Insperity, Inc. — Q3 2023 Form 10-Q
Business and period: Insperity provides HR and payroll services, principally through PEO co-employment arrangements with small and midsized businesses. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are with the same 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Revenue | $1,550.9m (+7.8%) | $1,439.2m | $4,905.7m (+10.3%) | $4,449.1m |
| Gross profit | $257.9m (+5.5%) | $244.6m | $814.7m (+5.8%) | $770.2m |
| Operating income | $59.5m (+13.0%) | $52.6m | $196.3m (-1.6%) | $199.4m |
| Net income | $44.3m (+17.7%) | $37.7m | $151.8m (+7.6%) | $141.2m |
| Diluted EPS | $1.16 (+18.4%) | $0.98 | $3.94 (+7.7%) | $3.66 |
| Operating cash flow | — | — | $140.3m | $122.0m |
Revenue growth reflected average worksite employees (WSEEs) paid rising 4.0% in Q3 and 7.0% YTD, alongside revenue per WSEE per month increasing 3.7% and 3.1%, respectively. Gross profit per WSEE per month rose to $273 from $269 in Q3, but fell to $291 from $294 YTD. Approximate gross margin on reported revenue was 16.6% in Q3 versus 17.0%; YTD it was 16.6% versus 17.3%. Approximate operating margin was 3.8% versus 3.7% in Q3 and 4.0% versus 4.5% YTD.
Adjusted EBITDA, adjusted net income, and adjusted EPS are non-GAAP measures. Q3 adjusted EBITDA was $94.3m (+18.2%) and adjusted EPS was $1.46 (+18.7%); YTD adjusted EBITDA was $297.6m (+8.9%) and adjusted EPS was $4.76 (+8.7%).
Liquidity, debt, and capital allocation
- At September 30, cash and cash equivalents were $678.6m, restricted cash $51.3m, and marketable securities $13.8m. Reported cash, cash equivalents, and marketable securities totaled $692.4m, but included $482.7m payable for payroll-related withholdings and $20.2m of client prepayments. Management’s non-GAAP adjusted cash measure, after those amounts, was $189.6m, versus $224.3m at year-end 2022.
- Working capital was $156.3m, compared with $158.5m at December 31, 2022. The company reported $140.3m of YTD operating cash flow; investing activities used $2.3m and financing activities used $194.8m.
- Long-term debt was $369.4m under a $650m revolving facility, with $279.6m of borrowing capacity available after a $1.0m letter of credit. The facility matures June 30, 2027; the average YTD interest rate was 6.75%. The company was in compliance with its financial covenants.
- YTD financing outflows included $131.5m of stock repurchases or share withholding and $63.0m of dividends. The board authorized an additional 2 million shares for repurchase in August; 1,969,562 shares remained authorized at quarter-end.
Material changes, outlook, and risks
- YTD operating income declined despite revenue growth, as operating expenses rose 8.3%, faster than gross profit growth of 5.8%. General and administrative expense increased 15.2%, primarily on travel and event costs, software costs, and SaaS implementation amortization.
- Direct-cost estimates materially affected results. Q3 health-claim run-off reduced costs by $23.0m, compared with a $16.6m reduction a year earlier. YTD health-claim run-off reduced costs by $13.9m, versus a $12.8m increase in 2022. Workers’ compensation prior-period estimate reductions were $26.2m YTD, compared with $35.3m in 2022. These estimates are judgmental and may change as claims develop.
- Management said Q3 net gain in the client base declined year over year; YTD net gain declined significantly and new-client WSEEs slightly declined, while retention remained consistent. Middle-market WSEEs grew 13.4% YTD.
- No specific forward earnings or operating guidance is provided in the supplied filing text. Management said existing cash, operating cash flow, marketable securities, and facility availability should meet liquidity needs for the remainder of 2023.
- A $149.3m IRS employee-retention-tax-credit receipt was included in quarter-end cash and payroll-tax payables and distributed to PEO clients in early October. It is a timing-related client amount, not unrestricted operating liquidity.
- Risks include economic weakness affecting small and midsized clients, client nonpayment or cancellations, rising health and workers’ compensation costs, uncertain insurance claims estimates, variable-rate borrowing costs, and banking-system disruptions. Insperity disclosed that cash deposits exceed FDIC insurance limits and relies on financial institutions for PEO operations and credit-facility commitments.
- Various ordinary-course lawsuits and claims are pending; management believes their outcomes will not materially adversely affect financial position or results. The filing reports no material changes to previously disclosed risk factors other than the added financial-institution risk discussion.
Important facts for investors to verify
- Whether WSEE growth and client acquisition trends stabilize, given the reported slowdown in net client gains.
- How much future gross profit depends on favorable health and workers’ compensation claim-development estimates.
- Underlying available liquidity after excluding payroll withholdings, client prepayments, and restricted or program-related funds.
- The effect of variable interest rates on debt service, and continued compliance with credit-facility covenants.
- Whether operating expense growth, particularly general and administrative costs, remains elevated relative to gross profit growth.