Insperity, Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Insperity provides HR, payroll, benefits, workers’ compensation and related services, primarily through its PEO co-employment solutions for small and medium-sized businesses.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,769.7 million | $1,577.8 million | +12.2% |
| Gross profit | $332.1 million | $285.8 million | +16.2% |
| Operating income | $121.0 million | $98.4 million | +23.0% |
| Net income | $94.6 million | $69.9 million | +35.4% |
| Diluted EPS | $2.45 | $1.80 | +36.1% |
| Operating cash flow | $39.4 million | $58.8 million | Down $19.5 million |
Gross margin was approximately 18.8% versus 18.1%; operating margin was approximately 6.8% versus 6.2%. Adjusted EPS, a non-GAAP measure, was $2.67, up 34.2%; adjusted EBITDA was $152.4 million, up 28.5%.
Average worksite employees paid (WSEEs) increased 10.1% to 306,691. Revenue per WSEE per month rose 1.9% to $1,923, while gross profit per WSEE per month increased 5.6% to $361.
At March 31, 2023, cash and cash equivalents were $696.6 million, marketable securities $35.5 million, and working capital $215.1 million. Reported cash, cash equivalents and marketable securities totaled $732.1 million, but included $457.8 million associated with payroll taxes and deductions and $42.9 million of client prepayments. Management’s adjusted cash measure, which excludes those amounts, was $231.4 million.
Long-term debt was $369.4 million under a $650 million revolving facility, with $279.6 million of available capacity after letters of credit. The facility matures June 30, 2027; the average borrowing rate in Q1 was 6.35%. Insperity reported compliance with its financial covenants. Financing cash outflows included $19.9 million of dividends and $34.6 million of treasury stock purchases and withholding.
Material changes and drivers
- Growth reflected a 10.1% increase in average WSEEs and a 1.9% increase in revenue per WSEE per month. Middle-market WSEEs grew 19.7% year over year.
- Gross profit growth outpaced revenue growth; pricing contributed to higher gross profit per WSEE, partly offset by higher direct costs.
- Q1 2023 included a $9.0 million reduction in health-benefit costs from prior-period claims estimates, compared with a $0.8 million increase in Q1 2022. Workers’ compensation costs included a $7.6 million prior-period reserve reduction, versus $14.9 million in Q1 2022.
- Interest income rose $8.6 million year over year, while interest expense rose $4.3 million as rates increased. The effective tax rate declined to 23.5% from 27.7%.
- Operating expenses increased 12.7%, including higher salaries and general and administrative costs; advertising expense declined, primarily because of timing.
Outlook, risks and contingencies
No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated it believes cash on hand, marketable securities, operating cash flows and facility availability will meet liquidity requirements for the remainder of 2023. Management also noted that WSEE growth continued, but net gains in the client base and client retention were lower than in Q1 2022.
Key risks include economic conditions, inflation, labor competition, client cancellations or nonpayment, healthcare and workers’ compensation claim trends, regulatory and tax changes, cybersecurity and service-provider disruptions, and exposure to variable interest rates. Insperity added a specific risk disclosure regarding bank failures: deposits exceed FDIC insurance limits, and disruptions could impair access to cash, payroll processing or credit-facility availability. The company also reported that some clients had deposits at banks recently placed into receivership.
Health and workers’ compensation liabilities depend on estimates and actuarial assumptions. The company reported $229.5 million of accrued workers’ compensation claims, including a $181.4 million noncurrent portion. Management said it is defending ordinary-course lawsuits and does not expect their outcome to materially affect financial position or results, while noting litigation outcomes cannot be predicted with certainty. No material change to previously disclosed risk factors was reported apart from the bank-related risk.
Important facts for investors to verify
- Whether WSEE growth, client retention and new-client gains sustain momentum.
- How much of earnings growth reflects underlying operations versus prior-period health and workers’ compensation reserve adjustments.
- Whether benefit, payroll-tax and workers’ compensation costs remain aligned with pricing as contracts renew.
- Liquidity available for corporate use after excluding client funds and payroll-related obligations, and the company’s exposure to uninsured deposits and banking disruptions.
- Variable-rate debt costs, covenant headroom and the pace of share repurchases and dividends.