Insperity, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Insperity provides HR outsourcing and related services, primarily through PEO arrangements in which it shares employer responsibilities with clients. Reported revenue excludes worksite employee payroll costs and represents the service markup.
Key financial metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $3,300.2 million | $2,941.3 million | +12.2% |
| Gross profit | $572.7 million | $491.6 million | +16.5% |
| Operating income | $129.9 million | $106.3 million | +22.2% |
| Net income | $84.4 million | $66.0 million | +27.9% |
| Diluted EPS | $2.01 | $1.54 | +30.5% |
| Operating cash flow | $204.4 million | $132.7 million | +$71.8 million |
| Working capital at year-end | $52.5 million | $39.4 million | +$13.1 million |
| Total debt at year-end | $104.4 million | $104.4 million | No change |
Gross margin was approximately 17.4% of reported revenue, versus 16.7% in 2016; operating margin was approximately 3.9%, versus 3.6%. Average paid worksite employees increased 10.2% to 182,696, while revenue per worksite employee per month increased 1.8% to $1,505. Gross profit per worksite employee per month rose 5.7% to $261.
Fourth-quarter 2017 revenue was $826.5 million, gross profit $142.9 million, operating income $23.7 million and net income $15.6 million; diluted EPS was $0.36. Fourth-quarter 2016 figures were $729.1 million, $110.5 million, $14.5 million and $9.5 million, respectively, with diluted EPS of $0.23.
- Cash, cash equivalents and marketable securities were $356.2 million at year-end, but included $271.5 million payable for payroll-related withholdings and $23.6 million in client prepayments. Management’s non-GAAP adjusted cash measure was $61.1 million.
- Cash used in investing activities was $33.3 million, primarily for property and equipment purchases; cash used in financing was $102.9 million, including $38.7 million of share repurchases and $65.8 million of dividends.
- The company reported $104.4 million of borrowings and $1.0 million of letters of credit under its credit facility at year-end. In February 2018, after the reporting date, the facility was increased from $200 million to $350 million and extended to February 2023.
Material changes versus the prior year
- Growth in average paid worksite employees slowed to 10.2% from 13.7% in 2016. Management attributed the change to lower growth from new sales, retention and net hiring at existing clients compared with the prior year; client retention was approximately 85%, down from 86%.
- Gross profit per worksite employee improved as revenue per employee rose faster than direct costs. Direct costs per employee increased 1.1%, while revenue per employee increased 1.8%.
- Operating expenses rose 14.9% to $442.8 million, faster than revenue, and operating expenses per worksite employee increased 4.1% to $202. Higher corporate headcount, incentive compensation, stock-based compensation and general and administrative expenses contributed.
- Operating cash flow increased to $204.4 million from $132.7 million. Year-end working capital also increased, while total debt remained unchanged.
Outlook, commentary and risks
- Management expected average paid worksite employees of 193,500–195,300 in the first quarter of 2018. The filing provides no clear full-year 2018 revenue or earnings guidance.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% beginning in 2018. Insperity recorded a provisional, non-cash $2.5 million tax charge in 2017 to remeasure deferred tax assets; adjustments could be required by the fourth quarter of 2018.
- Workers’ compensation costs included a $16.3 million reduction in estimated prior-period losses in 2017, versus a $10.9 million reduction in 2016. Health benefits costs included a $1.2 million reduction for prior-period claims estimates in 2017. These estimates affect reported profitability.
- Key exposures include health claims and dependence on UnitedHealthcare, which provided approximately 87% of health coverage and whose contract expires December 31, 2019; workers’ compensation claims and renewal of Chubb coverage, which expires September 30, 2018; client cancellations and unpaid payroll-related costs; changing healthcare and employment regulations; cyber incidents; and economic conditions affecting small and midsize businesses.
- A worksite employee 401(k) class-action lawsuit alleges fiduciary breaches and excessive recordkeeping fees. The company intends to defend the case; no provision was recorded because the outcome is uncertain.
- Shareholders received $65.8 million in dividends, including a $41.7 million special dividend. The company also completed a two-for-one stock split in December 2017. Insperity reported effective disclosure controls, and the auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the 2017 growth in worksite employees and improved per-employee profitability can continue, particularly given slower growth than in 2016.
- The sensitivity of earnings to health and workers’ compensation estimates, including the prior-period claim reductions recorded in 2017.
- Renewal terms and pricing for Chubb workers’ compensation coverage and the UnitedHealthcare health plan.
- Available liquidity after excluding payroll withholdings and client prepayments, and the terms and covenants of the amended credit facility.
- Developments in the 401(k) class action and final tax adjustments related to the 2017 Tax Cuts and Jobs Act.