Insperity, Inc.
Q4 2006 Earnings Call Transcript

Published: 12 Feb 2007

[Operator:]

Good day, ladies and gentlemen, and welcome to the Administaff fourth quarter 2006 earnings conference call. (Operator Instructions) Joining us on the call today are Mr. Paul Sarvadi, Chairman and Chief Executive Officer; Mr. Richard Rawson, President; and Mr. Douglas Sharp, Chief Financial Officer. I would now like to turn the call over to Mr. Doug Sharp.

[Doug Sharp:]

Thank you. We appreciate you joining us this morning. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson, or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, projects, believes, likely, probably, goal, objective, outlook, guidance, appears, target, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now let me take a minute to outline our plan for this morning's call. First I'll discuss our fourth quarter and 2006 full year financial results. Paul will recap the 2006 year and comment on our outlook for 2007. Richard will then discuss recent and projected trends in our direct costs, including

[Paul Sarvadi:]

Thank you, Doug. In my part of the call today, I'll discuss three separate topics

[Richard Rawson:]

Thank you, Paul. This morning I'm going to comment briefly on the details of our fourth quarter gross profit results, then I will explain how we see our pricing strategy and direct cost trends affect our gross profit per worksite employee per month for 2007. As you know, our pricing model is built by using individual allocations designed to match each of the direct costs, plus a separate allocation for our HR services -- we call the markup -- that is designed to generate most of our gross profit per worksite employee per month. Since all of the direct costs are not known in advance, we build in targeted allocations to cover those particular costs. Our pricing strategy is to have these allocations match or exceed the direct cost and produce a surplus of approximately 3% that when added to our markup produces the desired gross profit per worksite employee per month. For this quarter, as Doug just reported, our gross profit per worksite employee per month of $239 was above the top end of our forecasted range by $1 per worksite employee per month. These results came from achieving our targeted average markup for the quarter of $200 per worksite employee per month and generating a surplus of $39 per worksite employee per month, or 4.1% of total direct costs allocations. This surplus came from contributions in two of the direct cost centers offset by higher than expected costs in one cost center. Let me explain. The surplus in the payroll tax cost center has continued to come from better than expected unemployment tax rates that we received earlier in 2006 compared to our pricing allocations. Additionally, the reduction in expense from the State of California rate issue that Doug mentioned a few moments ago also contributed to this surplus. Our second contributor to this surplus in this quarter came from our workers' compensation program. The better than expected surplus came as a result of managing the settlement of workers' compensation claims at lower than expected costs. In addition, we continue to see favorable trends in the incidents rate on the current policy. That rate is down 2% on a worksite employee base that has grown 11% this quarter. That leaves the benefits cost center, which did not contribute to gross profit surplus at all. Specifically, the healthcare costs in the quarter were $16 per covered employee higher than what we had forecasted for the quarter. This spike was driven by a 35% increase over prior quarters in both the number and dollar amount of large claims that exceeded $50,000 per claim. Over the years, United Healthcare has told us that our experience with large claims has generally been at the lower end of the range of their actuarial expectations. This quarter we were at the high end of their expected range. Now, despite this unexpected increase in the fourth quarter, the plan experienced a 5.6% increase for the full year, which is substantially lower than the cost trends seen in the small business marketplace. In summary, 2006 was an exceptional year from a pricing and direct cost management perspective. Our average markup increased $3 per worksite employee per month to our target of $198 per worksite employee per month for the year and our surplus increased from an expected $24 per worksite employee per month for the year to $36 per worksite employee per month. It was a job well done by a lot of great people. Now, I'd like to update everyone on the changes to our gross profit per worksite employee per month expectation for 2007 since our last conference call. The bottom line is, we have a wider range in our expectations for this metric than we did last fall to account for a wider range of possible benefit costs. Let me explain each component beginning with pricing. Our plan this year is to increase the average markup from the 2006 average of $198 per worksite employee per month to $201 per worksite employee per month for 2007. The demand for our service is still very high and renewal pricing in the fourth quarter increased slightly more than $4 per worksite employee per month. The second component of our gross profit per worksite employee per month comes from the surpluses that we generate by managing the direct cost so that they are lower than what we allocate in our pricing to cover those costs. Historically, we generate a surplus from our payroll tax cost center and 2007 should not be any different. Our preliminary guidance last fall included estimated state unemployment tax rates from Price Waterhouse Coopers consistent with how we budget this expense every year.. Now, most of the states have given us our unemployment tax rates for 2007 and the expected costs will be lower than 2006 and somewhat better than we anticipated last fall. Because of how payroll tax expense and the corresponding billing allocation work in our model, we should see a nice surplus in Q1 followed by nominal surpluses in Q2 and Q3 and then a moderate surplus in Q4. As for workers' compensation, we see a surplus contribution continuing throughout 2007 generated by the difference between our allocations and the ultimate cost of the program. We expect our cost to remain at the current level in a range of 0.85% to 0.90% of non-bonus payroll for each quarter of 2007. This range is also slightly better than what we had expected last fall. Now the benefits cost center is the driver to the change in our expectations for 2007. Last quarter, I spoke at length about our cost expectations for 2007 and the reasons why we would expect our benefit cost per covered employee to increase 7% to 8% over 2006. The new factor to consider today is the higher than expected large claims we experienced in the fourth quarter. We believe the conservative approach is to include both possibilities related to these large claims. If that trend were to continue throughout 2007, we could see our cost per covered employee increase 9% over 2006. If the increase in large claims is not a trend, then our 7% low end expectation is still valid. Therefore, our new range for expected costs is a 7% to 9% increase per covered worksite employee over 2006. Since our current pricing allocation is based on a 7% to 8% increase, we could have a shortfall that would translate into a $3 to $4 per worksite employee per month reduction at the gross profit line. We should know in less than 90 days whether Q4 was a blip or the beginning of a trend. If it is a trend, then we'll have to add further increases to our allocations. If it was a blip, then we will not be increasing those allocations as aggressively. In summary, as we look to 2007, we see the average markup per worksite employee per month to gradually increase throughout the year from an average of $198 to $201. The surplus generated from two of our three direct cost centers is better than what we thought last quarter and the benefits cost might be worse if large loss claims continue. Therefore, the surplus component of our gross profit for the full year could be $26 to $35 per worksite employee per month. Now, I would like to turn the call back over to Doug.

[Doug Sharp:]

Thanks, Richard. As most of you are probably aware, we provided our preliminary 2007 outlook during our previous conference call. This outlook was provided prior to the completion of our fall sales campaign, year end client renewal period, and finalization of our operating expense budget. So at this point, I'd like to update our full-year guidance and provide some detail by quarter. Let's begin with worksite employees. As Paul mentioned a moment ago, when you take our January starting point, combined with our forecast for net unit growth of 1,100 to 1,300 for each month thereafter, we are now forecasting 10% to 11% unit growth for the full year of 2007. As for the first quarter, we now expect the average paid worksite employees to be in a range of 105,500 to 106,000. Now let's discuss our pricing and direct cost metric, gross profit per worksite employee per month. As Richard mentioned, our 2007 forecast has been updated since our previous conference call. We now expect full-year 2007 gross profit per worksite employee per month to be in a range $227 to $236. The low to the high end of this range is primarily based upon the expected range of outcomes of our healthcare claim costs. We plan to adjust the pricing of the healthcare component of our fee based upon this range of expected cost. The price increases will take effect as clients renew and will therefore largely impact gross profit favorably during the latter half of the year. So as for the quarters, we are now forecasting a range of gross profit per worksite employee per month of $224 to $230 in Q1. We would expect Q2 to decline by about 1% to 2% from Q1 due to increased payroll tax cost associated with new business. Thereafter, we would expect a sequential increase of 4% to 5% in Q3 and again in Q4, as payroll tax costs decline and price increases take effect. Now, let's discuss operating expenses. Since providing our preliminary guidance of a 13% to 14% increase in 2007 annual operating expenses, we have finalized and recalibrated our operating expense budget in light of our revised unit growth and gross profit guidance. We are now forecasting an 8.5% to 10% increase in operating expenses, or a range of $240 million to $243 million. The high end of our full year range is tied to achieving higher unit growth and gross profit goals. Under either scenario, we are targeting a decline in operating expenses on a per worksite employee per month basis from $183 in 2006 to approximately $181 for 2007. As for the details, we expect an 8% to 10% increase in cash compensation costs over 2006, with the upper end of this range tied to additional incentive compensation upon achieving higher unit growth and gross profit results. Cash compensation costs will increase sequentially each quarter throughout the year with the hiring of sales reps as we open new sales offices. Stock-based compensation costs are estimated at $7.1 million and step up in the second quarter with the annual restricted share grant scheduled for March and the board of directors grant in May. We expect depreciation and amortization expense to remain relatively flat when compared to 2006, between $14.5 million and $15 million and consistent from quarter to quarter. As for commission expense, we expect an increase between 12% and 13% over 2006, slightly higher than our forecasted unit growth due to the change in the compensation structure mentioned in our previous conference call. These costs should increase sequentially over the year as our worksite employee base grows. Advertising expense is expected to increase approximately 2% over 2006, and because this is a non-election year, we can increase our air time without a corresponding increase in expense. As in previous years, these costs step up in Q2 and Q4 due to advertising associated with our spring and fall sales campaigns. General and administrative expenses are expected to increase approximately 8% over 2006 and are higher in Q1 due to costs associated with our annual sales conference and employee incentive trip. So as for the first quarter, we expect total operating expenses to be in a range of $58.25 million to $59 million. We expect net interest income to be between $3 million and $3.2 million for the first quarter and between $13 million and $14 million for the full year, based upon forecasted cash balances and current interest rates. We are forecasting an effective income tax rate of 36.2% and expect average outstanding shares of 28.2 million for the first quarter and for the full year. It is important to note that our forecast of net interest income and average outstanding shares excludes the impact of any share repurchase activity. Finally, we have budgeted capital expenditures at $15 million. At this time, I'd like to open up the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from Tobey Sommer - SunTrust Robinson Humphrey.

[Tobey Sommer:]

I was wondering if we could dig into the middle market clients who left in November and December? Was there any additional color you could give us in terms of any industry concentration or geographic concentration that would give us a little bit more insight into what happened?

[Paul Sarvadi:]

Well Tobey, thanks for your question. there's really nothing further geographically. There were only seven accounts, but they totaled the 2,000 worksite employees and it was just basically companies making a decision to move, as I said, just mostly taking it in-house at year end.

[Tobey Sommer:]

In taking a look at the 10% to 11% growth in worksite employees in '07, if you look at the core traditional customer base, what sort of growth rate is implied in that 10% to 11% for the core smaller customers?

[Paul Sarvadi:]

I don't have that specifically, but it's higher than that because we basically want to be conservative about giving ourselves time for the mid market to develop. I think it's prudent at this point to factor in what we just saw, so that's what we did. We want to be conservative about the going-forward growth and then put people on to both the mid-market game plan and accelerate the core market selling program and see things accelerate as we move on later in the year.

[Tobey Sommer:]

Okay. Another question for you regarding not necessarily the service fee, but markup or the surplus, over time we've talked about you finding other areas that can contribute both profit to that gross profit per worksite employee per month. Do you have any comments on what sort of expectations we should have for that expanding over time?

[Paul Sarvadi:]

We really didn't break that out very much in this particular call because we had so much to cover. But last quarter we talked about the fact that we do have a couple dollars of gross profit per worksite employee expectation in this year's model related to the total of the other initiatives, which includes HR tools, which is selling other HR services and products to prospects as an introduction to Administaff and the quality of our services, try to bring in more prospects that way to our core business. We have the marketplace, which consists of other 50 high-quality strategic alliances where we sell other goods and services to our current client base and their employees and families. So between those two major initiatives we expect to see that begin contributing this year and we think that has tremendous potential for growth over the years. And we look forward to demonstrating that over the course of this year.

[Tobey Sommer:]

Last question and I'll get back in the queue. Do you have any expectation for the number of trained sales people that you're targeting for being in place for the fall campaign in '07?

[Paul Sarvadi:]

Yes, we do. This past year, we did a great job of getting back on the right end of growing the sales staff with the 14% increase by year end. Our broad based initiatives that we looked at to effect turnover rate have taken hold. Over the last five months or so we've seen the turnover rate go down to 30%, which is really exciting. You were starting to see more people move into that tenured position of more than 18 months with us and that's where the efficiency rate really grows. Over the course of this year, we're opening eight new offices and so you can kind of build in about an average of maybe five, takes us from about the 259 or 260 to 300 as an average. We get to that number 300 or so by fall campaign. That's where we'd like to be.

[Tobey Sommer:]

259 was the hired number at the end of the fourth quarter or was that the train number?

[Paul Sarvadi:]

Trained number.

[Tobey Sommer:]

Thank you very much.

[Operator:]

Your next question comes from Mark Marcon - Robert W. Baird.

[Mark Marcon:]

How big is the mid-market segment for you right now just in terms of percentage of worksite employees?

[Paul Sarvadi:]

Yes, that's a good question. The mid-market for us at this stage of the game, after we've seen some deterioration over the past quarter in that market, is down to 39 accounts and a total of right around 11,000 worksite employees, kind of the good news and bad news. The bad news is it's down to that, the good news is it shouldn't be able to affect us too much more going forward before we start to grow that segment again.

[Mark Marcon:]

Is the fee in the GP per worksite employee lower for those clients than it is for your average client?

[Paul Sarvadi:]

Yes, it is. If you'll recall our gross profit per employees runs about 10%, a little over that. Maybe 10% or 11% lower than the rest of the book of business. But the operating income per worksite employee we think is probably just a little better than our core business.

[Mark Marcon:]

And that 11,000 worksite employees, how much is that down year over year?

[Paul Sarvadi:]

Well, the peak I think was around 14,000 worksite employees at one point, so that kind of gives you a framework of where that is over that period of time.

[Mark Marcon:]

Okay. Why are these mid-market employees bringing it in-house? When you talk to them, what's the primary driver?

[Paul Sarvadi:]

I think it varies from account to account. But what I pointed out in our script that you have a new person involved, either a CFO or a senior HR person, and a lot of times they're either staking out their claim or trying to make a cost-related impact and they weren't involved in the original agreement with our company or in the execution of our game plan. I think the bottom line is we haven't in our process developed the right relationship at the right levels in the client company to mitigate that when a new influencer comes into the mix, so that's something we'll be working on.

[Mark Marcon:]

How's retention with your smaller core clients?

[Paul Sarvadi:]

Very good. It was excellent throughout the year, throughout the fall campaign period. The whole situation we looked at from Q4 to where we are today is this mid-market level.

[Mark Marcon:]

So the retention for the smaller core clients, that remains in the 81% range?

[Paul Sarvadi:]

Yes. In fact, we talk about an 80% range on client retention. We actually had that. For last year, our total client retention would be right around 80%, but the ones that went away were on average, larger accounts because of these mid-market accounts and that's why you have that effect at the worksite employee level.

[Mark Marcon:]

So when you talk about reengineering the mid-market initiative, is it primarily in terms of the client contact or is there something that's going to change with regards to the service that's being provided or the pricing?

[Paul Sarvadi:]

When I say reengineering I intend to convey that we're not going to tweak this. What we're doing at this point when we'll complete this quarter, we're taking each group. The mid-market sales group, we've already had an initial retreat with that group to do a SWOT analysis and have a brainstorming session. We're going to do the same thing with our mid-market service team and the same thing with what we call our mid-market infrastructure group, which affects the areas of benefits and legal and finance, and that group that provide the infrastructure to these two other teams that sell and service the accounts. We're going to have that retreat with each one of those groups separately, then bring the group back together and nothing is off the table in terms of pricing, in terms of how we sell it, how we service. At this stage of the game, we've learned a lot, but it's time for us to bring all that together and then have a real step up of effectiveness in this area.

[Mark Marcon:]

So it sounds like once you've completed that step, your guidance could change again, could it not?

[Paul Sarvadi:]

It certainly could.

[Mark Marcon:]

Okay, great. I'll jump back in the queue.

[Paul Sarvadi:]

Thank you.

[Operator:]

Your next question comes from Jim Macdonald - First Analysis.

[Jim Macdonald:]

Yes, good morning, guys.

[Paul Sarvadi:]

Hey, Jim.

[Richard Rawson:]

Morning, Jim.

[Jim Macdonald:]

I just wanted to follow-up on a couple things here. In terms of your metrics, do they exclude the mid-market or how do you handle that in your metrics? When you said 80% retention, was that a number of customers or of worksite employees?

[Paul Sarvadi:]

The 80% client retention is number of customers. We had more employees go away at that level than we did before, of course, because first of all the customer base is bigger, but also the fact that the average sized client that went away was higher than last year. That's the answer to that question. Now what was the first question again?

[Jim Macdonald:]

The first question was when you give your metrics that you're selling X percent of budget, do you somehow exclude mid-market there or are those included in that sales?

[Paul Sarvadi:]

No, it's all included.

[Jim Macdonald:]

Going back to the metrics question, so what would be retention be for a worksite, not a worksite employee level?

[Paul Sarvadi:]

I didn't really work out the numbers that way. But again, this is what we're digging into kind of by segment. Obviously we just discussed the fact that you're actually down in the mid-market segment and grew faster than our average rate in the rest of the business. This is really what we feel like is a very isolated incident related to this particular year end and that 2,500 employee difference, but we will be digging in on that going forward.

[Richard Rawson:]

Well, I think the other thing to remember is that in the whole rest of our book of business, the customer satisfaction survey results were record setting for 2006 in terms of the survey results that we had, so it's not like people are abandoning the ship here. They love the services and they're willing to pay more for it every year.

[Paul Sarvadi:]

Yes, we really drill down on every aspect of the core service side of the business and core selling side of the business, and we're continuing to hit on all cylinders in that regard.

[Jim Macdonald:]

Okay. You mentioned that everything's on the table. What about the possibility of offering mid-market clients on a non-PEO basis?

[Paul Sarvadi:]

I think in order to do an effective brainstorming exercise, you can't have limitations. I'm going to say if the amount we invest is no object, we're going to take everything off the table to brainstorm. That doesn't mean that's where we're going to land, but I don't think you can have an effective brainstorm if you don't put that option on the table. The first round of retreat I had with the sales group, we know that the co-employment models bring in some substantial advantage to our mid-market customer. I would look for that as a likely outcome, but we're certainly going to explore that as part of potential solutions.

[Jim Macdonald:]

Let me just change gears to the benefits for a second. I may have missed this number, but did you give your benefits cost for healthcare in the fourth quarter?

[Richard Rawson:]

Yes, it ended up being $646 per covered employee. Not worksite employee, but covered employee.

[Jim Macdonald:]

Right. Just in terms of dealing with some of the larger losses you've had in that area, are you doing anything different on underwriting? Is this concentrated in several accounts that obviously you could drop? Or is there a possibility of reinsuring any of these large losses?

[Richard Rawson:]

Well, you've asked a number of questions of which we've all asked, as well, so let me just try to answer it generally for you, Jim. Specifically, this quarter there were just a random nature of how healthcare system works, and there's some things that you can control and some things that you can't completely control. Large loss claims you bake in an estimate every quarter for what you think they're going to be. As I in my prepared remarks for 2006, we've been rocking along within a few dollars of a number of large loss claims every quarter have been virtually the same, even though we've been growing, so this fourth quarter spike in those was certainly not expected. I can tell you that we do get the breakdown of claims by locale, by the plan of which they came in. We get that kind of information by customer. We get it by the type of claim, like was this a premature baby or did someone have a heart attack or whatever. So we're constantly analyzing that information to see if there's things that become systemic to the driving our health plan costs. If we find that there's something systemic, then we can make a change. If it's kind of random, then there's not much you can do.

[Operator:]

Your next question comes from Cynthia Houlton - RBC Capital.

[Cynthia Houlton:]

You said the 30% attrition that you're seeing in your sales force over five months that is an analyzed number, right? So in the last quarter you mentioned it was in the high 30s. This quarter it's gone down that much? Is that correct?

[Paul Sarvadi:]

Right. It's an annual turnover rate that's down to around 30% from what was running at high 30s, near 40%. In historical perspective, the highest we've ever been is in the low 40s, and the lowest we've ever been is where we are right now.

[Cynthia Houlton:]

And in terms of annual bonuses, is that something that's paid out in the March quarter? I want to get a sense of timing if that's somewhat due to timing of bonus payments.

[Paul Sarvadi:]

Good question. From a compensation standpoint, we really don't have a big bonus program for the sales people that has people hanging on until a certain time. In fact it's quite the reverse. By this time of the new year, we usually have a culling related to sales staff that maybe were not successful in the fall campaign. In other words they actually get their increase in compensation by selling more through the fall campaign. Then if they didn't make it through that period, that's when our managers would say, look if they can't make it during our peak selling period, they're not going to make it in the rest of the selling period. Things look really good right now. We don't have what we've seen in historical periods of a significant number of sales staff that we're terminating for lack of production from the fall campaign. That further validates that in the core business we had a very strong fall campaign and it was very much across the board.

[Cynthia Houlton:]

A follow-up on mid-market initiative. Could you put some numbers around how many people are dedicated to that effort now? Meaning that, again, is this a fairly large group currently? Is this a risk that this group maybe gets reduced significantly or just trying to get my arms around how many people are dedicated to mid market right now?

[Paul Sarvadi:]

I think that's a real good question. Let me tell you part of the answer, I think, is part of where we could have done better in getting to this point. What I mean by that is we took somewhat of what I would call incremental approach to mid-market. We have a total of about ten or 12 people in mid market sales; eight or so salespeople and then a support staff. On the service side of the fence, we have quite a few people who touch servicing mid-market clients, but it's actually pretty hard to even break them out because they're a part of our entire service organization. There are service teams that are out there in the regional processing centers and then also individuals that are out in the service offices, the local offices. So you have people spending part of their time on mid-market accounts and part of the time on our core service account. That incremental approach, I think, is part of maybe why we haven't progressed as quickly, because you don't customize as much to fit specific needs if you don't have it segmented off as effectively. So we'll look at how we're organized in the area and some of those more basic things to get structured to make more improvements, but don't have a direct answer to the question. But even if those people that are involved in that effort, I wouldn't see us reducing that group. We would be redirecting them to our core segment or really seeing this thing ramp up and maybe segment them off into a different service unit.

[Operator:]

Your next question comes from Michael Baker - Raymond James.

[Michael Baker:]

Yes. I was wondering if you could comment in general on the slowdown in growth in the west region. Is that primarily related to a concentration of these mid-market defections in that area?

[Paul Sarvadi:]

No, actually it wasn't. It's really more related to the number of trained rep count by region as that compares to the base of our customer base in each region. And that continues to be the main driver of our regional results. In other words, where we put the sales staff is where you get the sales, and you've got to keep the number of sales people up high enough for the size of the base. What happened is we grew the west coast very quickly, especially down in southern California. But we had some offices that weren't producing like they should. When you have 42 offices, you always have one or two or three district managers that maybe aren't getting the job done. We had some of that happen both in Phoenix and San Francisco. So we replaced those managers and even replaced the regional manager, so you actually had a reduction in the number of trained reps, did a little housecleaning out there. Over the course of last year, you went down from in the mid 50s to mid 40s the number of trained reps on the west coast. That kind of ultimately flows through the model and you see a little slower growth out there.

[Michael Baker:]

Were there any competitive factors that have changed, particularly in the California market that's influenced anything or is it pretty much just what you talked about?

[Paul Sarvadi:]

It's just what I just said.

[Michael Baker:]

If you do have to increase health benefit pricing, can you just give us a general sense of how sensitive your clients are to that?

[Paul Sarvadi:]

I'll let Richard comment on that, that's in his area, but we don't see any pricing scenario outlook for us that puts our pricing on this component even at the kind of rates that small businesses are seeing increases. We feel pretty good about maintaining our competitive advantage there.

[Michael Baker:]

That's helpful. Finally, a number of states are starting to put forth some proposals to try and deal with the uninsured. Are there any specific provisions that you either view as a benefit or a detriment along those lines?

[Richard Rawson:]

Actually I was just going to say any time that there's a regulatory environment that's starting to mandate something in the area of our direct cost, we've always seen that as a positive, not a negative.

[Paul Sarvadi:]

You have to be sure that you're included in the specific initiative and that you don't get hurt, which we did, for example, up in Massachusetts when they put their proposal together. We had our people on the ground there making sure we were in good shape there and we're fine with that proposal. If that extended across the country, I think we'd be in real good shape to be one of the kind of aggregators that they look at in that model. The other development on this issue, though, that is really exciting to me, I want to keep myself from being too excited about it until it happens; it hasn't happened. But as you all may be aware, the Senate passed a minimum wage bill a couple weeks ago. And in it was a package of small business tax breaks, if you will, that would help small businesses offset a minimum wage hike. We've been in Washington for maybe 15 years trying to pass some type of certification-type legislation at the federal level that would recognize our industry and offer the opportunity for us to become certified and obtain what's called successor status for the purpose of certain taxes that would ultimately lower the cost of our service for our customer and increase our profitability. So it's kind of a win-win, because right now the government gets a double dip when a customer comes into a PEO relationship, the wage basis start over and we pay more tax for really no good reason. But any way, we actually were in that minimum wage bill in the Senate. Our provisions were part of that small business package. Now, the House has since passed their version, which also turned out to be a minimum wage hike and a much smaller package of small business tax incentives. We were not in the House version, so that has to go to conference committee and who knows what happens there. But if we survive that, that would be a huge win for our industry and it's something our company's been working toward for, like I said, a long, long time.

[Operator:]

Your next question comes from Thomas Giovine - Giovine Capital Group.

[Thomas Giovine:]

I think you do yourself a little bit of a disservice is the attrition due to middle-market clients that were as a result of M&A, how much was that? I guess my point was that you should probably break that out, because it's really completely under the control of if IBM buys one of your bigger clients.

[Paul Sarvadi:]

Yes, and we have. We have a success penalty, if you will, in a couple of different ways. Companies grow and they're successful and then they get purchased.

[Thomas Giovine:]

But what was the actual number this quarter?

[Paul Sarvadi:]

I don't have the exact number. I'll get that for you, but I know of two for sure that were sales without researching it. But I'd have to go back and get you a hard number.

[Thomas Giovine:]

That was what, at least 200 employees, 300?

[Paul Sarvadi:]

One was 500.

[Thomas Giovine:]

Right. Maybe an amount of what folks are sort of concerned about I'm assuming at this point?

[Paul Sarvadi:]

Yes, and I think that's fair. I can go back and get that information. Remember, the first goal of our whole initiative was to have big enough pipeline to kind of offset those because they're going to happen.

[Thomas Giovine:]

Okay. And then I have a couple of quick mini questions here. First thing if I look at cash, restricted cash and marketable securities, it comes out to be about $9 a share. What of that is sort of temporary and what exactly is restricted cash? In other words of that $9.25 per share, what as a shareholder can I look at as pure real cash?

[Doug Sharp:]

Yes, the restricted cash is dealing with money tied up in our workers' compensation program. I think it's best we steer our investors to look at working capital as far as our liquidity and that we ended the year at about $128 million in working capital, and that's a good number for you to look at.

[Richard Rawson:]

$6 bucks a share.

[Thomas Giovine:]

About $6 a share. Great. And I guess my other question is if you look to see what's happening in the market, there's clearly a lot of arbitrage going on between the public and private market's tolerance for debt levels. I was disappointed to see you pay off your debt for the building because debt's sort of a good thing, and if you think about you have public companies with three times debt to EBITDA, which would mean you could put on $265 million worth of debt easily. In the private market, they're putting on ten times EBITDA. I'm not advocating you do that, but the thing is at 5%, I'm not that interested in Administaff having a cash management business as much as I am seeing you get a little bit more aggressive with a buy back or a dividend, because the fact that, as you mentioned, you're not a big cash user as you grow. In fact, you generate positive working capital. I'm just trying to understand why we're not being more aggressive with either a dividend or a share buyback. If you subtract $6 of cash, $29 and then whatever, maybe your earnings will drop a little bit. But you're still depending on what earnings estimate is, you're still turning around 14 times earnings. If you buy back stock it's massively accretive on a cost of equity basis. Why aren't we seeing a little bit more aggressive buy back? There is a little bit of share creep.

[Paul Sarvadi:]

Yes, that's a really good question. In fact, that was the primary discussion of a two-day board meeting we had in New York just a couple weeks ago. We brought in some banks to give us their view of our capital structure and use of capital going forward and just to get some input from others. Where we landed is very much what you're describing. We increased the dividend 22%, I believe, immediately. We then, as we announced today, increased the authorization by one million shares, which gives us 1.5 million shares authorized to buy back. Obviously, we have plenty of cash to be aggressive buying shares back and anywhere in the range, even where we started today, is certainly accretive. So I expect us to be active buying our shares back. We've fully investigated the acquisition pipeline that we're interested in and what requirements the business has to accelerate our growth. There's plenty of funds left over to buy shares back and that is very much accretive to us and I expect that to be part of our game plan going forward.

[Operator:]

Sir, that will conclude the question and answer portion of our conference call. I will turn it over to you for any closing remarks.

[Paul Sarvadi:]

Once again we want to thank everyone for being on the call today. We look forward to seeing you out at the many conferences that we'll be involved in this spring and then back with you next time around. Thank you again.