Insperity, Inc. — Q3 2017 Form 10-Q
Business and period: Insperity provides HR and business services, principally through its professional employer organization (PEO) solutions. This unaudited filing covers the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. Revenue is reported net of worksite employee payroll costs.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Revenue | $795.5 million | $702.5 million | +13.2% |
| Gross profit | $140.0 million | $117.8 million | +18.8% |
| Operating income | $29.8 million | $22.8 million | +30.9% |
| Net income | $19.2 million | $14.1 million | +36.5% |
| Diluted EPS | $0.91 | $0.66 | +37.9% |
For the first nine months, revenue was $2.474 billion (+11.8%), gross profit $429.9 million (+12.8%), operating income $106.2 million (+15.7%), and net income $68.8 million (+21.9%). Diluted EPS was $3.27 versus $2.64. Approximate Q3 gross margin increased to 17.6% from 16.8%; operating margin increased to 3.7% from 3.2%.
Q3 growth reflected a 10.5% increase in average worksite employees paid per month and 2.5% growth in revenue per employee. Gross profit per employee per month rose 7.8% to $250. Operating expenses increased 15.9% in the quarter, faster than revenue, with higher staffing, incentive compensation, stock compensation and G&A costs.
Cash, liquidity and capital
- Nine-month operating cash flow was $70.4 million, versus $34.8 million in 2016; investing cash use was $26.7 million and financing cash use was $43.8 million.
- Cash and cash equivalents were $285.9 million at September 30; cash, cash equivalents and marketable securities totaled $287.9 million. These balances included $168.3 million of payroll-related withholdings and $14.2 million of client prepayments. The company’s non-GAAP adjusted cash measure, excluding those amounts, was $105.4 million.
- Working capital was $91.7 million, compared with $39.4 million at December 31, 2016. The filing says available cash, operating cash flow and facility capacity should meet liquidity needs through the remainder of 2017.
- Long-term debt was $104.4 million under a $200 million revolving facility; $94.6 million of borrowing capacity remained after a $1.0 million letter of credit. The facility matures February 2020, bears variable-rate interest (2.99% at quarter-end), and the company reported compliance with its covenants.
- During the first nine months, Insperity repurchased $27.2 million of stock and paid $17.8 million in dividends. The board had authorized an additional 873,782 shares for repurchase at quarter-end.
Outlook, risks and notable items
- No specific earnings or revenue guidance is provided in the filing. Management noted improved new-client sales and consistent client retention, but a weaker net change in worksite employees at existing clients.
- Results include favorable estimates for prior-period claims: Q3 health-claims run-off reduced benefits costs by $5.0 million, and workers’ compensation estimates reduced costs by $2.9 million. The company also received a $1.2 million premium-tax refund. These estimates and recoveries affect reported results and may not recur.
- Q3 operating expenses included $1.2 million in Hurricane Harvey relief donations. The nine-month effective tax rate was 35.1%, compared with 37.8% in 2016, including tax benefits related to vesting restricted-stock awards.
- Workers’ compensation liabilities totaled $203.4 million; health and workers’ compensation costs depend on claims experience and actuarial estimates. Other cited risks include economic conditions, insurance pricing and replacement coverage, client losses, regulation, competition, geographic concentration, data security, IT systems and litigation.
- A class-action lawsuit alleges fiduciary breaches concerning the worksite employee 401(k) plan. Insperity said it would defend the case; it recorded no provision because the outcome is uncertain. Management did not expect other routine litigation to have a material adverse effect.
Important facts for investors to verify
- Whether worksite employee growth, client retention and new-client sales remain strong, especially given the weaker existing-client employee trend.
- How much earnings growth depends on favorable health and workers’ compensation claim estimates, and whether actual claims develop as expected.
- The availability of genuinely free cash after payroll-related funds and customer prepayments, and the effect of variable interest rates and facility covenants.
- Potential financial exposure from the 401(k) class action and other contingencies; the filing does not provide a clear estimate of a possible loss.
- Comparability of non-GAAP adjusted earnings and cash measures with GAAP results; the company excludes specified items, including stock compensation and Harvey donations, from certain measures.