Insperity, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; interim financial statements are unaudited. Insperity provides PEO human-resources outsourcing and related payroll, benefits, workers’ compensation, and business services. Reported revenue is gross billings less worksite employee payroll costs.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $925.1m | $795.5m | $2,861.8m | $2,473.7m |
| Gross profit | $166.1m | $140.0m | $520.3m | $429.9m |
| Operating income | $48.1m | $29.8m | $146.4m | $106.2m |
| Net income | $36.2m | $19.2m | $110.8m | $68.8m |
| Diluted EPS | $0.86 | $0.46 | $2.63 | $1.64 |
| Adjusted EBITDA (non-GAAP) | $61.6m | $43.1m | $192.0m | $139.2m |
| Adjusted EPS (non-GAAP) | $0.96 | $0.57 | $3.06 | $1.90 |
Margins: Gross margin was approximately 18.0% in Q3 versus 17.6% a year earlier, and 18.2% for nine months versus 17.4%. Operating margin was approximately 5.2% versus 3.7% in Q3 and 5.1% versus 4.3% for nine months.
Growth drivers and costs: Average worksite employees paid rose 15.2% to 215,051 in Q3 and 13.6% to 204,895 for nine months. Gross profit increased 18.6% in Q3 and 21.0% year to date. Q3 operating expenses rose 7.0%, slower than revenue growth; nine-month expenses rose 15.5%. Nine-month salaries included a $9.3m one-time tax-reform bonus. The effective tax rate fell to 26.1% from 35.8% in Q3 and to 25.3% from 35.1% year to date, primarily reflecting the lower U.S. statutory rate following tax reform.
Cash, liquidity, debt, and capital
- Nine-month operating cash flow was $70.3m, compared with $68.4m in 2017. Investing used $57.3m, including $21.5m of property and equipment purchases; financing used $39.8m, including $16.2m of share repurchases and $25.2m of dividends.
- At September 30, cash and cash equivalents were $328.3m, marketable securities $37.6m, and restricted cash $42.3m. Of cash and securities, $181.3m related to payroll-tax withholding and other deductions and $18.0m to client prepayments. Management’s non-GAAP adjusted cash, cash equivalents, and securities measure was $166.5m.
- Working capital was $148.9m, versus $52.5m at December 31, 2017. Long-term debt was $104.4m under a $350m revolving facility; $244.6m of borrowing capacity remained available after the outstanding letter of credit. The facility matures in 2023, had a 3.76% interest rate at quarter-end, and Insperity reported compliance with its covenants.
- Management said cash, operating cash flows, marketable securities, and facility availability should meet liquidity needs for the remainder of 2018.
Material changes, outlook, and risks
- Management attributed earnings growth to higher worksite-employee counts, improved sales and client trends, and effective management of gross profit and operating costs. Q3 new-client WSEE additions rose 57.5% year over year; retention and net changes within existing clients also improved versus Q3 2017.
- Q3 gross profit per WSEE per month increased to $257 from $250. Health-benefit claims estimates contributed a $0.7m reduction in Q3 costs, compared with a $5.0m reduction in the prior-year quarter. Workers’ compensation estimates reduced Q3 costs by $2.4m versus $2.9m. For nine months, workers’ compensation estimate revisions reduced costs by $13.4m versus $11.0m.
- The filing provides no quantified full-year earnings or revenue guidance. Management noted results are sensitive to client growth and retention, payroll levels, insurance costs and claims estimates, and business conditions. Other cited risks include regulation and tax changes, competition, geographic concentration, information-technology disruption, and potential liability for payroll, benefits, and employee-related claims.
- A certified class-action lawsuit alleges fiduciary breaches involving the Insperity 401(k) plan. Discovery was complete; a summary-judgment motion was awaiting a ruling, and no provision was recorded because the outcome was uncertain. Management said other ordinary-course litigation was not expected to materially affect results.
- Revenue-recognition guidance adopted in 2018 did not materially change revenue policies or business processes. The company was assessing the impact of the forthcoming lease-accounting standard.
Important facts for investors to verify
- Whether WSEE growth, new-client sales, retention, and pricing remain strong in subsequent periods.
- How health-benefit and workers’ compensation claims experience and actuarial estimate revisions affect future gross profit.
- Cash generation relative to payroll-related working-capital swings, dividends, repurchases, and capital spending.
- Variable-rate facility exposure, covenant headroom, and management’s liquidity outlook beyond 2018.
- Developments in the 401(k) class action and any resulting financial exposure.
- Non-GAAP reconciliations: adjusted EBITDA and adjusted EPS exclude specified items, including stock-based compensation; they supplement, rather than replace, GAAP results.