Insperity, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Insperity provides HR and business solutions, including PEO services. The company changed its name from Administaff, Inc. effective March 3, 2011.
Financial performance
Amounts are in millions except per-share data and worksite-employee statistics. Revenue is gross billings less worksite employee payroll costs.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Gross billings | $2,888 | $2,475 | — |
| Revenue | $536.4 | $457.7 | +17.2% |
| Gross profit | $91.0 | $72.7 | +25.1% |
| Operating expenses | $75.8 | $68.9 | +10.0% |
| Operating income | $15.1 | $3.8 | +302.3% |
| Net income | $8.8 | $2.3 | +282.2% |
| Diluted EPS | $0.33 | $0.09 | +266.7% |
| Operating cash flow | $59.1 | $8.4 | — |
Gross margin on reported revenue was approximately 17.0% versus 15.9%; operating margin was 2.8% versus 0.8%. Average worksite employees paid per month increased 9.1% to 112,409, while revenue per employee per month rose 7.4% to $1,591. Gross profit per employee per month increased 14.9% to $270.
Financial position and liquidity
At March 31, 2011, cash and cash equivalents were $277.8 million and marketable securities were $42.3 million; restricted cash was an additional $40.8 million. Working capital was $140.8 million, down from $144.5 million at December 31, 2010. Current assets were $553.3 million and current liabilities $412.4 million. The balance sheet presents no borrowings or debt line item.
Cash, cash equivalents and marketable securities totaled $320.1 million, but included $136.0 million of payroll tax and other withholdings and $57.7 million of client prepayments, both payable in early April. Management attributed part of cash-flow variability to payroll-cycle timing. Investing cash use was $13.5 million, including $10.8 million for an acquisition; financing cash use was $2.6 million, including dividends and treasury-stock purchases. Management said cash on hand and operating cash flows should meet liquidity needs for the remainder of 2011.
Material changes and management commentary
- Revenue growth reflected both higher worksite-employee counts and higher revenue per employee. Management said net changes in existing clients, new sales and retention all improved from Q1 2010.
- Payroll taxes per employee increased 19.7%, primarily due to higher federal and state unemployment tax rates. Direct costs per employee rose 6.0%, slower than revenue per employee.
- Health-benefit costs per covered employee increased 2.7%; management cited plan-design changes and fewer COBRA participants as favorable factors. Workers’ compensation costs increased 14.2%, although costs as a percentage of non-bonus payroll were unchanged at 0.61%.
- Operating expenses rose partly due to $4.8 million of rebranding costs and $2.9 million of expenses associated with acquisitions. Advertising increased 42.0%, partly reflecting the rebrand.
- In January, Insperity acquired HumanConcepts’ OrgPlus software product line and related assets for $10.8 million, with another $1.2 million expected in 2012 under the agreement.
- The company declared a quarterly dividend of $0.15 per share, versus $0.13 a year earlier. No shares were repurchased under the buyback program; 105,317 restricted shares were withheld for tax obligations.
Risks, contingencies and unusual items
- A California unemployment-tax dispute concerns a 2003 assessment. In March 2011, the state provided an account statement indicating approximately $8.1 million in taxes, penalties and interest. Insperity is continuing to contest the assessment; an adverse outcome could increase payroll-tax expense. No hearing date was set.
- Workers’ compensation reserves depend on actuarial estimates and claim development. The company reduced prior-period loss estimates by $1.9 million in Q1 2011, compared with $2.1 million in Q1 2010.
- Key stated risks include economic conditions, regulation and taxes, health and workers’ compensation costs and contract renewals, competition, growth execution, acquisition integration, payroll-related liabilities, data privacy and litigation. The filing reported no material changes to the risk factors in the 2010 Form 10-K.
- Management reported disclosure controls were effective at March 31, 2011, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether worksite-employee growth, client retention and per-employee revenue gains continue beyond Q1.
- How much of the sharp operating-cash-flow increase reflects quarter-end timing and client/payroll funding rather than sustainable operating improvement.
- Developments in the $8.1 million California tax dispute and the potential effect of an adverse decision.
- Future health-benefit, unemployment-tax and workers’ compensation costs, including changes in claim estimates and insurance arrangements.
- OrgPlus acquisition performance, integration costs and the expected additional $1.2 million payment.