Insperity, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Insperity provides HR and business services, primarily through its professional employer organization (PEO) solutions. Financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,014.4 million | $882.7 million | +14.9% |
| Gross profit | $199.7 million | $159.3 million | +25.3% |
| Operating income | $64.7 million | $53.5 million | +21.0% |
| Net income | $50.0 million | $35.6 million | +40.3% |
| Diluted EPS | $1.18 | $0.85 | +38.8% |
| Operating cash flow | $23.6 million | $43.5 million | Lower |
Revenue is reported after deducting worksite employee payroll costs from gross billings. Gross billings were $5.923 billion versus $5.016 billion. Average worksite employees paid per month increased 12.2% to 195,683; revenue per worksite employee per month rose 2.4% to $1,728. Gross profit per worksite employee per month increased 11.5% to $340.
Calculated from reported figures, gross margin increased to approximately 19.7% from 18.1%; operating margin was approximately 6.4% versus 6.1%, and net margin approximately 4.9% versus 4.0%. Adjusted EBITDA, a non-GAAP measure, was $83.8 million, up 33.6%; adjusted net income was $59.5 million and adjusted diluted EPS was $1.41. These adjusted measures exclude specified items and should be considered alongside GAAP results.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $354.6 million; restricted cash was $41.1 million and marketable securities were $1.9 million. Working capital was $91.4 million, up from $52.5 million at December 31, 2017.
- Management’s non-GAAP adjusted cash, cash equivalents and marketable securities was $87.5 million after excluding payroll-related withholdings and client prepayments from $356.6 million of reported cash and securities.
- Long-term debt was $104.4 million under a $350 million revolving facility, with $244.6 million of available borrowing capacity after an outstanding letter of credit. The facility’s interest rate was 3.15%; the company was in compliance with its financial covenants.
- Operating cash flow was $23.6 million; investing cash outflow was $6.6 million, primarily for property and equipment; financing cash outflow was $16.6 million. The company repurchased $8.6 million of stock and paid $8.4 million in dividends. The reported share repurchases were withholding of shares for employee tax obligations, not purchases under the announced repurchase program.
Material changes and management commentary
- Growth reflected higher worksite employee counts and higher revenue per employee. Management said new-client sales, net changes at existing clients, and client retention improved year over year.
- Gross profit growth exceeded revenue growth, supported by higher pricing and lower per-employee direct costs. Q1 benefits costs included a $3.8 million reduction for prior-period claims estimates; workers’ compensation costs included a $5.7 million reduction for prior-period losses. Corresponding prior-period reductions were $1.7 million and $3.9 million, respectively.
- Operating expenses rose 27.6%, faster than revenue. Salaries and related costs included a $9.3 million one-time tax-reform bonus to corporate employees, as well as higher corporate headcount and incentive compensation. Excluding that bonus, adjusted operating expenses rose 18.8%.
- The effective income tax rate fell to 23.2% from 33.2%, reflecting the lower U.S. statutory rate following tax reform, among other factors.
- Operating cash flow declined year over year despite higher earnings. Management cited timing of payroll and client payments, insurance funding, and balance-sheet movements as factors affecting period cash flow.
Outlook, risks and contingencies
Management believed cash on hand, securities, operating cash flow and revolver availability would be adequate for liquidity requirements through the remainder of 2018. The filing provides no specific revenue or earnings guidance. Management cautions that interim results may not indicate full-year performance.
Key risks identified include economic conditions; regulatory and tax developments; health and workers’ compensation costs, claims trends and insurance renewals; client cancellations and retention; geographic concentration; competition and the ability to manage growth; payroll-related liabilities; data privacy and IT-system failures; acquisition execution; and litigation.
A class action concerning fiduciary duties and fees in the Insperity 401(k) plan had been certified; discovery was substantially complete, with no bench-trial date set. Insperity said it intended to defend the case and recorded no provision because of uncertainty. Management said other ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether employee growth, retention and pricing continue to support revenue and gross-profit growth.
- How much earnings benefit came from prior-period health and workers’ compensation estimate reductions, and whether those benefits recur.
- Whether operating-expense growth moderates after the one-time $9.3 million bonus and whether underlying hiring and incentive costs remain elevated.
- Cash-flow trends, including payroll timing and insurance funding; reported cash includes substantial amounts payable for payroll taxes, deductions and client prepayments.
- Variable-rate debt exposure, revolver availability and covenant compliance, alongside the outcome and potential financial effect of the 401(k) litigation.