Insperity, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Insperity provides HR and professional employer organization services, along with adjacent business services.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $637.0 million | $611.8 million | +4.1% |
| Gross profit | $106.2 million | $108.1 million | -1.8% |
| Operating income | $16.6 million | $22.0 million | -24.6% |
| Net income | $9.6 million | $13.2 million | -27.4% |
| Diluted EPS | $0.37 | $0.51 | -27.5% |
| Operating cash flow | $8.9 million | $17.5 million | Lower |
Gross margin was approximately 16.7% versus 17.7%; operating margin was approximately 2.6% versus 3.6%. Revenue growth reflected a 2.3% increase in average worksite employees paid per month and 1.7% higher revenue per employee. Gross profit per employee per month declined 4.1% to $280, as direct costs per employee rose faster than revenue.
Liquidity, capital and balance sheet
- Cash and cash equivalents were $213.5 million; marketable securities were $46.9 million. Restricted cash of $52.2 million is reported separately.
- Working capital was $123.1 million, down from $128.6 million at year-end 2013. Management said available cash, securities, operating cash flow and credit availability should meet liquidity needs for the remainder of 2014.
- The $100 million revolving credit facility, which may be increased to $150 million subject to conditions, was undrawn at quarter-end; Insperity reported covenant compliance. The filing does not clearly state a separate total-debt figure.
- Investing activities used $3.5 million, mainly for $2.4 million of property and equipment purchases. Financing activities used $17.7 million, including $13.9 million of share repurchases and $4.4 million of dividends.
Material changes and management commentary
- Benefits costs per covered employee increased 5.3%; Q1 included $5.1 million of costs for revisions to 2013 health-claim estimates and $2.2 million of additional taxes, primarily related to health care reform requirements.
- Workers’ compensation costs per worksite employee increased 24.6%, primarily due to higher claim severity. Favorable revisions to prior-period loss estimates reduced costs by $0.7 million, compared with $3.6 million in Q1 2013.
- Operating expenses rose 4.0%, including higher corporate and sales staffing costs. Average worksite employee count increased 2.3%; management noted slight improvement in new-client sales, with modest declines in retention and net changes among existing clients compared with the prior-year quarter.
- The effective income tax rate increased to 42.4% from 40.4%, mainly due to state taxes and nondeductible expenses.
Outlook, risks and contingencies
- Management expected cash resources, operating cash flow and the undrawn facility to cover liquidity requirements for the remainder of 2014; no specific earnings or revenue guidance is provided in this filing.
- Fourteen states, including California, were at risk of additional FUTA taxes in 2014. Potential additional tax associated with worksite employees in those states was approximately $3.6 million at March 31. Insperity generally may adjust service fees, but said recovery could be incomplete; state waiver decisions were expected in Q3.
- Health-claim and workers’ compensation accruals depend on estimates and actuarial assumptions. Other cited risks include health and workers’ compensation cost trends, unemployment taxes, regulation, client retention and competition, payroll-related liabilities, data security, IT systems, and litigation.
- Insperity was involved in ordinary-course lawsuits and claims; management believed their resolution would not materially adversely affect financial position or results. The filing does not quantify a specific litigation exposure.
Important facts for investors to verify
- Whether revenue and worksite-employee growth continue while gross profit per employee and operating margins recover.
- Subsequent health-plan claim development and workers’ compensation severity, estimate revisions and funding requirements.
- Whether potential FUTA increases are imposed and can be passed through to clients.
- Cash-flow trends after accounting for payroll timing, client prepayments and insurance funding; reported cash includes substantial client-related payroll and tax funds.
- Capital returns and liquidity: ongoing repurchases and dividends versus operating cash generation and credit-facility availability.