Insperity, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Insperity provides HR and business services, principally through its professional employer organization (PEO) Workforce Optimization offering, to small and medium-sized businesses. This unaudited report covers the three months ended March 31, 2013, compared with the same 2012 quarter. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
- Revenue: $611.8, up 2.8% from $595.2. Gross billings were $3.332 billion versus $3.231 billion; revenue is presented after worksite employee payroll costs. Average worksite employees paid monthly rose 1.2% to 123,391, and revenue per employee per month increased 1.6% to $1,653.
- Profitability: Gross profit was $108.1, up 5.0%. Operating income was $22.0, down 4.5%; net income was $13.2, down 5.1%. Diluted EPS declined to $0.51 from $0.54. Gross profit per worksite employee per month rose 3.5% to $292, while operating income per employee fell 6.3% to $59.
- Costs and margins: Operating expenses increased 7.7% to $86.1, faster than revenue, led by higher salaries and depreciation and amortization. Calculated from reported figures, gross margin was about 17.7% versus 17.3%; operating margin was about 3.6% versus 3.9%.
- Cash flow: Operating activities provided $17.5, compared with $33.3 in Q1 2012. Investing used $37.8, primarily reflecting net purchases of marketable securities; financing used $16.8, including $13.5 of treasury-stock purchases and $4.3 of dividends. Cash and cash equivalents fell to $227.4 from $264.5 at year-end.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $278.8 at March 31; about $169.6 related to payroll and tax withholdings and $11.9 to client prepayments, both payable in early April. Working capital was $113.7. The $100 million revolving facility was undrawn, with no debt reported, and the company was compliant with its covenants.
- Balance sheet: Total assets were $760.7 and stockholders’ equity $239.4. Accrued workers’ compensation costs totaled $115.6, including current and noncurrent portions.
Material changes versus Q1 2012
- Revenue and gross profit grew, supported by higher worksite employee counts, higher revenue per employee, and improved contribution from Adjacent Businesses.
- Health-benefit costs rose $19 per worksite employee per month, while workers’ compensation costs declined $1 per employee per month. Prior-period workers’ compensation estimates reduced current-quarter costs by $3.6, similar to $3.5 in Q1 2012.
- Operating expenses rose faster than gross profit, with salaries, wages and payroll taxes up 11.3% and depreciation and amortization up 22.2%. Operating and net income declined despite revenue growth.
- Operating cash flow was lower, and investing cash outflow was substantially higher due primarily to marketable-security purchases. Repurchases and dividends also used cash.
Outlook, risks and contingencies
- Management said available cash, marketable securities, operating cash flows and the credit facility were expected to meet liquidity needs for the remainder of 2013. No specific earnings or revenue guidance was provided in the filing text.
- Management noted weaker client retention and net changes in existing clients during Q1, while worksite employees from new client sales increased. Results remain sensitive to economic conditions, client retention and growth, health and workers’ compensation claims and costs, regulatory changes, and competition.
- The former workers’ compensation carrier, Lumbermens Mutual, is in rehabilitation; a liquidation complaint had been filed but not yet ruled on. Guaranty associations could seek reimbursement for open claims. The company estimated potentially affected claims at $2.9–$5.0 million and said a successful recovery claim could materially reduce net income; outcome and timing are uncertain.
- Workers’ compensation reserves depend on actuarial estimates and claim development. Management also identified uncertainty in health-plan cost estimates and funding. The filing reports no material change in previously disclosed risk factors.
- The company repurchased 356,653 shares under its buyback program and paid a quarterly dividend of $0.17 per share. Disclosure controls were assessed as effective at March 31, 2013.
Important facts for investors to verify
- Whether client retention, new-client additions and worksite employee growth improve in subsequent quarters.
- Whether benefit and workers’ compensation costs, including reserve estimates and prior-period adjustments, remain favorable.
- Whether operating-expense growth moderates and margins recover.
- How operating cash flow changes with payroll timing, client funding and insurance-plan funding; distinguish available corporate liquidity from payroll-related funds.
- The status and potential outcome of Lumbermens Mutual liquidation and any guaranty-association recovery claims.
- Future use of cash for share repurchases and dividends, and continued compliance with credit-facility covenants.