INSPERITY, INC. - FORM 10-Q - November 1, 2011

Attached files

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EX-31.2 - EXHIBIT 31.2 - INSPERITY, INC.	ex31_2.htm
EX-32.2 - EXHIBIT 32.2 - INSPERITY, INC.	ex32_2.htm
EX-10.1 - EXHIBIT 10.1 - INSPERITY, INC.	ex10_1.htm
EX-32.1 - EXHIBIT 32.1 - INSPERITY, INC.	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - INSPERITY, INC.	ex31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - INSPERITY, INC.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011.

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 þ 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 þ 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 þ

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 þ

As of October 25, 2011, 25,809,994 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS

Part I

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

Part II

Item 1.	Legal Proceedings	31

Item 1a.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6.	Exhibits	33

Table of Contents

PART I

ITEM 1.

FINANCIAL STATEMENTS

INSPERITY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

ASSETS

	September 30, 2011			December 31, 2010
	(Unaudited)

Current assets:
Cash and cash equivalents	$	169,910		$	234,829
Restricted cash		42,812			41,204
Marketable securities		55,394			43,367
Accounts receivable, net:
Trade		2,069			1,194
Unbilled		154,256			134,187
Other		6,013			6,726
Prepaid insurance		15,182			24,978
Other current assets		10,967			8,528
Income taxes receivable		989			1,808
Deferred income taxes		1,751			1,267
Total current assets		459,343			498,088

Property and equipment:
Land		3,653			3,260
Buildings and improvements		66,673			64,953
Computer hardware and software		76,174			67,714
Software development costs		29,778			27,482
Furniture and fixtures		35,124			35,164
Aircraft		35,806			31,524
		247,208			230,097
Accumulated depreciation and amortization		(158,756	)		(154,070	)
Total property and equipment, net		88,452			76,027

Other assets:
Prepaid health insurance		9,000			9,000
Deposits – health insurance		2,640			2,640
Deposits – workers’ compensation		46,728			51,731
Goodwill and other intangible assets, net		28,867			21,251
Other assets		1,440			1,108
Total other assets		88,675			85,730
Total assets	$	636,470		$	659,845

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INSPERITY, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30, 2011			December 31, 2010
	(Unaudited)

Current liabilities:
Accounts payable	$	2,659		$	3,309
Payroll taxes and other payroll deductions payable		104,204			145,096
Accrued worksite employee payroll cost		130,788			109,697
Accrued health insurance costs		5,209			15,419
Accrued workers’ compensation costs		45,316			42,081
Accrued corporate payroll and commissions		22,296			23,743
Other accrued liabilities		19,778			14,264
Total current liabilities		330,250			353,609

Noncurrent liabilities:
Accrued workers’ compensation costs		58,508			55,730
Other accrued liabilities		––			1,261
Deferred income taxes		9,260			8,850
Total noncurrent liabilities		67,768			65,841

Commitments and contingencies

Stockholders’ equity:
Common stock		309			309
Additional paid-in capital		136,111			135,607
Treasury stock, at cost		(134,697	)		(124,464	)
Accumulated other comprehensive income, net of tax		52			21
Retained earnings		236,677			228,922
Total stockholders’ equity		238,452			240,395
Total liabilities and stockholders’ equity	$	636,470		$	659,845

See accompanying notes.

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INSPERITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues (gross billings of $2.835 billion, $2.444 billion, $8.454 billion and $7.274 billion, less worksite employee payroll cost of $2.363 billion, $2.030 billion, $6.973 billion and $5.990 billion, respectively)	$	471,821		$	414,146		$	1,481,105		$	1,284,226
Direct costs:
Payroll taxes, benefits and workers’ compensation costs		384,792			340,460			1,219,276			1,066,498
Gross profit		87,029			73,686			261,829			217,728

Operating expenses:
Salaries, wages and payroll taxes		39,494			34,866			117,558			108,558
Stock-based compensation		2,109			1,970			6,455			6,148
Commissions		3,399			2,889			9,750			8,494
Advertising		5,235			2,605			18,280			11,180
General and administrative expenses		18,912			15,546			57,828			47,674
Depreciation and amortization		3,786			3,732			11,335			11,266
		72,935			61,608			221,206			193,320
Operating income		14,094			12,078			40,623			24,408

Other income (expense):
Interest, net		245			286			829			744
Other, net		(7,501	)		––			(7,497	)		––

Income before income tax expense		6,838			12,364			33,955			25,152

Income tax expense		2,739			5,130			14,329			10,501

Net income	$	4,099		$	7,234		$	19,626		$	14,651

Less net income allocated to participating securities		(120	)	$	(214	)		(582	)		(428	)

Net income allocated to common shares	$	3,979		$	7,020		$	19,044		$	14,223

Basic net income per share of common stock	$	0.16		$	0.28		$	0.75		$	0.56

Diluted net income per share of common stock	$	0.16		$	0.28		$	0.74		$	0.56

See accompanying notes.

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INSPERITY, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2011

(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, 2010		30,839	$	309	$	135,607		$	(124,464	)	$	21	$	228,922		$	240,395
Purchase of treasury stock, at cost		―		―		―			(22,459	)		—		―			(22,459	)
Exercise of stock options		―		―		(1,012	)		4,893			—		―			3,881
Income tax benefit from stock-based compensation, net		―		―		1,709			—			—		―			1,709
Stock-based compensation expense		—		—		(280	)		6,735			—		—			6,455
Other		―		―		87			598			—		―			685
Dividends paid		—		—		—			—			—		(11,871	)		(11,871	)
Change in unrealized gain on marketable securities, net of tax:
Unrealized gain		—		—		—			—			31		—			31
Net income		—		—		—			—			—		19,626			19,626
Comprehensive income		—		—		—			—			—		—			19,657
Balance at September 30, 2011		30,839	$	309	$	136,111		$	(134,697	)	$	52	$	236,677		$	238,452

See accompanying notes.

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INSPERITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2011			2010

Cash flows from operating activities:
Net income	$	19,626		$	14,651
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,335			11,266
Loss on exchange of assets		4,396			––
Amortization of marketable securities		1,535			1,148
Stock-based compensation		6,455			6,148
Deferred income taxes		(96	)		1,692
Changes in operating assets and liabilities, net of effects from acquisitions:
Restricted cash		(1,608	)		(3,225	)
Accounts receivable		(20,231	)		(28,665	)
Prepaid insurance		9,796			(1,285	)
Other current assets		(2,339	)		(2,227	)
Other assets		4,876			8,350
Accounts payable		(650	)		21
Payroll taxes and other payroll deductions payable		(40,892	)		(48,195	)
Accrued worksite employee payroll expense		21,091			70,315
Accrued health insurance costs		(10,210	)		4,041
Accrued workers’ compensation costs		6,013			6,199
Accrued corporate payroll, commissions and other accrued liabilities		3,656			4,851
Income taxes payable/receivable		479			2,566
Total adjustments		(6,394	)		33,000
Net cash provided by operating activities		13,232			47,651

Cash flows from investing activities:
Marketable securities purchases		(43,607	)		(56,775	)
Marketable securities proceeds from dispositions		3,907			2,748
Marketable securities proceeds from maturities		26,194			15,890
Cash exchanged for acquisitions		(13,125	)		(12,886	)
Property and equipment		(23,404	)		(4,349	)
Net cash used in investing activities		(50,035	)		(55,372	)

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INSPERITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2011			2010

Cash flows from financing activities:
Purchase of treasury stock	$	(22,459	)	$	(7,852	)
Dividends paid		(11,871	)		(10,148	)
Proceeds from the exercise of stock options		3,881			5,505
Income tax benefit from stock-based compensation		2,049			432
Other		284			629
Net cash used in financing activities		(28,116	)		(11,434	)

Net decrease in cash and cash equivalents		(64,919	)		(19,155	)
Cash and cash equivalents at beginning of period		234,829			227,085
Cash and cash equivalents at end of period	$	169,910		$	207,930

Supplemental Cash Flow Information:

In September 2011, the Company exchanged an existing aircraft with a fair value of $4.0 million and paid an additional $10.0 million to acquire a replacement aircraft, resulting in a non-cash loss of $4.4 million, which is included in other income (expense).

See accompanying notes.

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INSPERITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

1.	Basis of Presentation

Insperity, Inc., a Delaware corporation formerly named Administaff, Inc. (“Insperity” or the “Company”) provides an array of human resources (“HR”) and business solutions designed to help improve business performance. The Company’s name change, which was effective March 3, 2011, reflects the Company’s evolution over the past 25 years from a professional employer organization (“PEO”), an industry it pioneered, to its current position as a comprehensive business performance solutions provider. The Company’s most comprehensive HR business offering is provided through its PEO services, now known as Workforce OptimizationTM , which encompasses a broad range of human resource functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management, and training and development services. In addition to Workforce Optimization, the Company offers Performance Management, Expense Management, Time and Attendance, Organizational Planning, Employment Screening, Recruiting Services, Retirement Services, Business Insurance and Technology Services solutions, (collectively “Adjacent Businesses”), many of which are offered via desktop applications and software as a service (“SaaS”) delivery models. For the nine months ended September 30, 2011 and 2010, PEO revenues from the Company’s Texas markets represented 27% and 29%, while PEO revenues from the Company’s California markets represented 16% and 15%, of the Company’s total PEO revenues, respectively.

The consolidated financial statements include the accounts of the Company 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 the Company’s audited consolidated financial statements as of and for the year ended December 31, 2010. The Company’s Consolidated Balance Sheets at December 31, 2010 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. The Company’s Consolidated Balance Sheets at September 30, 2011 and the Consolidated Statements of Operations and Cash Flows for the periods ended September 30, 2011 and 2010, and Stockholders’ Equity for the period ended September 30, 2011, have been prepared by the Company 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.

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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

The Company provides group health insurance coverage to its worksite employees through a national network of carriers including UnitedHealthcare (“United”), PacifiCare, Kaiser Permanente, Blue Shield of California, Hawaii Medical Service Association, Unity Health Plans and Tufts, all of which provide fully insured policies or service contracts.

The policy with United provides the majority of the Company’s health insurance coverage. As a result of certain contractual terms, the Company has accounted for this plan since its inception using a partially self-funded insurance accounting model. Accordingly, Insperity records the costs of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense in the Consolidated Statements of Operations. The estimated incurred claims are based upon: (i) the level of claims processed during the quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs.

Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in the Company’s 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 the Company would record an asset for the excess premiums in its Consolidated Balance Sheets. The terms of the arrangement require the Company 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 $2.6 million as of September 30, 2011, and is reported as a long-term asset. As of September 30, 2011, Plan Costs were less than the net premiums paid and owed to United by $22.7 million. As this amount is in excess of the agreed-upon $9.0 million surplus maintenance level, the $13.7 million balance is included in prepaid insurance, a current asset, in the Company’s Consolidated Balance Sheets. The premiums owed to United at September 30, 2011 were $1.9 million, which is included in accrued health insurance costs, a current liability in the Company’s Consolidated Balance Sheets.

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Workers’ Compensation Costs

The Company’s 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 the Company satisfies its responsibilities. Through September 30, 2010, the Company 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 the Company bearing the economic burden for the first $1 million layer of claims per occurrence, the Company will also bear the economic burden for those claims exceeding $1 million, up to a maximum aggregate amount of $5 million per policy year.

Because the Company bears the economic burden for claims up to the levels noted above, such claims, which are the primary component of the Company’s 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.

The Company employs a third party actuary to estimate its 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 the Company’s workers’ compensation claims cost estimates. During the nine months ended September 30, 2011 and 2010, Insperity reduced accrued workers’ compensation costs by $8.6 million and $5.0 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 rates utilized in 2011 and 2010 were 1.2% and 1.5%, respectively) and are accreted over the estimated claim payment period and included as a component of direct costs in the Company’s Consolidated Statements of Operations.

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The following table provides the activity and balances related to incurred but not paid workers’ compensation claims for the nine months ended September 30, 2011 and 2010:

	2011			2010
	(in thousands)

Beginning balance, January 1,	$	96,934		$	88,450
Accrued claims		26,668			24,985
Present value discount		(1,159	)		(1,350	)
Paid claims		(21,123	)		(18,133	)
Ending balance	$	101,320		$	93,952

Current portion of accrued claims	$	42,812		$	39,661
Long-term portion of accrued claims		58,508			54,291
	$	101,320		$	93,952

The current portion of accrued workers’ compensation costs on the Consolidated Balance Sheets at September 30, 2011 includes $2.5 million of workers’ compensation administrative fees.

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 the Company’s Consolidated Balance Sheets. In the first nine months of 2011 and 2010, the Company received $10.0 million and $15.6 million, respectively, for the return of excess claim funds related to the ACE Program, which reduced deposits. As of September 30, 2011, the Company had restricted cash of $42.8 million and deposits of $46.7 million.

The Company’s 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 its estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on the Company’s Consolidated Balance Sheets.

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3.	Cash, Cash Equivalents and Marketable Securities

The following table summarizes the Company’s investments in cash equivalents and marketable securities held by investment managers and overnight investments:

	September 30, 2011			December 31, 2010
	(in thousands)
Overnight Holdings
Money market funds (cash equivalents)	$	18,367		$	157,680
Investment Holdings
Money market funds (cash equivalents)		60,174			72,258
Marketable securities		55,394			43,367
		133,935			273,305
Cash held in demand accounts		105,194			31,295
Outstanding checks		(13,825	)		(26,404	)
Total cash, cash equivalents and marketable securities	$	225,304		$	278,196

Cash and cash equivalents	$	169,910		$	234,829
Marketable securities		55,394			43,367
	$	225,304		$	278,196

The Company’s cash and overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the cash balance as of September 30, 2011 and December 31, 2010, are $93.1 million and $128.8 million, respectively, in funds associated with federal and state income tax withholdings, employment taxes and other payroll deductions, as well as $3.9 million and $8.1 million in client prepayments, respectively.

The Company accounts for its 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; and

Level 3 - significant unobservable inputs.

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The following table summarizes the levels of fair value measurements of the Company’s financial assets:

	Fair Value Measurements
	(in thousands)
	September 30, 2011		Level 1		Level 2		Level 3

Money market funds	$	78,541	$	78,541	$	—	$	—
Municipal bonds		55,394		––		55,394		—
Total	$	133,935	$	78,541	$	55,394	$	—

	Fair Value Measurements
	(in thousands)
		December 31, 2010	Level 1		Level 2		Level 3

Money market funds	$	229,938	$	229,938	$	—	$	—
Municipal bonds		43,367		—		43,367		—
Total	$	273,305	$	229,938	$	43,367	$	—

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. Valuation techniques used by the Company 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 table summarizes the Company’s available-for-sale marketable securities as of September 30, 2011 and December 31, 2010:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(in thousands)
September 30, 2011:
Municipal bonds	$	55,304	$	125	$	(35	)	$	55,394

December 31, 2010:
Municipal bonds	$	43,330	$	63	$	(26	)	$	43,367

The Company utilizes specific identification to account for realized gains and losses recognized on sales of available-for-sale marketable securities. During the periods ended September 30, 2011 and 2010, the Company had no realized gains or losses recognized on sales of marketable securities.

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As of September 30, 2011, the contractual maturities of the Company’s marketable securities were as follows:

	Amortized Cost		Estimated Fair Value
	(in thousands)

Less than one year	$	31,601	$	31,640
One to five years		23,703		23,754
Total	$	55,304	$	55,394

4.	Acquisitions

The Company accounts for its acquisitions in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on the fair value at the date of purchase. The purchase price in excess of the identifiable assets and liabilities is recorded to goodwill. All acquisition related costs are expensed as incurred and recorded in operating expenses. The Company includes operations associated with acquisitions from the date of acquisition forward.

In January 2011, the Company acquired from HumanConcepts, a provider of workforce decision support solutions, ownership of its OrgPlus desktop software product line for small and medium-sized businesses, and its associated customer base, as well as a source code license for a SaaS-based version. OrgPlus facilitates creation, management and communication of detailed organizational charts. The acquisition reflects Insperity’s continued business strategy to expand its human resource services as well as the solutions available to the Company’s current and target clients. The Company paid $10.8 million upon the closing of the transaction and expects to pay an additional $1.2 million in the first quarter of 2012 based on the terms of the agreement.

5.	Revolving Credit Facility

On September 15, 2011, the Company entered into a four-year, $100 million revolving credit facility (the “Facility”), which may be increased to $150 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). The Facility is available for working capital and general corporate purposes, including acquisitions. The Company’s obligations under the Facility are secured by 65% of the stock of the Company’s captive insurance subsidiary and are guaranteed by all of the Company’s domestic subsidiaries. At September 30, 2011, the Company had not drawn on the Facility.

The Facility matures on September 15, 2015. Borrowings under the Facility bear interest at an alternate base rate or LIBOR, at the Company’s option, plus an applicable margin. Depending on the Company’s leverage ratio, the applicable margin varies (i) in the case of LIBOR loans, from 2.00% to 2.75% and (ii) in the case of alternate base rate loans, from 0.00% to 0.75%. The alternate base rate is the highest of (i) the prime rate most recently published in The Wall Street Journal, (ii) the federal funds rate plus 0.50% and (iii) the 30-day LIBOR rate plus 2.00%. The Company also pays an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25%. Interest expense and unused commitment fees are recorded in other income (expense).

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The Facility contains both affirmative and negative covenants, which the Company believes are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on the Company’s ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires the Company to comply with financial covenants limiting the Company’s total funded debt, minimum interest coverage ratio and maximum leverage ratio. The Company was in compliance with all financial covenants under the Credit Agreement at September 30, 2011.

6.	Stockholders’ Equity

The Company’s Board of Directors (the “Board”) has authorized a program to repurchase shares of the Company’s outstanding common stock from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions and other factors. In September 2011, the Board increased the authorized number of shares to be repurchased under the program by 1,000,000. During the nine months ended September 30, 2011, 787,304 shares were repurchased under the program and 108,280 shares were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards. The shares related to withholding obligations are not subject to the repurchase program. As of September 30, 2011, the Company was authorized to repurchase an additional 1,352,089 shares under the program.

The Board declared quarterly dividends of $0.15 and $0.13 per share of common stock in each of the first three quarters of 2011 and 2010, respectively, resulting in a total of $11.9 million and $10.1 million, respectively, in dividend payments made by the Company during the nine months ended September 30 of each year.

7.	Net Income per Share

The Company utilizes 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. 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.

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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 for the three month and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands, except per share amounts)

Net income	$	4,099		$	7,234		$	19,626		$	14,651
Less income allocated to participating securities		(120	)		(214	)		(582	)		(428	)
Net income allocated to common shares	$	3,979		$	7,020		$	19,044		$	14,223


Weighted average common shares outstanding		25,425			25,312			25,546			25,258
Incremental shares from assumed conversions of common stock options		74			111			98			105
Adjusted weighted average common shares outstanding		25,499			25,423			25,644			25,363

Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect		54			339			21			492

8.	Commitments and Contingencies

The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, except as set forth below, management believes the final outcome of such litigation will not have a material adverse effect on the Company’s financial position or results of operations.

As a result of a 2001 corporate restructuring, the Company filed for a transfer of its state unemployment tax reserve account with the Employment Development Department of the State of California (“EDD”). The EDD approved the Company’s request for transfer of the reserve account in May 2002 and also notified the Company of its new contribution rates based upon the approved transfer. In December 2003, the Company received a Notice of Duplicate Accounts and Notification of Assessment (“Notice”) from the EDD. The Notice stated that the EDD was collapsing the accounts of the Company’s subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all of the Company’s California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, the Company filed petitions with an administrative law judge of the California Unemployment Insurance Appeals Board (“ALJ”) to protest the validity of the Notice, asserting several procedural and substantive defenses.

One procedural defense included in the Company’s appeal asserts that EDD failed to meet the statutory requirement related to serving a proper notice within the stipulated time frame and that all of the statutes of limitations concerning EDD’s ability to reassess or modify unemployment tax rates for the periods addressed in the Notice had expired (“Notification Defense”). During 2010, a California Circuit Court issued a ruling in favor of EDD regarding a dispute involving a taxpayer who made arguments similar to the Company’s Notification Defense. The Supreme Court of California subsequently denied the taxpayer’s petition for review. The Company subsequently received a statement of account from the EDD indicating taxes, penalties and interest due of approximately $8.1 million.

While still denying all liability, the Company entered into a written agreement with the EDD in September 2011 to fully and finally settle this dispute (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, which is subject to the approval of the ALJ, the Company agreed to pay $3.1 million (the “Settlement Amount”) to the EDD. The Settlement Amount of $3.1 million was recorded in other income (expense) in the third quarter of 2011.

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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, 2010, 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 .

In September 2011, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other (Topic 350) – Testing Goodwill for Impairment was issued. ASU 2011-08 provides companies with a new option to determine whether or not it is necessary to apply the traditional two-step quantitative goodwill impairment test in ASC 350, Intangibles – Goodwill and Other. Under ASU 2011-08 companies are no longer required to calculate the fair value of a reporting unit unless it determines, on the basis of qualitative information, that it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for periods ending after December 15, 2011; however, early adoption is permitted for periods ending after September 15, 2011. The Company plans to early adopt ASU 2011-08 in the fourth quarter of 2011 when we perform our annual impairment test. We do not anticipate the adoption to have a material impact on our Consolidated Financial Statements.

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Results of Operations

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010.

The following table presents certain information related to our results of operations for the three months ended September 30, 2011 and 2010:

	Three Months Ended September 30,
	2011			2010		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $2.835 billion and $2.444 billion, less worksite employee payroll cost of $2.363 billion and $2.030 billion, respectively)	$	471,821		$	414,146		13.9	%
Gross profit		87,029			73,686		18.1	%
Operating expenses		72,935			61,608		18.4	%
Operating income		14,094			12,078		16.7	%
Other income (expense)		(7,256	)		286		––
Net income		4,099			7,234		(43.3	)%
Diluted net income per share of common stock		0.16			0.28		(42.9	)%

Statistical Data:
Average number of worksite employees paid per month		118,226			108,440		9.0	%
Revenues per worksite employee per month(1)	$	1,330		$	1,273		4.5	%
Gross profit per worksite employee per month		245			227		7.9	%
Operating expenses per worksite employee per month		206			189		9.0	%
Operating income per worksite employee per month		40			37		8.1	%
Net income per worksite employee per month		12			22		(45.5	)%

_________________________

(1)	Gross billings of $7,992 and $7,513 per worksite employee per month, less payroll cost of $6,662 and $6,240 per worksite employee per month, respectively.

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Revenues

Our revenues for the third quarter of 2011 increased 13.9% over the 2010 period, primarily due to a 9.0% increase in the average number of worksite employees paid per month and a 4.5%, or $57 increase in revenues per worksite employee per month.

By region, our Workforce Optimization revenue change from the third quarter of 2010 and distribution for the quarters ended September 30, 2011 and 2010 were as follows:

	Three Months Ended September 30,							Three Months Ended September 30,
	2011		2010		% Change			2011			2010
	(in thousands)							(% of total revenues)

Northeast	$	120,994	$	99,351		21.8	%		26.1	%		24.3	%
Southeast		46,271		44,728		3.4	%		10.0	%		10.9	%
Central		66,314		59,923		10.7	%		14.3	%		14.6	%
Southwest		134,295		124,504		7.9	%		28.9	%		30.5	%
West		96,122		80,732		19.1	%		20.7	%		19.7	%
		463,996		409,238		13.4	%		100.0	%		100.0	%
Adjacent Businesses and other revenue		7,825		4,908		59.4	%
Total revenue	$	471,821	$	414,146		13.9	%

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 third quarter of 2011, the net change in existing clients improved as compared to the third quarter of 2010, while worksite employees paid from new client sales declined and client retention remained consistent with the third quarter of 2010.

Gross Profit

Gross profit for the third quarter of 2011 increased 18.1% over the third quarter of 2010 to $87.0 million. The average gross profit per worksite employee increased 7.9% to $245 per month in the 2011 period from $227 per month in the 2010 period. Also included in gross profit in 2011 is a $12 per worksite employee per month contribution from our Adjacent Businesses compared to $7 per worksite employee per month in the 2010 period, primarily due to the OrgPlus acquisition that closed in the first quarter 2011. Our pricing objectives attempt to maintain or improve the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in primary direct costs and operating expenses.

While our revenues increased 4.5% per worksite employee per month, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 3.7% to $1,085 per worksite employee per month in the third quarter of 2011 versus $1,046 in the third quarter of 2010.

Benefits costs – The cost of group health insurance and related employee benefits increased $25 per worksite employee per month, or 5.2% on a cost per covered employee basis compared to the third quarter of 2010. These results were favorably impacted by a decrease in the number of COBRA participants. The number of participants electing COBRA coverage in the United plan declined from 6.4% in the third quarter of 2010 to 3.4% in the third quarter of 2011 due primarily to the August 2011 expiration of the 65% federal premium subsidy provided to COBRA eligible participants under the American Recovery and Reinvestment Act of 2009. Historically, the net costs of COBRA claims per enrollee are approximately double the cost of claims associated with active enrollees. The percentage of worksite employees covered under our health insurance plans was 73.0% in the 2011 period compared to 73.7% in the 2010 period. Please read Note 2 - “Accounting Policies – Health Insurance Costs” on page 10 for a discussion of our accounting for health insurance costs.

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Workers’ compensation costs – Workers’ compensation costs decreased 15.8%, or $8 per worksite employee per month, compared to the third quarter of 2010. As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.43% in the 2011 period compared to 0.58% in the 2010 period. During the 2011 period, we recorded reductions in workers’ compensation costs of $4.9 million, or 0.22% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $2.0 million, or 0.10% of non-bonus payroll costs, in the 2010 period. Please read Note 2 “Accounting Policies – Workers’ Compensation Costs” on page 11 for a discussion of our accounting for workers’ compensation costs.

Payroll tax costs – Payroll taxes increased 13.9%, or $18 per worksite employee per month compared to the third quarter of 2010, primarily due to the 16.4% increase in payroll costs. Payroll taxes as a percentage of payroll cost were 6.4% in the 2011 period compared to 6.5% in the 2010 period.

Operating Expenses

The following table presents certain information related to our operating expenses for the three months ended September 30, 2011 and 2010

	Three Months Ended September 30,							Three Months Ended September 30,
	2011		2010		% Change			2011		2010		% Change
	(in thousands)							(per worksite employee per month)

Salaries, wages and payroll taxes	$	39,494	$	34,866		13.3	%	$	111	$	107		3.7	%
Stock–based compensation		2,109		1,970		7.1	%		6		6		––
Commissions		3,399		2,889		17.7	%		10		9		11.1	%
Advertising		5,235		2,605		101.0	%		15		8		87.5	%
General and administrative expenses		18,912		15,546		21.7	%		53		48		10.4	%
Depreciation and amortization		3,786		3,732		1.4	%		11		11		––
Total operating expenses	$	72,935	$	61,608	18.4`%			$	206	$	189		9.0	%

Operating expenses increased 18.4% to $72.9 million compared to $61.6 million in the third quarter of 2010, primarily due to $1.8 million in expenses related to our rebranding initiative and $1.0 million in expenses associated with acquisitions completed in late 2010 and early 2011. Operating expenses per worksite employee per month increased to $206 in the 2011 period from $189 in the 2010 period. The components of operating expenses changed as follows:

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·	Salaries, wages and payroll taxes of corporate and sales staff increased 13.3%, or $4 per worksite employee per month compared to the 2010 period. This increase was primarily due to a 7.5% rise in headcount, largely related to our adjacent business strategy and the associated acquisitions.

·	Stock-based compensation increased 7.1%, but remained flat on a per worksite employee per month basis compared to the 2010 period. The stock-based compensation expense represents amortization of restricted stock awards granted to employees.

·	Commissions expense increased 17.7%, or $1 per worksite employee per month basis compared to the 2010 period.

·	Advertising costs increased 101.0%, or $7 per worksite employee per month compared to the 2010 period, primarily due to advertising and business promotions related to our rebranding initiative.

·	General and administrative expenses increased 21.7%, or $5 per worksite employee per month compared to the third quarter of 2010, primarily due to increased travel, consulting and office expenses, as well as costs associated with recent acquisitions.

·	Depreciation and amortization expense increased 1.4%, but remained flat on a per worksite employee per month basis compared to the 2010 period.

Other Income (Expense)

Other expense increased $7.5 million in the third quarter of 2011 compared to the third quarter of 2010, primarily due to a $4.4 million loss related to the exchange of a corporate aircraft and a $3.1 million loss related to the Employment Development Department of the State of California (“EDD”) settlement. See Note 8, “Commitments and Contingencies” on page 17 for additional information on the EDD settlement.

Income Tax Expense

Our effective income tax rate was 40.1% in the 2011 period compared to 41.5% in the 2010 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.

Operating and Net Income

Operating and net income per worksite employee per month was $40 and $12 in the 2011 period, versus $37 and $22 in the 2010 period.

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Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010.

The following table presents certain information related to our results of operations for the nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,
	2011			2010		% Change
	(in thousands, except per share and statistical data)
Revenues (gross billings of $8.454 billion and $7.274 billion, less worksite employee payroll cost of $6.973 billion and $5.990 billion, respectively)	$	1,481,105		$	1,284,226		15.3	%
Gross profit		261,829			217,728		20.3	%
Operating expenses		221,206			193,320		14.4	%
Operating income		40,623			24,408		66.4	%
Other income (expense)		(6,668	)		744		—
Net income		19,626			14,651		34.0	%
Diluted net income per share of common stock		0.74			0.56		32.1	%

Statistical Data:
Average number of worksite employees paid per month		115,097			105,603		9.0	%
Revenues per worksite employee per month(1)	$	1,430		$	1,351		5.8	%
Gross profit per worksite employee per month		253			229		10.5	%
Operating expenses per worksite employee per month		214			203		5.4	%
Operating income per worksite employee per month		39			26		50.0	%
Net income per worksite employee per month		19			15		26.7	%

_________________________

(1)	Gross billings of $8,161 and $7,653 per worksite employee per month, less payroll cost of $6,731 and $6,302 per worksite employee per month, respectively.

Revenues

Our revenues for the nine months ended September 30, 2011, increased 15.3% over the 2010 period, primarily due to a 9.0% increase in the average number of worksite employees paid per month and a 5.8%, or $79 increase in revenues per worksite employee per month.

By region, our Workforce Optimization revenues compared to the first nine months of 2010 and distribution for the nine months ended September 30, 2011 and 2010 were as follows:

	Nine Months Ended September 30,							Nine Months Ended September 30,
	2011		2010		% Change			2011			2010
	(in thousands)							(% of total revenues)

Northeast	$	383,938	$	306,610		25.2	%		26.3	%		24.1	%
Southeast		144,120		138,774		3.9	%		9.8	%		10.9	%
Central		212,910		188,618		12.9	%		14.6	%		14.8	%
Southwest		423,139		391,745		8.0	%		29.0	%		30.8	%
West		295,678		247,275		19.6	%		20.3	%		19.4	%
		1,459,785		1,273,022		14.7	%		100.0	%		100.0	%
Adjacent Businesses and other revenue		21,320		11,204		90.3	%
Total revenue	$	1,481,105	$	1,284,226		15.3	%

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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 nine months of 2011, the net change in existing clients, worksite employees paid from new client sales and client retention all improved as compared to the first nine months of 2010.

Gross Profit

Gross profit for the first nine months of 2011 increased 20.3% over the 2010 period to $261.8 million. The average gross profit per worksite employee increased 10.5% to $253 per month in the 2011 period from $229 per month in the 2010 period. Also included in gross profit in 2011 is an $11 per worksite employee per month contribution from our Adjacent Businesses compared to $5 per worksite employee per month in the 2010 period, due to acquisitions that closed during 2010 and 2011. Our pricing objectives attempt to maintain or improve the gross profit per worksite employee by increasing revenue per worksite employee to match or exceed changes in primary direct costs and operating expenses.

While our revenues increased 5.8% per worksite employee per month, our direct costs, which primarily include payroll taxes, benefits and workers’ compensation expenses, increased 4.9% to $1,177 per worksite employee per month in the first nine months of 2011 versus $1,122 in the first nine months of 2010.

Benefits costs – The cost of group health insurance and related employee benefits increased $21 per worksite employee per month, or 4.3% on a cost per covered employee basis compared to the 2010 period. These results reflect the favorable impact of plan design changes implemented on January 1, 2011, and a decrease in the number of COBRA participants. The number of participants electing COBRA coverage in the United plan declined from 6.8% in the first nine months of 2010 to 3.9% in the first nine months of 2011 due primarily to the August 2011 expiration of the 65% federal premium subsidy provided to COBRA eligible participants under the American Recovery and Reinvestment Act of 2009. Historically, the net costs of COBRA claims per enrollee are approximately double the cost of claims associated with active enrollees. The percentage of worksite employees covered under our health insurance plans was 73.7% in the 2011 period compared to 74.3% in the 2010 period. Please read Note 2 - “Accounting Policies – Health Insurance Costs” on page 10 for a discussion of our accounting for health insurance costs.

Workers’ compensation costs – Workers’ compensation costs increased 1.0%, but decreased $3 per worksite employee per month compared to the first nine months of 2010. As a percentage of non-bonus payroll cost, workers’ compensation costs were 0.54% in the 2011 period compared to 0.61% in the 2010 period. During the 2011 period, we recorded reductions in workers’ compensation costs of $8.6 million, or 0.14% of non-bonus payroll costs, for changes in estimated losses related to prior reporting periods, compared to $5.0 million, or 0.09% of non-bonus payroll costs, in the 2010 period. Please read Note 2 “Accounting Policies – Workers’ Compensation Costs” on page 11 for a discussion of our accounting for workers’ compensation costs.

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Payroll tax costs – Payroll taxes increased 16.6%, or $34 per worksite employee per month compared to the first nine months of 2010 primarily due to the 16.4% increase in payroll costs. Payroll taxes as a percentage of payroll cost were 7.7% in both the 2011 and 2010 periods.

Operating Expenses

The following table presents certain information related to our operating expenses for the nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,							Nine Months Ended September 30,
	2011		2010		% Change			2011		2010		% Change
	(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes	$	117,558	$	108,558		8.3	%	$	113	$	114		(0.9	)%
Stock–based compensation		6,455		6,148		5.0	%		6		6		––
Commissions		9,750		8,494		14.8	%		10		9		11.1	%
Advertising		18,280		11,180		63.5	%		18		12		50.0	%
General and administrative expenses		57,828		47,674		21.3	%		56		50		12.0	%
Depreciation and amortization		11,335		11,266		0.6	%		11		12		(8.3	)%
Total operating expenses	$	221,206	$	193,320		14.4	%	$	214	$	203		5.4	%

Operating expenses increased 14.4% to $221.2 million compared to $193.3 million in the first nine months of 2010, primarily due to $9.7 million in expenses related to our rebranding initiative and $6.8 million in expenses associated with acquisitions completed in late 2010 and early 2011. Operating expenses per worksite employee per month increased to $214 in the 2011 period versus $203 in the 2010 period. The components of operating expenses changed as follows:

Salaries, wages and payroll taxes of corporate and sales staff increased 8.3%, but decreased $1 on a per worksite per month basis compared to the 2010 period. This increase was primarily due to a 7.0% rise in headcount, largely related to our adjacent business strategy and the associated acquisitions.

·	Stock-based compensation increased 5.0%, but remained flat on a per worksite employee per month basis compared to the 2010 period. The stock-based compensation expense represents amortization of restricted stock awards granted to employees.

·	Commissions expense increased 14.8%, or $1 per worksite employee per month basis compared to the 2010 period.

·	Advertising costs increased 63.5%, or $6 per worksite employee per month compared to the 2010 period, primarily due to $6.1 million in advertising and business promotions related to our rebranding initiative.

General and administrative expenses increased 21.3%, or $6 per worksite employee per month compared to the first nine months of 2010, primarily due to $3.6 million in expenses associated with the Company’s rebranding initiative and $2.4 million in expenses associated with the acquisitions in 2010 and early 2011.

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·	Depreciation and amortization expense increased 0.6%, but decreased $1 on a per worksite employee per month basis compared to the 2010 period.

Other Income (Expense)

Other expense was $6.7 in the 2011 period, primarily due to a $4.4 million loss related to the exchange of an aircraft and a $3.1 million loss related to the EDD settlement with the State of California in the third quarter of 2011. See Note 8, “Commitments and Contingencies” on page 17 for additional information on the EDD settlement.

Income Tax Expense

Our effective income tax rate was 42.2% in the 2011 period compared to 41.8% in the 2010 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.

Operating and Net Income

Operating and net income per worksite employee per month was $39 and $19 in the 2011 period, versus $26 and $15 in the 2010 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.

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	Three Months Ended September 30,				%			Nine Months Ended September 30,				%
	2011		2010		Change			2011		2010		Change
	(in thousands, except per worksite employee data)

Payroll cost (GAAP)	$	2,362,941	$	2,030,006		16.4	%	$	6,972,806	$	5,989,681		16.4	%
Less: Bonus payroll cost		174,668		105,674		65.3	%		644,129		427,163		50.8	%
Non-bonus payroll cost	$	2,188,273	$	1,924,332		13.7	%	$	6,328,677	$	5,562,518		13.8	%

Payroll cost per worksite employee (GAAP)	$	6,662	$	6,240		6.8	%	$	6,731	$	6,302		6.8	%
Less: Bonus payroll cost per worksite employee		492		325		51.4	%		621		449		38.3	%
Non-bonus payroll cost per worksite employee	$	6,170	$	5,915		4.3	%	$	6,110	$	5,853		4.4	%

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, acquisition plans and other operating cash needs. To meet short- and long-term liquidity requirements, including payment of direct and operating expenses and repaying debt, we rely primarily on cash from operations. However, 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 $225.3 million in cash, cash equivalents and marketable securities at September 30, 2011, of which approximately $93.1 million was payable in early October 2011 for withheld federal and state income taxes, employment taxes and other payroll deductions, and approximately $3.9 million of client prepayments that were payable in October 2011. At September 30, 2011, we had working capital of $129.1 million compared to $144.5 million at December 31, 2010. We currently believe that our cash on hand and cash flows from operations will be adequate to meet our liquidity requirements for the remainder of 2011. We will rely on these same sources, as well as public and private debt or equity financing, to meet our longer-term liquidity and capital needs.

In September 2011, we completed the financing for a new four-year, $100 million revolving credit facility (“Facility”), with a syndicate of financial institutions. The Facility is available for working capital and general corporate purposes, including acquisitions, and was undrawn at September 30, 2011. See Note 5, “Revolving Credit Facility” on page 15 for additional information.

Cash Flows from Operating Activities

Net cash provided by operating activities in 2011 was $13.2 million. Our primary source of cash from operations is the comprehensive service fee and payroll funding we collect from our clients. The level of cash and cash equivalents, and thus our reported cash flows from operating activities are significantly impacted by various external and internal factors, which are reflected in part by the changes in our balance sheet accounts. These include the following:

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Timing of client payments / payrolls – 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. In the period ended September 30, 2011, which ended on a Friday, client prepayments were $3.9 million and accrued worksite employee payroll was $130.8 million. In the period ended December 31, 2010, which also ended on a Friday, client prepayments were $8.1 million and accrued worksite employee payroll was $109.7 million.

Workers’ compensation plan funding – Under our workers’ compensation insurance arrangements, we make monthly payments to the carriers comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). These pre-determined amounts are stipulated in our agreements with the carriers, and are based primarily on anticipated worksite employee payroll levels and workers’ compensation loss rates during the policy year. Changes in payroll levels from those that were anticipated in the arrangements can result in changes in the amount of 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 $27.3 million in the first nine months of 2011 and $28.5 million in the first nine months of 2010. However, our estimate of workers’ compensation loss costs was $25.5 million and $23.6 million in 2011 and 2010, respectively. During 2011 and 2010, we received $10.0 million and $15.6 million, respectively, for the return of excess claim funds related to the workers’ compensation program, which resulted in an increase to working capital.

Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are solely determined by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. Since inception of the United plan, premiums owed and cash funded to United has exceeded Plan Costs, resulting in a $22.7 million surplus, $13.7 million of which is reflected as a current asset, and $9.0 million of which is reflected as a long-term asset on our Consolidated Balance Sheets at September 30, 2011. The premiums owed to United at September 30, 2011, 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 increased 34.0% to $19.6 million in the nine months ended September 30, 2011, compared to $14.7 million in the nine months ended September 30, 2010. Please read Results of Operations – Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010 on page 23.

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Cash Flows from Investing Activities

Net cash flows used in investing activities were $50.0 million for the nine months ended September 30, 2011, due to $23.4 million in capital expenditures primarily related to our technology infrastructure and $10.0 million aircraft purchase. We also spent $10.8 million for the acquisition of the OrgPlus business from HumanConcepts. See Note 4, “Acquisitions” on page 15 for additional information.

Cash Flows from Financing Activities

Net cash flows used in financing activities were $28.1 million for the nine months ended September 30, 2011, including $22.5 million in stock repurchases and $11.9 million in dividends paid.

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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. Our cash equivalent short-term investments consist primarily of overnight investments and money market funds, 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.

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.

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 September 30, 2011.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1.

LEGAL PROCEEDINGS.

Please read Note 8 to our financial statements, 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 adjacent business strategy, including acquisitions; and (x) an adverse final judgment or settlement of claims against Insperity. These factors are discussed in further detail in our 2010 Annual Report on Form 10-K under “Factors That May Affect Future Results and the Market Price of Common Stock” on page 17, 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.

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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, 2010.

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 September 30, 2011, 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)
07/01/2011 – 07/31/2011		4,916	$	29.12		12,484,185		1,015,815
08/01/2011 – 08/31/2011		339,537		25.37		12,823,722		676,278
09/01/2011 – 09/30/2011		325,487		21.75		13,147,911		1,352,089
Total		669,940	$	23.64		13,147,911		1,352,089

_______________

(1)

Our Board of Directors has approved a repurchase program of Insperity common stock, including an additional 1,000,000 shares authorized for repurchase in September 2011. During the three months ended September 30, 2011, 668,067 shares were repurchased under the program and 1,873 shares were withheld to satisfy tax withholding obligations for the vesting of restricted stock awards. As of September 30, 2011, the Company was authorized to repurchase an additional 1,352,089 shares under the program. Unless terminated earlier by resolution of the board of directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.

(2)

These shares include 1,873 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.

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ITEM 6. EXHIBITS

(a)

List of exhibits.

10.1	*	Exchange agreement for corporate aircraft, dated August 30, 2011.
10.2	*	Credit Agreement, dated September 15, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s current Report on Form 8-K filed on September 21, 2011).
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.DEF		XBRL Extension Definition 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 month and nine month periods ended September 30, 2011 and 2010; (ii) the Consolidated Balance Sheets at September 30, 2011 and December 31, 2010; (iii) the Consolidated Statements of Cash Flows for the periods ended September 30, 2011 and 2010 and; (iv) the Consolidated Statement of Stockholders' Equity for the period ended September 30, 2011 (v) Notes to the Consolidated Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, additionally the data is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under these sections.

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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.

Date: November 1, 2011	By:	/s/ Douglas S. Sharp
		Senior Vice President of Finance,
		Chief Financial Officer and Treasurer
		(Principal Financial and Duly Authorized Officer)

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INSPERITY, INC. - FORM 10-Q - November 1, 2011

Attached files

INSPERITY, INC. Reports