Insperity, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Insperity provides HR and business services, primarily through professional employer organization (PEO) solutions and co-employment arrangements. Financial statements are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,209.6 million | $1,007.8 million | $3,681.8 million | $3,230.7 million |
| Gross profit | $198.5 million | $185.0 million | $649.5 million | $639.3 million |
| Operating income | $39.6 million | $28.8 million | $158.7 million | $187.0 million |
| Net income | $27.3 million | $20.0 million | $114.4 million | $134.0 million |
| Diluted EPS | $0.70 | $0.51 | $2.94 | $3.43 |
| Adjusted EBITDA | $60.1 million | $57.6 million | $224.6 million | $250.8 million |
- Q3 revenue increased 20.0%, while gross profit rose 7.3%; gross profit per worksite employee (WSEE) per month declined 3.4% to $257. Q3 adjusted EPS declined 2.2% to $0.89 despite higher GAAP net income and diluted EPS.
- For the first nine months, revenue rose 14.0% and gross profit 1.6%, but operating income fell 15.2%, net income fell 14.6%, and adjusted EPS fell 12.8% to $3.62.
- Average paid WSEEs grew 11.1% in Q3 and 5.2% year to date. Revenue per WSEE per month increased 7.9% in Q3 and 8.3% year to date; gross profit per WSEE per month decreased 3.4% and 3.3%, respectively.
- Management attributed revenue growth to more paid WSEEs, higher average pricing, and the non-recurrence of 2020 client FICA deferrals and service-fee credits. Higher health benefit costs weighed on gross profit: year-to-date benefits cost per covered employee rose 10.3% year over year.
Cash, debt and liquidity
- Nine-month operating cash flow was $54.8 million, down from $106.6 million. Investing used $22.4 million and financing used $95.2 million, including $50.2 million of dividends and $49.8 million of treasury stock purchases or withholdings.
- At September 30, cash and cash equivalents were $467.9 million; restricted cash was $47.8 million and marketable securities were $32.7 million. Of cash, cash equivalents and marketable securities totaling $500.6 million, $198.4 million related to payroll taxes and deductions and $74.6 million to client prepayments. Management’s adjusted measure, excluding those amounts, was $227.6 million.
- Working capital was $202.3 million. Long-term debt was $369.4 million under a $500 million revolving facility; after a $1.0 million letter of credit, available capacity was $129.6 million. The facility matures September 2024; Insperity reported compliance with its financial covenants.
- Stockholders’ equity was $97.0 million at quarter-end, compared with $44.1 million at December 31, 2020. The company paid quarterly dividends of $0.45 per share in Q2 and Q3 2021 and had authorization to repurchase 874,828 additional shares at quarter-end.
Outlook, risks and notable items
- Management expected average paid WSEEs to increase 11.0%–12.0% year over year in Q4 2021, implying sequential growth of 3.1%–4.1% from Q3, if achieved. It said available cash, operating cash flows and facility capacity should meet liquidity requirements for the remainder of 2021.
- Management cautioned that COVID-19 effects remain uncertain. Benefits costs may be affected by healthcare utilization and COVID-19 testing, vaccination and treatment costs; the ultimate pandemic impact on workers’ compensation was also uncertain.
- Workers’ compensation estimates were reduced by $31.4 million year to date for favorable prior-period loss development; health benefits costs included a $4.5 million increase for prior-period claim run-off estimates. These estimates involve judgment and can change.
- A federal securities class action filed in 2020 alleges materially false or misleading statements and seeks unspecified damages and other relief. Insperity disputes the allegations and intends to defend the case; no provision was recorded. Management said other pending litigation was not expected to materially affect financial position or results.
- Other stated risks include economic conditions, client retention and sales, health and workers’ compensation costs, insurance availability, regulatory matters, credit-facility covenants, cybersecurity and IT disruptions, and geographic concentration. Management reported no material changes to previously disclosed risk factors.
Key investor verification points
- Assess whether WSEE growth and Q4 guidance translate into improved gross profit per WSEE, given rising benefit costs and weaker year-to-date operating income.
- Review the sustainability of favorable workers’ compensation claim development and the assumptions behind health-claim estimates.
- Reconcile reported cash with payroll-related funds and client prepayments, and monitor operating cash flow, debt capacity and covenant compliance.
- Track the securities class action and any changes in the company’s assessment or potential financial exposure.
- Compare GAAP results with adjusted EBITDA and adjusted EPS; the company’s non-GAAP measures exclude stock-based compensation and are not substitutes for GAAP results.