Insperity, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request references 2014 Q4, this filing reports full-year results; fourth-quarter figures are included below where available.
Business context
Insperity provides HR outsourcing and business services, principally through professional employer organization (PEO) arrangements. It co-employs clients’ worksite employees and provides payroll administration, benefits, workers’ compensation, compliance and HR services. It averaged 130,718 paid worksite employees per month in 2014; fourth-quarter average was 136,764, up 4.6% year over year.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue, net of worksite payroll costs | $2,357.8 million | $2,256.1 million | +4.5% |
| Gross profit | $403.8 million | $393.3 million | +2.7% |
| Operating income | $47.5 million | $56.2 million | -15.6% |
| Net income | $28.0 million | $32.0 million | -12.6% |
| Diluted EPS | $1.05 | $1.25 | -16.0% |
| Adjusted EBITDA (non-GAAP) | $84.1 million | $92.3 million | -8.9% |
Gross margin was approximately 17.1% versus 17.4%; operating margin was approximately 2.0% versus 2.5%; net margin was approximately 1.2% versus 1.4%. Gross profit per worksite employee per month was unchanged at $257. Operating expenses rose 5.7% to $356.3 million, with per-employee monthly expense increasing from $220 to $227. Higher corporate compensation and incentive pay were key contributors. Workers’ compensation costs rose 25.2% per employee per month; health-benefit costs per covered employee increased 2.4%.
Fourth quarter: Revenue was $595.9 million versus $557.1 million; gross profit was $101.4 million versus $90.0 million; operating income was $13.0 million versus $6.9 million; net income was $8.2 million versus $5.3 million. The 2014 quarter included a $1.2 million non-cash charge; the prior-year quarter included a $3.3 million impairment charge and a $2.0 million tax benefit elsewhere in 2013.
Cash flow and balance sheet: Cash from operations was $141.7 million, compared with $34.7 million in 2013. Investing activities used $3.2 million, including $19.1 million of capital expenditures; financing activities used $87.8 million, principally dividends and share repurchases. Year-end cash, cash equivalents and marketable securities totaled $305.1 million, including $152.1 million of payroll-related withholdings and $87.9 million of client prepayments. Working capital was $73.1 million, down from $128.6 million, partly reflecting the special dividend. The company had no borrowings on its credit facility at year-end. In February 2015, the facility was increased to $125 million and extended to February 2020. No material funded debt balance is identified in the supplied filing text.
Material changes and capital allocation
- Average paid worksite employees increased 2.5% for the year; revenue per worksite employee per month rose 2.0% to $1,503.
- Revenue growth did not translate into higher per-employee gross profit: direct costs per worksite employee increased 2.4%, faster than revenue per employee.
- Operating income and net income declined despite revenue growth, reflecting higher operating expenses and direct costs.
- Insperity paid $69.5 million in dividends, including a $50.7 million special dividend, and spent $20.8 million on share repurchases. Stockholders’ equity fell to $204.1 million from $253.3 million.
- Strategic Businesses generated 1.5% of total revenue outside PEO services; their gross-profit contribution was $17 per worksite employee per month, up from $14.
Outlook, commentary and risks
Management expected average paid worksite employees of 138,300–138,900 per month in the first quarter of 2015 and stated that available liquidity and the credit facility should meet 2015 needs. Management also intended to seek certification under the Small Business Efficiency Act, whose federal PEO payroll-tax framework becomes effective in 2016. The filing does not provide full-year 2015 earnings or revenue guidance.
- Insurance and claims: Health-benefit estimates rely on claims-development assumptions. The United contract covered approximately 85% of health coverage and runs through December 31, 2017, subject to termination on notice. Workers’ compensation coverage with ACE expires September 30, 2015, with a possible extension subject to conditions. Insperity bears defined layers of claim costs; year-end accrued claims were $136.1 million.
- Regulation: The application of health-care reform and other employment laws to PEOs remains uncertain in some respects. The company noted potential cost increases and limitations on passing them through to clients.
- Client and operating exposure: Client contracts are generally cancellable on 30 days’ notice, and the company remains responsible for payroll and specified benefits even if a client fails to pay. Other risks include economic weakness, competition, regional concentration, cyber or technology outages, and carrier or financial-institution failures.
- Contingencies: Texas aircraft sales/use tax assessments totaled approximately $1.7 million, and a Massachusetts corporate-tax assessment was approximately $2.5 million. Insperity disputes the assessments; outcomes were uncertain. Management stated ordinary-course litigation was not expected to be material, apart from disclosed matters.
- Unusual items: 2014 included a $2.5 million goodwill/intangible impairment in Employment Screening and a $1.2 million non-cash office-planning charge. Adjusted net income was $30.3 million versus GAAP net income of $28.0 million; adjusted measures are non-GAAP.
- Governance: The company disclosed public criticism and strategic demands from its two largest stockholders, with potential for proxy activity and management distraction.
Key facts for investors to verify
- Whether the first-quarter 2015 worksite-employee outlook was achieved and whether growth converted into improved margins.
- Subsequent health-insurance claims experience and workers’ compensation costs, estimates, and renewal terms.
- Progress toward federal CPEO certification and the resulting implementation costs and operating effects.
- Resolution and potential financial impact of the Texas and Massachusetts tax assessments.
- Cash available after payroll-related and client funds, and the effects of dividends, repurchases, and any future borrowing.
- Performance and impairment risk in Strategic Businesses, particularly Employment Screening and other acquired or technology-related operations.