Insperity, Inc. — Q3 2015 Form 10-Q
Business and period: Insperity provides HR, payroll, benefits, workers’ compensation and related services, primarily through its PEO offerings to small and midsize businesses. This unaudited report covers the three and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless otherwise noted. Dollar amounts below are in millions except per-share and per-employee figures.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $626.3 | $560.3 | $1,953.6 | $1,761.9 |
| Gross profit | $106.7 | $100.8 | $340.8 | $302.4 |
| Operating income | $19.9 | $14.5 | $55.7 | $34.5 |
| Net income | $12.0 | $8.4 | $33.1 | $19.8 |
| Diluted EPS | $0.48 | $0.33 | $1.32 | $0.78 |
| Adjusted EBITDA (non-GAAP) | $28.3 | $22.6 | $93.2 | $61.5 |
- Q3 revenue rose 11.8%, while gross profit rose 5.9%, operating income 37.9% and net income 42.5%. For the nine-month period, revenue increased 10.9%, gross profit 12.7%, operating income 61.5% and net income 66.6%.
- Approximate Q3 gross, operating and net margins were 17.0%, 3.2% and 1.9%, respectively; corresponding 2014 margins were 18.0%, 2.6% and 1.5%. For the first nine months, those margins were approximately 17.4%, 2.9% and 1.7%, versus 17.2%, 2.0% and 1.1% in 2014.
- Average worksite employees paid per month increased 13.3% in Q3 to 149,086 and 11.4% for the nine-month period to 143,392. Revenue per worksite employee per month declined 1.4% in Q3 and 0.5% year to date. Gross profit per employee per month fell 6.3% in Q3 to $239, but increased 1.1% year to date to $264.
- Q3 operating expenses increased 0.5%; year-to-date expenses increased 6.4%, including $11.1 million of impairment and other charges versus $2.5 million in 2014. Year-to-date adjusted operating expenses, a non-GAAP measure, increased 2.6%.
- Effective tax rates were 40.1% in Q3 and 40.6% for the first nine months, above the 35% U.S. statutory rate, primarily due to state taxes and nondeductible items.
Cash flow, liquidity and capital
- Cash and cash equivalents were $201.1 million at September 30, 2015; marketable securities were $9.8 million. Combined cash, cash equivalents and marketable securities were $210.8 million, down from $305.1 million at December 31, 2014.
- Management’s adjusted cash measure was $70.9 million after excluding $99.4 million for payroll-related withholdings and deductions and $40.5 million in client prepayments. These balances are affected by payroll timing and are not all available for general corporate use.
- Working capital was $76.4 million, compared with $73.1 million at year-end. The company reported no borrowings on its $125 million revolving facility, which matures in February 2020; a $0.6 million letter of credit was outstanding, and the company said it was in compliance with covenants.
- Operating cash flow was negative $25.7 million for the first nine months, versus negative $1.0 million in 2014. The filing cites working-capital movements, including a $98.3 million increase in accounts receivable, as well as payroll and insurance funding timing.
- Investing activities provided $20.3 million, including $12.2 million of proceeds from selling two aircraft. Financing activities used $69.9 million, including $58.6 million for share repurchases and $15.8 million for dividends.
- Insperity stated that cash, operating cash flows and available credit were expected to meet liquidity needs for the remainder of 2015.
Material changes, outlook and risks
- Management attributed revenue growth primarily to more worksite employees, with improvement in new client sales, retention and hiring/layoffs at existing clients. Gross profit growth lagged Q3 revenue growth; management cited lower revenue per employee and a decline in gross profit per employee.
- Workers’ compensation costs rose 20.9% year to date, reflecting higher incurred claims and workforce growth. The accrued workers’ compensation liability was $155.1 million, including $112.1 million long-term; estimates rely on actuarial assumptions and claim development.
- Health-benefit costs reflected favorable claim trends and lower COBRA participation. Insperity reported a $17.8 million surplus under its United health plan, including $8.8 million recorded as a current asset and $9.0 million as a long-term asset. Results remain sensitive to claims and insurer-set funding rates.
- The company recorded $11.1 million of year-to-date impairment and other charges related principally to planned aircraft sales and a Texas sales-and-use-tax assessment. Both aircraft were sold in July for net proceeds of $12.2 million. Q3 had no impairment charges. The filing also included $1.5 million of year-to-date stockholder advisory expenses.
- Four states were at risk of a 2015 federal unemployment tax add-on; the potential additional tax was estimated at approximately $3.5 million. State waivers were pending, and the company cautioned that fee adjustments might not fully recover any increase.
- No numerical earnings or revenue guidance was provided. Key stated risks include economic conditions, regulatory and tax changes, insurance costs and availability, claims experience, competition, managing growth, payroll-related liabilities, data security and IT systems, litigation, and stockholder-related business disruption.
- Management said ordinary-course lawsuits were being defended and were not expected to have a material adverse effect. Disclosure controls were assessed as effective at September 30, 2015.
Important facts for investors to verify
- Whether worksite-employee growth continues and whether revenue and gross profit per employee stabilize or improve.
- Workers’ compensation claim trends, reserve assumptions and funding needs, alongside health-plan costs and insurer funding rates.
- Whether operating cash flow improves as receivables and payroll-related balances fluctuate, and how much reported cash is available after client and payroll obligations.
- The outcome of the FUTA waiver process and the extent to which any resulting tax increases can be passed through to clients.
- The aircraft-related charges and other adjustments, and the assumptions behind management’s non-GAAP adjusted earnings and EBITDA measures.
- Capital returns: share repurchases, remaining authorization, and dividend sustainability relative to cash generation.