Insperity, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Insperity provides HR and business services, principally through its Workforce Optimization professional employer organization (PEO) solution for small and medium-sized businesses. Its revenue excludes client worksite payroll costs and principally represents service-fee markups.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $1,976.2 million | $1,719.8 million | +14.9% |
| Gross profit | $351.8 million | $298.5 million | +17.8% |
| Operating income | $57.3 million | $37.1 million | +54.7% |
| Net income | $30.5 million | $22.4 million | +35.8% |
| Diluted EPS | $1.16 | $0.86 | +34.9% |
| Operating cash flow | $73.9 million | $78.8 million | Down $4.9 million |
Gross and operating margins on reported revenue were approximately 17.8% and 2.9%, respectively, in 2011; net margin was approximately 1.5%. Revenue growth reflected a 9.2% increase in average monthly paid worksite employees to 116,839 and a 5.3% increase in revenue per employee per month. Gross profit per employee per month rose 8.2% to $251.
At year-end, working capital was $126.6 million, versus $144.5 million a year earlier. Cash, cash equivalents and marketable securities totaled $268.2 million; this included $150.8 million of payroll-related withholdings and $10.4 million of client prepayments payable in early January. Insperity reported no drawn debt. Its new four-year revolving credit facility provides $100 million of capacity, potentially expandable to $150 million; it was undrawn at year-end. Total assets were $712.3 million and stockholders’ equity was $245.2 million.
Investing cash outflow was $61.7 million, including $31.4 million of capital expenditures, $14.6 million for acquisitions and other investments, and a $10.0 million replacement-aircraft purchase. Financing cash outflow was $35.8 million, primarily $25.1 million of share repurchases and $15.7 million of dividends.
Fourth-quarter results
Fourth-quarter 2011 revenue was $495.1 million, gross profit $89.9 million, operating income $16.7 million, net income $10.8 million, and diluted EPS $0.42. In fourth-quarter 2010, the respective amounts were $435.5 million, $80.8 million, $12.7 million, $7.8 million, and $0.30. Fourth-quarter 2011 gross profit included a $2.5 million benefit from reversing previously accrued Pennsylvania sales taxes.
Material changes and unusual items
- Operating expenses rose 12.6% to $294.5 million, including $11.8 million in rebranding costs and $9.2 million associated with acquisitions. The company changed its name from Administaff to Insperity in March 2011.
- Other expense was $6.5 million, compared with $1.0 million of other income in 2010. The 2011 amount included a $4.4 million loss on an aircraft exchange and a $3.1 million California unemployment-tax settlement.
- Workers’ compensation costs benefited from an $11.4 million reduction in prior-period loss estimates, compared with a $6.2 million reduction in 2010. The year-end estimated claim liability was $104.8 million.
- Adjacent Business Unit revenue unrelated to Workforce Optimization was 1.2% of total revenue, versus 0.6% in 2010. The mid-market sector represented approximately 15% of paid worksite employees and grew 22% year over year.
- Annual client retention improved to approximately 82% from 80%. The fourth-quarter average of paid worksite employees was 122,065, up 9.7% year over year.
Outlook, commentary and risks
Management expected average monthly paid worksite employees of 121,750–122,250 in the first quarter of 2012. The filing provides no numerical full-year 2012 revenue or earnings guidance. Management stated that cash, marketable securities, operating cash flows and credit availability should be adequate for 2012 liquidity needs.
- Direct costs and margins are exposed to medical claims, workers’ compensation claims and rising state unemployment taxes; contractual terms or competition may delay or limit passing cost increases to clients.
- Insperity bears responsibility for worksite payroll, payroll taxes and specified benefits even if a client fails to pay. Client service agreements are generally terminable on 30 days’ notice.
- The UnitedHealthcare contract covered approximately 90% of health insurance coverage and expires December 31, 2013, subject to 180 days’ notice. ACE workers’ compensation coverage expires September 30, 2012; replacement coverage on competitive terms is not assured.
- Health-care reform’s future effects remained uncertain, including potential compliance costs, client demand and the ability to adjust fees. A U.S. Supreme Court decision was expected in 2012.
- Pennsylvania sales-tax exposure for 2010–2011 was estimated at approximately $3.0 million if the company’s position is unsuccessful; a separate $2.9 million refund claim for taxes previously paid was unrecognized and uncertain.
- Other disclosed risks include adverse economic conditions, competition, regulatory uncertainty around PEO co-employment, geographic concentration, data-security incidents, insurance-carrier failure and execution or integration risks related to acquisitions.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2011.
Important facts for investors to verify
- Whether employee growth, retention and mid-market expansion continued after the reported first-quarter 2012 employee outlook.
- How medical claims, workers’ compensation estimate revisions and unemployment-tax increases affected subsequent gross profit and cash generation.
- Renewal terms and pricing for ACE workers’ compensation coverage and the UnitedHealthcare health-plan contract.
- Resolution of the Pennsylvania sales-tax case and refund claim, and any further contingent liabilities or settlements.
- Whether adjacent-business acquisitions and cross-selling generated revenue and returns sufficient to justify related costs and investments.
- Cash available after payroll-related withholdings, client prepayments, restricted insurance funds and other near-term obligations.