Insperity, Inc. — Q1 2021 Form 10-Q
Business and period. Insperity provides HR and business services, primarily through its professional employer organization (PEO) solutions. This unaudited report covers the three months ended March 31, 2021, compared with Q1 2020. Revenue largely reflects gross billings less worksite employee (WSEE) payroll costs.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $1,286.8 million | $1,229.5 million; up 4.7% |
| Gross profit | $251.4 million | $234.0 million; up 7.4% |
| Operating income | $83.8 million | $85.2 million; down 1.6% |
| Net income | $61.9 million | $62.1 million; down 0.3% |
| Diluted EPS | $1.59 | $1.58; up 0.6% |
| Adjusted EBITDA (non-GAAP) | $104.2 million | $101.3 million; up 2.9% |
| Adjusted EPS (non-GAAP) | $1.82 | $1.70; up 7.1% |
| Average WSEEs paid per month | 233,170 | 238,014; down 2.0% |
Gross margin was approximately 19.5% of revenue, versus 19.0% a year earlier; operating margin was approximately 6.5%, versus 6.9%. Revenue per WSEE per month rose 6.9% to $1,840, while gross profit per WSEE per month rose 9.5% to $359. Operating expenses increased 12.6% to $167.6 million, led by higher salaries and stock-based compensation.
Net cash provided by operating activities was $2.0 million, down from $23.8 million. Investing activities used $12.1 million, primarily for capital expenditures; financing activities used $42.4 million, including $15.5 million of dividends and $29.7 million for shares repurchased or withheld. The company paid a quarterly dividend of $0.40 per share.
At March 31, cash and cash equivalents were $494.8 million and marketable securities were $34.3 million. Management’s adjusted cash, cash equivalents and marketable securities measure was $196.7 million after excluding payroll-related amounts and client prepayments. Working capital was $207.2 million. Long-term debt was $369.4 million under a $500 million revolving facility; $129.6 million of borrowing capacity remained after a $1.0 million letter of credit. The facility matures September 2024, and the company reported compliance with its financial covenants at quarter-end.
Material changes and notable items
- Revenue growth reflected a 6.9% increase in revenue per WSEE per month, partly offset by the 2.0% decline in average WSEEs paid. The company cited year-end attrition, including the loss of a large client with 6,800 WSEEs; client attrition rose from 11% to 12% of beginning-of-year WSEEs.
- Gross profit growth benefited from higher pricing and lower workers’ compensation costs. Workers’ compensation cost estimates were reduced by $13.2 million for prior-period claims, compared with a $10.1 million reduction in Q1 2020. Health benefit costs included a $5.5 million increase for prior-period claim run-off, versus a $1.5 million reduction in the prior-year quarter.
- Operating expenses rose as salaries and stock-based compensation increased; lower general and administrative expense, partly due to reduced travel, provided an offset.
- The company repurchased 49,904 shares under its repurchase program and withheld another 290,413 shares for tax obligations. The reported $29.7 million treasury-stock cash outflow includes stock-related activity as presented in the filing.
Outlook, risks and contingencies
Management expected average paid WSEEs to increase 5%–6% year over year in Q2 2021, equivalent to 2.6%–3.6% sequential growth from Q1. The filing does not provide clear full-year earnings or revenue guidance.
Management expected higher healthcare costs during the remainder of 2021 and potentially beyond, including costs associated with deferred elective procedures. It said the impact of COBRA subsidies under the American Rescue Plan Act on claims was not yet determinable. COVID-19’s effects on client activity, healthcare claims and workers’ compensation remained uncertain. The company also cited risks including economic conditions, client retention and new sales, insurance costs and claims estimates, regulatory changes, regional concentration, technology and data security, and credit-facility compliance.
A securities class action filed in 2020 seeks unspecified damages; the company said it would defend the case and recorded no provision. Defendants moved to dismiss on April 26, 2021, after quarter-end. A separate 401(k) class action settlement received final court approval in March 2021; Insperity said it did not contribute financially. On April 28, 2021, the company amended its credit agreement, including lowering the required interest coverage ratio.
Important facts for investors to verify
- Whether WSEE growth and new-client sales recover as management expected, given elevated attrition and the loss of a large client.
- Whether healthcare claims, deferred procedures and COBRA-related costs affect benefit margins beyond the quarter.
- The sustainability of favorable workers’ compensation reserve adjustments and the sensitivity of earnings to claims estimates.
- Why operating cash flow was only $2.0 million despite $61.9 million of net income, including the timing and reversal of payroll-related balances.
- The terms and effect of the April 28 credit amendment, ongoing covenant compliance and available liquidity.
- The status and potential exposure of the securities class action; the filing does not quantify a possible loss.
- How non-GAAP adjusted results reconcile to GAAP results; adjusted measures exclude stock-based compensation and are not substitutes for GAAP performance.