Insperity, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Insperity provides HR, payroll, benefits, workers’ compensation, and related services, primarily through its PEO co-employment solutions for small and midsize businesses. Revenue is reported net of worksite employee (WSEE) payroll costs.
Financial performance
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $1.439B | $1.210B | $4.449B | $3.682B |
| Gross profit | $244.6M | $198.5M | $770.2M | $649.5M |
| Operating income | $52.6M | $39.6M | $199.4M | $158.7M |
| Net income | $37.7M | $27.3M | $141.2M | $114.4M |
| Diluted EPS | $0.98 | $0.70 | $3.66 | $2.94 |
| Operating cash flow | — | $122.0M | $54.8M |
Q3 revenue increased 19.0%, net income 38.0%, and diluted EPS 40.0% year over year. For the first nine months, revenue rose 20.8%, net income 23.4%, and diluted EPS 24.5%. Average WSEEs paid grew 17.8% in Q3 and 18.9% YTD. Gross profit per WSEE per month was $269 in Q3, up from $257; YTD it was $294 versus $295. Calculated from reported amounts, Q3 gross margin was approximately 17.0% versus 16.4%, and operating margin approximately 3.7% versus 3.3%.
Adjusted EPS, a non-GAAP measure, was $1.23 in Q3 (up 38.2%) and $4.38 YTD (up 21.0%). Adjusted EBITDA was $79.8M in Q3 (up 32.7%) and $273.4M YTD (up 21.8%). These measures exclude stock-based compensation; see the filing’s reconciliations.
Liquidity, debt and capital allocation
At September 30, cash and cash equivalents were $562.1M, marketable securities $34.5M, and restricted cash $51.8M. Working capital was $167.8M, versus $116.3M at December 31, 2021. Management’s adjusted cash, cash equivalents and marketable securities measure was $238.9M after excluding payroll-related obligations and client prepayments. Cash, cash equivalents, restricted cash and client funds totaled $818.3M for cash-flow reporting purposes.
Long-term debt was $369.4M under a variable-rate revolving facility with $650M capacity; $279.6M remained available after a $1.0M letter of credit. The facility matures June 30, 2027; average borrowing rate for the first nine months was 2.8%. Insperity reported compliance with its financial covenants. YTD operating cash flow was $122.0M; investing cash use was $19.9M and financing cash use was $123.4M. Financing included $56.9M of dividends and $63.4M of share repurchases and withholding.
Operating changes, outlook and risks
- Q3 revenue growth reflected higher WSEE counts and a 1.0% rise in revenue per WSEE per month. YTD, those measures rose 18.9% and 1.7%, respectively.
- Q3 gross profit benefited from $16.6M of lower estimated health-claims run-off costs and $9.4M of lower workers’ compensation costs from prior-period claim estimates. YTD health-claims run-off changes increased costs by $12.8M, while workers’ compensation estimate changes reduced costs by $35.3M. Results therefore include meaningful estimates and reserve adjustments.
- Management expected average paid WSEEs to increase 14.5%–15.5% year over year in Q4 2022, implying 1.5%–2.4% sequential growth from Q3 if achieved. The filing provides no earnings guidance.
- Management cited continuing uncertainty around pandemic-related healthcare utilization and claims, inflation, labor availability, and economic conditions. Other stated risks include health and workers’ compensation claims and reserve estimates, client cancellations or retention, regional concentration, regulatory changes, cybersecurity and technology disruptions, and variable-rate borrowing costs.
- The company said cash, operating cash flows and facility availability were expected to meet remaining-2022 liquidity needs. It reported ordinary-course litigation and management did not expect a material adverse outcome. No material risk-factor changes from the 2021 Form 10-K were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether WSEE growth and the Q4 outlook are realized, particularly as client-base net gains moderated from the prior-year comparison.
- How healthcare claims, coverage levels and prior-period run-off estimates affect future direct costs and margins.
- Whether workers’ compensation reserve reductions persist, given their actuarial assumptions and claim development.
- Cash available for corporate use after payroll obligations and client funds, and the effect of variable rates on facility interest expense.
- Capital returns and covenant headroom alongside continued operating and investment needs.