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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 March 31, 2016



OR

 



 



 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from____________   to  ____________



Commission File Number: 001-35232

__________________________________________________________

WAGEWORKS, INC.

(Exact name of Registrant as specified in its charter)

__________________________________________________________





 

 



 

 

Delaware

 

94-3351864

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)







San Mateo, California

 

 

1100 Park Place, 4th Floor

San Mateo, California

(Address of principal executive offices

 

94403

(Zip Code)



(650) 577-5200

(Registrant’s telephone number, including area code)

__________________________________________________________



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 (“Exchange Act”) 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       No  

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

 

 



 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  



As of April 29, 2016, there were 36,231,628 shares of the registrant’s common stock outstanding. 

 

 

 

 

 


 



WAGEWORKS, INC.

FORM 10-Q QUARTERLY REPORT

Table of Contents





 

 



 

 



 

Page No.



PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

3



Consolidated Balance Sheets as of December 31, 2015 and March 31, 2016

3



Consolidated Statements of Income for the Three Months Ended March 31, 2015 and 2016

4



Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2016

5



Notes to Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24



PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 6.

Exhibits

25



Signatures

26



 

 





2

 


 

PART I.     FINANCIAL INFORMATION

Item 1. Financial Statements

WAGEWORKS, INC.

Consolidated Balance Sheets

(In thousands, except per share amounts)











 

 

 

 

 



 

 

 

 

 



December 31, 2015

 

March 31, 2016



Derived from

 

 

 



Audited Financial

 

 

 



Statements

 

(Unaudited)

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

500,918 

 

$

562,441 

Restricted cash

 

332 

 

 

332 

Accounts receivable, net

 

72,271 

 

 

89,583 

Prepaid expenses and other current assets

 

13,254 

 

 

14,550 

Total current assets

 

586,775 

 

 

666,906 

Property and equipment, net

 

47,955 

 

 

47,265 

Goodwill

 

157,109 

 

 

157,109 

Acquired intangible assets, net

 

82,616 

 

 

91,283 

Deferred tax assets

 

9,837 

 

 

9,837 

Other assets

 

4,447 

 

 

4,342 

Total assets

$

888,739 

 

$

976,742 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

$

60,541 

 

$

72,134 

Customer obligations

 

400,821 

 

 

474,614 

Short-term contingent consideration

 

739 

 

 

 —

Other current liabilities

 

2,893 

 

 

816 

Total current liabilities

 

464,994 

 

 

547,564 

Long-term debt

 

78,996 

 

 

79,030 

Other non-current liabilities

 

7,780 

 

 

7,294 

Total liabilities

 

551,770 

 

 

633,888 

Stockholders' Equity:

 

 

 

 

 

Common stock, $0.001 par value (authorized 1,000,000 shares; 36,055 shares issued and 35,936 shares outstanding at December 31, 2015 and 36,547 shares issued and 36,202 shares outstanding at March 31, 2016)

 

36 

 

 

36 

Additional paid-in capital

 

343,166 

 

 

352,626 

Treasury stock at cost (119 shares at December 31, 2015 and 345 shares at March 31, 2016)

 

(5,003)

 

 

(14,374)

Retained earnings (accumulated deficit)

 

(1,230)

 

 

4,566 

Total stockholders’ equity

 

336,969 

 

 

342,854 

Total liabilities and stockholders’ equity

$

888,739 

 

$

976,742 





















The accompanying notes are an integral part of the consolidated financial statements.

 

3


 

WAGEWORKS, INC.

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)















 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2015

 

2016

Revenues:

 

 

 

 

 

Healthcare

$

47,289 

 

$

50,370 

Commuter

 

15,897 

 

 

17,376 

COBRA

 

12,570 

 

 

15,406 

Other

 

9,540 

 

 

3,850 

Total revenues

 

85,296 

 

 

87,002 

Operating expenses:

 

 

 

 

 

Cost of revenues (excluding amortization of internal use software)

 

32,071 

 

 

31,260 

Technology and development 

 

10,585 

 

 

9,831 

Sales and marketing 

 

13,131 

 

 

13,920 

General and administrative 

 

13,565 

 

 

14,615 

Amortization and change in contingent consideration

 

6,279 

 

 

7,445 

Total operating expenses

 

75,631 

 

 

77,071 

Income from operations

 

9,665 

 

 

9,931 

Other income (expense):

 

 

 

 

 

Interest income

 

 

 

86 

Interest expense

 

(575)

 

 

(405)

Other income (expense)

 

66 

 

 

(4)

Income before income taxes

 

9,158 

 

 

9,608 

Income tax provision

 

(3,519)

 

 

(3,812)

Net income

$

5,639 

 

$

5,796 

Net income per share:

 

 

 

 

 

Basic

$

0.16 

 

$

0.16 

Diluted

$

0.15 

 

$

0.16 

Shares used in computing net income per share:

 

 

 

 

 

Basic

 

35,555 

 

 

35,916 

Diluted

 

36,668 

 

 

36,529 



























The accompanying notes are an integral part of the consolidated financial statements.



4


 

WAGEWORKS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)









 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2015

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net income

$

5,639 

 

$

5,796 

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

 

 

 

 

 

Depreciation

 

1,554 

 

 

1,778 

Amortization and change in contingent consideration

 

6,279 

 

 

7,348 

Stock-based compensation

 

4,436 

 

 

5,991 

Loss on disposal of fixed assets

 

 

 

20 

Provision for doubtful accounts

 

44 

 

 

801 

Deferred taxes

 

(285)

 

 

 —

Excess tax benefit related to stock-based compensation

 

(3,519)

 

 

(3,812)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(8,188)

 

 

(18,113)

Prepaid expenses and other current assets

 

(2,791)

 

 

(1,296)

Other assets

 

200 

 

 

105 

Accounts payable and accrued expenses

 

(5,835)

 

 

(205)

Customer obligations

 

37,274 

 

 

73,793 

Other liabilities

 

3,218 

 

 

1,283 

Net cash provided by operating activities

 

38,030 

 

 

73,489 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(5,972)

 

 

(3,333)

Cash paid for acquisition of intangible assets

 

 —

 

 

(7,629)

Net cash used in investing activities

 

(5,972)

 

 

(10,962)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exercise of common stock options

 

2,366 

 

 

4,697 

Proceeds from issuance of common stock under Employee Stock Purchase Plan

 

598 

 

 

511 

Payment of contingent consideration

 

 —

 

 

(653)

Payment for treasury stock acquired

 

 —

 

 

(9,371)

Excess tax benefit related to stock-based compensation

 

3,519 

 

 

3,812 

Net cash provided by (used in) financing activities

 

6,483 

 

 

(1,004)

Net increase in cash and cash equivalents

 

38,541 

 

 

61,523 

Cash and cash equivalents at beginning of period

 

413,301 

 

 

500,918 

Cash and cash equivalents at end of period

$

451,842 

 

$

562,441 

Supplemental cash flow disclosure:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

1,053 

 

$

358 

Taxes

 

317 

 

 

1,555 

Noncash financing and investing activities:

 

 

 

 

 

Accrued capital expenditures

 

366 

 

 

6,571 









The accompanying notes are an integral part of the consolidated financial statements.





 

5


 

(1)     Summary of Business and Significant Accounting Policies



Business



WageWorks, Inc., (together with its subsidiaries, “WageWorks” or the “Company”) was incorporated in the state of Delaware in 2000. The Company is a leader in administering Consumer-Directed Benefits (“CDBs”), which empower employees to save money on taxes while also providing corporate tax advantages for employers. The Company operates as a single reportable segment on an entity level basis.





Basis of Presentation



In the opinion of the Company’s management, the unaudited interim consolidated financial statements and condensed notes have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results of the interim period presented herein are not necessarily indicative of the results of future periods or annual results for the year ending December 31, 2016.



These unaudited interim consolidated financial statements and condensed notes should be read in conjunction with the December 31, 2015 audited financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Annual Report on Form 10-K. The December 31, 2015 consolidated balance sheet included in this interim Quarterly Report on Form 10-Q was derived from audited financial statements. Certain prior year amounts in the consolidated statement of cash flows have been reclassified to conform to the current year’s presentation.



There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K.





Principles of Consolidation



The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.





Use of Estimates



The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates in these consolidated financial statements include allowances for doubtful accounts, estimates of future cash flows associated with assets, useful lives for depreciation and amortization, loss contingencies, expired and unredeemed products, deferred tax assets, reserve for income tax uncertainties, the assumptions used for stock-based compensation, the assumptions used for software and website development cost classification, and valuation and impairments of goodwill and long-lived assets. Actual results could differ from those estimates. In making its estimates, the Company considers the current economic and legislative environment and has considered those factors when reviewing the underlying assumptions of the estimates.





Fair Value of Financial Instruments



The Company’s financial assets and liabilities are recognized or disclosed at fair value in the financial statements on a recurring basis. The carrying amount of financial instruments approximates fair value because of their short maturity. The carrying amount of the Company’s variable rate debt approximates fair value.



The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

·

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

6


 

·

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

·

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.



The contingent consideration payable related to the acquisition of Benefit Concepts, Inc. (“BCI”) was recorded at fair value on the acquisition date and is adjusted quarterly to fair value. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, it is categorized as Level 3. The final contingent consideration for BCI was paid during the first quarter of 2016.



Other financial instruments not measured at fair value on the Company’s unaudited consolidated balance sheet at March 31, 2016, but which require disclosure of their fair values include: cash and cash equivalents (including restricted cash), accounts receivable, accounts payable and accrued expenses and debt under the revolving credit facility with certain lenders.  The estimated fair value of such instruments at March 31, 2016 approximates their carrying value as reported on the consolidated balance sheets. The fair value of all of these instruments are categorized as Level 2 of the fair value hierarchy, with the exception of cash, which is categorized as Level 1 due to its short term nature.



The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):







 

 



 

 



Contingent

   

Consideration



BCI

Balance at December 31, 2015

 

739 

Gains or losses included in earnings:

 

 

Losses on revaluation of contingent consideration

 

11 

Payment of contingent consideration

 

(750)

Balance at March 31, 2016

$

 —



The Company measures contingent consideration elements each reporting period at fair value and recognizes changes in fair value in earnings each period in the amortization and change in contingent consideration line item on the consolidated statements of income, until the contingency is resolved. Losses on revaluation of contingent consideration result from accretion charges due to the passage of time and fair value adjustments due to changes in forecasted revenue levels.



The Company recorded $0.1 million and an immaterial charge related to the change in fair value of the contingent consideration for each of the three months ended March 31, 2015 and 2016, respectively, as a result of accretion charges due to the passage of time.



 

Recently Issued Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) which supersedes existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard allows for either a full retrospective with or without practical expedients or a retrospective with a cumulative catch upon adoption transition method. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods) in ASU 2015-14. Early adoption is permitted to the original effective date for periods beginning after December 15, 2016 (including interim reporting periods within those periods). The Company is in the process of determining which transition method it will use and what impact, if any, the adoption of ASU 2014-09 will have on its consolidated financial statements and related disclosures.



In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.

7


 

The guidance will not change GAAP for a customer's accounting for service contracts. The Company adopted ASU 2015-05 in the first quarter of 2016. The adoption of ASU 2015-05 did not have a material impact on the consolidated financial statements and related disclosures.



In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases,  (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently assessing what impact, if any, the adoption of this ASU will have on its consolidated financial statements and related disclosure.



 In March 2016, the FASB issued Accounting Standard Update No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products,  (“ASU 2016-04”). The new guidance creates an exception under ASC 405-20, Liabilities-Extinguishments of Liabilities, to derecognize financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently assessing what impact, if any, the adoption of this ASU will have on its consolidated financial statements and related disclosure.



In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations,  (“ASU 2016-08”). The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations in ASU 2014-09. The effective date for this ASU is the same as the effective date for ASU 2014-09. The Company is currently assessing what impact, if any, the adoption of this ASU will have on its consolidated financial statements and related disclosure.



In March 2016, the FASB Issued ASU No. 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,  (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing what impact, if any, the adoption of this ASU will have on its consolidated financial statements and related disclosure.







(2)     Net Income per Share



The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):









 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2015

 

2016

Numerator for basic net income per share:

 

 

 

 

 

Net income

$

5,639 

 

$

5,796 

Denominator for basic net income per share:

 

 

 

 

 

Weighted-average common shares outstanding

 

35,555 

 

 

35,916 

Basic net income per share

$

0.16 

 

$

0.16 



 

 

 

 

 

Numerator for diluted net income per share:

 

 

 

 

 

Net income

$

5,639 

 

$

5,796 

Denominator for diluted net income per share:

 

 

 

 

 

Weighted-average common shares outstanding

 

35,555 

 

 

35,916 

Dilutive stock options and restricted stock units

 

1,113 

 

 

515 

Dilutive vested performance restricted stock units

 

 -

 

 

98 

Diluted weighted-average common shares outstanding

 

36,668 

 

 

36,529 

Diluted net income per share

$

0.15 

 

$

0.16 



Stock options and restricted stock units to purchase common stock are not included in the computation of diluted earnings per share if their effect would be anti-dilutive. There were 0.3 million and 1.4 million anti-dilutive shares for the three months ended March 31, 2015 and 2016, respectively.

 



8


 





(3)     Intangible Assets



 

Acquired intangible assets at December 31, 2015 and March 31, 2016 were comprised of the following (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2015

 

March 31, 2016



Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 



carrying

 

Accumulated

 

 

 

 

carrying

 

Accumulated

 

 

 



amount

 

amortization

 

Net

 

amount

 

amortization

 

Net

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client contracts and broker relationships

$

124,261 

 

$

47,013 

 

$

77,248 

 

$

137,230 

 

$

50,896 

 

$

86,334 

Trade names

 

3,880 

 

 

2,405 

 

 

1,475 

 

 

3,880 

 

 

2,578 

 

 

1,302 

Technology

 

13,846 

 

 

11,039 

 

 

2,807 

 

 

13,846 

 

 

11,245 

 

 

2,601 

Noncompete agreements

 

2,232 

 

 

1,870 

 

 

362 

 

 

2,232 

 

 

1,888 

 

 

344 

Favorable lease

 

1,136 

 

 

412 

 

 

724 

 

 

1,136 

 

 

434 

 

 

702 

Total

$

145,355 

 

$

62,739 

 

$

82,616 

 

$

158,324 

 

$

67,041 

 

$

91,283 







Amortization expense of intangible assets totaled $3.8 million and $4.3 million for the three months ended March 31, 2015 and 2016, respectively. These costs are included in amortization and change in contingent consideration in the accompanying consolidated statements of income.



The estimated expected amortization expense in future periods at March 31, 2016 is as follows (in thousands):









 

 



 

 

Remainder of 2016

$

13,305 

2017

 

17,221 

2018

 

14,051 

2019

 

13,491 

2020

 

11,508 

Thereafter

 

21,707 

Total

$

91,283 

 

(4)     Accounts Receivable



Accounts receivable at December 31, 2015 and March 31, 2016 were comprised of the following (in thousands):











 

 

 

 

 



 

 

 

 

 



December 31,

 

March 31,



2015

 

2016

Trade receivables

$

37,999 

 

$

43,370 

Unpaid amounts for benefit services

 

35,343 

 

 

47,894 



 

73,342 

 

 

91,264 

Less allowance for doubtful accounts

 

(1,071)

 

 

(1,681)

Accounts receivable, net

$

72,271 

 

$

89,583 

 

 

9


 

(5)     Property and Equipment



Property and equipment at December 31, 2015 and March 31, 2016 were comprised of the following (in thousands):











 

 

 

 

 



 

 

 

 

 



December 31,

 

March 31,



2015

 

2016

Computers and equipment

$

14,461 

 

$

14,571 

Software and software development costs

 

92,898 

 

 

96,093 

Furniture and fixtures

 

5,083 

 

 

5,096 

Leasehold improvements

 

13,594 

 

 

14,004 



$

126,036 

 

$

129,764 

Less accumulated depreciation and amortization

 

(78,081)

 

 

(82,499)

Property and equipment, net

$

47,955 

 

$

47,265 



In the three months ended March 31, 2015 and 2016, the Company capitalized software development costs of $4.7 million and $3.4 million, respectively. In the three months ended March 31, 2015 and 2016, the Company amortized $2.4 million and $3.1 million of capitalized software development costs, respectively. These costs are included in amortization and change in contingent consideration in the accompanying consolidated statements of income. At March 31, 2016, the unamortized software development costs included in property and equipment in the accompanying consolidated balance sheets was $27.7 million.  



Total depreciation expense, including amortization of capitalized software development costs, in the three months ended March 31, 2015 and 2016 was $4.0 million and $4.9 million, respectively.





(6)     Accounts Payable and Accrued Expenses



Accounts payable and accrued expenses at December 31, 2015 and March 31, 2016 were comprised of the following (in thousands):





 





 

 

 

 

 



 

 

 

 

 



December 31,

 

March 31,



2015

 

2016

Accounts payable

$

2,542 

 

$

2,196 

Payable to benefit providers and transit agencies

 

23,169 

 

 

31,116 

Accrued payables

 

11,198 

 

 

16,667 

Accrued compensation and related benefits

 

18,538 

 

 

14,848 

Other accrued expenses

 

2,891 

 

 

3,595 

Deferred revenue

 

2,203 

 

 

3,712 

Accounts payable and accrued expenses

$

60,541 

 

$

72,134 

 





(7)     Long-term debt



On June 5, 2015, the Company entered into an Amended and Restated Credit Agreement with certain lenders, including MUFG Union Bank, N.A., as administrative agent. With a $15.0 million subfacility for the issuance of letters of credit, the amendment provides for a $150.0 million revolving credit facility and an increase option permitting the Company to arrange with existing lenders and/or new lenders to provide up to an aggregate of $100.0 million in additional commitments. The amendment extended the term of the credit facility to June 5, 2020 and reduced the margin added to the London Interbank Offered Rate (“LIBOR”) to a range of 125 to 175 basis points. The interest rate applicable to the revolving credit facility as of March 31, 2016 is 1.69%.  In connection with the Amended and Restated Credit Agreement, the Company incurred fees of approximately $0.4 million, which are being amortized over the term of the amendment. The fees incurred are classified as a direct deduction from the long-term debt line item in the consolidated balance sheets. As of March 31, 2016, the Company had $79.6 million outstanding under the revolving credit facility. 



10


 

Amounts borrowed, outstanding letters of credit and amounts available to borrow, were as follows (in thousands):







 

 

 

 

 



 

 

 

 

 



December 31,

 

March 31,



2015

 

2016

Amounts borrowed

$

79,600 

 

$

79,600 

Outstanding letters of credit

 

2,700 

 

 

2,700 

Amounts available to borrow (1) 

 

67,700 

 

 

67,700 



(1)

Excluding $100 million increase option



As collateral, the Company’s obligations are secured by substantially all of the Company’s assets. All of the Company’s material existing and future subsidiaries are required to guaranty the Company’s obligations under the credit facility. Such guarantees by existing and future material subsidiaries are and will be secured by substantially all of the property of such material subsidiaries.



The credit facility contains customary affirmative and negative covenants and also has financial covenants relating to a liquidity ratio, a consolidated leverage ratio and an interest coverage ratio. The Company is obligated to pay customary commitment fees and letter of credit fees for a facility of this size and type. The Company is currently in compliance with all financial and non-financial covenants under the credit facility.

The credit facility contains customary events of default, including, among others, payment defaults, covenant defaults, inaccuracy of representations and warranties, cross-defaults to other material indebtedness, judgment defaults, a change of control default and bankruptcy and insolvency defaults.  Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the loan agreement at a per annum rate of interest equal to 2.00% above the applicable interest rate. Upon an event of default, the lenders may terminate the commitments, declare the outstanding obligations payable by the Company to be immediately due and payable and exercise other rights and remedies provided for under the credit facility.



(8)     Organizational Efficiency Plan



During the second quarter of 2015, the Company integrated operations and consolidated certain positions resulting in employee headcount reductions. The Company continually evaluates ways to improve business processes to ensure that operations align with its strategy and vision for the future. In 2015, the Company recognized charges in operating expenses of $1.9 million, primarily for severance costs. The Company recorded these severance costs within accrued expenses in the accompanying consolidated balance sheets. 



Changes in the Company’s accrued liabilities for workforce reduction costs in the three months ended March 31, 2016 were as follows (in thousands):





 

 



 



Amount

Beginning balance as of December 31, 2015

$

183 

Employee termination and other charges

 

 —

Cash paid

 

(127)

Ending balance as of March 31, 2016

$

56 













(9)     Employee Benefit Plans 



Employee Stock Option Plan



The Company’s stock option program is a long-term retention program that is intended to attract, retain, and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests.



11


 

The following table summarizes the weighted-average fair value of stock options granted:







 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2015

 

2016

Stock options granted (in thousands)

 

37 

 

 

496 

Weighted-average fair value at date of grant

$

24.05 

 

$

16.62 







Stock option activity for the three months ended March 31, 2016 was as follows (shares in thousands):







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

Remaining

 

Aggregate



 

 

Weighted-average

 

contractual term

 

intrinsic value



Shares

 

exercise price

 

(in years)

 

(in thousands)

Outstanding at December 31, 2015

3,037 

 

$

25.18 

 

6.41 

 

$

65,229 

Granted

496 

 

 

43.63 

 

 

 

 

 

Exercised

(301)

 

 

15.60 

 

 

 

 

 

Forfeited

(27)

 

 

45.38 

 

 

 

 

 

Outstanding as of March 31, 2016

3,205 

 

$

28.76 

 

6.96 

 

$

71,600 

Vested and expected to vest at March 31, 2016

3,068 

 

$

28.10 

 

6.87 

 

$

70,533 

Exercisable at March 31, 2016

1,763 

 

$

16.79 

 

5.29 

 

$

60,371 







As of March 31, 2016, there was $22.7 million of total unrecognized compensation cost related to unvested stock options which are expected to vest. The cost is expected to be recognized over a weighted-average period of approximately 2.98 years as of March 31, 2016.  



The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:  











 

 

 



 

 

 



Three Months Ended March 31,



2015

 

2016

Expected volatility

44.32% 

 

42.88% 

Risk-free interest rate

1.55% 

 

1.09% 

Expected term (in years)

4.74 

 

4.87 

Dividend yield

—%

 

—%



Stock-based compensation cost is measured at the grant date based on the fair value of the award. The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatility is determined using weighted-average volatility of peer publicly traded companies as well as the Company’s own historical volatility. The Company expects that it will increase weighting of its own historical data in future periods, as that history grows over time. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations and has not paid cash dividends on its common stock. The Company estimates the expected term based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior such as exercises and forfeitures.





Restricted Stock Units



The Company grants restricted stock units to certain employees, officers and directors under the 2010 Equity Incentive Plan. Restricted stock units vest upon performance-based, market-based or service-based criteria.



Performance-based restricted stock units vest based on the satisfaction of specific performance criteria. At each vesting date, the holder of the award is issued shares of the Company’s common stock. Compensation expense from these awards is equal to the fair market value of the Company’s common stock on the date of grant and is recognized over the remaining service period based on the probable outcome of achievement of the financial metrics. Management’s estimate of the number of shares expected to vest is based on the anticipated achievement of the specified performance criteria.



12


 

Market-based performance restricted stock units are granted such that they vest upon the achievement of certain per share price targets of the Company’s common stock during a specified performance period. The fair market values of market-based performance restricted stock units are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated including the future daily stock price of the Company’s common stock over the specified performance period, the Company’s stock price volatility and risk-free interest rate. The amount of compensation expense is equal to the per share fair value calculated under the Monte Carlo simulation multiplied by the number of market-based performance restricted stock units granted, recognized over the specified performance period.



Generally, service-based restricted stock units vest over four years with 25% vesting after one year and the balance vesting monthly over the remaining period.



In the first quarter of 2015 and 2016, the Company granted a total of 140,000 and 263,000, respectively, of performance-based restricted stock units to certain executive officers. Performance-based restricted stock units are typically granted such that they vest upon the achievement of certain revenue growth rates and other financial metrics, during a specified performance period for which participants have the ability to receive up to 150% or 200% of the target number of shares originally granted, depending on terms of the grant agreement.  



The restricted stock units will be eligible to vest based on the Company’s achievement against an average annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin target equal to or greater than 22% and compound revenue growth target for the specified performance period.

 

The following table describes the levels of revenue growth target for the specified performance period for the restricted stock units granted in 2016 to vest:





 

Achievement of Revenue Growth Objective

Percentage of Restricted Stock Unit Vesting

20% and Greater

200% will vest

Between 15% but less than 20%

Between 100% and 200% will vest

Between 10% but less than 15%

Between 50% and 100% will vest

Below 10%

None will vest



Stock-based compensation expense related to restricted stock units was $2.6 million and $3.8 million for the three months ended March 31, 2015 and 2016, respectively. Total unrecorded stock-based compensation cost at March 31, 2016 associated with restricted stock units was $27.3 million, which is expected to be recognized over a weighted-average period of 2.00 years.



The following table summarizes information about restricted stock units issued to officers, directors and employees under the 2010 Equity Incentive Plan (shares in thousands):











 

 

 

 



 

 

 

 



 

 

Weighted-Average



 

 

Grant Date



Shares

 

Fair Value

Unvested at December 31, 2015

763 

 

$

44.83 

Granted (1)

371 

 

 

33.27 

Vested (2)

(303)

 

 

18.49 

Forfeited

(3)

 

 

61.08 

Unvested at March 31, 2016

828 

 

$

49.24 



(1)

Includes additional shares granted as specified financial metrics for the performance-based restricted stock units, granted to certain executives in 2013, during the performance period of January 1, 2013 through December 31, 2015 were met, resulting in actual shares vesting at 150% of the target number of shares originally granted.

(2)

Includes 264,000 shares vested from performance-based restricted stock units granted to certain executives in 2013 representing 150% of the target number of shares originally granted.



Stock-based compensation is classified in the consolidated statements of income in the same expense line items as cash compensation. Amounts recorded as expense in the consolidated statements of income was as follows (in thousands):  









13


 



 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2015

 

2016

Cost of revenue

$

801 

 

$

1,150 

Technology and development

 

48 

 

 

485 

Sales and marketing

 

664 

 

 

707 

General and administrative

 

2,923 

 

 

3,649 

Total

$

4,436 

 

$

5,991 

 



(10)     Income Taxes 



The income tax provision for the three months ended March 31, 2015 and 2016 was $3.5 million and $3.8 million, respectively. The Company's effective tax rate was 38.4% and 39.7% for the three months ended March 31, 2015 and 2016, respectively.  The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable.



The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Presently, the Company is under audit in New York State. There are no other income tax examinations ongoing in the jurisdictions where the Company operates.



As of March 31, 2016, the Company remains in a net deferred tax asset position. The realization of the Company’s deferred tax assets depends primarily on its ability to generate sufficient U.S. taxable income in future periods. The amount of deferred tax assets considered realizable may increase or decrease in subsequent quarters as management reevaluates the underlying basis for the estimates of future domestic taxable income.

  

(11)    Commitments and Contingencies



(a) Operating Leases



The Company leases office space and equipment under noncancelable operating leases with various expiration dates through 2023. Future minimum lease payments under noncancelable operating leases are as follows (in thousands):











 

 



 

 



As of



March 31, 2016

Remainder of 2016

$

5,289 

2017

 

7,812 

2018

 

7,891 

2019

 

7,865 

2020

 

7,661 

Thereafter

 

13,634 

Total future minimum lease payments

$

50,152 

 

Rent expense for the three months ended March 31, 2015 and 2016 was $1.9 million and $1.6 million, respectively. Future minimum lease payments under capital leases, not included in the table above, as of March 31, 2016 are $0.1 million.  The Company has no future minimum lease payments under capital leases extending beyond 2016.





(b) Legal Matters



The Company is involved from time to time in claims that arise in the normal course of its business. The Company is not presently subject to any material litigation nor, to management’s knowledge, is any litigation threatened against the Company that collectively is expected to have a material adverse effect on the Company’s cash flows, financial condition or results of operations.

 

14


 



(12)     Stockholders’ Equity



Share Repurchase Program



On August 6, 2015, the Company’s Board of Directors authorized a $100 million stock repurchase program which commenced immediately and does not have an expiration dateRepurchases made under this program may be made in the open market as the Company deems appropriate and market conditions allow. The Company repurchased 226,170 shares of common stock during the three months ended March 31, 2016 for a total cost of $9.4 million, or an average price of $41.43 per share.



15


 

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



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning market opportunity, our future financial and operating results, investment strategy, sales and marketing strategy, management’s plans, beliefs and objectives for future operations, technology and development, economic and industry trends, expectations about seasonality, opportunity for channel partnerships and acquisition activities and our integration thereof, use of non-GAAP financial measures, our future operating expenses, anticipated income tax rates, capital expenditures, cash flows and liquidity. These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, 2015. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such events.





Overview



We are a leader in administering Consumer-Directed Benefits, or CDBs, which empower employees to save money on taxes and provide corporate tax advantages for employers. We are solely dedicated to administering CDBs, including pre-tax spending accounts such as Health Savings Accounts, or HSAs, health and dependent care Flexible Spending Accounts, or FSAs, Health Reimbursement Arrangements, or HRAs, as well as Commuter Benefit Services, including transit and parking programs, wellness programs, Consolidated Omnibus Budget Reconciliation Act, or COBRA, and other employee benefits. 



We deliver our CDB programs through a highly scalable delivery model that employer clients and their employee participants may access through a standard web browser on any internet-enabled device, including computers, smart phones and other mobile devices such as tablet computers. Our on-demand delivery model eliminates the need for our employer clients to install and maintain hardware and software in order to support CDB programs and enables us to rapidly implement product enhancements across our entire user base.



Our CDB programs assist employees and their families in saving money by using pre-tax dollars to pay for certain of their healthcare, dependent care and commuter expenses. Employers financially benefit from our programs through reduced payroll taxes, the benefits are realized even after factoring in our fees. Under our FSA, HSA and commuter programs, employee participants contribute funds from their pre-tax income to pay for qualified out-of-pocket healthcare expenses not fully covered by insurance, such as co-pays, deductibles and over-the-counter medical products or for commuting costs.



We price our services based on the estimated number and types of claims, whether payment processing and client support activities will be provided within or outside of the United States, the estimated number of calls to our customer support center and any specific client requirements. In addition, we derive a portion of our revenues from interchange fees that we receive when employee participants use the prepaid debit cards we provide to them for healthcare and commuter expenses.



In September 2015, we entered into our second channel partner arrangement with Ceridian Corporation, or Ceridian, to transition their COBRA and direct bill portfolio to WageWorks. This relationship also allows Ceridian to resell the Company’s COBRA and direct bill services to their new and existing clients in addition to the full suite of healthcare and commuter products they have been selling. Pursuant to the arrangement, transition of accounts is to be mostly completed by the second quarter of 2016.

 

Critical Accounting Policies and Significant Management Estimates

There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2016, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

16


 

Results of Operations

 

Revenue 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended March 31,

 

Change from



 

 

 

 

 

 

 

 



 

2015

 

2016

 

prior year



 

 

 

 

 

 

 

 

Revenues:

 

(In thousands, unaudited)

 

 

Healthcare

 

$

47,289 

 

$

50,370 

 

7% 

Commuter

 

 

15,897 

 

 

17,376 

 

9% 

COBRA

 

 

12,570 

 

 

15,406 

 

23% 

Other

 

 

9,540 

 

 

3,850 

 

-60%

Total revenues

 

$

85,296 

 

$

87,002 

 

2% 



 

 

 

 

 

 

 

 







Healthcare Revenue



We derive our healthcare revenue from the service fees paid by our employer clients for the administration services we provide in connection with their employee participants’ FSAs, HRAs and HSAs. We also earn interchange revenue paid by financial institutions related to transaction fees on debit cards used by employee participants in connection with all of our healthcare programs and through our wholesale card program, and revenue from self-service plan kits called Premium Only Plan kits, or POP revenue.



The $3.1 million increase in healthcare revenue for the three months ended March 31, 2016 as compared to the same period in 2015 was driven primarily by a $2.4 million increase in HSA  and interchange fee revenue.  





Commuter Revenue



We derive our commuter revenue from monthly service fees paid by our employer clients, interchange revenue paid by financial institutions related to transaction fees on debit cards used by employee participants in connection with our commuter solutions and commissions from the sale of transit passes used in our commuter solutions which we purchase from various transit agencies on behalf of employee participants.



The $1.5 million increase in commuter revenue for the three months ended March 31, 2016 as compared to the same period in 2015 was driven primarily by the increase in employee participation as result of the maximum pre-tax monthly benefit for transit and vanpooling increased from $130 in 2015 to $255 in 2016, as well as the addition of new clients and growth in employee participation in other Commuter programs.





COBRA Revenue



COBRA revenue is derived from administration services we provide to employer clients for continuation of coverage for participants who are no longer eligible for the employer’s health benefits, such as medical, dental and vision, and for the continued administration of the employee participants’ HRAs and certain healthcare FSAs.



The $2.8 million increase in COBRA revenue for the three months ended March 31, 2016 as compared to the same period in 2015 was due primarily to the channel partner arrangement with Ceridian.





Other Revenue



Other revenue includes enrollment and eligibility services, employee account administration (i.e., tuition and health club reimbursements) and project-related professional fees. We also derive other revenue from administrative services we provide to a significant customer to operate their health insurance exchange business which includes enrollment, billing, customer service and payment processing services. In September 2015, the aforementioned customer and we mutually agreed to transition the relationship. As a result, revenues related to administrative services provided to this individual customer are not expected to continue to be a significant portion of Other Revenue beyond 2015.



The $5.7 million decrease in other revenue for the three months ended March 31, 2016 as compared to the same period in 2015 was driven primarily by a decrease in revenue resulting from the termination of the relationship with a significant customer in health insurance exchange business.



17


 



Cost of Revenues









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,

 

Change from



 

 

 

 

 

 

 

 

 

 

 



 

2015

 

2016

 

prior year



 

 

 

 

 

 

 

 

 

 

 



 

(In thousands, unaudited)

 

 

 

Cost of revenues (excluding amortization of internal use software)

 

$

32,071 

 

 

$

31,260 

 

 

-3%

 

Percent of revenue

 

 

38% 

 

 

 

36% 

 

 

 

 









The primary component of cost of revenues is expenses related to our claims processing, product support and customer service personnel. Cost of revenues also includes outsourced and temporary labor costs, check/ACH payment processing services, debit card processing services, shipping and handling costs for cards and passes and employee participant communications costs.



The $0.8 million decrease in cost of revenues for the three months ended March 31, 2016 as compared to the same period in 2015 was due primarily to decrease in salaries and personnel-related costs, and outsourced services as a result of a reduction in headcount due a consolidation of certain positions as part of our efficiency plan.



As we grow organically and through portfolio purchases, acquisitions and channel partner arrangements, we expect our cost of revenues to increase in dollar amount to support increased employer client and employee participant levels. Prior to migrating to our proprietary technology platforms, new portfolios often operate with higher service delivery costs that result in increased cost of revenues until we are able to complete the migration process, which typically occurs over the 12- to 24-month period following closing of the portfolio purchase or acquisition.





Technology and Development







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,

 

Change from



 

 

 

 

 

 

 

 

 

 

 



 

2015

 

2016

 

prior year



 

 

 

 

 

 

 

 

 

 

 



 

(In thousands, unaudited)

 

 

 

Technology and development

 

$

10,585 

 

 

$

9,831 

 

 

-7%

 

Percent of revenue

 

 

12% 

 

 

 

11% 

 

 

 

 







Technology and development expenses include personnel and related expenses for our technology operations and development personnel as well as outsourced programming services, the costs of operating our on-demand technology infrastructure, depreciation of equipment and software licensing expenses. During the planning and post-implementation phases of development, we expense, as incurred, all internal use software and website development expenses associated with our proprietary scalable delivery model. Expenses associated with the platform content or the repair or maintenance of the existing platforms are expensed as incurred.



The $0.8 million decrease in technology and development expenses for the three months ended March 31, 2016 as compared to the same period in 2015 was due primarily to a decrease in salaries and personnel-related, temporary help and consulting services expenses. Salaries and personnel-related, temporary help and consulting services expenses in the first quarter of 2015 were higher as result of resources dedicated to a significant customer relationship in the health insurance exchange business that was terminated in the second half of 2015. 



 

We intend to continue enhancing the functionality of our software platform as part of our continuous effort to improve our employer client and employee participant experience and to maintain and enhance our control and compliance environment. The timing of development and enhancement projects, including the nature of expenditures as well as the phase of the project that could require capitalization or expense treatment, will significantly affect our technology and development expense both in dollar amount and as a percentage of revenues.  











Sales and Marketing









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

18


 



 

Three Months Ended March 31,

 

Change from



 

 

 

 

 

 

 

 

 

 

 



 

2015

 

2016

 

prior year



 

 

 

 

 

 

 

 

 

 

 



 

(In thousands, unaudited)

 

 

 

Sales and marketing

 

$

13,131 

 

 

$

13,920 

 

 

6% 

 

Percent of revenue

 

 

15% 

 

 

 

16% 

 

 

 

 





Sales and marketing expenses consist primarily of personnel and related expenses for our sales, client services and marketing staff, including sales commissions for our direct sales force and external agent/broker commission expense, as well as communication, promotional, public relations and other marketing expenses.



The $0.8 million increase in sales and marketing expense for the three months ended March 31, 2016 as compared to the same period in 2015 was due primarily to sales commission expense, temporary help and consulting services expenses to support the increase in our client base through our broker relationships and ongoing promotional marketing initiatives.



We continue to invest in sales, client services and marketing by hiring additional personnel and continuing to build our broker and channel relationships. We will also promote our brand through a variety of marketing and public relations activities. As a result, we expect our sales and marketing expenses to increase in dollar amount in future periods.





General and Administrative









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,

 

Change from



 

 

 

 

 

 

 

 

 

 

 



 

2015

 

2016

 

prior year



 

 

 

 

 

 

 

 

 

 

 



 

(In thousands, unaudited)

 

 

 

General and administrative

 

$

13,565 

 

 

$

14,615 

 

 

8% 

 

Percent of revenue

 

 

16% 

 

 

 

17% 

 

 

 

 





General and administrative expenses include personnel and related expenses and professional fees incurred by our executive, finance, legal, human resources and facilities departments.



The $1.1 million increase in general and administrative expenses for the three months ended March 31, 2016 as compared to the same period in 2015 was due primarily to an increase of $0.7 million in stock-based compensation expense due primarily to new grants of restricted stock units, performance-based restricted stock units and stock options, and a $0.8 million increase in bad debt expense. These increases were offset by a decrease of $0.3 million in rent expense due to a higher prior year expense as result of our Arizona office relocation and a decrease of $0.2 million in outsourced services as result of the termination of a significant customer relationship in the health insurance exchange business.



As we continue to grow, we expect our general and administrative expenses to continue to increase in absolute dollars as we expand general and administrative headcount to support our continued growth.





Amortization and Change in Contingent Consideration



 





 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,

 

Change from



 

 

 

 

 

 

 

 

 



 

2015

 

2016

 

prior year



 

 

 

 

 

 

 

 

 



 

(In thousands, unaudited)

 

 

 

Amortization and change in contingent consideration

 

$

6,279 

 

$

7,445 

 

19% 

 





Our amortization and change in contingent consideration consists of three components: amortization of internal use software, amortization of acquired intangible assets and change in contingent consideration. We capitalize our software development costs related to the development and enhancement of our business solution. When the technology is available for its intended use, the capitalized costs are amortized over the technology’s estimated useful life, which is generally four years. Acquisition-related intangible assets are also amortized over their estimated useful lives.  



19


 

The $1.2 million increase in the amortization and change in contingent consideration for the three months ended March 31, 2016 as compared to the same period in 2015 was driven primarily by an increase in amortization from additions to internally developed software and acquired intangible assets from the channel partner arrangement with Ceridian and the CONEXIS acquisition. 





Other Income (Expense)









 

 

 

 

 

 



 

Three Months Ended March 31,



 

 

 

 

 

 



 

2015

 

2016



 

 

 

 

 

 



 

(In thousands, unaudited)

Interest income

 

$

 

$

86 

Interest expense

 

 

(575)

 

 

(405)

Other income

 

 

66 

 

 

(4)





The $0.2 million decrease in interest expense for the three months ended March 31, 2016 as compared to the same period in 2015 was due to a decrease in interest rate for our revolving credit facility with MUFG Union Bank, N.A from 2.50% to 1.69% in the first quarter 2016.  



Income Taxes 









 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

 

 

 

 

 



 

2015

 

2016



 

 

 

 

 

 



 

(In thousands, unaudited)

Income tax provision

 

$

(3,519)

 

$

(3,812)





The $0.3 million increase in the provision for income taxes for the three months ended March 31, 2016 as compared to the prior-year period was due primarily to an increase in income before income taxes and effective tax rate.



 



Liquidity and Capital Resources



At March 31, 2016, our principal sources of liquidity were cash and cash equivalents totaling $562.4 million comprised primarily of funding by clients of amounts to be paid on behalf of employee participants as well as other cash flows from operating activities. For the three months ended March 31, 2016 our cash flow from operating activities provided $73.5 million and at
March 31, 2016, we had $67.7 million of borrowing capacity available under our revolving credit facility. 



We believe that our existing cash and cash equivalents and expected cash flow from operations will be sufficient to meet our working capital, debt, capital expenditures and stock repurchase needs, as well as anticipated cash requirements for potential future portfolio purchases, over at least the next 12 months. We have historically been able to fulfill our obligations as incurred and expect to continue to fulfill our obligations in the future. Our expectation is based on our current and anticipated client retention rates and our continuing funding model in which the vast majority of our enterprise clients provide us with prefunds as more fully described below under “—Prefunds.” To the extent these current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, including any potential portfolio purchases; we may need to raise additional funds through public or private equity or debt financing. We cannot provide assurance that we will be able to raise additional funds on favorable terms, if at all.





20


 

Prefunds



Under our contracts with the vast majority of our employer clients, we receive prefunds that have been and are expected to continue to be a significant source of cash flows from operating activities. Our client contracts do not contain restrictions on our use of client prefunds and, as a result, each prefund is reflected in cash and cash equivalents on our consolidated balance sheet with an equivalent customer obligation recorded as a liability as the prefund is received. Changes in these prefunds and the corresponding customer obligations are reflected in our cash flows from operating activities. The timing of when employer clients make their prefunds as well as the timing of when we make payments on behalf of employee participants can significantly affect our cash flows.



The operation of these prefunds for our employer clients throughout the year typically is as follows: at the beginning of a plan year, these employer clients provide us with prefunds for their FSA and HRA programs based on a percentage of projected spending by the employee participants for the plan year and other factors. In the case of our commuter program, at the beginning of each month we receive prefunds based on the employee participants’ monthly elections. These prefunds are typically replenished on a weekly basis by our FSA and HRA employer clients and on a monthly basis by our commuter employer clients, in each case, the replenishment occurs after we have advanced the funds necessary to process employee participants’ FSA and HRA claims as they are submitted to us and to pay vendors relating to our commuter programs. As a result, our cash balances can vary significantly depending upon the timing of invoicing and the date payment is received from our employer clients for reimbursement of payments we have made on behalf of employee participants.





MUFG Union Bank, N.A. Revolving Credit Facility



In the second quarter of 2015, we entered into an Amended and Restated Credit Agreement with certain lenders, including MUFG Union Bank, N.A, as administrative agent. The amendment provides for a $150.0 million revolving credit facility, an increase option permitting us to arrange with existing lenders and/or new lenders to provide up to an aggregate of $100.0 million in additional commitments and a $15.0 million subfacility for the issuances of letters of credit. In addition, the credit facility provides for stock repurchases from employees of up to an aggregate of $1.0 million in any fiscal year. The amendment extended the term of the credit facility to June 5, 2020 and reduced the margin added to the London Interbank Offered Rate, or LIBOR, to a range from 125 to 175 basis points. The interest rate applicable on the revolving credit facility as of March 31, 2016 is 1.69%. As of March 31, 2016, the Company had $79.6 million outstanding under the credit facility.



Amounts borrowed, outstanding letters of credit and amounts available to borrow, were as follows (in thousands):





 

 

 

 

 



December 31,

 

March 31,



2015

 

2016

Amounts borrowed

$

79,600 

 

$

79,600 

Outstanding letters of credit

 

2,700 

 

 

2,700 

Amounts available to borrow (1) 

 

67,700 

 

 

67,700 



(1)

Excluding $100 million increase option



As collateral for the revolving credit facility,  we granted MUFG Union Bank, N.A. a security interest in substantially all of our assets. All of our material existing and future subsidiaries are required to guaranty our obligations under the revolving credit facility. Such guarantees by existing and future material subsidiaries are and will be secured by substantially all of the property of such material subsidiaries.



The revolving credit facility contains customary affirmative and negative covenants and also has financial covenants relating to a consolidated leverage ratio and an interest coverage ratio. We are obligated to pay customary commitment fees and letter of credit fees for a facility of this size and type. We are currently in compliance with all financial and non-financial covenants under the revolving credit facility.



The revolving credit facility contains customary events of default, including, among others, payment defaults, covenant defaults, inaccuracy of representations and warranties, cross-defaults to other material indebtedness, judgment defaults, a change of control default and bankruptcy and insolvency defaults. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the loan agreement at a per annum rate of interest equal to 2.00% above the applicable interest rate. Upon an event of default, the lenders may terminate the commitments, declare the outstanding obligations payable by us to be immediately due and payable and exercise other rights and remedies provided for under the revolving credit facility. 





21


 

Cash Flows



The following table presents information regarding our financial position including cash and cash equivalents:













 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

March 31,



 

 

 

 

 

 



 

2015

 

2016



 

 

 

 

 

 



 

(In thousands, unaudited)



 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

500,918 

 

$

562,441 





The following table presents information regarding our cash position:









 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

 

 

 

 

 



 

2015

 

2016



 

 

 

 

 

 



 

(In thousands, unaudited)



 

 

 

 

 

 

Net cash provided by operating activities

 

$

38,030 

 

$

73,489 

Net cash used in investing activities

 

 

(5,972)

 

 

(10,962)

Net cash provided by (used in) financing activities

 

 

6,483 

 

 

(1,004)

Net increase in cash and cash equivalents

 

$

38,541 

 

$

61,523 



 

 

 

 

 

 





Cash Flows from Operating Activities







Net cash provided by operating activities increased during the three months ended March 31, 2016 as compared to the prior-year period by $35.5 million, primarily due to the $31.7 million increase in cash provided by our working capital. Cash from operating activities during the three months ended March 31, 2016 resulted primarily from our net income of $5.8 million adjusted for the following non-cash items:  $1.8 million for depreciation, $7.3 million for amortization and change in contingent consideration and $6.0 million for stock-based compensation expense. Cash from operating activities in 2016 compared to 2015 was further increased by changes in our working capital due primarily to a $36.5 million increase in customer obligation due to the increase in prefunds and timing of payments to transit agencies. 





Cash Flows from Investing Activities





Net cash used in investing activities increased during the three months ended March 31, 2016 as compared to the prior-year period by $5.0 million, primarily due to payments of $7.6 million for the acquisition of intangible assets for the transition of Ceridian’s COBRA and direct bill portfolio to the Company. This increase was offset by decreased capital expenditures of $2.6 million.





Cash Flows from Financing Activities







Net cash used in financing activities increased during the three months ended March 31, 2016 as compared to the prior-year period by $7.5 million, primarily due to payments of $9.4 million for share repurchase activities in 2016, partially offset by the increase in proceeds from exercise of stock options of $2.3 million.





22


 

Contractual Obligations





The following table describes our contractual obligations as of March 31, 2016 (unaudited):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Less than

 

1-3

 

3-5

 

More than



 

Total

 

1 year

 

years

 

years

 

5 years

Long-term debt obligations (1)

 

$

79,600 

 

$

 —

 

$

 —

 

$

79,600 

 

$

 —

Interest on long-term debt obligations (2)

 

 

5,619 

 

 

1,322 

 

 

2,644 

 

 

1,653 

 

 

 —

Operating lease obligations (3)

 

 

50,152 

 

 

5,289 

 

 

15,702 

 

 

15,527 

 

 

13,634 

Total

 

$

135,371 

 

$

6,611 

 

$

18,346 

 

$

96,780 

 

$

13,634 

                                      

(1)

As of March 31, 2016, maximum borrowings under the revolving credit facility are $150.0 million with a base rate determined in accordance with the credit agreement or, at our option, LIBOR plus a spread of 1.25% to 1.75% per annum, and a maturity date of June 5, 2020. At March 31, 2016, we had $79.6 million of outstanding principal which is recorded net of debt issuance costs on our consolidated balance sheets. The debt issuance costs are not included in the table above.

(2)

Estimated interest payments assume the interest rate applicable as of March 31, 2016 of 1.69% per annum on a $79.6 million principal amount.

(3)

We lease facilities under non-cancelable operating leases expiring at various dates through 2023.





Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.





23


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk



There has been no material changes in our market risk during the three months ended March 31, 2016.  For additional information, see Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk”, of our Annual Report on Form 10-K for the year ended December 31, 2015.  





Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.



Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.



Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2016, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.





Changes in Internal Control over Financial Reporting



There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



24


 

PART II.     OTHER INFORMATION



Item 1. Legal Proceedings



From time-to-time, we may be subject to various legal proceedings and claims that arise in the normal course of our business activities. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any litigation whereby the outcome of such litigation, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations, prospects, cash flows, financial position or brand.





Item 1A. Risk Factors 



There have been no material changes in our risk factors disclosed in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, 2015.





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



Stock Repurchases



The following table provides the repurchases of common stock by the Company during the three months ended March 31, 2016:





 

 

 

 

 

 

 

 

 

 



Total Number of Shares Repurchased

 

 

Average Price
Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Program
(in thousands)

January 1, 2016 to January 31, 2016

226,170 

 

$

41.43 

 

 

226,170 

 

$

85,626 

February 1, 2016 to February 29, 2016

 —

 

 

 —

 

 

 —

 

 

85,626 

March 1, 2016 to March 31, 2016

 —

 

 

 —

 

 

 —

 

 

85,626 



226,170 

 

$

41.43 

 

 

226,170 

 

$

85,626 





Item 6. Exhibits



The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Quarterly Report.



25


 

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.







 

 



 

WAGEWORKS, INC.



 

 

Date: May 5, 2016

By:

/s/ COLM M CALLAN



 

Colm M  Callan



 

Chief Financial Officer



 

(Principal Financial Officer)



 

 



 

/s/ COLM M CALLAN



 

Colm M  Callan



 

Chief Financial Officer



 

(Principal Accounting Officer)



 

 





26


 

Exhibit Index 





 

 

 

 

 

 



 

Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

31.1

Certification of the Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

X

31.2

Certification of the Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

X

32.1(1)

Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

X

101.INS

XBRL Instance Document

 

 

 

 

 

101.SCH

XBRL Taxonomy Schema Linkbase Document

 

 

 

 

 

101.CAL

XBRL Taxonomy Calculation Linkbase Document

 

 

 

 

 

101.DEF

XBRL Taxonomy Definition Linkbase Document

 

 

 

 

 

101.LAB

XBRL Taxonomy Labels Linkbase Document

 

 

 

 

 

101.PRE

XBRL Taxonomy Presentation Linkbase Document

 

 

 

 

 



(1)

The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of WageWorks, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q,  irrespective of any general incorporation language contained in such filing.





27