Document - 06.30.2013 - 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the quarterly period ended June 30, 2013.
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 
For the transition period from  _______________ to _______________


Commission File No. 1-13998
 
Insperity, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
76-0479645
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
19001 Crescent Springs Drive
 
 
Kingwood, Texas
 
77339
(Address of principal executive offices)
 
(Zip Code)

(Registrant’s Telephone Number, Including Area Code):  (281) 358-8986

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No ý
 
As of July 25, 2013, 25,611,985 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.



 
TABLE OF CONTENTS
 
 
 
 
 
Part I
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 1a.
 
 
 
Item 2.
 
 
 
Item 6.


Table of Contents

PART I

ITEM 1.  FINANCIAL STATEMENTS

INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS
 
 
 
June 30,
2013
 
December 31, 2012
 
 
(Unaudited)
 
 
 
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
178,493

 
$
264,544

Restricted cash
 
47,467

 
47,149

Marketable securities
 
52,686

 
16,904

Accounts receivable, net:
 
 

 
 

Trade
 
2,743

 
6,931

Unbilled
 
194,985

 
181,040

Other
 
2,676

 
2,415

Prepaid insurance
 
17,742

 
15,620

Other current assets
 
9,384

 
9,651

Deferred income taxes
 
4,125

 
7,211

Total current assets
 
510,301

 
551,465

 
 
 
 
 
Property and equipment:
 
 

 
 

Land
 
4,115

 
4,115

Buildings and improvements
 
68,695

 
68,583

Computer hardware and software
 
84,102

 
81,140

Software development costs
 
37,184

 
35,866

Furniture and fixtures
 
36,828

 
36,717

Aircraft
 
35,879

 
35,879

 
 
266,803

 
262,300

Accumulated depreciation and amortization
 
(175,593
)
 
(168,358
)
Total property and equipment, net
 
91,210

 
93,942

 
 
 
 
 
Other assets:
 
 

 
 

Prepaid health insurance
 
9,000

 
9,000

Deposits – health insurance
 
3,000

 
3,000

Deposits – workers’ compensation
 
69,947

 
64,201

Goodwill and other intangible assets, net
 
22,775

 
23,775

Other assets
 
2,085

 
4,817

Total other assets
 
106,807

 
104,793

Total assets
 
$
708,318

 
$
750,200


- 3 -

Table of Contents

INSPERITY, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
June 30,
2013
 
December 31,
2012
 
 
(Unaudited)
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
2,605

 
$
3,660

Payroll taxes and other payroll deductions payable
 
129,682

 
178,534

Accrued worksite employee payroll cost
 
172,229

 
150,070

Accrued health insurance costs
 
5,274

 
13,942

Accrued workers’ compensation costs
 
50,281

 
49,484

Accrued corporate payroll and commissions
 
17,265

 
23,537

Other accrued liabilities
 
14,415

 
12,478

Income taxes payable
 
39

 
4,054

Total current liabilities
 
391,790

 
435,759

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 

Accrued workers’ compensation costs
 
66,868

 
64,536

Deferred income taxes
 
8,183

 
9,000

Total noncurrent liabilities
 
75,051

 
73,536

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock
 
308

 
308

Additional paid-in capital
 
134,349

 
133,207

Treasury stock, at cost
 
(142,468
)
 
(133,950
)
Accumulated other comprehensive income (loss), net of tax
 
(3
)
 
16

Retained earnings
 
249,291

 
241,324

Total stockholders’ equity
 
241,477

 
240,905

Total liabilities and stockholders’ equity
 
$
708,318

 
$
750,200

 
See accompanying notes.

- 4 -

Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Revenues (gross billings of $3.167 billion, $3.039 billion, $6.499 billion and $6.271 billion, less worksite employee payroll cost of $2.620 billion, $2.520 billion, $5.340 billion and $5.156 billion, respectively)
 
$
547,274

 
$
519,256

 
$
1,159,110

 
$
1,114,433

 
 
 
 
 
 
 
 
 
Direct costs:
 
 

 
 

 
 

 
 

Payroll taxes, benefits and workers’ compensation costs
 
449,528

 
431,962

 
953,246

 
924,135

 
 
 
 
 
 
 
 
 
Gross profit
 
97,746

 
87,294

 
205,864

 
190,298

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Salaries, wages and payroll taxes
 
45,689

 
40,047

 
93,900

 
83,370

Stock-based compensation
 
3,292

 
2,801

 
5,602

 
4,956

Commissions
 
3,533

 
3,506

 
6,740

 
6,941

Advertising
 
9,720

 
8,566

 
14,970

 
13,321

General and administrative expenses
 
20,039

 
18,494

 
42,025

 
40,572

Depreciation and amortization
 
5,245

 
4,465

 
10,390

 
8,677

 
 
87,518

 
77,879

 
173,627

 
157,837

Operating income
 
10,228

 
9,415

 
32,237

 
32,461

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 

 
 

Interest, net
 
60

 
156

 
129

 
320

Other, net
 
(2,676
)
 
20

 
(2,667
)
 
144

Income before income tax expense
 
7,612

 
9,591

 
29,699

 
32,925

Income tax expense
 
4,124

 
3,970

 
13,038

 
13,420

Net income
 
$
3,488

 
$
5,621

 
$
16,661

 
$
19,505

 
 
 
 
 
 
 
 
 
Less distributed and undistributed earnings allocated to participating securities
 
(124
)
 
(162
)
 
(481
)
 
(564
)
 
 
 
 
 
 
 
 
 
Net income allocated to common shares
 
$
3,364

 
$
5,459

 
$
16,180

 
$
18,941

 
 
 
 
 
 
 
 
 
Basic net income per share of common stock
 
$
0.14

 
$
0.22

 
$
0.65

 
$
0.75

 
 
 
 
 
 
 
 
 
Diluted net income per share of common stock
 
$
0.14

 
$
0.22

 
$
0.65

 
$
0.75


See accompanying notes.

- 5 -

Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net income
 
$
3,488

 
$
5,621

 
$
16,661

 
$
19,505

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 

 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
 
(35
)
 
(1
)
 
(19
)
 
34

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
3,453

 
$
5,620

 
$
16,642

 
$
19,539

 
See accompanying notes.

- 6 -

Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2013
(in thousands)
(Unaudited)
 
 
 
Common Stock Issued
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
30,758

 
$
308

 
$
133,207

 
$
(133,950
)
 
$
16

 
$
241,324

 
$
240,905

Purchase of treasury stock, at cost
 

 

 

 
(15,122
)
 

 

 
(15,122
)
Exercise of stock options
 

 

 
(494
)
 
1,352

 

 

 
858

Income tax benefit from stock-based compensation, net
 

 

 
709

 

 

 

 
709

Stock-based compensation expense
 

 

 
877

 
4,725

 

 

 
5,602

Other
 

 

 
50

 
527

 

 

 
577

Dividends paid
 

 

 

 

 

 
(8,694
)
 
(8,694
)
Unrealized loss on marketable securities, net of tax
 

 

 

 

 
(19
)
 

 
(19
)
Net income
 

 

 

 

 

 
16,661

 
16,661

Balance at June 30, 2013
 
30,758

 
$
308

 
$
134,349

 
$
(142,468
)
 
$
(3
)
 
$
249,291

 
$
241,477

 
See accompanying notes.

- 7 -

Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income
 
$
16,661

 
$
19,505

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
10,377

 
8,652

Impairment charge
 
2,679

 

Amortization of marketable securities
 
1,029

 
1,279

Stock-based compensation
 
5,602

 
4,956

Deferred income taxes
 
2,281

 
1,001

Changes in operating assets and liabilities:
 
 

 
 

Restricted cash
 
(318
)
 
157

Accounts receivable
 
(10,018
)
 
(5,495
)
Prepaid insurance
 
(2,122
)
 
3,148

Other current assets
 
267

 
3,355

Other assets
 
(5,698
)
 
(4,991
)
Accounts payable
 
(1,055
)
 
(2,212
)
Payroll taxes and other payroll deductions payable
 
(48,852
)
 
(46,062
)
Accrued worksite employee payroll expense
 
22,159

 
14,568

Accrued health insurance costs
 
(8,668
)
 
441

Accrued workers’ compensation costs
 
797

 
2,382

Accrued corporate payroll, commissions and other accrued liabilities
 
(2,003
)
 
(7,515
)
Income taxes payable/receivable
 
(4,259
)
 
4,090

Total adjustments
 
(37,802
)
 
(22,246
)
Net cash used in operating activities
 
(21,141
)
 
(2,741
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Marketable securities:
 
 

 
 

Purchases
 
(45,642
)
 
(14,818
)
Proceeds from dispositions
 
4,564

 
13,401

Proceeds from maturities
 
4,236

 

Cash exchanged for acquisitions
 

 
(1,200
)
Property and equipment
 
(6,640
)
 
(8,331
)
Net cash used in investing activities
 
(43,482
)
 
(10,948
)

- 8 -

Table of Contents

INSPERITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)

 
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Purchase of treasury stock
 
$
(15,122
)
 
$
(11,741
)
Dividends paid
 
(8,694
)
 
(8,285
)
Proceeds from the exercise of stock options
 
858

 
1,044

Income tax benefit from stock-based compensation
 
953

 
1,434

Other
 
577

 
619

Net cash used in financing activities
 
(21,428
)
 
(16,929
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(86,051
)
 
(30,618
)
Cash and cash equivalents at beginning of period
 
264,544

 
211,208

Cash and cash equivalents at end of period
 
$
178,493

 
$
180,590

 


See accompanying notes.

- 9 -

Table of Contents

INSPERITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)


1.
Basis of Presentation

Insperity, Inc., a Delaware corporation (“Insperity,” “we,” “our,” and “us”), provides an array of human resources (“HR”) and business solutions designed to help improve business performance.  Our most comprehensive HR business offering is provided through our professional employer organization (“PEO”) services, known as Workforce Optimization, which encompasses a broad range of HR functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services.

In addition to Workforce Optimization, we offer Human Capital Management, Payroll Services, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Financial Services, Expense Management, Retirement Services and Insurance Services (collectively “Adjacent Businesses”), many of which are offered via desktop applications and software as a service (“SaaS”) delivery models.  These other products or services are offered separately, as a bundle, or along with Workforce Optimization.

We provide our Workforce Optimization solution to small and medium-sized businesses in strategically selected markets throughout the United States.  For the six months ended June 30, 2013 and 2012, Workforce Optimization revenues from our Texas markets represented 25% and 26%, respectively, while Workforce Optimization revenues from our California markets represented 18% and 17%, respectively, of our total Workforce Optimization revenues.

The Consolidated Financial Statements include the accounts of Insperity and its subsidiaries, all of which are wholly owned.  Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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.

The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements as of and for the year ended December 31, 2012. Our Consolidated Balance Sheet at December 31, 2012 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by GAAP for complete financial statements.  Our Consolidated Balance Sheet at June 30, 2013 and our Consolidated Statements of Operations and Comprehensive Income for the three and six month periods ended June 30, 2013 and 2012, our Consolidated Statements of Cash Flows for the six month periods ended June 30, 2013 and 2012, and our Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2013, have been prepared by us without audit.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made.

The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations.

2.
Accounting Policies

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 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

- 10 -

Table of Contents

based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees.  Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter.  If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Consolidated Balance Sheets.  On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Consolidated Balance Sheets.  The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $9.0 million, which is reported as long-term prepaid insurance.  In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $2.8 million as of June 30, 2013, and is reported as a long-term asset.  As of June 30, 2013, Plan Costs were less than the net premiums paid and owed to United by $14.9 million.  As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $5.9 million balance is included in prepaid insurance, a current asset, in our Consolidated Balance Sheets.  The premiums owed to United at June 30, 2013 were $1.9 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets.

Workers’ Compensation Costs

Our workers’ compensation coverage has been provided through an arrangement with the ACE Group of Companies (“the ACE Program”) since 2007.  The ACE Program is fully insured in that ACE has the responsibility to pay all claims incurred regardless of whether we satisfy our responsibilities.  Through September 30, 2010, we bore the economic burden for the first $1 million layer of claims per occurrence and the insurance carrier was and remains responsible for the economic burden for all claims in excess of such first $1 million layer.

Effective October 1, 2010, in addition to our 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 six months ended June 30, 2013 and 2012, we reduced our workers’ compensation costs by $6.5 million and $6.7 million, respectively, for changes in estimated losses related to prior reporting periods.  Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S.  Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rates utilized in 2013 and 2012 were 0.5% and 0.8%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.


- 11 -

Table of Contents

The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:


 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
 
(in thousands)
 
 
 
 
 
Beginning balance, January 1,
 
$
111,685

 
$
104,791

Accrued claims
 
19,194

 
19,164

Present value discount
 
(345
)
 
(532
)
Paid claims
 
(16,199
)
 
(15,179
)
Ending balance
 
$
114,335

 
$
108,244

 
 
 
 
 
Current portion of accrued claims
 
$
47,467

 
$
44,580

Long-term portion of accrued claims
 
66,868

 
63,664

 
 
$
114,335

 
$
108,244


The current portion of accrued workers’ compensation costs on the Consolidated Balance Sheets at June 30, 2013 includes $2.8 million of workers’ compensation administrative fees.

As of June 30, 2013 and 2012, the undiscounted accrued workers’ compensation costs were $125.1 million and $120.9 million, respectively.

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 the first half of 2012, we received $2.5 million for the return of excess claim funds related to the ACE Program, which reduced deposits. As of June 30, 2013, we had restricted cash of $47.5 million and deposits of $69.9 million.

Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers’ compensation costs and included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on our Consolidated Balance Sheets.


- 12 -

Table of Contents

3.
Cash, Cash Equivalents and Marketable Securities

The following table summarizes our cash and investments in cash equivalents and marketable securities held by investment managers and overnight investments:

 
 
June 30,
2013
 
December 31,
2012
 
 
(in thousands)
Overnight Holdings
 
 
 
 
Money market funds (cash equivalents)
 
$
135,260

 
$
255,000

Investment Holdings
 
 

 
 

Money market funds (cash equivalents)
 
37,233

 
26,087

Marketable securities
 
52,686

 
16,904

 
 
225,179

 
297,991

Cash held in demand accounts
 
18,313

 
21,732

Outstanding checks
 
(12,313
)
 
(38,275
)
Total cash, cash equivalents and marketable securities
 
$
231,179

 
$
281,448

 
 
 
 
 
Cash and cash equivalents
 
$
178,493

 
$
264,544

Marketable securities
 
52,686

 
16,904

 
 
$
231,179

 
$
281,448


Our cash and overnight holdings fluctuate based on the timing of clients' payroll processing cycles.  Included in the cash balance as of June 30, 2013 and December 31, 2012, are $117.3 million and $158.2 million, respectively, in funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $14.8 million and $13.5 million in client prepayments, respectively.

We account for our financial assets in accordance with Accounting Standard Codification (“ASC”) 820, Fair Value Measurement.  This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The fair value measurement disclosures are grouped into three levels based on valuation factors:

Level 1 - quoted prices in active markets using identical assets
Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs
Level 3 - significant unobservable inputs

The following table summarizes the levels of fair value measurements of our financial assets:

 
 
Fair Value Measurements
 
 
(in thousands)
 
 
June 30,
2013
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Money market funds
 
$
172,493

 
$
172,493

 
$

 
$

Municipal bonds
 
52,686

 

 
52,686

 

Total
 
$
225,179

 
$
172,493

 
$
52,686

 
$

 

- 13 -

Table of Contents

 
 
Fair Value Measurements
 
 
(in thousands)
 
 
December 31,
2012
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
Money market funds
 
$
281,087

 
$
281,087

 
$

 
$

Municipal bonds
 
16,904

 

 
16,904

 

Total
 
$
297,991

 
$
281,087

 
$
16,904

 
$


The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. Government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.

The following is a summary of our available-for-sale marketable securities:

 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
 
 
(in thousands)
 
 
June 30, 2013
 
 
 
 
 
 
 
 
Municipal bonds
 
$
52,691

 
$
33

 
$
(38
)
 
$
52,686

 
 
 
 
 
 
 
 
 
December 31, 2012
 
 

 
 

 
 

 
 

Municipal bonds
 
$
16,878

 
$
29

 
$
(3
)
 
$
16,904


During the periods ended June 30, 2013 and 2012, we had no realized gains or losses recognized on sales of marketable securities.

As of June 30, 2013, the contractual maturities of our marketable securities were as follows:

 
 
Amortized
Cost
 
Estimated
Fair Value
 
 
(in thousands)
 
 
 
 
 
Less than one year
 
$
28,920

 
$
28,939

One to five years
 
23,771

 
23,747

Total
 
$
52,691

 
$
52,686


4.
Other Assets
    
In 2011, we acquired a minority interest in The Receivables Exchange ("TRE"), an online marketplace for the sale of accounts receivable for $2.8 million. TRE recently issued similar securities at per share amounts substantially below the per share book value of our investment. Accordingly, we valued the investment based on a similar security market transaction, which is a Level 2 valuation technique. This resulted in a non-cash impairment charge of $2.7 million, which is included in other income (expense) in our Consolidated Statements of Operations, during the second quarter of 2013. Due to federal income tax limitations on capital losses, no tax benefit associated with the impairment was recognized.



    


- 14 -

Table of Contents

5.
Revolving Credit Facility

We have a $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 matures on September 15, 2015.  The Facility contains both affirmative and negative covenants, which we believe are customary for arrangements of this nature.  At June 30, 2013, we were in compliance with all financial covenants under the Credit Agreement and had not drawn on the Facility.

6.
Stockholders' Equity

Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”).  The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors.  In May 2013, the Board increased the authorized number of shares to be repurchased under the program by one million.  During the six months ended June 30, 2013, 415,627 shares were repurchased under the Repurchase Program and 116,747 shares not subject to the Repurchase Program were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards.  As of June 30, 2013, we were authorized to repurchase an additional 1,413,845 shares under the program.

The Board declared quarterly dividends of $0.17 per share of common stock in the first and second quarters of 2013 and quarterly dividends of $0.15 and $0.17 per share of common stock in the first and second quarters of 2012, respectively, resulting in a total of $8.7 million and $8.3 million, respectively, in dividends paid during the first six months of each year.

7.
Net Income per Share

We utilize the two-class method to compute net income per share.  The two-class method allocates a portion of net income to participating securities, which include unvested awards of share-based payments with non-forfeitable rights to receive dividends.  Net income allocated to unvested share-based payments is excluded from net income allocated to common shares.  Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities.  Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.

The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations:

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Net income
 
$
3,488

 
$
5,621

 
$
16,661

 
$
19,505

Less distributed and undistributed earnings allocated to participating securities
 
(124
)
 
(162
)
 
(481
)
 
(564
)
Net income allocated to common shares
 
$
3,364

 
$
5,459

 
$
16,180

 
$
18,941

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
24,820

 
25,095

 
24,858

 
25,091

Incremental shares from assumed conversions of common stock options
 
24

 
60

 
27

 
66

Adjusted weighted average common shares outstanding
 
24,844

 
25,155

 
24,885

 
25,157

 
 
 
 
 
 
 
 
 
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect
 
16

 
42

 
16

 
29



- 15 -

Table of Contents

8.
Commitments and Contingencies

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, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.

Lumbermens Mutual Casualty Company

In 2003, facing continued capital constraints and a series of downgrades from various rating agencies, our former workers’ compensation insurance carrier for the two-year period ended September 2003, Lumbermens Mutual Casualty Company, formerly known as Kemper, (“Lumbermens Mutual”) made the decision to substantially cease underwriting operations and voluntarily entered into “run-off."  In July 2012, Lumbermens Mutual announced that an agreed order of rehabilitation had been entered against it in Cook County, Illinois.  Under the order, the Director of the Illinois Department of Insurance was vested with control over Lumbermens Mutual property and decision-making.  In an order effective May 10, 2013, the Circuit Court of Cook County, Illinois, found that Lumbermens was insolvent and ordered its liquidation.

The entry of a liquidation order has triggered the transition of claim handling responsibilities for Lumbermens Mutual's open claims to state guaranty associations around the country. Guaranty associations are non-profit organizations created by statute for the purpose of protecting policyholders from severe financial losses and preventing delays in claim payments due to the insolvency of an insurer.  They do this by assuming responsibility for the payment of claims that would otherwise have been paid by the insurer had it not become insolvent.  Each state has one or more guaranty association(s), with each association handling certain types of insurance.  Insurance companies are required to be members of the state guaranty association as a condition of being licensed to do business in the state.

The guaranty associations in some states, including Texas, may assert that state law allows them to recover the amount of benefits paid by the guaranty association along with associated administration and defense costs from an insured with a net worth exceeding certain specified levels.  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 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 $1.1 million to $5.0 million as of June 30, 2013.  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.

- 16 -

Table of Contents

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012, as well as our Consolidated Financial Statements and notes thereto included in this quarterly report on Form 10-Q.

New Accounting Pronouncements

We believe we have implemented the accounting pronouncements with a material impact on our financial statements.

Results of Operations

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012.

The following table presents certain information related to our results of operations:

 
 
Three Months Ended 
 June 30,
 
 
2013
 
2012
 
% Change
 
 
(in thousands, except per share and statistical data)
Revenues (gross billings of $3.167 billion and $3.039 billion, less worksite employee payroll cost of $2.620 billion and $2.520 billion, respectively)
 
$
547,274

 
$
519,256

 
5.4
 %
Gross profit
 
97,746

 
87,294

 
12.0
 %
Operating expenses
 
87,518

 
77,879

 
12.4
 %
Operating income
 
10,228

 
9,415

 
8.6
 %
Other income (expense)
 
(2,616
)
 
176

 

Net income
 
3,488

 
5,621

 
(37.9
)%
Diluted net income per share of common stock
 
0.14

 
0.22

 
(36.4
)%
 
 
 
 
 
 
 
Statistical Data:
 
 

 
 

 
 

Average number of worksite employees paid per month
 
126,696

 
124,219

 
2.0
 %
Revenues per worksite employee per month(1)
 
$
1,440

 
$
1,393

 
3.4
 %
Gross profit per worksite employee per month
 
257

 
234

 
9.8
 %
Operating expenses per worksite employee per month
 
230

 
209

 
10.0
 %
Operating income per worksite employee per month
 
27

 
25

 
8.0
 %
Net income per worksite employee per month
 
9

 
15

 
(40.0
)%
 ____________________________________
 
(1) 
Gross billings of $8,332 and $8,156 per worksite employee per month, less payroll cost of $6,892 and $6,763 per worksite employee per month, respectively.

Revenues

Our revenues for the second quarter of 2013 increased 5.4% over the 2012 period, primarily due to a 2.0% increase in the average number of worksite employees paid per month and a 3.4%, or $47 increase in revenues per worksite employee per month.


- 17 -

Table of Contents

By region, our Workforce Optimization revenue change from the second quarter of 2012 and distribution for the quarters ended June 30, 2013 and 2012 were as follows:

 
 
Three Months Ended 
 June 30,
 
Three Months Ended 
 June 30,
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
 
(in thousands)
 
(% of total revenue)
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
141,054

 
$
134,571

 
4.8
%
 
26.2
%
 
26.3
%
Southeast
 
51,435

 
47,534

 
8.2
%
 
9.6
%
 
9.3
%
Central
 
78,941

 
74,295

 
6.3
%
 
14.7
%
 
14.5
%
Southwest
 
148,042

 
142,968

 
3.5
%
 
27.5
%
 
28.0
%
West
 
119,082

 
111,672

 
6.6
%
 
22.0
%
 
21.9
%
 
 
538,554

 
511,040

 
5.4
%
 
100.0
%
 
100.0
%
Other revenue(1)
 
8,720

 
8,216

 
6.1
%
 
 
 
 
Total revenue
 
$
547,274

 
$
519,256

 
5.4
%
 
 
 
 
_____________________________

(1) Comprised primarily of revenues generated by Adjacent Businesses.

Our Workforce Optimization growth rate is affected by three primary sources – worksite employees paid from new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs.  During the second quarter of 2013, the net change in existing clients and worksite employees paid from new client sales was consistent with 2012, while retention improved over the second quarter of 2012.

Gross Profit

Gross profit for the second quarter of 2013 increased 12.0% over the second quarter of 2012 to $97.7 million.  The average gross profit per worksite employee increased 9.8% to $257 per month in the 2013 period from $234 per month in the 2012 period.  Included in gross profit in 2013 is a $14 per worksite employee per month contribution from our Adjacent Businesses compared to $12 per worksite employee per month in the 2012 period.

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.  Our revenues increased 3.4% per worksite employee per month and our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 2.1% to $1,183 per worksite employee per month in the second quarter of 2013 versus $1,159 in the second quarter of 2012.  The primary direct cost components changed as follows:

Benefits costs – The cost of group health insurance and related employee benefits increased $5 per worksite employee per month, or 1.0% on a cost per covered employee basis compared to the second quarter of 2012.  Included in 2013 benefits costs is a reduction of $3.4 million, or $9 per worksite employee per month, for lower than expected claim costs and premium taxes related to prior periods. The 2012 benefits costs included $2.4 million, or $6 per worksite employee per month, in claim costs for higher than expected run-off of claims incurred in prior periods. The percentage of worksite employees covered under our health insurance plans was 72.1% in the 2013 period compared to 72.2% in the 2012 period. Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies– Health Insurance Costs,” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs – Workers’ compensation costs increased 9.3%, or $2 per worksite employee per month compared to the second quarter of 2012.  As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.55% in the 2013 period compared to 0.53% in the 2012 period. During the 2013 period, we recorded reductions in workers’ compensation costs of $3.0 million, or 0.12% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $3.4 million, or 0.15% of non-bonus payroll costs in the 2012 period.  Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.


- 18 -

Table of Contents

Payroll tax costs – Payroll taxes increased 5.6%, or $17 per worksite employee per month compared to the second quarter of 2012 primarily due to the 4.0% increase in payroll costs and a $2.9 million, or $8 per worksite employee per month, credit recognized in 2012 related to a Pennsylvania tax matter. Payroll taxes as a percentage of payroll cost were 7.1% in the 2013 period compared to 7.0% in the 2012 period.

Operating Expenses

The following table presents certain information related to our operating expenses:

 
 
Three Months Ended 
 June 30,
 
Three Months Ended 
 June 30,
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
 
 
(in thousands)
 
(per worksite employee per month)
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and payroll taxes
 
$
45,689

 
$
40,047

 
14.1
%
 
$
120

 
$
107

 
12.1
%
Stock-based compensation
 
3,292

 
2,801

 
17.5
%
 
9

 
8

 
12.5
%
Commissions
 
3,533

 
3,506

 
0.8
%
 
9

 
9

 

Advertising
 
9,720

 
8,566

 
13.5
%
 
25

 
23

 
8.7
%
General and administrative expenses
 
20,039

 
18,494

 
8.4
%
 
53

 
50

 
6.0
%
Depreciation and amortization
 
5,245

 
4,465

 
17.5
%
 
14

 
12

 
16.7
%
Total operating expenses
 
$
87,518

 
$
77,879

 
12.4
%
 
$
230

 
$
209

 
10.0
%

Operating expenses increased 12.4% to $87.5 million compared to $77.9 million in the second quarter of 2012.  Operating expenses per worksite employee per month increased to $230 in the 2013 period from $209 in the 2012 period.  The components of operating expenses changed as follows:

Salaries, wages and payroll taxes of corporate and sales staff increased 14.1% or $13 per worksite employee per month compared to the 2012 period.  This increase was due to a 6.0% rise in headcount and higher incentive compensation accruals resulting from improved operating results.

Stock-based compensation increased 17.5%, or $1 per worksite employee per month compared to the 2012 period, due primarily to an increase in the weighted average market value on the date of grant associated with restricted stock awards.  Stock-based compensation expense represents amortization of restricted stock awards granted to employees.

Commissions expense increased 0.8%, but remained flat on a per worksite employee per month basis compared to the 2012 period.

Advertising costs increased 13.5%, or $2 per worksite employee per month compared to the 2012 period, primarily due to increased spending on health care reform related advertising and business promotions.

General and administrative expenses increased 8.4%, or $3 per worksite employee per month compared to the 2012 period, primarily due to increased travel and training, rent and repairs and maintenance, partially offset by reductions in professional services.

Depreciation and amortization expense increased 17.5%, or $2 per worksite employee per month compared to the 2012 period, primarily due to investments in our technology infrastructure and amortization associated with our Adjacent Business investments.

Other Income (Expense)

Other expense increased $2.8 million in the second quarter of 2013 compared to the second quarter of 2012, primarily due to a non-cash impairment charge related to our minority investment in The Receivables Exchange. Please read Note 4 to the Consolidated Financial Statements, "Other Assets," for additional information.


- 19 -

Table of Contents

Income Tax Expense

Our effective income tax rate was 54.2% in the 2013 period compared to 41.4% in the 2012 period.  Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses, including the 2013 non-cash impairment charge related to our minority investment in The Receivables Exchange. Due to federal income tax limitations on capital losses, no tax benefit associated with the impairment was recognized. Please read Note 4 to the Consolidated Financial Statements, "Other Assets," for additional information.

Operating and Net Income

Operating and net income per worksite employee per month was $27 and $9 in the 2013 period, versus $25 and $15 in the 2012 period.

    
Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012.

The following table presents certain information related to our results of operations:
 
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
% Change
 
 
(in thousands, except per share and statistical data)
Revenues (gross billings of $6.499 billion and $6.271 billion, less worksite employee payroll cost of $5.340 billion and $5.156 billion, respectively)
 
$
1,159,110

 
$
1,114,433

 
4.0
 %
Gross profit
 
205,864

 
190,298

 
8.2
 %
Operating expenses
 
173,627

 
157,837

 
10.0
 %
Operating income
 
32,237

 
32,461

 
(0.7
)%
Other income (expense)
 
(2,538
)
 
464

 

Net income
 
16,661

 
19,505

 
(14.6
)%
Diluted net income per share of common stock
 
0.65

 
0.75

 
(13.3
)%
 
 
 
 
 
 
 
Statistical Data:
 
 

 
 

 
 

Average number of worksite employees paid per month
 
125,044

 
123,079

 
1.6
 %
Revenues per worksite employee per month(1)
 
$
1,545

 
$
1,509

 
2.4
 %
Gross profit per worksite employee per month
 
274

 
258

 
6.2
 %
Operating expenses per worksite employee per month
 
231

 
214

 
7.9
 %
Operating income per worksite employee per month
 
43

 
44

 
(2.3
)%
Net income per worksite employee per month
 
22

 
26

 
(15.4
)%
 ____________________________________
 
(1)
Gross billings of $8,663 and $8,491 per worksite employee per month, less payroll cost of $7,118 and $6,982 per worksite employee per month, respectively.

Revenues

Our revenues for the six months ended June 30, 2013 increased 4.0% over the 2012 period, primarily due to a 1.6% increase in the average number of worksite employees paid per month and a 2.4%, or $36 increased in revenues per worksite employee per month.


- 20 -

Table of Contents

By region, our Workforce Optimization revenue change from the first six months of 2012 and distribution for the six months ended June 30, 2013 and 2012 were as follows:
 
 
Six Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
 
(in thousands)
 
(% of total revenue)
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
303,344

 
$
293,536

 
3.3
%
 
26.6
%
 
26.7
%
Southeast
 
107,121

 
100,882

 
6.2
%
 
9.4
%
 
9.2
%
Central
 
168,691

 
161,589

 
4.4
%
 
14.8
%
 
14.7
%
Southwest
 
312,102

 
306,774

 
1.7
%
 
27.3
%
 
27.9
%
West
 
250,771

 
236,278

 
6.1
%
 
21.9
%
 
21.5
%
 
 
1,142,029

 
1,099,059

 
3.9
%
 
100.0
%
 
100.0
%
Other revenue(1)
 
17,081

 
15,374

 
11.1
%
 
 
 
 
Total revenue
 
$
1,159,110

 
$
1,114,433

 
4.0
%
 
 
 
 
______________________________

(1) Comprised primarily of revenues generated by Adjacent Businesses.

Our Workforce Optimization growth rate is affected by three primary sources – worksite employees paid from new client sales, client retention and the net change in existing clients through worksite employee new hires and layoffs.  During the first six months of 2013, the net change in existing clients and client retention declined compared to the 2012 period, while worksite employees paid from new client sales improved over the first six months of 2012.

Gross Profit

Gross profit for the first six months of 2013 increased 8.2% over the first six months of 2012 to $205.9 million.  The average gross profit per worksite employee increased 6.2% to $274 per month in the 2013 period from $258 per month in the 2012 period.  Included in gross profit in 2013 is a $14 per worksite employee per month contribution from our Adjacent Businesses compared to $11 per worksite employee per month in the 2012 period.

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.  Our revenues increased 2.4% per worksite employee per month and our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 1.6% to $1,271 per worksite employee per month compared to $1,251 in the first six months of 2012.  The primary direct cost components changed as follows:

Benefits costs – The cost of group health insurance and related employee benefits increased $12 per worksite employee per month, or 2.3% on a cost per covered employee basis compared to the first six months of 2012.  Included in 2013 benefits costs is a reduction of $3.4 million, or $5 per worksite employee per month, for lower than expected claim costs and premium taxes related to prior periods. The 2012 benefits costs included $2.4 million, or $3 per worksite employee per month in claim costs for higher than expected run-off of claims incurred in prior periods. The percentage of worksite employees covered under our health insurance plans was 72.3% in the 2013 period compared to 72.5% in the 2012 period.  Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Health Insurance Costs,” for a discussion of our accounting for health insurance costs.

Workers’ compensation costs – Workers’ compensation costs increased 4.0%, or $1 per worksite employee per month compared to the first six months of 2012.  As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.54% in the 2013 period compared to 0.55% in the 2012 period.  During the 2013 period, we recorded reductions in workers’ compensation costs of $6.5 million, or 0.14% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $6.7 million, or 0.15% of non-bonus payroll costs in the 2012 period.  Please read Note 2 to the Consolidated Financial Statements, “Accounting Policies – Workers’ Compensation Costs,” for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs – Payroll taxes increased 2.7%, or $6 per worksite employee per month compared to the first six months of 2012, primarily due to the 3.6% increase in payroll costs and a $2.9 million, or $4 per worksite employee per

- 21 -

Table of Contents

month credit recognized in 2012 related to a Pennsylvania tax matter. Payroll taxes as a percentage of payroll cost were 8.3% in both the 2013 and 2012 periods.  

Operating Expenses

The following table presents certain information related to our operating expenses:

 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
 
 
(in thousands)
 
(per worksite employee per month)
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and payroll taxes
 
$
93,900

 
$
83,370

 
12.6
 %
 
$
125

 
$
113

 
10.6
%
Stock-based compensation
 
5,602

 
4,956

 
13.0
 %
 
7

 
7

 

Commissions
 
6,740

 
6,941

 
(2.9
)%
 
9

 
9

 

Advertising
 
14,970

 
13,321

 
12.4
 %
 
20

 
18

 
11.1
%
General and administrative expenses
 
42,025

 
40,572

 
3.6
 %
 
56

 
55

 
1.8
%
Depreciation and amortization
 
10,390

 
8,677

 
19.7
 %
 
14

 
12

 
16.7
%
Total operating expenses
 
$
173,627

 
$
157,837

 
10.0
 %
 
$
231

 
$
214

 
7.9
%

Operating expenses increased 10.0% to $173.6 million compared to $157.8 million in the first six months of 2012.  Operating expenses per worksite employee per month increased to $231 in the 2013 period from $214 in the 2012 period.  The components of operating expenses changed as follows:

Salaries, wages and payroll taxes of corporate and sales staff increased 12.6%, or $12 per worksite employee per month compared to the 2012 period.  This increase was due to a 5.5% rise in headcount and higher incentive compensation accruals resulting from improved operating results.

Stock-based compensation increased 13.0%, but remained flat on a per worksite employee per month basis compared to the 2012 period, due primarily to an increase in the weighted average market value on the date of grant associated with restricted stock awards.  Stock-based compensation expense represents amortization of restricted stock awards granted to employees.

Commissions expense decreased 2.9%, but remained flat on a per worksite employee per month basis compared to the 2012 period.

Advertising costs increased 12.4%, or $2 per worksite employee per month compared to the 2012 period, primarily due to increased spending on health care reform related advertising and business promotions.

General and administrative expenses increased 3.6%, or $1 per worksite employee per month compared to the 2012 period, primarily due to increased travel and training and repairs and maintenance, partially offset by reductions in professional services.

Depreciation and amortization expense increased 19.7%, or $2 per worksite employee per month compared to the 2012 period, primarily due to investments in our technology infrastructure and amortization associated with our Adjacent Business investments.

Other Income (Expense)

Other expense increased $3.0 million in the first six months of 2013 compared to the first six months of 2012, primarily due to a non-cash impairment charge related to our minority investment in The Receivables Exchange. Please read Note 4 to the Consolidated Financial Statements, "Other Assets," for additional information.

- 22 -

Table of Contents

Income Tax Expense

Our effective income tax rate was 43.9% in the 2013 period compared to 40.8% in the 2012 period.  Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses, including the 2013 non-cash impairment charge related to our minority investment in The Receivables Exchange. Please read Note 4 to the Consolidated Financial Statements, "Other Assets ," for additional information.

Operating and Net Income

Operating and net income per worksite employee per month was $43 and $22 in the 2013 period, versus $44 and $26 in the 2012 period.

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.

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
 
 
(in thousands, except per worksite employee per month data)
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP to non-GAAP reconciliation:
 
 
 
 
 
 
 
 
 
 
 
 
Payroll cost (GAAP)
 
$
2,619,690

 
$
2,520,058

 
4.0
 %
 
$
5,340,202

 
$
5,156,187

 
3.6
 %
Less: Bonus payroll cost
 
171,362

 
204,042

 
(16.0
)%
 
513,927

 
571,865

 
(10.1
)%
Non-bonus payroll cost
 
$
2,448,328

 
$
2,316,016

 
5.7
 %
 
$
4,826,275

 
$
4,584,322

 
5.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll cost per worksite employee per month (GAAP)
 
$
6,892

 
$
6,763

 
1.9
 %
 
$
7,118

 
$
6,982

 
1.9
 %
Less: Bonus payroll cost per worksite employee per month
 
451

 
548

 
(17.7
)%
 
685

 
774

 
(11.5
)%
Non-bonus payroll cost per worksite employee per month
 
$
6,441

 
$
6,215

 
3.6
 %
 
$
6,433

 
$
6,208

 
3.6
 %

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 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 $231.2 million in cash, cash equivalents and marketable securities at June 30, 2013, of which approximately $117.3 million was payable in early July 2013 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $14.8 million were customer prepayments that were payable in July 2013.  At June 30, 2013, we had working capital of $118.5 million compared to $115.7 million at December 31, 2012.  We currently believe that our cash on hand, marketable securities, cash flows from operations and availability under our credit facility will be adequate to meet our liquidity requirements for the remainder of 2013.  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.

- 23 -

Table of Contents


We have a $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 June 30, 2013.  Please read Note 5 to the Consolidated Financial Statements, “Revolving Credit Facility,” for additional information.

Cash Flows from Operating Activities

Net cash used in operating activities in 2013 was $21.1 million.  Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients.  Our 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; therefore, operating cash flows decrease in the reporting periods that end on a Friday or a Monday.  In the period ended June 30, 2013, the last business day of the reporting period was a Friday, client prepayments were $14.8 million and accrued worksite employee payroll was $172.2 million.  In the year ended December 31, 2012, the last business day of the reporting period was a Monday, client prepayments were $13.5 million and accrued worksite employee payroll was $150.1 million.

Workers’ compensation plan funding – Under our workers’ compensation insurance arrangements, we make monthly payments to the carriers comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”).  These pre-determined amounts are stipulated in our agreements with the carriers, and are based primarily on anticipated worksite employee payroll levels and workers’ compensation loss rates during the policy year.  Changes in payroll levels from those that were anticipated in the arrangements can result in changes in the amount of 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 $22.2 million in the first six months of 2013 and $21.5 million in the first six months of 2012.  However, our estimate of workers’ compensation loss costs was $18.8 million in 2013 and $18.6 million in 2012, respectively. During the first half of 2012, we received $2.5 million for the return of excess claim funds related to the workers' compensation program, which resulted in an increase to working capital.

Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter.  Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows.  In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows.  At June 30, 2013, premiums owed and cash funded to United have exceeded Plan Costs, resulting in a $14.9 million surplus, $5.9 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.  The premiums owed to United at June 30, 2013, were $1.9 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.

Operating results – Our net income has a significant impact on our operating cash flows.  Our net income decreased 14.6% to $16.7 million in the six months ended June 30, 2013, compared to $19.5 million in the six months ended June 30, 2012, due in part to a $2.7 million non-cash impairment charge on a minority investment.  Please read “Results of Operations Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012.”

Cash Flows from Investing Activities

Net cash flows used in investing activities were $43.5 million for the six months ended June 30, 2013, primarily due to marketable securities purchases, net of maturities and dispositions, of $36.8 million.

Cash Flows from Financing Activities

Net cash flows used in financing activities were $21.4 million for the six months ended June 30, 2013, including $15.1 million in stock repurchases and $8.7 million in dividends paid.

- 24 -

Table of Contents

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are primarily exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of our cash equivalent short-term investments and our available-for-sale marketable securities.   In addition, borrowings under our Facility bear interest at a variable market rate.  As of June 30, 2013, we had not drawn on the Facility.  Please read Note 5 to the Consolidated Financial Statements, “Revolving Credit Facility,” for additional information.  The cash equivalent short-term investments consist primarily of overnight investments, which are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned on these investments.  The available-for-sale marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate.  As a result, the market values of these securities are affected by changes in prevailing interest rates.

We attempt to limit our exposure to interest rate risk primarily through diversification and low investment turnover.  Our investment policy is designed to maximize after-tax interest income while preserving our principal investment.  As a result, our marketable securities consist of tax-exempt short and intermediate-term debt securities, which are primarily prefunded municipal bonds that are secured by escrow funds containing U.S. Government Securities.

ITEM 4.  CONTROLS AND PROCEDURES.

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.
 
There has been no change in our internal controls over financial reporting that occurred during the three months ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


- 25 -

Table of Contents

PART II

ITEM 1.  LEGAL PROCEEDINGS.

Please read Note 8 to the Consolidated Financial Statements, “Commitments and Contingencies,” which is incorporated herein by reference.

ITEM 1A.  RISK FACTORS

Forward-Looking Statements

The statements contained herein that are not historical facts are forward-looking statements within the meaning of the federal securities laws (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “possibly,” “probably,” “goal,” “opportunity,” “objective,” “target,” “assume,” “outlook,” “guidance,” “predicts,” “appears,” “indicator” and similar expressions.  Forward-looking statements involve a number of risks and uncertainties.  In the normal course of business, Insperity, Inc., in an effort to help keep our stockholders and the public informed about our operations, may from time to time issue such forward-looking statements, either orally or in writing.  Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings, unit growth, profit per worksite employee, pricing, operating expenses or other aspects of operating results.  We base the forward-looking statements on our expectations, estimates and projections at the time such statements are made.  These statements are not guarantees of future performance and involve risks and uncertainties that we cannot predict.  In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate.  Therefore, the actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements.  Among the factors that could cause actual results to differ materially are: (i) continued effects of the economic recession and general economic conditions; (ii) regulatory and tax developments and possible adverse application of various federal, state and local regulations; (iii) the ability to secure competitive replacement contracts for health insurance and workers’ compensation contracts at expiration of current contracts; (iv) increases in health insurance costs and workers’ compensation rates and underlying claims trends, health care reform, financial solvency of workers’ compensation carriers and other insurers, state unemployment tax rates, liabilities for employee and client actions or payroll-related claims; (v) failure to manage growth of our operations and the effectiveness of our sales and marketing efforts; (vi) changes in the competitive environment in the PEO industry, including the entrance of new competitors and our ability to renew or replace client companies; (vii) our liability for worksite employee payroll, payroll taxes and benefits costs; (viii) our liability for disclosure of sensitive or private information; (ix) our ability to integrate or realize expected return on our acquisitions; and (x) an adverse final judgment or settlement of claims against Insperity.  These factors are discussed in further detail in our 2012 Annual Report on Form 10-K under “Factors That May Affect Future Results and the Market Price of Common Stock” on page 19, and elsewhere in this report.  Any of these factors, or a combination of such factors, could materially affect the results of our operations and whether forward-looking statements we make ultimately prove to be accurate.

There have been no material changes in the risk factors disclosed pursuant to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.


- 26 -

Table of Contents

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases by Insperity during the three months ended June 30, 2013, of equity securities that are registered by Insperity pursuant to Section 12 of the Exchange Act:

 
 
 
 
Period
Total Number of Shares Purchased(1)(2)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program(1)
Maximum Number of Shares that may yet be Purchased under the Program(1)
04/01/2013 – 04/30/2013
58,104

$
26.95

57,516

415,303

05/01/2013 – 05/31/2013
1,458

27.01

1,458

1,413,845

06/01/2013 – 06/30/2013
601

31.00


1,413,845

Total
60,163

$
26.99

58,974

1,413,845

 ____________________________________

(1) 
Our Board has approved a program to repurchase up to 15,500,000 shares of our outstanding common stock, including an additional one million shares authorized for repurchase in May 2013.  During the three months ended June 30, 2013, 58,974 shares were repurchased under the program and 1,189 shares were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards.  As of June 30, 2013, we were authorized to repurchase an additional 1,413,845 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.

(2) 
These shares include shares of restricted stock that were withheld to satisfy tax-withholding obligations arising in conjunction with the vesting of restricted stock.  The required withholding is calculated using the closing sales price reported by the New York Stock Exchange on the date prior to the applicable vesting date.  These shares are not subject to the repurchase program described above.

- 27 -

Table of Contents

ITEM 6.  EXHIBITS

 
(a)
List of Exhibits
 

31.1
*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
**
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
**
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
*
XBRL Instance Document.(1)
101.SCH
*
XBRL Taxonomy Extension Schema Document.
101.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
*
XBRL Extension Definition Linkbase Document.
101.LAB
*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document.
 
____________________________________
 
 
 
 
 
 
*
Filed with this report.
 
 
 
 
 
**
Furnished with this report

(1) 
Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the three and six month periods ended June 30, 2013 and 2012; (ii) the Consolidated Statements of Comprehensive Income for the three and six month periods ended June 30, 2013 and 2012; (iii) the Consolidated Balance Sheets at June 30, 2013 and December 31, 2012; (iv) the Consolidated Statement of Stockholders’ Equity for the six month period ended June 30, 2013; (v) the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2013 and 2012; and (vi) Notes to the Consolidated Financial Statements.

- 28 -

Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Insperity, Inc.