Insperity, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited fourth-quarter results. Insperity provides HR outsourcing and related services, primarily through its PEO solutions, which combine payroll and employment administration, employee benefits, workers’ compensation, compliance support and HR services. Its reported revenue excludes client worksite employee payroll costs.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $3.829 billion | $3.300 billion | +16.0% |
| Gross profit | $681.9 million | $572.7 million | +19.1% |
| Operating income | $179.0 million | $129.9 million | +37.8% |
| Net income | $135.4 million | $84.4 million | +60.4% |
| Diluted EPS | $3.22 | $2.01 | +60.2% |
| Adjusted EBITDA (non-GAAP) | $239.6 million | $177.7 million | +34.8% |
Approximate GAAP margins, calculated from reported amounts: gross margin 17.8% (2017: 17.4%); operating margin 4.7% (2017: 3.9%); net margin 3.5% (2017: 2.6%). Average paid worksite employees (WSEEs) grew 14.5% to 209,123; revenue per WSEE per month increased 1.4% to $1,526, and gross profit per WSEE per month rose to $272 from $261.
Fourth quarter: Revenue was $966.8 million versus $826.5 million in Q4 2017; gross profit was $161.6 million versus $142.9 million; operating income was $32.6 million versus $23.7 million; net income was $24.7 million versus $15.6 million; diluted EPS was $0.59 versus $0.36. The filing provides no quarterly cash-flow figures.
Cash flow, liquidity and debt
- FY operating cash flow was $184.5 million, compared with $213.2 million in 2017. Investing cash flow was negative $94.1 million and financing cash flow was negative $104.5 million.
- Cash, cash equivalents and marketable securities totaled $387.6 million at year-end. This included $224.5 million payable for payroll-related withholdings and deductions and $34.2 million in client prepayments; management’s adjusted cash measure excluding those items was $128.9 million.
- Working capital was $94.2 million, up from $54.2 million. Total debt was $144.4 million, borrowed under a revolving facility increased to $350 million in February 2018 and maturing in February 2023. The company was in compliance with its financial covenants.
- Management said cash, securities, operating cash flows and available credit were expected to be adequate for 2019 liquidity needs. It paid $33.4 million in dividends and repurchased $113.3 million of stock in 2018.
Changes, outlook and notable items
- Management attributed growth to higher WSEE counts, new-client sales and improved retention, alongside management of gross profit and operating costs. Middle-market WSEEs were approximately 24.6% of annual average paid WSEEs.
- Insperity expected average paid WSEEs of 224,000–226,000 per month in Q1 2019; the filing gives no full-year 2019 earnings or revenue guidance.
- Workers’ compensation costs benefited from an $18.8 million reduction in estimates for prior-period claims in 2018 (versus $16.3 million in 2017). Health-benefit costs included a $1.3 million favorable adjustment for prior-period claims in 2018, compared with a $1.2 million unfavorable adjustment in 2017. These estimates are sensitive to claims development and actuarial assumptions.
- Operating expenses included a one-time $9.3 million tax-reform bonus to corporate employees. Adjusted EBITDA and other adjusted measures are non-GAAP and exclude specified items, including this bonus and stock-based compensation.
- In February 2019, a subsidiary entered a construction agreement for a new headquarters office building and parking garage, expected to cost $65–$75 million and be completed in 2020.
- A class-action lawsuit concerning fiduciary duties and fees in the WSEE 401(k) plan remained pending; the company was seeking summary judgment and had made no provision because of outcome uncertainty. Management said other ordinary-course litigation was not expected to have a material adverse effect.
Key risks and items to verify
- Health insurance claims and pricing: the UnitedHealthcare arrangement supplied approximately 86% of health coverage and was subject to cancellation on 180 days’ notice; verify claims experience, plan funding and ability to recover cost increases through client pricing.
- Workers’ compensation coverage with Chubb was scheduled to expire September 30, 2019. Verify replacement terms and changes in claim estimates; accrued workers’ compensation claims were $229.6 million at year-end.
- Insperity remains responsible for WSEE wages, payroll taxes and specified benefits even when clients do not pay. Economic weakness, client defaults, short-notice client cancellations and unemployment-tax increases could pressure results.
- Verify Q1 2019 WSEE growth against the stated range, and track whether growth translates into sustained per-WSEE gross profit and earnings without relying on favorable prior-claim adjustments.
- Review the 401(k) class-action developments, PEO regulatory and health-care-law changes, cyber/data-security exposure, and the funding and returns associated with the planned headquarters project and continuing share repurchases.