Insperity, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Insperity provides HR and business services, principally professional employer organization services, to small and medium-sized businesses. Revenue is reported net of worksite employee payroll costs; gross billings were $3.236 billion for the quarter and $9.736 billion for the nine-month period.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $539.9 million | $512.0 million | $1,699.0 million | $1,626.4 million |
| Gross profit | $97.4 million | $98.4 million | $303.3 million | $288.7 million |
| Operating income | $17.1 million | $19.1 million | $49.3 million | $51.6 million |
| Net income | $10.1 million | $11.5 million | $26.7 million | $31.0 million |
| Diluted EPS | $0.39 | $0.45 | $1.04 | $1.20 |
| Gross / operating / net margin | 18.0% / 3.2% / 1.9% | 19.2% / 3.7% / 2.2% | 17.9% / 2.9% / 1.6% | 17.8% / 3.2% / 1.9% |
Margins are approximate, calculated using reported revenue. Average worksite employees paid per month increased 1.7% in Q3 and 1.6% for the first nine months. Revenue per worksite employee per month rose 3.6% and 2.8%, respectively.
Cash flow, liquidity, and capital
- Operating cash flow was negative $34.4 million for the first nine months, versus positive $25.0 million in 2012. Management cites payroll-period timing, workers’ compensation funding and other working-capital movements as important drivers.
- Investing cash flow used $41.4 million, primarily reflecting net purchases of marketable securities; financing cash flow used $27.0 million, including $17.1 million of share repurchases and $13.0 million of dividends. Cash and cash equivalents declined $102.7 million to $161.8 million.
- Cash, cash equivalents and marketable securities totaled $209.2 million. This includes funds held for payroll-related withholdings and client prepayments; approximately $90.1 million of withholdings and $9.0 million of client prepayments were payable in early October. Working capital was $122.7 million.
- The company had no borrowings under its $100 million revolving credit facility, which matures September 15, 2015, and reported compliance with its covenants. No other debt balance is reported in the supplied filing text.
Changes and management commentary
- Q3 revenue increased 5.5%, but gross profit fell 1.0%, operating income fell 10.6%, and net income fell 12.0% year over year. Direct costs per worksite employee per month rose 5.2%, faster than revenue per employee, primarily reflecting higher health-benefit costs; Q3 2012 had unusually low claims activity.
- For the first nine months, revenue grew 4.5% and gross profit 5.0%, while operating expenses rose 7.1%; operating income declined 4.4% and net income 13.6%. Higher corporate and sales staffing, advertising, and depreciation and amortization contributed to expense growth.
- Other expense included a $2.7 million noncash impairment of Insperity’s minority investment in The Receivables Exchange (TRE), after a later securities transaction implied a lower investment value. The impairment had no recognized tax benefit and contributed to the higher year-to-date effective tax rate of 42.9%.
- Workers’ compensation cost reductions from revised estimates of prior-period claims were $8.3 million for the first nine months, compared with $10.4 million in 2012. Health costs also included a $3.4 million reduction for prior-period claims and premium taxes.
- Management believed cash, securities, operating cash flows and available credit would meet liquidity needs for the remainder of 2013. The filing provides no specific earnings or revenue guidance.
Risks and contingencies
- Former workers’ compensation carrier Lumbermens Mutual was ordered into liquidation. State guaranty associations may seek recovery from Insperity; the company estimates potentially claimable amounts of $1.1 million to $5.0 million and intends to defend against claims. A successful recovery could materially affect income in the period recorded.
- Insperity is involved in ordinary-course lawsuits and claims; management does not expect their final outcome to materially adversely affect financial position or results, while noting outcomes cannot be predicted with certainty.
- Key disclosed risks include economic conditions, regulation and taxes, health and workers’ compensation costs and carrier solvency, client retention and sales execution, competition, payroll-related liabilities, privacy, acquisition returns, and adverse litigation outcomes. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether health-benefit claims and workers’ compensation estimates normalize, and how sensitive margins are to further cost increases or reserve revisions.
- The timing and drivers of operating cash flow, including payroll-cycle effects and workers’ compensation funding, and the distinction between reported cash and client or payroll-related funds.
- Whether guaranty associations pursue claims related to Lumbermens Mutual and whether the potential exposure changes.
- Progress in revenue growth, client retention, new-client sales, and Adjacent Businesses relative to operating-expense growth.
- The effects of the TRE impairment, ongoing repurchases and dividends, and the company’s liquidity needs and credit-facility availability.