|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
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
$5.1 million
as of
September 30, 2018
, and is reported as a long-term asset. As of
September 30, 2018
, Plan Costs were less than the net premiums paid and owed to United by
$18.9 million
. As this amount is
in excess of
the agreed-upon
$9.0 million
surplus maintenance level, the
$9.9 million
difference is included in
prepaid health insurance, a current asset
, in our Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at
September 30, 2018
were
$28.5 million
, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets. Our benefits costs incurred in the first
nine
months of
2018
included
a reduction
of
$1.3 million
for changes in estimated run-off related to prior periods. Our benefits costs incurred in the first
nine
months of
2017
included an increase of
$1.0 million
for changes in estimated run-off related to prior periods.
Workers’ Compensation Costs
Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program, we have financial responsibility to Chubb for the first
$1 million
layer of claims per occurrence and, for claims over $1 million, up to a maximum aggregate amount of
$5 million
per policy year for claims that exceed
$1 million
. Chubb bears the financial responsibility for all claims in excess of these levels.
Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment.
We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the
nine
months ended
September 30,
2018
and
2017
, we reduced accrued workers’ compensation costs by
$13.4 million
and
$11.0 million
, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate utilized in the
2018
period was
2.5%
and in the
2017
period was
1.5%
) and are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations.
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
10
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
The following table provides the activity and balances related to incurred but not paid workers’ compensation claims:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
|
|
|
Beginning balance, January 1,
|
$
|
207,630
|
|
|
$
|
183,928
|
|
Accrued claims
|
54,744
|
|
|
52,133
|
|
Present value discount
|
(5,372
|
)
|
|
(3,048
|
)
|
Paid claims
|
(31,645
|
)
|
|
(29,574
|
)
|
Ending balance
|
$
|
225,357
|
|
|
$
|
203,439
|
|
|
|
|
|
Current portion of accrued claims
|
$
|
42,258
|
|
|
$
|
41,748
|
|
Long-term portion of accrued claims
|
183,099
|
|
|
161,691
|
|
Total accrued claims
|
$
|
225,357
|
|
|
$
|
203,439
|
|
The current portion of accrued workers’ compensation costs on our Consolidated Balance Sheets at
September 30, 2018
includes
$3.5 million
of workers’ compensation administrative fees.
As of
September 30, 2018
and
2017
, the undiscounted accrued workers’ compensation costs were
$241.3 million
and
$215.0 million
, respectively.
At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within
one year
are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits – workers’ compensation, a long-term asset in our Consolidated Balance Sheets. During the first
nine
months of
2018
and
2017
, we received
$19.4 million
and
$22.7 million
, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in a net decrease to deposits - workers’ compensation. As of
September 30, 2018
, we had restricted cash of
$42.3 million
and deposits – workers’ compensation of
$152.3 million
.
Our estimate of incurred claim costs expected to be paid within
one year
is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on our Consolidated Balance Sheets.
Recently Adopted Accounting Standards
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
using the modified retrospective approach. Under this method, the guidance is applied only to the most current period presented in the financial statements. ASU No. 2014-09 outlines a single comprehensive revenue recognition model for revenue arising from contracts with customers and superseded most of the previous revenue recognition guidance, including industry-specific guidance. Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Our revenue recognition policies remained substantially unchanged as a result of adoption ASU No. 2014-09 and we did not have any significant changes in our business processes or systems.
We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally have a term of 12 months, but are cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms.
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
11
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our Consolidated Balance Sheets.
Pursuant to the “practical expedients” provided under ASU No 2014-09, we expense sales commissions when incurred because the terms of our contracts are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations.
Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in thousands)
|
2018
|
2017
|
% Change
|
|
2018
|
2017
|
% Change
|
|
|
|
|
|
|
|
|
Northeast
|
$
|
237,076
|
|
$
|
204,318
|
|
16.0
|
%
|
|
$
|
748,717
|
|
$
|
644,703
|
|
16.1
|
%
|
Southeast
|
109,552
|
|
92,646
|
|
18.2
|
%
|
|
333,004
|
|
283,501
|
|
17.5
|
%
|
Central
|
155,184
|
|
131,978
|
|
17.6
|
%
|
|
476,277
|
|
405,854
|
|
17.4
|
%
|
Southwest
|
217,946
|
|
184,572
|
|
18.1
|
%
|
|
664,731
|
|
573,773
|
|
15.9
|
%
|
West
|
192,011
|
|
169,321
|
|
13.4
|
%
|
|
599,617
|
|
527,217
|
|
13.7
|
%
|
|
911,769
|
|
782,835
|
|
16.5
|
%
|
|
2,822,346
|
|
2,435,048
|
|
15.9
|
%
|
Other revenue
|
13,357
|
|
12,678
|
|
5.4
|
%
|
|
39,447
|
|
38,681
|
|
2.0
|
%
|
Total revenue
|
$
|
925,126
|
|
$
|
795,513
|
|
16.3
|
%
|
|
$
|
2,861,793
|
|
$
|
2,473,729
|
|
15.7
|
%
|
In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
, clarifying the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning period and ending period total amounts shown on the statement of cash flows. As a result of our adoption of the new guidance, in the first quarter of 2018, our beginning and ending cash balances on the Consolidated Statements of Cash Flows now include restricted cash and long-term workers compensation deposits and prior period balances were retrospectively adjusted. Restricted cash and long-term workers compensation deposits are cash deposits funded to secure future claim payments under our workers compensation program and are considered restricted under Topic 230.
In March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update).
ASU 2018-05 adds the SEC guidance released on December 22, 2017 regarding the U.S. tax reform to the FASB Accounting Standards Codification. At
September 30, 2018
, we have not made a material adjustment to the provisional tax provision recorded under ASU 2018-05 at December 31, 2017. In addition, we have considered the impact of the statutory changes from the Act in our estimated tax rate for 2018, including reasonable estimates of those provisions effective for the 2018 tax year.
New Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard requires recognition of lease assets and lease liabilities for leases previously classified as operating leases. The guidance is effective for fiscal years beginning after December 15, 2018. We are currently reviewing the guidance and assessing the impact on our consolidated financial statements.
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
12
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(in thousands)
|
Cash & Cash Equivalents
|
Marketable Securities
|
Total
|
|
Cash & Cash Equivalents
|
Marketable Securities
|
Total
|
|
|
|
|
|
|
|
|
Overnight holdings
|
$
|
270,172
|
|
$
|
—
|
|
$
|
270,172
|
|
|
$
|
338,112
|
|
$
|
—
|
|
$
|
338,112
|
|
Investments holdings
|
43,989
|
|
37,576
|
|
81,565
|
|
|
22,634
|
|
1,960
|
|
24,594
|
|
Cash in demand accounts
|
29,585
|
|
—
|
|
29,585
|
|
|
26,700
|
|
—
|
|
26,700
|
|
Outstanding checks
|
(15,447
|
)
|
—
|
|
(15,447
|
)
|
|
(33,186
|
)
|
—
|
|
(33,186
|
)
|
Total
|
$
|
328,299
|
|
$
|
37,576
|
|
$
|
365,875
|
|
|
$
|
354,260
|
|
$
|
1,960
|
|
$
|
356,220
|
|
Our cash and overnight holdings fluctuate based on the timing of clients’ payroll processing cycles. Included in the cash, cash equivalents and marketable securities at
September 30, 2018
and
December 31, 2017
are
$181.3 million
and
$271.5 million
, respectively, of funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as
$18.0 million
and
$23.6 million
in client prepayments, respectively.
|
|
|
4.
|
Fair Value Measurements
|
We account for our financial assets in accordance with Accounting Standard Codification 820,
Fair Value Measurement
. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors:
|
|
•
|
Level 1 - quoted prices in active markets using identical assets
|
|
|
•
|
Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs
|
|
|
•
|
Level 3 - significant unobservable inputs
|
Fair Value of Instruments Measured and Recognized at Fair Value
The following table summarizes the levels of fair value measurements of our financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(in thousands)
|
Total
|
Level 1
|
Level 2
|
|
Total
|
Level 1
|
Level 2
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
314,161
|
|
$
|
314,161
|
|
$
|
—
|
|
|
$
|
360,746
|
|
$
|
360,746
|
|
$
|
—
|
|
U.S. Treasury bills
|
20,867
|
|
—
|
|
20,867
|
|
|
—
|
|
—
|
|
—
|
|
Municipal bonds
|
16,709
|
|
—
|
|
16,709
|
|
|
1,960
|
|
—
|
|
1,960
|
|
Total
|
$
|
351,737
|
|
$
|
314,161
|
|
$
|
37,576
|
|
|
$
|
362,706
|
|
$
|
360,746
|
|
$
|
1,960
|
|
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.
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
13
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
The following is a summary of our available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
U.S. Treasury bills
|
$
|
20,869
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
20,867
|
|
Municipal bonds
|
16,732
|
|
—
|
|
(23
|
)
|
16,709
|
|
Total
|
$
|
37,601
|
|
$
|
—
|
|
$
|
(25
|
)
|
$
|
37,576
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
U.S. Treasury bills
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Municipal bonds
|
1,965
|
|
—
|
|
(5
|
)
|
1,960
|
|
Total
|
$
|
1,965
|
|
$
|
—
|
|
$
|
(5
|
)
|
$
|
1,960
|
|
As of
September 30, 2018
, the contractual maturities of our marketable securities were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
Estimated Fair Value
|
|
|
|
Less than one year
|
$
|
37,601
|
|
$
|
37,576
|
|
One to five years
|
—
|
|
—
|
|
Total
|
$
|
37,601
|
|
$
|
37,576
|
|
Fair Value of Other Financial Instruments
The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, deposits and accounts payable approximate their fair values due to the short-term maturities of these instruments.
As of
September 30, 2018
, the carrying value of borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read
Note 5
, “
Long-Term Debt
,” for additional information.
We have a revolving credit facility (the “Facility”) with borrowing capacity up to
$350 million
. The Facility may be increased to
$400 million
based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions, stock repurchases 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
September 30, 2018
, our outstanding balance on the Facility was
$104.4 million
, and we had an outstanding
$1.0 million
letter of credit issued under the Facility, providing us with an available borrowing capacity of
$244.6 million
.
The Facility matures on
February 6, 2023
. Borrowings under the Facility bear interest at an
alternate base rate
or
LIBOR
, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from
1.50%
to
2.25%
and (2) in the case of
alternate base rate
loans, from
0.00%
to
0.50%
. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus
0.50%
and (3) the 30-day LIBOR rate plus
2.00%
. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of
0.25%
. The interest rate at
September 30, 2018
was
3.76%
. Interest expense and unused commitment fees are recorded in other income (expense).
The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
14
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
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. We were in compliance with all financial covenants under the Credit Agreement at
September 30, 2018
.
During the first
nine
months of
2018
, we repurchased or withheld an aggregate of
211,972
shares of our common stock, as described below.
Two-for-One Stock Split
On December 18, 2017, we effected a two-for-one stock split in the form 100% stock dividend.
Repurchase Program
Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. During the
nine months ended September 30, 2018
,
80,000
shares were repurchased under the Repurchase Program. As of
September 30, 2018
, we were authorized to repurchase an additional
2,597,564
shares under the Repurchase Program.
Withheld Shares
During the
nine
months ended
September 30, 2018
, we withheld
131,972
shares to satisfy tax withholding obligations for the vesting of long-term incentive and restricted stock awards.
Dividends
The Board declared quarterly dividends as follows:
|
|
|
|
|
|
|
|
|
(amounts per share)
|
2018
|
|
|
2017
|
|
|
|
|
|
First quarter
|
$
|
0.20
|
|
|
$
|
0.125
|
|
Second quarter
|
0.20
|
|
|
0.150
|
|
Third quarter
|
0.20
|
|
|
0.150
|
|
During the
nine months ended September 30, 2018
and
2017
, we paid dividends totaling
$25.2 million
and
$17.8 million
, respectively.
We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options.
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
15
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
|
|
|
|
|
Net income
|
$
|
36,207
|
|
$
|
19,202
|
|
|
$
|
110,758
|
|
$
|
68,848
|
|
Less distributed and undistributed earnings allocated to participating securities
|
(503
|
)
|
(337
|
)
|
|
(1,546
|
)
|
(1,233
|
)
|
Net income allocated to common shares
|
$
|
35,704
|
|
$
|
18,865
|
|
|
$
|
109,212
|
|
$
|
67,615
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
41,330
|
|
40,946
|
|
|
41,311
|
|
41,110
|
|
Incremental shares from assumed LTIP awards and conversions of common stock options
|
218
|
|
296
|
|
|
283
|
|
238
|
|
Adjusted weighted average common shares outstanding
|
41,548
|
|
41,242
|
|
|
41,594
|
|
41,348
|
|
|
|
|
8.
|
Commitments and Contingencies
|
Worksite Employee 401(k) Retirement Plan Class Action Litigation
In December 2015, a class action lawsuit was filed against us and the third-party discretionary trustee of the Insperity 401(k) retirement plan that is available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division, on behalf of Plan participants. The suit generally alleges that Insperity’s third-party discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries, and by making imprudent investment choices. The parties filed a stipulation concerning class certification that defined the class as “all participants and beneficiaries of the Insperity 401(k) Plan from December 22, 2009 through September 30, 2017.” In November 2017, the court approved the class certification stipulation and denied the plaintiffs’ request for a jury trial. A date for the bench trial has not yet been set. Discovery is complete. On June 8, 2018, we filed a motion for summary judgment seeking dismissal of all claims. Briefing on that motion was completed in September 2018, which motion is now awaiting a ruling by the court. We believe we have meritorious defenses, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter,
no
provision has been made in the accompanying consolidated financial statements.
Other Litigation
We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations.
|
|
|
|
Insperity | 2018 Third Quarter Form 10-Q
|
16
|