Insperity, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a quarterly filing; fourth-quarter figures below are from the filing’s unaudited quarterly data.
Business context
Insperity provides HR outsourcing and related services, primarily through its PEO solutions for small and midsize businesses. In these arrangements, Insperity and clients share employer responsibilities; reported revenue excludes worksite employee payroll costs. The company averaged 235,547 paid worksite employees (WSEEs) per month in 2019 and ended the year averaging 243,715 in the fourth quarter.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $4.315 billion | $3.829 billion | +12.7% |
| Gross profit | $732.9 million | $681.9 million | +7.5% |
| Operating income | $186.6 million | $179.0 million | +4.2% |
| Net income | $151.1 million | $135.4 million | +11.6% |
| Diluted EPS | $3.70 | $3.22 | +14.9% |
| Adjusted EBITDA (non-GAAP) | $250.0 million | $239.6 million | +4.3% |
Average paid WSEEs rose 12.6%; revenue per WSEE per month was nearly flat at $1,527. Gross profit per WSEE per month fell 4.8%, to $259 from $272, and adjusted EBITDA per WSEE per month declined 7.4%, to $88 from $95. Operating expenses increased 8.6% to $546.3 million, but fell per WSEE per month to $193 from $201. Approximate gross, operating and net margins were 17.0%, 4.3% and 3.5%, respectively; these ratios are calculated from reported figures.
Fourth quarter: Revenue was $1.075 billion versus $966.8 million in Q4 2018 (+11.2%). Gross profit was $161.9 million versus $161.6 million (+0.2%); operating income was $27.7 million versus $32.6 million (-15.0%); and net income was $20.4 million versus $24.7 million (-17.3%). Diluted EPS was $0.51 versus $0.59.
Cash flow, liquidity and capital
- Operating cash flow was $205.2 million in 2019, compared with $184.5 million in 2018. Investing activities used $29.7 million, including $56.3 million of property and equipment purchases; financing activities used $118.4 million.
- Cash, cash equivalents and marketable securities totaled $402.1 million at year-end. This included $234.6 million in payroll tax withholdings and other payroll deductions and $59.6 million in client prepayments; management’s adjusted cash measure excluding these amounts was $107.9 million.
- Working capital was $105.7 million, up from $94.2 million. Long-term debt was $269.4 million. The revolving facility was increased to $500 million in September 2019, matures in 2024, and had $270.4 million of borrowings and letters of credit outstanding at year-end. Borrowings carry variable rates; the average 2019 rate was 3.8%. The company reported compliance with financial covenants.
- Insperity repurchased $203.0 million of shares and paid $48.6 million in dividends in 2019. Total stockholders’ equity was $4.1 million at year-end, versus $77.7 million a year earlier.
Changes, outlook and notable items
- Growth in revenue and earnings reflected higher WSEE volumes, while higher medical claims—particularly large individual claims—reduced gross profit per WSEE. Health insurance cost per covered employee rose 4.0%.
- Workers’ compensation costs decreased 4.7% per WSEE. Prior-period claims estimate revisions reduced 2019 costs by $31.7 million, compared with a $18.8 million reduction in 2018; this favorable reserve development materially supported results.
- Management expected average paid WSEEs of 238,000–240,200 per month in Q1 2020. The filing does not provide a clear full-year 2020 earnings or revenue forecast. Management said cash, securities, operating cash flow and available credit were expected to meet 2020 liquidity needs.
- Seasonality is significant: medical claims typically rise through the year and peak in Q4, while payroll-tax gross profit contribution generally declines in the latter half of the year.
- Effective January 1, 2020, Insperity’s financial responsibility under its United health plan was limited to the first $1 million of paid claims per claimant for 2020. A February 10, 2020 agreement described in the filing allowed this arrangement, at Insperity’s option, in subsequent calendar years.
- Workers’ compensation coverage with Chubb was scheduled to expire September 30, 2020. Insperity’s retained responsibility per occurrence increased from $1 million to $1.5 million for claims incurred on or after October 1, 2019, subject to the program’s aggregate terms.
- A class action concerning the WSEE 401(k) plan alleged damages up to $146 million. Some claims had been dismissed; remaining claims were to proceed to a bench trial scheduled for March 2, 2020. Insperity said it had meritorious defenses and recorded no provision because the outcome was uncertain.
- Key risks include medical and workers’ compensation claim estimation, client nonpayment and short-notice cancellations, economic and regional concentration, competition, regulatory uncertainty over PEO and money-transmitter status, and cybersecurity, privacy and third-party service disruptions. The company also noted CCPA compliance costs. The auditor issued unqualified opinions on the financial statements and internal controls; health and workers’ compensation claim estimates were identified as critical audit matters.
Most important facts for investors to verify
- Whether growth in paid WSEEs and middle-market clients can offset pressure on gross profit per WSEE and declining adjusted EBITDA per WSEE.
- How medical claims and the new United plan risk-sharing terms affect benefits costs and earnings in 2020.
- Whether workers’ compensation reserve releases continue, and the effect of the higher retention and 2020 coverage renewal.
- Debt capacity, variable-rate exposure, covenant headroom, and liquidity after buybacks, dividends and the new facility construction commitment.
- Developments and potential financial exposure in the 401(k) class action, and any material regulatory or cybersecurity events.