Insperity, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also discusses fourth-quarter performance. Insperity provides HR outsourcing and related services, primarily to small and midsize businesses, through professional employer organization (PEO) co-employment arrangements. Its revenue is reported net of worksite employee payroll costs.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $4.287 billion | $4.315 billion | -0.6% |
| Gross profit | $806.9 million | $732.9 million | +10.1% |
| Operating income | $194.7 million | $186.6 million | +4.3% |
| Net income | $138.2 million | $151.1 million | -8.5% |
| Diluted EPS | $3.54 | $3.70 | -4.3% |
| Adjusted EBITDA (non-GAAP) | $288.6 million | $250.0 million | +15.4% |
| Net cash from operations | $346.4 million | $205.2 million | — |
- Gross margin, calculated on reported revenue, was approximately 18.8%, versus 17.0% in 2019; operating margin was approximately 4.5%, versus 4.3%.
- Average paid worksite employees (WSEEs) fell 0.6% to 234,223. Revenue per WSEE per month was nearly flat at $1,525, while gross profit per WSEE per month rose to $287 from $259.
- Cash, cash equivalents and marketable securities totaled $589.4 million at year-end, including $342.0 million of payroll tax withholdings and other deductions and $35.3 million of client prepayments. Insperity’s adjusted cash measure, excluding those amounts, was $212.1 million.
- Working capital was $172.3 million, up from $105.7 million. Long-term debt was $369.4 million under a $500 million revolving facility maturing in 2024; the company reported covenant compliance. Total assets were $1.584 billion and stockholders’ equity was $44.1 million.
- Capital expenditures were $98.2 million, including $61.0 million for a corporate building. The company paid $61.9 million in dividends and repurchased $99.4 million of stock.
Material changes and drivers
- COVID-19 reduced employment at client businesses. Paid WSEEs declined year over year in each reported 2020 quarter; fourth-quarter average paid WSEEs were down 1.8% year over year but up 3.2% sequentially.
- Higher gross profit reflected lower health-care utilization and lower workers’ compensation costs. Workers’ compensation expense included a $42.1 million reduction in estimates for prior-period claims, compared with a $31.7 million reduction in 2019.
- Operating expenses rose 12.1% to $612.2 million, notably as stock-based compensation increased 150.7% to $60.1 million and salaries increased 11.4%. Lower travel and training costs partly offset these increases.
- GAAP net income declined despite higher gross and operating income, reflecting higher income tax expense and the shift from $3.0 million of other income in 2019 to $5.4 million of other expense in 2020. The 2020 effective tax rate was 27.0%, compared with 20.3%.
Outlook, risks and contingencies
- Management expected first-quarter 2021 average paid WSEEs of 232,100–234,400, including the effect of a large client termination involving approximately 6,800 WSEEs. It expected reduced employment levels to weigh on 2021 results; the filing provides no full-year earnings or revenue guidance.
- Management anticipated higher health-care costs in 2021 as deferred elective care resumed, alongside COVID-related treatment and COBRA claims. It also anticipated state unemployment tax rates could increase as a result of elevated claims.
- Key exposures include COVID-19-related client failures, layoffs and collection risk; health and workers’ compensation claim estimates; short-notice client cancellations; and reliance on major benefit vendors. United provided approximately 87% of health coverage, with its contract expiring December 31, 2022. Chubb’s workers’ compensation coverage was due to expire September 30, 2021, with an extension committed subject to terms and conditions.
- The company recorded $240.8 million of accrued workers’ compensation claims at year-end, including $195.2 million noncurrent. Health-claim and workers’ compensation reserve estimates were identified as critical audit matters. The independent auditor issued unqualified opinions on the financial statements and internal controls.
- A worksite 401(k) class action had preliminary settlement approval; Insperity said it would make no settlement contribution, subject to final court approval. A separate securities class action filed in 2020 sought unspecified damages; Insperity denied the allegations and intended to defend itself. No provision was recorded for either matter.
Important facts for investors to verify
- Whether WSEE levels and client retention recover, particularly after the approximately 6,800-WSEE client termination; 2020 retention was approximately 82%, down from 85%.
- Whether health-care utilization, COBRA claims, unemployment taxes and workers’ compensation costs develop as management expected, and how reserve-estimate changes affect earnings.
- Renewal and terms of the Chubb workers’ compensation coverage and the United health-insurance agreement, as well as the company’s ability to pass cost increases through to clients.
- Debt-facility availability and covenant headroom as the company funds operations, capital spending, dividends and repurchases; distinguish reported cash from payroll-related and client funds.
- Progress and financial exposure in the securities litigation and final approval of the 401(k) settlement. Review the company’s non-GAAP reconciliations, especially the effect of excluding stock-based compensation from adjusted results.