Insperity, Inc. — Q3 2014 Form 10-Q
Business context and period: Insperity provides HR and business services, primarily through its professional employer organization (PEO) Workforce Optimization offering, with additional strategic business units. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $560.3 million | $539.9 million | $1,761.9 million | $1,699.0 million |
| Gross profit | $100.8 million | $97.4 million | $302.4 million | $303.3 million |
| Operating income | $14.5 million | $17.1 million | $34.5 million | $49.3 million |
| Net income | $8.4 million | $10.1 million | $19.8 million | $26.7 million |
| Diluted EPS | $0.33 | $0.39 | $0.78 | $1.04 |
- Q3 revenue increased 3.8%, supported by 1.8% growth in average monthly worksite employees paid and 2.0% higher revenue per employee. Nine-month revenue increased 3.7%, with the same respective drivers each contributing 1.8% and 1.9%.
- Q3 gross profit rose 3.5%, but nine-month gross profit declined 0.3%. Nine-month gross profit per worksite employee per month fell to $261 from $266 as direct costs per employee rose faster than revenue per employee.
- Operating expenses rose 7.5% in Q3 and 5.5% year to date. Q3 operating income declined 15.5% and net income declined 16.8%; year-to-date operating income declined 30.2% and net income declined 25.8%.
- Cash from operations was negative $1.0 million for the first nine months, versus negative $34.4 million in 2013. Investing activities used $12.1 million and financing activities used $33.2 million.
- At September 30, cash and cash equivalents were $179.5 million, restricted cash $57.2 million, and marketable securities $46.0 million. Combined cash, cash equivalents and marketable securities were $225.4 million; approximately $90.8 million related to payroll taxes and deductions and $18.3 million to client prepayments. Working capital was $119.1 million, down from $128.6 million at December 31, 2013.
- The company had no borrowings under its $100 million revolving credit facility, which matures September 15, 2015; a $0.6 million letter of credit was outstanding. It reported compliance with facility covenants.
- For the nine months, Insperity repurchased $20.8 million of stock and paid $14.0 million in dividends. It had authorization to repurchase another 768,765 shares at quarter-end.
Material changes, outlook and risks
- Employment Screening impairment charges of $2.5 million were recorded in Q2 2014, including $0.7 million of intangible-asset impairment and $1.8 million of goodwill impairment, following weaker results and customer losses.
- Higher workers’ compensation costs weighed on margins: costs per worksite employee per month increased 22.6% for the first nine months. Health-related costs also included $8.5 million of additional taxes, primarily from health care reform requirements. Prior-period claim estimate adjustments reduced workers’ compensation costs by $3.0 million year to date, compared with $8.3 million in 2013; such estimates depend on actuarial assumptions and claims development.
- Management said it expected cash on hand, marketable securities, operating cash flows and facility availability to cover liquidity needs for the remainder of 2014. No earnings or revenue guidance is provided in the filing.
- Potential additional 2014 federal unemployment taxes associated with worksite employees in 11 states were approximately $4.3 million as of September 30. Insperity may be unable to recover all such increases through client fees, which could materially affect results.
- Other stated risks include adverse economic or regulatory changes, health and workers’ compensation claims and insurance costs, client retention and sales execution, payroll-related liabilities, competition, data-security and technology failures, and litigation. Management believed pending ordinary-course lawsuits would not materially affect financial position or results.
- The company reported effective disclosure controls as of September 30, 2014. It was evaluating the impact of the new revenue recognition standard and had not determined its effect.
Important facts for investors to verify
- Whether revenue and worksite employee growth can translate into improved gross profit per employee as benefits and workers’ compensation costs develop.
- How much of reported earnings and cash flow depends on health and workers’ compensation reserve estimates, prior-period adjustments, and the timing of payroll funding.
- Whether states receive FUTA waivers and whether any resulting tax increases can be passed through to clients.
- The performance and customer outlook for Employment Screening after the impairment, and the remaining facility terms and maturity needs.