1 per
worksite employee per month compared to the 2010 period.
Other Income (Expense)
Other expense was $6.5 million in 2011 compared to other income of $961,000 in
2010, primarily due to a $4.4 million loss related to the exchange of an
aircraft and a $3.1 million loss related to a settlement with the EDD in the
third quarter of 2011. Please read Note 12 to the Consolidated Financial
Statements, "Commitments and Contingencies," for additional information on the
EDD settlement.
Income Tax Expense
During 2011 we incurred federal and state income tax expense of $20.3 million on
pre-tax income of $50.8 million. Our provision for income taxes differed from
the US statutory rate of 35% primarily due to state income taxes and
non-deductible expenses, offset slightly by tax-exempt interest income. Our
effective income tax rate was 40.0% in the 2011 period compared to 41.0% in the
2010 period.
Net Income
Net income for 2011 was $30.5 million, or $1.16 per diluted share, compared to
$22.4 million, or $0.86 per diluted share in 2010. On a per worksite employee
per month basis, net income was $22 in 2011 compared to $17 in 2010.
- 38 ---------------------------------------------------------------------------------
Table Of Contents
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009.
The following table presents certain information related to our results of
operations:
Year ended December 31,
2010 2009 % Change
(in thousands, except per share and statistical data)
Revenues (gross billings of $10.169 billion and
$9.856 billion, less worksite employee payroll
cost of $8.449 billion and $8.203 billion,
respectively) $ 1,719,752 $ 1,653,096 4.0 %
Gross profit 298,536 287,967 3.7 %
Operating expenses 261,476 260,934 0.2 %
Operating income 37,060 27,033 37.1 %
Other income 961 1,616 (40.5 )%
Net income 22,440 16,574 35.4 %
Diluted net income per share of common stock 0.86 0.65 32.3 %
Statistical Data:
Average number of worksite employees paid per
month 107,014 108,736 (1.6 )%
Revenues per worksite employee per month(1) $ 1,339 $ 1,267 5.7 %
Gross profit per worksite employee per month 232 221 5.0 %
Operating expenses per worksite employee per month 204 200 2.0 %
Operating income per worksite employee per month 29 21 38.1 %
Net income per worksite employee per month 17 13 30.8 %
_______________
(1) Gross billings of $7,919 and $7,553 per worksite employee per month, less
payroll cost of $6,580 and $6,286 per worksite employee per month,
respectively.
Revenues
Our revenues, which represent gross billings net of worksite employee payroll
cost, increased 4.0% compared to 2009, due to a 5.7%, or $72 increase in
revenues per worksite employee per month, offset in part by a 1.6% decrease in
the average number of worksite employees paid per month. The 5.7% increase in
revenues per worksite employee per month was due primarily to increases in the
benefits and payroll tax pricing to offset anticipated increases in these direct
costs.
By region, our Workforce Optimization revenue change from 2009 and distribution
for years ended December 31, 2010 and 2009 were as follows:
Year ended December 31, Year ended December 31,
2010 2009 % Change 2010 2009
(in thousands) (% of total revenue)
Northeast $ 412,233 $ 369,761 11.5 % 24.2 % 22.5 %
Southeast 184,223 182,888 0.7 % 10.8 % 11.1 %
Central 251,756 248,544 1.3 % 14.8 % 15.2 %
Southwest 522,518 518,828 0.7 % 30.7 % 31.6 %
West 331,916 321,935 3.1 % 19.5 % 19.6 %
1,702,646 1,641,956 3.7 % 100.0 % 100.0 %
Other revenue 17,106 11,140 53.6 %
Total revenue $ 1,719,752 $ 1,653,096 4.0 %
Other revenue is comprised primarily of revenues generated by our ABUs.
- 39 ---------------------------------------------------------------------------------
Table Of Contents
Our growth in the number of worksite employees paid is affected by three primary
sources - new client sales, client retention and the net change in existing
clients through worksite employee new hires and layoffs. In 2010, our average
number of paid worksite employees decreased 1.6% compared to 2009. However,
during 2010 our average number of paid worksite employees increased 8.0% from
the first quarter of 2010 to 111,249 in the fourth quarter of 2010, as the net
change in existing clients, new client sales and client retention improved
throughout 2010.
Gross Profit
Gross profit increased 3.7% to $298.5 million compared to 2009. The average
gross profit per worksite employee increased 5.0% to $232 per month in 2010
versus $221 in 2009. Our pricing objectives attempt to maintain or improve the
gross profit per worksite employee by increasing revenue per worksite employee
to match or exceed changes in primary direct costs and operating expenses.
While our revenues per worksite employee per month increased 5.7% to $1,339 in
2010 versus 2009, our direct costs, which primarily include payroll taxes,
benefits and workers' compensation expenses, increased 5.8% to $1,107 per
worksite employee per month. The primary direct cost components changed as
follows:
· Benefits costs - The cost of group health insurance and related employee
benefits increased $29 per worksite employee per month, or 6.0%, on a per
covered employee basis compared to 2009. This increase was due to expected
medical cost increases, as well as higher claims associated with increased
COBRA participation resulting from the severe economic environment and the
ARRA. ARRA provided a federal subsidy for COBRA premiums and extended the
election period for certain terminated employees. The net costs of claims per
COBRA enrollee are approximately double the cost of claims associated with
active enrollees. The number of participants electing COBRA coverage declined
from 7.2% in the fourth quarter of 2009 to 5.5% in the fourth quarter of
2010. The percentage of worksite employees covered under our health insurance
plan was 74.3% in 2010 versus 74.8% in 2009. Please read "-Critical Accounting
Policies and Estimates - Benefits Costs" for a discussion of our accounting for
health insurance costs.
· Workers' compensation costs - Workers' compensation costs decreased 4.1%, but
increased $1 per worksite employee per month compared to 2009. As a percentage
of non-bonus payroll cost, workers' compensation costs decreased to 0.60% in
2010 from 0.64% in 2009. During 2010, we recorded reductions in workers'
compensation costs of $6.2 million, or 0.08% of non-bonus payroll costs, for
changes in estimated losses related to prior reporting periods, compared to
$5.7 million, or 0.08% of non-bonus payroll costs in 2009. The 2010 period
costs include the impact of a 1.4% discount rate used to accrue workers'
compensation loss claims, compared to a 1.8% discount rate used in the 2009
period. Please read "-Critical Accounting Policies and Estimates - Workers'
Compensation Costs" for a discussion of our accounting for workers'
compensation costs.
· Payroll tax costs - Payroll taxes increased 5.3%, or $31 per worksite employee
per month compared to 2009. Payroll taxes as a percentage of payroll cost
increased from 6.96% in 2009 to 7.11% in 2010. The increases in payroll tax
costs were due primarily to higher state unemployment tax rates, which
increased approximately 50% over the 2009 period as a result of unemployment
claims experienced during the economic recession and a 4.7% increase in average
payroll cost per worksite employee per month.
- 40 ---------------------------------------------------------------------------------
Table Of Contents
Operating Expenses
The following table presents certain information related to our operating
expenses:
Year ended December 31, Year ended December 31,
2010 2009 % Change 2010 2009 % Change
(in thousands) (per worksite employee per month)
Salaries, wages and
payroll taxes $ 146,901 $ 144,086 2.0 % $ 115 $ 110 4.5 %
Stock-based
compensation 8,126 10,064 (19.3 )% 6 8 (25.0 )%
Commissions 11,881 11,800 0.7 % 9 9 -
Advertising 16,447 16,011 2.7 % 13 12 8.3 %
General and
administrative
expenses 63,214 62,381 1.3 % 49 48 2.1 %
Depreciation and
amortization 14,907 16,592 (10.2 )% 12 13 (7.7 )%
Total operating
expenses $ 261,476 $ 260,934 0.2 % $ 204 $ 200 2.0 %
Operating expenses of $261.5 million were relatively flat compared to 2009. The
2010 operating expenses included $5.0 million related to acquisition costs and
ongoing operating expenses associated with the ExpensAble and Galaxy
Technologies acquisitions. Operating expenses per worksite employee per month
increased to $204 in 2010 versus $200 in 2009. The components of operating
expenses changed as follows:
· Salaries, wages and payroll taxes of corporate and sales staff increased 2.0%,
or $5 per worksite employee per month compared to 2009, primarily due to an
increase in our incentive compensation accrual associated with our improved
operating results compared to 2009.
· Stock-based compensation decreased 19.3%, or $2 per worksite employee per month
compared to 2009, due primarily to a large number of forfeitures in 2010 as a
result of employee terminations. The stock-based compensation expense
represents amortization of restricted stock awards granted to employees and the
annual stock grant made to non-employee directors. Please read Note 1 to the
Consolidated Financial Statements, "Accounting Policies," for additional
information.
· Commissions expense increased 0.7%, but remained flat on a per worksite
employee per month basis compared to 2009.
· Advertising costs increased 2.7%, or $1 per worksite employee per month
compared to 2009.
· General and administrative expenses increased 1.3%, or $1 per worksite employee
per month.
· Depreciation and amortization expense decreased 10.2%, or $1 per worksite
employee per month compared to the 2009 period, due primarily to the reduction
in capital expenditures during 2009 and 2010.
Other Income (Expense)
Other income decreased to $961,000 in 2010 compared to $1.6 million in 2009, due
to the continued decline in interest rates.
Income Tax Expense
During 2010 we incurred federal and state income tax expense of $15.6 million on
pre-tax income of $38.0 million. Our provision for income taxes differed from
the US statutory rate of 35% primarily due to state income taxes and
non-deductible expenses, offset slightly by tax-exempt interest income. Our
effective income tax rate was 41.0% in the 2010 period compared to 42.1% in the
2009 period.
- 41 ---------------------------------------------------------------------------------
Table Of Contents
Net Income
Net income for 2010 was $22.4 million, or $0.86 per diluted share, compared to
$16.6 million, or $0.65 per diluted share in 2009. On a per worksite employee
per month basis, net income was $17 in 2010 compared to $13 in 2009.
Non-GAAP Financial Measures
Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact
of bonus payrolls paid to our worksite employees. Bonus payroll cost varies from
period to period, but has no direct impact to our ultimate workers' compensation
costs under the current program. As a result, our management refers to non-bonus
payroll cost in analyzing, reporting and forecasting our workers' compensation
costs. Non-GAAP financial measures are not prepared in accordance with GAAP and
may be different from non-GAAP financial measures used by other
companies. Non-GAAP financial measures should not be considered as a substitute
for, or superior to, measures of financial performance prepared in accordance
with GAAP. We include these non-GAAP financial measures because we believe they
are useful to investors in allowing for greater transparency related to the
costs incurred under our current workers' compensation program. Investors are
encouraged to review the reconciliation of the non-GAAP financial measures used
to their most directly comparable GAAP financial measures as provided in the
table below.
Year ended December 31,
2011 2010 % Change
(in thousands, except per worksite employee)
GAAP to non-GAAP reconciliation:
Payroll cost (GAAP) $ 9,723,990 $ 8,449,484 15.1 %
Less: bonus payroll cost 1,059,677 839,066 26.3 %
Non-bonus payroll cost $ 8,664,313 $ 7,610,418 13.8 %
Payroll cost per worksite employee
(GAAP) $ 6,935 $ 6,580 5.4 %
Less: Bonus payroll cost per
worksite employee 755 654 15.6 %
Non-bonus payroll cost per worksite
employee $ 6,180 $ 5,926 4.3 %
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of resources in view of, among other things, our expansion plans,
potential acquisitions, debt service requirements and other operating cash
needs. To meet short-term liquidity requirements, which are primarily the
payment of direct and operating expenses, we rely primarily on cash from
operations. Longer-term projects or significant acquisitions may be financed
with debt or equity. We have in the past sought, and may in the future seek, to
raise additional capital or take other steps to increase or manage our liquidity
and capital resources. We had $268.2 million in cash, cash equivalents and
marketable securities at December 31, 2011, of which approximately $150.8
million was payable in early January 2012 for withheld federal and state income
taxes, employment taxes and other payroll deductions, and $10.4 million were
customer prepayments that were payable in January 2012. At December 31, 2011, we
had working capital of $126.6 million compared to $144.5 million at December 31,
2010. 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 2012. We will rely on these same
sources, as well as public and private debt or equity financing, to meet our
longer-term liquidity and capital needs.
In September 2011, we completed the financing for a new four-year, $100 million
revolving credit facility ("Facility"), with a syndicate of financial
institutions. The Facility is available for working capital and general
corporate purposes, including acquisitions, and was undrawn at December 31,
2011. Please read Note 6 to the Consolidated Financial Statements, "Revolving
Credit Facility," for additional information.
- 42 ---------------------------------------------------------------------------------
Table Of Contents
Cash Flows from Operating Activities
Our cash flows from operating activities in 2011 were $73.9 million. Our primary
source of cash from operations is the comprehensive service fee and payroll
funding we collect from our Workforce Optimization clients. The level of cash
and cash equivalents, and thus our reported cash flows from operating
activities, are significantly impacted by various external and internal factors,
which are reflected in part by the changes in our balance sheet accounts. These
include the following:
· Timing of client payments / payroll levels - We typically collect our
comprehensive service fee, along with the client's payroll funding, from
clients at least one day prior to the payment of worksite employee payrolls and
associated payroll taxes. Therefore, the last business day of a reporting
period has a substantial impact on our reporting of operating cash flows. For
example, many worksite employees are paid on Fridays and at month-end;
therefore, operating cash flows decrease in the reporting periods that end on a
Friday. In the year ended December 31, 2011, which the last business day of the
reporting period ended on a Friday, client prepayments were $10.4 million and
accrued worksite employee payroll was $130.3 million. In the year ended
December 31, 2010, which also ended on a Friday, client prepayments were $8.1
million and accrued worksite employee payroll was $109.7 million.
· Workers' compensation plan funding - Under our workers' compensation insurance
arrangements, we make monthly payments to the carriers comprised of premium
costs and funds to be set aside for payment of future claims ("claim
funds"). These pre-determined amounts are stipulated in our agreements with the
carriers, and are based primarily on anticipated worksite employee payroll
levels and workers' compensation loss rates during the policy year. Changes in
payroll levels from those that were anticipated in the arrangements can result
in changes in the amount of the cash payments, which will impact our reporting
of operating cash flows. Our claim funds paid, based upon anticipated worksite
employee payroll levels and workers' compensation loss rates, were $41.5
million in 2011 and $40.3 million in 2010. However, our estimates of workers'
compensation loss costs were $35.3 million and $32.7 million in 2011 and 2010,
respectively. During 2011 and 2010, we received $10.0 million and $15.6
million, respectively, for the return of excess claim funds related to the
workers' compensation program, which resulted in an increase to working
capital.
· Medical plan funding - Our health care contract with United establishes
participant cash funding rates 90 days in advance of the beginning of a
reporting quarter. Therefore, changes in the participation level of the United
Plan have a direct impact on our operating cash flows. In addition, changes to
the funding rates, which are solely determined by United based primarily upon
recent claim history and anticipated cost trends, also have a significant
impact on our operating cash flows. Since inception of the United plan,
premiums paid and owed to United have exceeded Plan Costs, resulting in a $24.0
million surplus, $15.0 million of which is reflected as a current asset, and
$9.0 million of which is reflected as a long-term asset on our Consolidated
Balance Sheets at December 31, 2011. The premiums owed to United at December
31, 2011, were $6.1 million, which is included in accrued health insurance
costs, a current liability, on our Consolidated Balance Sheets.
· Operating results - Our net income has a significant impact on our operating
cash flows. Our net income increased 35.8% to $30.5 million in 2011 from $22.4
million in 2010. Please read "Results of Operations - Year Ended December 31,
2011 Compared to Year Ended December 31, 2010."
Cash Flows Used in Investing Activities
Our cash flows used in investing activities were $61.7 million during 2011. We
invested $31.4 million in capital expenditures, primarily related to our
technology infrastructure and $10.0 million to acquire a replacement
aircraft. We also invested $15.8 million, net, in marketable securities and
$14.6 million in acquisitions and other investments.
Cash Flows Used in Financing Activities
Our cash flows used in financing activities were $35.8 million during 2011,
primarily due to $25.1 million in treasury stock repurchases and $15.7 million
in dividends paid.
- 43 -
--------------------------------------------------------------------------------
Table Of Contents
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial
commitments as of December 31, 2011, and the effect they are expected to have on
our liquidity and capital resources (in thousands):
Less than More than
Contractual
obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
Non-cancelable operating leases $ 44,117 $ 13,488 $ 20,008 $ 8,737 $ 1,884
Purchase obligations (1) 21,694 4,737 6,359 4,078 6,520
Other long-term liabilities:
Accrued workers' compensation
claim costs(2) 104,791 42,595 27,559 24,137 10,500
Estimated acquisition payouts(3) 2,538 2,538 -- -- --
Total contractual cash
obligations $ 173,140 $ 63,358 $ 53,926 $ 36,952 $ 18,904
(1) The table includes purchase obligations associated with non-cancelable
contracts individually greater than $100,000 and one year.
(2) Accrued workers' compensation claim costs include the short and long-term
amounts. For more information, please read, "Critical Accounting Policies
and Estimates - Workers' Compensation Costs."
(3) Estimated acquisition costs include short-term amounts estimated to be paid
in connection with earn outs and contractual arrangements. Please read Note
5 to the Consolidated Financial Statements, "Acquisitions," for additional
information.
Seasonality, Inflation and Quarterly Fluctuations
We believe the effects of inflation have not had a significant impact on our
results of operations or financial condition.
[ Back To TMCnet.com's Homepage ]
|
TMCnet LOGIN
Webinars
