Insperity, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Insperity provides HR and business services, principally professional employer organization (PEO) solutions. Reported revenue is gross billings less worksite employee payroll costs.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $702.5 million | $626.3 million | $2,212.3 million | $1,953.6 million |
| Gross profit | $117.8 million | $106.7 million | $381.1 million | $340.8 million |
| Operating income | $22.8 million | $19.9 million | $91.8 million | $55.7 million |
| Net income | $14.1 million | $12.0 million | $56.5 million | $33.1 million |
| Diluted EPS | $0.66 | $0.48 | $2.64 | $1.32 |
| Adjusted EBITDA (non-GAAP) | $31.3 million | $28.3 million | $118.1 million | $93.2 million |
- Q3 revenue grew 12.2%, primarily on 13.3% growth in average monthly worksite employees paid to 168,909; revenue per employee per month declined 1.0%. Nine-month revenue rose 13.2%, with average paid employees up 14.1% to 163,607.
- Gross profit increased 10.4% in Q3 and 11.8% year to date, while gross profit per employee per month fell 2.9% in Q3 and 1.9% year to date. Reported operating and net income increased faster year to date; 2015 included $11.1 million of impairment and other charges related to aircraft disposition and a tax assessment.
- Operating cash flow was $34.8 million for the first nine months, versus cash used of $25.7 million in 2015. Investing used $13.3 million and financing used $67.5 million; cash and cash equivalents fell to $223.6 million from $269.5 million at year-end 2015.
- At September 30, cash, cash equivalents and marketable securities totaled $225.4 million; the company’s non-GAAP adjusted cash measure, excluding payroll-related funds and client prepayments, was $67.9 million. Working capital was $63.8 million.
- Long-term debt was $104.4 million under a $200 million revolving facility, plus a $1.0 million letter of credit. The facility’s stated interest rate was 2.19%; the company reported compliance with its financial covenants. The facility matures in February 2020.
- Dividends paid totaled $15.3 million in the first nine months. The company also spent $144.3 million on a January tender offer and $13.9 million on other treasury-stock purchases, substantially reducing stockholders’ equity.
Material changes, commentary and risks
- Management attributed growth to improved new-client sales; client retention also improved year to date. In Q3, net change in existing clients declined, while retention was consistent with the prior year. Management said cash and available resources should meet liquidity needs for the remainder of 2016; the filing provides no specific earnings or revenue guidance.
- Workers’ compensation costs benefited from $9.1 million of favorable prior-period loss estimate changes in the first nine months, including $7.1 million in Q3. Health benefits included $4.6 million of prior-period claim run-off costs year to date, including $2.8 million in Q3. These estimates depend on claims development and actuarial assumptions.
- Health insurance coverage and workers’ compensation claims involve significant estimation and funding risk. Other cited risks include economic conditions, client retention and acquisition, insurance pricing and availability, regulation, competition, privacy and IT systems, and litigation.
- A 401(k) class action alleges fiduciary breaches involving recordkeeping fees and investment choices. Insperity disputes the allegations, intends to defend the case, and recorded no provision because the outcome is uncertain. Management said other ordinary-course claims are not expected to materially affect results.
- Management reported effective disclosure controls as of September 30, 2016, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future earnings depend on favorable workers’ compensation reserve development and whether health claims costs continue to rise.
- Whether employee growth, client retention and pricing can sustain revenue and gross-profit growth despite lower per-employee revenue and gross profit.
- Available liquidity after excluding payroll withholding funds and customer prepayments, alongside debt service, buybacks and dividends.
- Developments and potential exposure in the 401(k) litigation, and the effect of insurance renewals, claims trends and related estimates.
- The timing and financial effects of adopting the new revenue recognition and lease accounting standards; the filing says the impact of the revenue standard was still under evaluation.