NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012
Description of Business
Insperity
TM
, Inc., formerly named Administaff, Inc. (“Insperity” or “we”, “our”, and “us”) provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Our name change, which was effective March 3, 2011, reflects our evolution over the past 25 years from a professional employer organization (“PEO”), an industry we pioneered, to our current position as a comprehensive business performance solutions provider.
Our most comprehensive HR business offering is provided through our PEO services, known as Workforce Optimization
TM
solution, which encompasses a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services. We were organized as a corporation in 1986 and have provided PEO services since inception.
In addition to Workforce Optimization, we offer Human Capital Management, Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Insurance Services, (collectively “Adjacent Businesses”), many of which are offered via desktop applications and software as a service delivery models. These other products or services are offered separately, as a bundle, or along with Workforce Optimization.
We provide our Workforce Optimization solution by entering into a co-employment relationship with our clients, under which Insperity and its clients each take responsibility for certain portions of the employer-employee relationship. Insperity and its clients designate each party’s responsibilities through its Client Services Agreement (“CSA”), under which Insperity becomes the employer of the employees who work at the client’s location (“worksite employees”) for most administrative and regulatory purposes.
As a co-employer of its worksite employees, we assume many of the rights and obligations associated with being an employer. We enter into an employment agreement with each worksite employee, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the right to evaluate employee qualifications or performance, and the right to establish employee compensation levels. Typically, Insperity only exercises these rights in consultation with its clients or when necessary to ensure regulatory compliance. The responsibilities associated with our role as employer include the following obligations with regard to our worksite employees: (i) to compensate its worksite employees through wages and salaries; (ii) to pay the employer portion of payroll-related taxes; (iii) to withhold and remit (where applicable) the employee portion of payroll-related taxes; (iv) to provide employee benefit programs; and (v) to provide workers’ compensation insurance coverage.
In addition to our assumption of employer status for our worksite employees, our Workforce Optimization solution also includes other human resources functions for our clients to support the effective and efficient use of personnel in their business operations. To provide these functions, we maintain a significant staff of professionals trained in a wide variety of human resources functions, including employee training, employee recruiting, employee performance management, employee compensation, and employer liability management. These professionals interact and consult with clients on a daily basis to help identify each client’s service requirements and to ensure that we are providing appropriate and timely personnel management services.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We provide our Workforce Optimization
TM
solution to small and medium-sized businesses in strategically selected markets throughout the United States. During 2012, 2011 and 2010, Workforce Optimization revenues from Insperity’s Texas markets represented 26%, 27% and 28%, while Workforce Optimization revenues from Insperity’s California markets represented 17%, 16% and 15% of Insperity’s total Workforce Optimization revenues, respectively.
Revenue and Direct Cost Recognition
We account for our Workforce Optimization revenues in accordance with Accounting Standards Codification (“ASC”) 605-45,
Revenue Recognition, Principal Agent Considerations.
Our Workforce Optimization revenues are derived from our gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the payroll cost component of gross billings, and therefore, consist solely of markup, are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our Consolidated Balance Sheets.
In determining the pricing of the markup component of the gross billings, we take into consideration our estimates of the costs directly associated with our worksite employees, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings.
Consistent with our revenue recognition policy, our direct costs do not include the payroll cost of our worksite employees. Our direct costs associated with our revenue generating activities are primarily comprised of all other costs related to our worksite employees,
such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.
Segment Reporting
We operate one reportable segment under ASC 280,
Segment Reporting
.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that could potentially subject us to concentration of credit risk include accounts receivable and marketable securities.
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 maturi
ties of greater than three months are classified as marketable securities in current assets.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We account for marketable securities in accordance with ASC 320,
Investments – Debt and Equity Securities
. We determine the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time of
purchase, and re-evaluate such classification as of each balance sheet date. At December 31, 2012 and 2011, all of our investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. We use the specific identification method of determining the cost basis in computing realized gains and losses on the sale of our available-for-sale securities. Realized gains and losses are included in other income.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short-term maturities of these instruments.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:
Buildings and improvements
|
5-30 years
|
Computer hardware and software, and acquired technologies
|
1-5 years
|
Software development costs
|
3 years
|
Furniture and fixtures
|
5-7 years
|
Aircraft
|
15-20 years
|
Software development costs relate primarily to software coding, system interfaces and testing of our proprietary professional employer information systems and are accounted for in accordance with ASC 350-40,
Internal Use Software
. Capitalized software development costs are amortized using the straight-line method over the estimated useful lives of the software, generally three years. We recognized $2.8 million, $1.6 million and $1.6 million in amortization of capitalized computer software costs in 2012, 2011 and 2010, respectively. Unamortized computer software costs were $8.2 million and $7.6 million in 2012 and 2011, 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.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill and Other Intangible Assets
Our purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, ranging from three to 10 years.
Our goodwill and intangible assets are subject to the provisions of ASC 350,
Intangibles – Goodwill and Other.
Accordingly, goodwill is tested for impairment on an annual basis or when indicators of impairment exist, and written down when impaired. Our goodwill impairment test involves a comparison of the fair value of each of our reporting units with its carrying amount. Fair value is estimated using a discounted cash flow model. An indication of potential impairment exists if the fair value is less than the carrying value. The amount of the impairment, if any, is then determined based on an allocation of the reporting unit fair values to individual assets and liabilities. Furthermore, ASC 350 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Please read Note 5, “Goodwill and Other Intangible Assets,” for additional information.
Health Insurance Costs
We provide group health insurance coverage to our worksite employees through a national network of carriers including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield, Unity Health Plan and Tufts, all of which provide fully insured policies or service contracts.
The policy with United provides the majority of our health insurance coverage. As a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, we record the cost of the United portion of the plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.
Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance. As of December 31, 2012, Plan Costs were less than the net premiums paid and owed to United by $18.5 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $9.5 million balance is included in prepaid insurance, a current asset, in our Consolidated Balance Sheets. The premiums owed to United at December 31, 2012, were $10.5 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets.
Workers’ Compensation Costs
Our workers’ compensation coverage has been provided through an arrangement with the ACE Group of Companies (“the ACE Program”) since 2007. The ACE Program is fully insured in that ACE has the responsibility to pay all claims incurred regardless of whether we satisfy our responsibilities. Through September 30, 2010, we bore the economic burden for the first $1 million layer of claims per occurrence and the insurance carrier was and remains responsible for the economic burden for all claims in excess of such first $1 million layer.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective October 1, 2010, in addition to bearing the economic burden for the first $1 million layer of claims per occurrence, we also bear the economic burden for those claims exceeding $1 million, up to a maximum aggregate amount of $5 million per policy year.
Because we bear the economic burden for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.
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, 2012 and 2011, we reduced accrued workers’ compensation costs by $13.1 million and $11.4 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rates utilized in 2012 and 2011 were 0.6% and 1.1%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.
The following table provides the activity and balances related to incurred but not reported workers’ compensation claims:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
104,791
|
|
|
$
|
96,934
|
|
Accrued claims
|
|
|
37,772
|
|
|
|
36,845
|
|
Present value discount
|
|
|
(868
|
)
|
|
|
(1,513
|
)
|
Paid claims
|
|
|
(30,010
|
)
|
|
|
(27,475
|
)
|
Ending balance
|
|
$
|
111,685
|
|
|
$
|
104,791
|
|
|
|
|
|
|
|
|
|
|
Current portion of accrued claims
|
|
$
|
47,149
|
|
|
$
|
44,737
|
|
Long-term portion of accrued claims
|
|
|
64,536
|
|
|
|
60,054
|
|
|
|
$
|
111,685
|
|
|
$
|
104,791
|
|
The current portion of accrued workers’ compensation costs at December 31, 2012 and 2011 includes $2.3 million and $1.8 million, respectively, of workers’ compensation administrative fees.
As of December 31, the undiscounted accrued workers’ compensation costs were $123.4 million in 2012 and $118.3 million in 2011.
At the beginning of each policy period, the insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated worksite employee payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits, a long-term asset in our Consolidated Balance Sheets. In 2012, we received $2.5 million for the return of excess claim funds related to the ACE program, which reduced deposits. As of December 31, 2012, we had restricted cash of $47.1 million and deposits of $64.2 million.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on our Consolidated Balance Sheets.
Stock-Based Compensation
At December 31, 2012, we have three stock-based employee compensation plans. We account for these plans under the recognition and measurement principles of ASC 718,
Compensation – Stock Compensation
, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
We generally make annual grants of restricted and unrestricted stock under our stock-based incentive compensation plans to our directors, officers and other management. Restricted stock grants to officers and other management vest over three to five years from the date of grant. Annual stock grants issued to directors are
100% vested on the grant date. Shares of restricted stock are based on fair value on date of grant and the associated expense, net of estimated forfeitures, is recognized over the vesting period.
Company-Sponsored 401(k) Plans
Under our 401(k) plan for corporate employees (the “Corporate Plan”), we matched 50% of eligible corporate employees’ contributions, up to 6% of the employees’ eligible compensation in 2012, 2011 and 2010. Under our separate 401(k) plan for worksite employees (the “Worksite Employee Plan”), the match percentage for worksite employees ranges from 0% to 6%, as determined by each client company. Matching contributions under the Corporate Plan and the Worksite Employee Plan are immediately vested. During 2012, 2011 and 2010, we made matching contributions to the Corporate and Worksite Employee Plans of $65.9 million, $58.1 million and $49.6 million, respectively. Of these contributions, $63.3 million, $55.7 million and $47.5 million were made under the Worksite Employee Plan on behalf of worksite employees. The remainder represents matching contributions made under the Corporate Plan on behalf of corporate employees.
Advertising
We expense all advertising costs as incurred.
Income Taxes
We use the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2012 presentation.
New Accounting Pronouncements
We believe that we have implemented the accounting pronouncements with a material impact on our financial statements and do not believe there are any new or pending announcements that will materially impact our financial position or results of operations.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2.
|
Cash, Cash Equivalents and Marketable Securities
|
The following table summarizes our investments in cash equivalents and marketable securities held by investment managers and overnight investments:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Overnight holdings:
|
|
|
|
|
|
|
Money market funds (cash equivalents)
|
|
$
|
255,000
|
|
|
$
|
71,350
|
|
Investment holdings:
|
|
|
|
|
|
|
|
|
Money market funds (cash equivalents)
|
|
|
26,087
|
|
|
|
59,587
|
|
Marketable securities
|
|
|
16,904
|
|
|
|
56,987
|
|
|
|
|
297,991
|
|
|
|
187,924
|
|
Cash held in demand accounts
|
|
|
21,732
|
|
|
|
113,968
|
|
Outstanding checks
|
|
|
(38,275
|
)
|
|
|
(33,697
|
)
|
Total cash, cash equivalents and marketable securities
|
|
$
|
281,448
|
|
|
$
|
268,195
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
264,544
|
|
|
$
|
211,208
|
|
Marketable securities
|
|
|
16,904
|
|
|
|
56,987
|
|
|
|
$
|
281,448
|
|
|
$
|
268,195
|
|
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, 2012 and December 31, 2011, are $158.2 million and $150.8 million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions, as well as $13.5 million and $10.4 million, respectively, in client prepayments.
We account for our financial assets in accordance with ASC 820,
Fair Value Measurement
. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:
|
·
|
Level 1 - quoted prices in active markets using identical assets
|
|
·
|
Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs
|
|
·
|
Level 3 - significant unobservable inputs
|
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables summarize the levels of fair value measurements of our financial assets:
|
|
Fair Value Measurements
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
281,087
|
|
|
$
|
281,087
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Municipal bonds
|
|
|
16,904
|
|
|
|
—
|
|
|
|
16,904
|
|
|
|
—
|
|
Total
|
|
$
|
297,991
|
|
|
$
|
281,087
|
|
|
$
|
16,904
|
|
|
$
|
—
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
130,937
|
|
|
$
|
130,937
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Municipal bonds
|
|
|
56,987
|
|
|
|
—
|
|
|
|
56,987
|
|
|
|
—
|
|
Total
|
|
$
|
187,924
|
|
|
$
|
130,937
|
|
|
$
|
56,987
|
|
|
$
|
—
|
|
The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. Government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.
The following is a summary of our available-for-sale marketable securities:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
16,878
|
|
|
$
|
29
|
|
|
$
|
(3
|
)
|
|
$
|
16,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
56,945
|
|
|
$
|
90
|
|
|
$
|
(48
|
)
|
|
$
|
56,987
|
|
For the year ended December 31, 2012, we realized a $58,000 gain on sales of available-for-sale marketable securities. For the years ended December 31, 2011 and 2010, we had no realized gains or losses recognized on sales of available-for-sale marketable securities.
As of December 31, 2012, the contractual maturities of our marketable securities were as follows:
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
9,301
|
|
|
$
|
9,309
|
|
One to five years
|
|
|
7,577
|
|
|
|
7,595
|
|
Total
|
|
$
|
16,878
|
|
|
$
|
16,904
|
|
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our accounts receivable is primarily composed of trade receivables and unbilled receivables. Our trade receivables, which represent outstanding gross billings to customers, are reported net of allowance for doubtful accounts of $1.0 million as of December 31, 2012 and 2011. We establish an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making a general provision for other potentially uncollectible amounts.
We make an accrual at the end of each accounting period for our obligations associated with the earned but unpaid wages of our worksite employees and for the accrued gross billings associated with such wages. These accruals are included in accrued worksite employee payroll cost and unbilled accounts receivable; however, these amounts are presented net in the Consolidated Statements of Operations. We generally require clients to pay invoices for service fees no later than one day prior to the applicable payroll date. As such, we generally do not require collateral. Customer prepayments directly attributable to unbilled accounts receivable have been netted against such receivables as the gross billings have been earned and the payroll cost has been incurred, thus we have the legal right of offset for these amounts. Unbilled accounts receivable consisted of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Accrued worksite employee payroll cost
|
|
$
|
150,070
|
|
|
$
|
130,317
|
|
Unbilled revenues
|
|
|
44,483
|
|
|
|
38,564
|
|
Customer prepayments
|
|
|
(13,513
|
)
|
|
|
(10,373
|
)
|
Unbilled accounts receivable
|
|
$
|
181,040
|
|
|
$
|
158,508
|
|
The contractual arrangement with United for health insurance coverage requires us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid health insurance. Please read Note 1, “Accounting Policies,” for a discussion of our accounting policies for health insurance costs.
As of December 31, 2012, we had $64.2 million in workers’ compensation long-term deposits. Please read Note 1 “Accounting Policies” for a discussion of our accounting policies for workers’ compensation costs.
5.
|
Goodwill and Other Intangible Assets
|
The following table provides the gross carrying amount and accumulated amortization for each class of intangible assets and goodwill:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization/
Impairment
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
(in thousands)
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
1,285
|
|
|
$
|
(571
|
)
|
|
$
|
714
|
|
|
$
|
1,785
|
|
|
$
|
(742
|
)
|
|
$
|
1,043
|
|
Customer relationships
|
|
|
9,643
|
|
|
|
(3,790
|
)
|
|
|
5,853
|
|
|
|
9,043
|
|
|
|
(2,809
|
)
|
|
|
6,234
|
|
Goodwill
|
|
|
21,156
|
|
|
|
(3,948
|
)
|
|
|
17,208
|
|
|
|
21,156
|
|
|
|
—
|
|
|
|
21,156
|
|
Total goodwill and intangible assets
|
|
$
|
32,084
|
|
|
$
|
(8,309
|
)
|
|
$
|
23,775
|
|
|
$
|
31,984
|
|
|
$
|
(3,551
|
)
|
|
$
|
28,433
|
|
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We performed our annual asset impairment testing as of December 31, 2012, the end of our calendar year. The estimated fair value of our Performance Management reporting unit was less than its related book value and we determined that its goodwill balance was impaired. Accordingly, step two of the goodwill impairment test was completed for the Performance Management reporting unit, which resulted in an impairment write down to goodwill and other intangible assets totaling $4.2 million in the fourth quarter of 2012.
The following summarizes the changes in the carrying amount of goodwill:
|
|
Goodwill
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
14,327
|
|
Acquisitions
|
|
|
6,829
|
|
Balance at December 31, 2011
|
|
|
21,156
|
|
Impairment
|
|
|
(3,948
|
)
|
Balance at December 31, 2012
|
|
$
|
17,208
|
|
Our amortization expense related to purchased intangible assets other than goodwill was $1.8 million in 2012, $1.7 million in 2011 and $799,000 in 2010, and is estimated to be $2.0 million in 2013, $2.0 million in 2014, $1.5 million in 2015, $700,000 in 2016 and $527,000 in 2017.
We account for our acquisitions in accordance with ASC 805,
Business Combinations,
which requires allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on the fair value at the date of purchase. All acquisition related costs are expensed as incurred and recorded in operating expenses. We include operations associated with acquisitions from the date of acquisition forward.
In January 2011, we acquired certain assets from HumanConcepts, a provider of workforce decision support solutions. We acquired ownership of the OrgPlus desktop software product line (“OrgPlus”), targeted at small and medium-sized businesses, and its associated customer base, as well as a source code license for a SaaS based version. The OrgPlus software facilitates creation, management and communication of detailed organizational charts. The acquisition represents our continued business strategy to expand the sales opportunity of our human resources services as well as the solutions available to our current and prospective clients. We paid $10.8 million upon the closing of the transaction and paid an additional $1.2 million in 2012 based on the terms of the agreement.
In June 2010, we acquired OneMind Connect, Inc. which conducted business under the name “ExpensAble,” and provides expense report management solutions delivered as both a SaaS and as a desktop software product. The acquisition of ExpensAble extends the sales opportunity of our human resources services as well as the solutions available to our current and prospective clients. We paid $5.5 million upon the closing of the transaction and paid an additional $1.3 million in 2011 based on the terms of the agreement.
In July 2010, we acquired certain assets from Galaxy Technologies, Inc. in an effort to expand the sales opportunity of our human resources services as well as the solutions available to our current and prospective clients. The primary assets acquired include time and attendance software solutions, which are delivered through a SaaS model and as a desktop software product, and the associated customer base. We paid $7.4 million upon the closing of the transaction and an additional $1.4 million in each of 2011 and 2012, respectively, based on the terms of the purchase agreement.
7.
|
Revolving Credit Facility
|
On September 15, 2011, we entered into a four-year, $100 million revolving credit facility (the “Facility”), which may be increased to $150 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, and issuances of letters of credit. Our obligations under the Facility are secured by 65% of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. At December 31, 2012, we had not drawn on the Facility.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Facility matures on September 15, 2015. Borrowings under the Facility bear interest at an alternate base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (i) in the case of LIBOR loans, from 2.00% to 2.75% and (ii) in the case of alternate base rate loans, from 0.00% to 0.75%. The alternate base rate is the highest of (i) the prime rate most recently published in The Wall Street Journal, (ii) the federal funds rate plus 0.50% and (iii) the 30-day LIBOR rate plus 2.00%. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25%. Interest expense and unused commitment fees are recorded in other income (expense).
The Facility contains both affirmative and negative covenants, which we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our total funded debt, minimum interest coverage ratio and maximum leverage ratio. In December 2012, the Credit Agreement was amended to modify the interest coverage ratio covenant to exclude the impact of the $25.7 million special dividend. We were in compliance with all financial covenants under the Credit Agreement at December 31, 2012.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the Consolidated Balance Sheets are as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Prepaid assets
|
|
$
|
(6,929
|
)
|
|
$
|
(9,268
|
)
|
Depreciation
|
|
|
(8,580
|
)
|
|
|
(8,616
|
)
|
Software development costs
|
|
|
(3,104
|
)
|
|
|
(2,858
|
)
|
Amortization
|
|
|
—
|
|
|
|
(1,210
|
)
|
Total deferred tax liabilities
|
|
|
(18,613
|
)
|
|
|
(21,952
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued incentive compensation
|
|
|
4,896
|
|
|
|
3,877
|
|
Net operating loss carryforward
|
|
|
2,057
|
|
|
|
2,290
|
|
Workers’ compensation accruals
|
|
|
5,079
|
|
|
|
3,744
|
|
Accrued rent
|
|
|
1,033
|
|
|
|
1,132
|
|
Stock-based compensation
|
|
|
3,114
|
|
|
|
2,908
|
|
Other
|
|
|
645
|
|
|
|
610
|
|
Total deferred tax assets
|
|
|
16,824
|
|
|
|
14,561
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(148
|
)
|
Total net deferred tax assets
|
|
|
16,824
|
|
|
|
14,413
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(1,789
|
)
|
|
$
|
(7,539
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
$
|
7,211
|
|
|
$
|
3,233
|
|
Net noncurrent deferred tax liabilities
|
|
|
(9,000
|
)
|
|
|
(10,772
|
)
|
|
|
$
|
(1,789
|
)
|
|
$
|
(7,539
|
)
|
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income tax expense are as follows:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
29,280
|
|
|
$
|
16,816
|
|
|
$
|
12,668
|
|
State
|
|
|
4,351
|
|
|
|
3,535
|
|
|
|
1,734
|
|
Total current income tax expense
|
|
|
33,631
|
|
|
|
20,351
|
|
|
|
14,402
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,363
|
)
|
|
|
47
|
|
|
|
1,033
|
|
State
|
|
|
(380
|
)
|
|
|
(93
|
)
|
|
|
146
|
|
Total deferred income tax (benefit) expense
|
|
|
(5,743
|
)
|
|
|
(46
|
)
|
|
|
1,179
|
|
Total income tax expense
|
|
$
|
27,888
|
|
|
$
|
20,305
|
|
|
$
|
15,581
|
|
As a result of nonqualified stock option exercises, disqualifying dispositions of certain employee incentive stock options and vesting of restricted stock awards, we had a net income tax benefit of $1.8 million in 2012, $1.7 million in 2011 and $25,000 in 2010. The income tax benefit is reported as a component of additional paid-in capital.
The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense from continuing operations is as follows:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at 35%
|
|
$
|
23,901
|
|
|
$
|
17,770
|
|
|
$
|
13,307
|
|
State income taxes, net of federal benefit
|
|
|
2,497
|
|
|
|
2,249
|
|
|
|
1,273
|
|
Nondeductible expenses
|
|
|
1,663
|
|
|
|
904
|
|
|
|
1,092
|
|
Research and development credit
|
|
|
—
|
|
|
|
(558
|
)
|
|
––
|
|
Other, net
|
|
|
(173
|
)
|
|
|
(60
|
)
|
|
|
(91
|
)
|
Reported total income tax expense
|
|
$
|
27,888
|
|
|
$
|
20,305
|
|
|
$
|
15,581
|
|
During 2012, we utilized $55,000 of our capital loss carryforwards. The remaining $345,000 expired at December 31, 2012. We had a valuation allowance of $345,000 against these related capital loss carryforwards at the time they expired. At December 31, 2012, we have net operating loss carryforwards totaling approximately $5.4 million that expire from 2021 to 2030 related to our acquisition of ExpensAble.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2012, 2011 and 2010, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 2009 through 2011 remain open to examination by the Internal Revenue Service of the United States.
Repurchase Program
Our Board of Directors (the “Board”) has authorized a program to repurchase up to 14,500,000 shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions or other factors. We repurchased 407,400 shares under the Repurchase Program during 2012. In addition, 107,293 shares were withheld during 2012 to satisfy tax withholding obligations for the vesting of restricted stock awards. These
purchases are not subject to the Repurchase Program. During 2011, we repurchased 902,521 shares under the Repurchase Program and 108,280 shares were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards. As of December 31, 2012, we were authorized to repurchase an additional 829,472 shares under the Repurchase Program. Shares repurchased under the Repurchase Program and shares withheld to satisfy tax withholding obligations for the vesting of restricted stock awards are recorded in treasury.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Dividends
The Board declared quarterly dividends of $0.17 per share of common stock in the second, third and fourth quarters of 2012 and $0.15 per share of common stock in the first quarter of 2012 and each quarter of 2011. Additionally, the Board declared a special dividend of $1.00 per share of common stock in the fourth quarter of 2012, resulting in a total of $42.7 million and $15.7 million in dividends paid in 2012 and 2011, respectively.
Tender Offer for Common Stock
In November 2012, we commenced a modified “Dutch auction” tender offer to purchase up to $50 million in value of our common stock at a price not less than $27.00 per share and not more than $31.00 per share. The tender offer period expired on December 21, 2012, resulting in the repurchase of 80,983 shares at a per share price of $31.00 and an aggregate price of $3.2 million, including transaction costs. The shares were immediately retired.
Preferred Stock
At December 31, 2012, 20 million shares of preferred stock were authorized, of which 600,000 shares were designated as Series A Junior Participating Preferred Stock that is reserved for issuance on exercise of preferred stock purchase rights under our Share Purchase Rights Plan (the “Rights Plan”). Each issued share of our common stock has one preferred stock purchase right attached to it. No preferred shares have been issued and the rights are not currently exercisable. The Rights Plan expires on November 13, 2017.
The Insperity, Inc. 1997 Incentive Plan, as amended, the 2001 Incentive Plan, as amended, and the 2012 Incentive Plan (collectively, the “Incentive Plans”) provide for options and other stock-based awards that may be granted to eligible employees and non-employee directors of Insperity or its subsidiaries. At the 2012 Annual Meeting, stockholders approved the 2012 Incentive Plan, which is currently the only plan under which new stock-based awards may be granted. There are no longer any awards outstanding under the 1997 Incentive Plan, and no new grants may be made under that Plan. 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, 2012, 1,770,329 shares of common stock were available for future grants under the 2012 Incentive Plan. The Incentive Plans permit stock options, including nonqualified stock options and options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, stock awards, phantom stock awards, stock appreciation rights, performance units, and other stock-based awards and cash awards, all of which may or may not be subject to the achievement of one or more performance objectives. The purposes of the Incentive Plans generally are to retain and attract persons of training, experience and ability to serve as employees of Insperity and its subsidiaries and to serve as non-employee directors of Insperity, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of Insperity and its subsidiaries.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Insperity Nonqualified Stock Option Plan (the “Nonqualified Plan”) provided for options to purchase shares of Insperity’s common stock that were granted to employees who were not officers. An aggregate of 3,600,000 shares of common stock of Insperity were authorized to be issued under the Nonqualified Plan. Although there are unissued shares remaining, no new awards may be granted under the Nonqualified Plan. The Committee may at any time terminate or amend the Nonqualified Plan, provided that no such amendment may adversely affect the rights of optionees with regard to outstanding options.
We recognized $9.8 million, $8.6 million and $8.1 million of compensation expense associated with the restricted stock awards in 2012, 2011 and 2010, respectively. We recognized $4.0 million, $3.4 million and $3.3 million of tax benefits associated with stock-based compensation in 2012, 2011 and 2010, respectively.
Stock Option Awards
The following is a summary of stock option award activity for 2012:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Life
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2011
|
|
|
315
|
|
|
$
|
16.67
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
(160
|
)
|
|
|
14.05
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(3
|
)
|
|
|
25.99
|
|
|
|
|
|
|
|
Outstanding – December 31, 2012
|
|
|
152
|
|
|
|
19.30
|
|
|
|
3.3
|
|
|
$
|
2,019
|
|
Exercisable – December 31, 2012
|
|
|
152
|
|
|
|
19.30
|
|
|
|
3.3
|
|
|
$
|
2,019
|
|
The intrinsic value of options exercised during the year was $2.5 million in 2012, $2.2 million in 2011 and $2.0 million in 2010.
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, 2012, 2011, and 2010 was $11.7 million, $11.1 million and $6.7 million, respectively. The weighted average grant date fair value of restricted stock awards during the years ended December 31, 2012, 2011 and 2010 was $30.47, $29.47 and $17.55, respectively. As of December 31, 2012, unrecognized compensation expense associated with the unvested shares outstanding was $12.2 million and is expected to be recognized over a weighted average period of 22 months.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of restricted stock award activity for 2012:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested – December 31, 2011
|
|
|
778
|
|
|
$
|
23.91
|
|
Granted
|
|
|
375
|
|
|
|
30.47
|
|
Vested
|
|
|
(383
|
)
|
|
|
22.65
|
|
Cancelled/Forfeited
|
|
|
(19
|
)
|
|
|
28.51
|
|
Non-vested – December 31, 2012
|
|
|
751
|
|
|
|
27.70
|
|
We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which include unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.
The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,402
|
|
|
$
|
30,470
|
|
|
$
|
22,440
|
|
Less distributed and undistributed earnings allocated to participating securities
|
|
|
(1,224
|
)
|
|
|
(908
|
)
|
|
|
(657
|
)
|
Net income allocated to common shares
|
|
$
|
39,178
|
|
|
$
|
29,562
|
|
|
$
|
21,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
25,007
|
|
|
|
25,405
|
|
|
|
25,254
|
|
Incremental shares from assumed conversions of common stock options
|
|
|
60
|
|
|
|
92
|
|
|
|
114
|
|
Adjusted weighted average common shares outstanding
|
|
|
25,067
|
|
|
|
25,497
|
|
|
|
25,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect
|
|
|
29
|
|
|
|
29
|
|
|
|
372
|
|
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We lease various office facilities, furniture, equipment and vehicles under operating lease arrangements, some of which contain rent escalation clauses. Most of the leases contain purchase and/or renewal options at fair market and fair rental value, respectively. Rental expense relating to all operating leases was $13.8 million, $14.0 million and $14.0 million in 2012, 2011 and 2010, respectively. At December 31, 2012, future minimum rental payments under noncancelable operating leases are as follows:
|
|
Operating
Leases
|
|
|
|
(in thousands)
|
|
|
|
|
|
2013
|
|
$
|
13,648
|
|
2014
|
|
|
10,658
|
|
2015
|
|
|
7,068
|
|
2016
|
|
|
5,196
|
|
2017
|
|
|
3,258
|
|
Thereafter
|
|
|
2,481
|
|
Total minimum lease payments
|
|
$
|
42,309
|
|
13.
|
Commitments and Contingencies
|
We enter into non-cancelable fixed purchase and service obligations in the ordinary course of business. These arrangements primarily consist of advertising commitments and service contracts. At December 31, 2012, future non-cancelable purchase and service obligations greater than $100,000 and one year were as follows (in thousands):
2013
|
|
$
|
6,308
|
|
2014
|
|
|
7,006
|
|
2015
|
|
|
5,700
|
|
2016
|
|
|
4,902
|
|
2017
|
|
|
1,430
|
|
Thereafter
|
|
|
5,490
|
|
Total obligations
|
|
$
|
30,836
|
|
We are a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, except as set forth below, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.
Massachusetts Tax Assessment
During the fourth quarter of 2012, we received assessments of approximately $2.5 million, including interest and penalties, related to the alleged underpayment of corporate income taxes to the State of Massachusetts for tax years 2006 through 2008. In 2009, we received similar assessments of approximately $470,000, including interest and penalties, which covered tax years 2003 through 2005. We believe the assessments are without merit and intend to vigorously contest them. At this time, we are unable to determine the ultimate outcome of this matter. However, in the event the State of Massachusetts succeeds with enforcement of the assessments, we may be required to pay some or all of the assessments, which would reduce net income and could have a material adverse effect on net income in the reported period.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Kemper Insurance Companies
In 2003, facing continued capital constraints and a series of downgrades from various rating agencies, our former workers’ compensation insurance carrier for the two-year period ended September 2003, Lumbermens Mutual Casualty Company, formerly known as Kemper, (“Lumbermens Mutual”) made the decision to substantially cease underwriting operations and voluntarily entered into “run-off.” In July 2012, Lumbermens Mutual announced that an agreed order of rehabilitation had been entered against it in Cook County, Illinois. Under the order, the Director of the Illinois Department of Insurance was vested with control over Lumbermens Mutual property and decision-making. The Director has publicly announced that while claims will continue to be paid during the rehabilitation process, he intends to use the rehabilitation period to work with state guaranty associations to prepare for the orderly transition of claim handling responsibilities to such funds once an Order of Liquidation is entered. After this transition process has been completed, the Director has stated that he intends to file a verified complaint for liquidation.
Guaranty associations are non-profit organizations created by statute for the purpose of protecting policyholders from severe financial losses and preventing delays in claim payment due to the insolvency of an insurer. They do this by assuming responsibility for the payment of claims that would otherwise have been paid by the insurer had it not become insolvent. Each state has one or more guaranty association(s), with each association handling certain types of insurance. Insurance companies are required to be members of the state guaranty association as a condition of being licensed to do business in the state.
The guaranty associations in some states, including Texas, may assert that state law allows them to recover the amount of benefits paid by the guaranty association along with associated administration and defense costs from an insured with a net worth exceeding certain specified levels. If an Order of Liquidation is entered and if one or more guaranty associations were to seek recovery from us for open claims with Lumbermens Mutual, we may be required to repay those amounts. While we are not certain when or if Lumbermens Mutual will be placed into liquidation or whether any state guaranty association will ultimately assert a claim against us, we intend to vigorously assert any and all available defenses to any such claim. We estimate the outstanding claims that may be subject to such contentions from state guaranty associations to range from $2.9 million to $5.0 million as of December 31, 2012. In the event state guaranty associations attempt to seek recovery from us and are successful, we would be required to pay such claims, which would reduce net income and could have a material adverse effect on net income in the reported period.
Pennsylvania Sales Taxes
Pennsylvania imposes a sales tax on “help supply services.” The Pennsylvania Department of Revenue (“Department”) had maintained that PEO services constitute help supply services and are subject to the tax. On February 21, 2012, the Pennsylvania Supreme Court affirmed the Appeals Court decision in the matter titled All Staffing vs. Commonwealth of Pennsylvania, which ruled that PEO services are not subject to the Pennsylvania sales tax.
For the period January 1, 2010, through September 30, 2011, we accrued approximately $2.5 million in Pennsylvania sales tax. As we believed our PEO services were not subject to the sales tax, we reduced our accrual for such amounts in the fourth quarter of 2011.
In 2010, we filed refund claims totaling $2.9 million with the Department for the sales taxes paid in error for the period April 1, 2007 through December 31, 2009. In the second quarter of 2012, the Pennsylvania Board of Finance and Revenue approved our refund claims, and we recognized a $2.9 million receivable and a corresponding reduction to payroll tax expense, a component of direct costs. During the third quarter of 2012, we received the $2.9 million refund.
INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
California Unemployment Taxes
As a result of a 2001 corporate restructuring, we filed for a transfer of our state unemployment tax reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved our request for transfer of the reserve account in May 2002 and also notified us of our new contribution rates based upon the approved transfer. In December 2003, we received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the EDD. The Notice stated that the EDD was collapsing the accounts of our subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all of our California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, we filed petitions with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the validity of the Notice, asserting several procedural and substantive defenses.
One procedural defense included in our appeal asserts that the EDD failed to meet the statutory requirement related to serving a proper notice within the stipulated time frame and that all of the statutes of limitations concerning the EDD’s ability to reassess or modify unemployment tax rates for the periods addressed in the Notice had expired (“Notification Defense”). During 2010, a California Circuit Court issued a ruling in favor of the EDD regarding a dispute involving a taxpayer who made arguments similar to our Notification Defense. The Supreme Court of California subsequently denied the taxpayer’s petition for review. We subsequently received a statement of account from the EDD indicating taxes, penalties and interest due of approximately $8.1 million.
While still denying all liability, we entered into
a written agreement with the EDD
in September 2011
to fully and finally settle this dispute (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, we agreed to pay $3.1 million (the “Settlement Amount”) to the EDD. The Settlement Amount of $3.1 million was paid and recorded in other income (expense) during the year ended December 31, 2011.
14.
|
Quarterly Financial Data (Unaudited)
|
|
|
Quarter ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(in thousands, except per share amounts)
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
595,177
|
|
|
$
|
519,256
|
|
|
$
|
511,953
|
|
|
$
|
532,438
|
|
Gross profit
|
|
|
103,004
|
|
|
|
87,294
|
(1)
|
|
|
98,420
|
|
|
|
93,503
|
|
Operating income
|
|
|
23,046
|
|
|
|
9,415
|
|
|
|
19,140
|
|
|
|
15,893
|
(2)
|
Net income
|
|
|
13,884
|
|
|
|
5,621
|
|
|
|
11,452
|
|
|
|
9,445
|
|
Basic net income per share
|
|
|
0.54
|
|
|
|
0.22
|
|
|
|
0.45
|
|
|
|
0.34
|
(3)
|
Diluted net income per share
|
|
|
0.54
|
|
|
|
0.22
|
|
|
|
0.45
|
|
|
|
0.34
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
536,381
|
|
|
$
|
472,903
|
|
|
$
|
471,821
|
|
|
$
|
495,114
|
|
Gross profit
|
|
|
90,959
|
|
|
|
83,841
|
|
|
|
87,029
|
|
|
|
89,946
|
(4)
|
Operating income
|
|
|
15,129
|
|
|
|
11,400
|
|
|
|
14,094
|
|
|
|
16,691
|
|
Net income
|
|
|
8,786
|
|
|
|
6,741
|
|
|
|
4,099
|
(5)
|
|
|
10,844
|
|
Basic net income per share
|
|
|
0.33
|
|
|
|
0.25
|
|
|
|
0.16
|
|
|
|
0.42
|
|
Diluted net income per share
|
|
|
0.33
|
|
|
|
0.25
|
|
|
|
0.16
|
|
|
|
0.42
|
|
(1)
|
Included in the results for the second quarter of 2012 is a $2.9 million reduction to payroll tax expense related to a refund of Pennsylvania sales taxes. Please read Note 13, “Commitments and Contingencies,” for additional information.
|
(2)
|
Included in the results for the fourth quarter of 2012 is a $4.2 million impairment charge, related to our Performance Management reporting unit. Please read Note 5, “Goodwill and Other Intangible Assets,” for additional information.
|
(3)
|
Under the two-class earnings per share method, undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. This resulted in a $0.03 earnings per share decrease in the fourth quarter of 2012. Please read Note 11, “Net Income Per Share,” for additional information.
|
(4)
|
Included in the results for the fourth quarter of 2011 is a $2.5 million adjustment related to the reversal of Pennsylvania sales taxes accrued in prior periods. Please read Note 13, “Commitments and Contingencies,” for additional information.
|
(5)
|
Included in the results for the third quarter of 2011 is a $4.4 million loss related to the exchange of an aircraft and a $3.1 million loss related to a settlement with the State of California. Please read Note 13, “Commitments and Contingencies,” for additional information on the settlement with the State of California.
|
F-30