Insperity, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Insperity provides HR and business services, principally professional employer organization (PEO) solutions to small and medium-sized businesses. The company recognizes PEO revenue as services are rendered.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,153.0 million | $1,014.4 million | +13.7% |
| Gross profit | $226.7 million | $199.7 million | +13.5% |
| Operating expenses | $141.3 million | $135.0 million | +4.6% |
| Operating income | $85.5 million | $64.7 million | +32.1% |
| Net income | $76.3 million | $50.0 million | +52.6% |
| Diluted EPS | $1.85 | $1.18 | +56.8% |
| Operating cash flow | $117.7 million | $30.2 million | — |
Gross margin was approximately 19.7% of revenue, versus 19.7% a year earlier; operating margin increased to approximately 7.4% from 6.4%. Average worksite employees (WSEEs) paid per month rose 15.3% to 225,525. Revenue per WSEE per month declined 1.4% to $1,704, and gross profit per WSEE per month declined to $335 from $340.
Management-reported non-GAAP measures were adjusted EBITDA of $101.4 million, up 21.0%, and adjusted EPS of $1.98, up 40.4%. The company cautions that these measures are not substitutes for GAAP results.
Liquidity, debt and cash flow
At March 31, 2019, cash and cash equivalents were $398.9 million, restricted cash was $44.7 million, and marketable securities were $53.6 million. Of the $452.5 million in cash, cash equivalents and marketable securities, $279.6 million related to payroll taxes and other deductions and $32.4 million to client prepayments. Management’s non-GAAP adjusted cash and marketable securities measure, excluding those amounts, was $140.5 million. Working capital was $129.7 million, up from $94.2 million at year-end 2018.
Long-term debt was $144.4 million under a $350 million revolving facility, with $204.6 million of borrowing capacity available after an outstanding letter of credit. The facility matures in 2023; the average interest rate during the quarter was 4.00%. Insperity reported compliance with its financial covenants. Financing cash outflows included $29.0 million of treasury stock purchases and $12.4 million of dividends. The quarterly dividend was $0.30 per share, versus $0.20 a year earlier.
Changes, outlook and notable matters
- Revenue and earnings growth reflected WSEE growth, strong new-client sales and client retention, and management’s control of gross profit and operating costs. Lower medical-plan participation reduced revenue per WSEE; health coverage participation was 67.4%, versus 69.7%.
- Workers’ compensation costs declined 2.5% per WSEE per month. The company reduced prior-period workers’ compensation estimates by $7.8 million, compared with $5.7 million in Q1 2018. Health-claim run-off estimates reduced costs by $0.3 million in Q1 2019, versus $3.8 million in Q1 2018.
- The effective tax rate fell to 12.3% from 23.2%, with tax benefits associated with vesting incentive awards contributing to the period’s tax provision.
- Insperity adopted lease accounting standard ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. At March 31, lease liabilities totaled $63.4 million. Adoption did not materially affect operating results or cash flows.
- Management said available cash, operating cash flows and facility capacity should meet liquidity requirements for the remainder of 2019. The filing provides no specific earnings or revenue guidance.
- A class action concerning the company’s 401(k) plan remained pending. The court dismissed claims concerning excessive recordkeeping fees and certain other fiduciary-duty claims; a bench trial had not been scheduled. No litigation provision was recorded because the outcome was uncertain.
- An IRS Chief Counsel memorandum issued April 19, 2019 addressed payroll tax reporting for certain self-employed owners who are WSEEs of certified PEO clients. Insperity said failure to transition its reporting and payroll processes, if required, could materially affect its business and ability to attract or retain clients.
Important facts for investors to verify
- Whether WSEE growth and client retention continue, and whether revenue and gross profit per WSEE stabilize.
- Whether health-claim and workers’ compensation estimates develop as expected; these estimates affect reported direct costs and may change.
- How much reported cash is available for corporate use after payroll-related funds and client prepayments are excluded.
- Whether variable-rate debt, facility covenants and planned repurchases or dividends affect liquidity.
- Developments in the 401(k) litigation and the IRS payroll-tax reporting issue, including any resulting costs or operational changes.