Insperity, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Insperity provides HR and payroll services, primarily through professional employer organization (PEO) arrangements with small and medium-sized businesses.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1.578 billion | $1.287 billion | +22.6% |
| Gross profit | $285.8 million | $251.4 million | +13.7% |
| Operating income | $98.4 million | $83.8 million | +17.4% |
| Net income | $69.9 million | $61.9 million | +12.9% |
| Diluted EPS | $1.80 | $1.59 | +13.2% |
| Operating cash flow | $58.8 million | $2.0 million | Improved |
| Average WSEEs paid per month | 278,660 | 233,170 | +19.5% |
Revenue is reported after deducting worksite employee (WSEE) payroll costs from gross billings. Gross billings were $10.36 billion, up 28.7%. Revenue per WSEE per month rose 2.6% to $1,887, while gross profit per WSEE per month fell 4.7% to $342. Gross margin on reported revenue was approximately 18.1%, versus 19.5% a year earlier; operating margin was approximately 6.2%, versus 6.5%.
Adjusted EBITDA, a non-GAAP measure, increased 13.8% to $118.6 million; adjusted EPS increased 9.3% to $1.99. These measures exclude stock-based compensation and should be considered alongside GAAP results.
Balance sheet, liquidity and capital allocation
- At March 31, 2022, cash and cash equivalents were $576.7 million, restricted cash $49.4 million, and marketable securities $32.6 million. Management’s non-GAAP adjusted cash, cash equivalents and marketable securities measure was $153.2 million after deducting payroll-related amounts payable and client prepayments.
- Working capital was $145.3 million, compared with $116.3 million at December 31, 2021. Management said available cash, operating cash flow and facility capacity should meet liquidity needs for the remainder of 2022.
- Long-term debt was $369.4 million under a $500 million revolving facility; $129.6 million of capacity remained available after a $1.0 million letter of credit. The facility matures September 2024. Insperity was in compliance with its financial covenants.
- Investing activities used $5.9 million, primarily for $4.7 million of property and equipment purchases. Financing activities used $43.9 million, including $17.2 million of dividends and $27.4 million for stock repurchases and share withholding.
- Stockholders’ equity was $34.0 million, compared with a $1.8 million deficit at year-end 2021.
Material changes, outlook and notable items
- WSEE growth drove higher revenue, but direct costs increased faster than revenue: gross profit rose 13.7% versus revenue growth of 22.6%. Benefits cost per covered employee increased 7.4%; the share of WSEEs enrolled in health plans declined to 66.3% from 67.8%.
- Workers’ compensation costs decreased 3.4% despite higher non-bonus payroll. Insperity reduced its workers’ compensation accrual by $14.9 million for favorable prior-period claim estimates, compared with a $13.2 million reduction in Q1 2021. Prior-period health-claim estimate changes increased costs by $0.8 million, versus $5.5 million in Q1 2021.
- Management expected average paid WSEEs to increase 18%–19% year over year in Q2 2022, equivalent to 3%–4% sequential growth from Q1 if achieved. No broader full-year financial guidance is provided in the supplied filing text.
- Management warned that healthcare costs could remain affected by pandemic-related utilization, testing, vaccination and treatment, and that the pandemic’s longer-term effects remain uncertain. Other cited risks include inflation, labor shortages, economic conditions, regional concentration, insurance costs and claims, client retention, regulatory matters, cybersecurity and technology disruptions, and credit-facility compliance.
- A federal securities class action was dismissed with prejudice on March 15, 2022; the appeal deadline had passed. Management said other ordinary-course litigation was not expected to have a material adverse effect.
- COVID-19, healthcare-cost trends and changes in claims estimates remain significant sources of uncertainty. The filing reports no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether projected Q2 WSEE growth of 18%–19% is achieved and translates into profitable growth.
- Whether benefits costs and workers’ compensation claims develop as estimated, including the effect of prior-period reserve reductions.
- How much reported cash is available for corporate use after payroll obligations and client prepayments, and whether operating cash flow remains strong across periods with different payroll timing.
- Debt-facility interest-rate exposure, remaining borrowing capacity, covenant compliance and refinancing needs before the September 2024 maturity.
- Whether margin pressure persists as direct costs and operating expenses evolve relative to pricing and WSEE growth.