Business context and reporting period
Insperity’s filing is under its then-registered name, Administaff, Inc. The 10-Q covers the quarter and nine months ended September 30, 2010. Administaff provides bundled personnel-management services as a professional employer organization (PEO). Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $414.1 | $390.9 | $1,284.2 | $1,257.2 |
| Gross profit | $73.7 | $71.1 | $217.7 | $226.6 |
| Operating income | $12.1 | $9.6 | $24.4 | $31.1 |
| Net income | $7.2 | $5.8 | $14.7 | $19.4 |
| Diluted EPS | $0.28 | $0.23 | $0.56 | $0.76 |
- Third-quarter revenue grew 5.9%, driven by a 5.1% rise in revenue per worksite employee per month and 0.8% growth in average paid worksite employees. Gross profit rose 3.6%; operating income rose 26.3% and net income rose 24.0%.
- For the first nine months, revenue increased 2.1%, but gross profit fell 3.9%, operating income fell 21.4%, and net income fell 24.4%. Average paid worksite employees declined 3.4%, while revenue per employee per month rose 5.7%.
- Gross margin was approximately 17.8% in Q3 2010 versus 18.2% a year earlier; for nine months, approximately 17.0% versus 18.0%. Operating margin was approximately 2.9% in Q3 and 1.9% for nine months. These ratios are calculated from reported figures.
- Direct costs increased faster than revenue per employee: 5.5% in Q3 and 7.1% for the nine-month period. Health-benefit costs, higher state unemployment taxes, and workers’ compensation costs pressured gross profit. Nine-month operating expenses declined 1.1%, but expense per worksite employee increased 2.0%.
- Operating cash flow was $47.7 million for the first nine months, compared with cash used of $42.2 million in 2009. Investing used $55.4 million, including $38.1 million net purchases of marketable securities and acquisition spending; financing used $11.4 million, including $10.1 million in dividends. Cash and cash equivalents ended at $207.9 million, down from $227.1 million at year-end 2009.
- At September 30, cash, cash equivalents, and marketable securities totaled $251.0 million; working capital was $137.2 million. The filing notes that $67.3 million of cash related to payroll tax withholdings and deductions and $56.4 million to client prepayments were payable in early October. Restricted cash was $39.7 million. No debt balance is reported in the presented balance sheet.
- Total assets were $626.2 million and stockholders’ equity $231.8 million. Current liabilities were $329.9 million, including $163.5 million accrued worksite payroll and $79.4 million payroll taxes and deductions payable.
Material changes and notable items
- Management reported improving employee trends: average paid worksite employees increased 5.3% from Q1 to Q3 2010, and Q3 client changes and retention improved versus Q3 2009. Nine-month average employment nevertheless remained below 2009.
- Q3 health-benefit costs per covered employee rose 6.6% year over year; nine-month costs rose 7.9%. COBRA participation remained elevated, at 6.4% of United Plan participants in Q3 and 6.8% for the nine-month period.
- Workers’ compensation estimates reduced costs by $5.0 million in the first nine months due to revised prior-period loss estimates. The company’s exposure changed for the ACE program year beginning October 1, 2010: in addition to the first $1 million per occurrence, it bears claims above that layer up to an aggregate $5 million.
- Administaff acquired ExpensAble in June and certain Galaxy Technologies assets in July to expand its software offerings. It paid $5.5 million and $7.4 million, respectively; further contingent consideration may be payable based on revenue targets.
- The company repurchased 250,000 shares under its buyback program in Q3 and had authorization for 1,139,393 additional shares at quarter-end. It declared quarterly dividends of $0.13 per share.
Outlook, risks, and contingencies
- Management said cash on hand and operating cash flows should be adequate for liquidity needs through the remainder of 2010. No quantified earnings or revenue guidance is provided.
- Management could not determine the future financial impact of federal health-care reform, including plan mandates, exchanges, employer penalties, and excise taxes. Costs may rise, and contractual or competitive conditions could limit the company’s ability to raise service fees.
- ARRA’s COBRA premium subsidy was scheduled to end in August 2011; increased COBRA enrollment and claims could raise plan costs, with delayed or limited recovery through pricing.
- Key risks include economic and employment conditions, health and workers’ compensation costs and claim estimates, state unemployment taxes, insurance-contract renewals, regulatory changes, client retention and sales, acquisition integration, and litigation. Management said pending ordinary-course lawsuits were not expected to materially adversely affect financial position or results, while noting outcomes cannot be predicted with certainty.
- Disclosure controls were reported effective as of September 30, 2010, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improving worksite-employee counts and client retention continued after Q3, given the nine-month decline versus 2009.
- Health-plan claims, COBRA enrollment, and the impact of the October 2010 workers’ compensation risk-sharing change on costs and reserves.
- Whether pricing can offset benefit, payroll-tax, and other direct-cost inflation without weakening client retention.
- Cash-flow sustainability after adjusting for payroll-cycle timing, client prepayments, restricted funds, and other working-capital movements.
- Acquisition performance, final purchase-price allocations, and any contingent payments tied to revenue targets.
- Effects of health-care reform and the outcome or development of litigation and other contingencies.