Insperity, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Insperity provides HR, payroll, benefits, workers’ compensation and related services, primarily through its PEO business. The financial statements are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1,229.5 million | $1,153.0 million | +6.6% |
| Gross profit | $234.0 million | $226.7 million | +3.2% |
| Operating income | $85.2 million | $85.5 million | -0.3% |
| Net income | $62.1 million | $76.3 million | -18.6% |
| Diluted EPS | $1.58 | $1.85 | -14.6% |
| Adjusted EBITDA (non-GAAP) | $101.3 million | $101.4 million | -0.2% |
| Cash from operations | $23.8 million | $117.7 million | Lower by $93.9 million |
Revenue is reported as gross billings less worksite employee (WSEE) payroll costs. Average WSEEs paid rose 5.5% to 238,014, while revenue per WSEE per month increased 1.1% to $1,722. Gross profit per WSEE per month fell 2.1% to $328. Gross margin was approximately 19.0% of revenue versus 19.7% a year earlier; operating margin was approximately 6.9% versus 7.4%, and net margin approximately 5.0% versus 6.6%.
Direct costs increased 7.5%, faster than revenue. Health insurance costs per covered employee rose 5.8%, partly offset by lower workers’ compensation and payroll tax costs per WSEE. Prior-period claim estimates reduced costs by $1.5 million for health benefits and $10.1 million for workers’ compensation in Q1 2020. Operating expenses increased 5.3% to $148.8 million. The effective tax rate rose to 26.7% from 12.3%; the filing cites state taxes, nondeductible expenses and stock-award vesting effects, including a smaller tax benefit from vesting awards than in 2019.
Balance sheet, liquidity and capital
At March 31, 2020, cash and cash equivalents were $404.7 million, restricted cash $48.3 million and marketable securities $19.5 million. Insperity’s non-GAAP adjusted cash, cash equivalents and marketable securities were $166.9 million after excluding payroll-related amounts payable and client prepayments. Working capital was $190.8 million, up from $105.7 million at year-end 2019.
Long-term debt was $369.4 million, up from $269.4 million at December 31, 2019, after a $100 million revolver draw in March. The $500 million facility had $129.6 million of available borrowing capacity at quarter-end, matures September 2024, and was in compliance with financial covenants. The company reported total assets of $1.52 billion and a stockholders’ deficit of $3.3 million.
Financing cash flow included the $100 million borrowing, $61.2 million of treasury-stock purchases or withholding, and $15.6 million of dividends. The quarterly dividend was $0.40 per share, compared with $0.30 in Q1 2019. Operating cash flow was affected by working-capital movements and timing of payroll, tax and health-plan funding.
Material developments, outlook and risks
- COVID-19: The pandemic had no significant effect on Q1 results, but client layoffs and temporary leaves began late in the quarter. Insperity paid 230,500 WSEEs in April, 3.3% fewer than in March, and expected the decline to continue at least into May. Management expected lower employment levels to negatively affect results for the remainder of 2020. No quantitative earnings or revenue guidance was provided.
- Health claims and COBRA: Management anticipated increased COVID-19 testing and treatment costs, while deferred elective care could make quarterly claims unusually variable. More former WSEEs could elect COBRA coverage, potentially raising claims and creating collection risk, particularly given the extended election and premium-payment timelines described in the filing.
- Economic and operating exposures: The filing highlights client failures or delayed payments, unemployment-tax increases, health and workers’ compensation costs, and reduced employment as risks. Oil-and-gas customers represented about 3% of clients; Texas represented about 20% of revenue, exposing the business to regional weakness.
- Litigation: A certified class action concerning the Insperity 401(k) plan had completed trial in March 2020. Plaintiffs alleged damages of up to approximately $146 million against all defendants. Insperity said it intended to defend the case; no provision was recorded because the outcome was uncertain. The court requested post-trial submissions by June 15, 2020.
- Insurance agreement: Under the amended UnitedHealthcare agreement effective January 1, 2020, Insperity no longer bears a participant’s annual claim costs above $1 million. Workers’ compensation remains subject to significant actuarial estimates; the company recorded favorable prior-period estimate adjustments in both comparison periods.
Important facts for investors to verify
- Subsequent WSEE counts, client retention and employment trends, and the effect of COVID-19 on full-year revenue and earnings.
- Whether health claims, COBRA elections and deferred care alter benefit costs, cash funding or premium collection.
- Developments and potential financial exposure in the 401(k) class action; the filing records no related reserve.
- Debt, revolver availability, covenant compliance and liquidity after the March borrowing and continued repurchases and dividends.
- The sustainability of favorable workers’ compensation claim-development adjustments and the company’s reported gross profit per WSEE.
- Cash-flow comparability: quarter-end payroll and tax timing, restricted funds, client prepayments and health-plan funding affect reported cash balances and operating cash flow.