INSPERITY, INC. quarterly report, Q1 FY2012

Insperity, Inc. — Q1 2012 Form 10-Q

Reporting period: Three months ended March 31, 2012; unaudited consolidated financial statements. Insperity provides HR and business services, principally its Workforce Optimization professional employer organization (PEO) offering, to small and medium-sized businesses.

Financial performance

MetricQ1 2012Q1 2011Change
Revenue$595.2 million$536.4 million+11.0%
Gross profit$103.0 million$91.0 million+13.2%
Operating expenses$80.0 million$75.8 million+5.4%
Operating income$23.0 million$15.1 million+52.3%
Net income$13.9 million$8.8 million+58.0%
Diluted EPS$0.54$0.33+63.6%
Operating cash flow$33.3 million$59.1 millionDecreased

Gross margin, calculated on reported revenue, was approximately 17.3% versus 17.0%; operating margin was approximately 3.9% versus 2.8%. Growth reflected an 8.5% rise in average monthly worksite employees paid and a 2.3% increase in revenue per employee. Average gross profit per worksite employee per month increased 4.4% to $282. Operating expenses per worksite employee per month fell 2.7% to $219.

Q1 revenue represented gross billings of $3.231 billion less worksite employee payroll costs of $2.636 billion. Direct costs were $492.2 million. The effective tax rate was 40.5%, compared with 43.0% a year earlier.

Cash, liquidity and capital

  • At March 31, 2012, cash and cash equivalents were $234.5 million and marketable securities were $57.0 million. Working capital was $135.9 million, up from $126.6 million at December 31, 2011.
  • Cash, cash equivalents and marketable securities totaled $291.5 million, but included $165.8 million of payroll-related withholdings and deductions and $10.7 million of client prepayments payable in early April.
  • Operating cash flow was $33.3 million; investing activities used $5.2 million, principally for $3.4 million of property and equipment; financing activities used $4.7 million. Cash increased $23.3 million during the quarter.
  • The company reported no drawn borrowings under its $100 million revolving credit facility, which may be increased to $150 million subject to conditions. A $285,000 standby letter of credit was issued under the facility. Insperity reported compliance with financial covenants.
  • Financing outflows included $3.9 million of dividends and $3.3 million related to shares withheld for employee tax obligations. The quarterly dividend was $0.15 per share. No shares were repurchased under the public repurchase program.

Material changes, outlook and risks

  • Workforce Optimization revenue increased 11.0%. Management said net changes in existing clients improved year over year; new-client worksite employee growth declined, while client retention was consistent.
  • Gross profit growth exceeded revenue growth. Direct costs per worksite employee rose 1.8%; health benefit costs per covered employee increased 3.6%, while workers’ compensation costs per worksite employee declined. Prior-period workers’ compensation estimates were reduced by $3.5 million, versus $1.9 million in Q1 2011.
  • Operating cash flow was lower than the prior-year quarter. Management cited quarter-end payroll and client-payment timing as a significant factor; the quarter ended on a Friday, compared with Thursday in 2011. Working-capital movements and insurance funding also affect cash flows.
  • Management believed cash on hand and operating cash flows would meet liquidity needs for the remainder of 2012. The filing provides no specific earnings or revenue guidance.
  • Key disclosed risks include economic conditions; regulatory and tax developments; health and workers’ compensation costs, claims and insurer arrangements; client retention and sales execution; competition; payroll-related liabilities; data privacy; and execution or returns from adjacent businesses and acquisitions. Management said there were no material changes to the risk factors in the 2011 Form 10-K.
  • Insperity is defending ordinary-course lawsuits and claims; management did not expect their outcomes to materially adversely affect financial position or results. A $2.9 million Pennsylvania sales-tax refund claim remained under review; recovery and timing were uncertain, and no asset was recorded.
  • Financial results include estimates for partially self-funded health plan costs and workers’ compensation claims. Management noted these estimates may differ from actual outcomes. The interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

  • Whether worksite employee growth, new-client sales and client retention sustain the reported revenue increase.
  • Whether gross profit gains persist given health benefit and workers’ compensation claims experience, including the impact of the $3.5 million prior-period reserve reduction.
  • How much reported cash is available for corporate uses after payroll withholdings, client prepayments and insurance-related funding requirements.
  • Whether operating cash flow improves as payroll timing and working-capital balances normalize.
  • The outcome of the Pennsylvania refund claim and any material developments in litigation, insurance arrangements or credit-facility covenants.