Insperity, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. Insperity provides HR and business services, principally through its professional employer organization (PEO) solutions for small and medium-sized businesses.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $699.5 million | $637.0 million | +9.8% |
| Gross profit | $129.9 million | $106.2 million | +22.3% |
| Operating income | $23.5 million | $16.6 million | +41.8% |
| Net income | $13.8 million | $9.6 million | +44.2% |
| Diluted EPS | $0.54 | $0.37 | +45.9% |
| Operating cash flow | $(38.0) million | $8.9 million | Turned negative |
Revenue is reported net of worksite employee payroll costs; gross billings were $3.940 billion versus $3.588 billion. Average worksite employees paid per month rose 9.2% to 137,959, while revenue per employee per month increased 0.5% to $1,690. Gross profit per employee per month increased 12.1% to $314. Approximate gross, operating, and net margins on reported revenue were 18.6%, 3.4%, and 2.0%, respectively, versus 16.7%, 2.6%, and 1.5% a year earlier.
GAAP operating expenses rose 18.7% to $106.3 million, including $9.8 million of impairment and other charges and $1.1 million of stockholder-advisory expenses. Management reported adjusted net income of $21.6 million, adjusted diluted EPS of $0.86, and adjusted EBITDA of $42.3 million; these are non-GAAP measures and should be considered alongside GAAP results. The effective tax rate was 41.4%, compared with 42.4%.
Balance sheet, liquidity, and capital
At March 31, 2015, cash and cash equivalents were $228.6 million, marketable securities $28.8 million, and restricted cash $45.2 million. Total assets were $840.6 million; stockholders’ equity was $213.1 million. Insperity had no borrowings under its $125 million revolving facility, which matures in February 2020, and had a $0.6 million letter of credit outstanding; the company reported compliance with its covenants.
Reported working capital was $101.8 million; adjusted working capital was $91.4 million. Of $257.4 million in cash, cash equivalents, and marketable securities, $158.6 million related to payroll taxes and other deductions and $22.7 million to customer prepayments. Adjusted cash and investments, excluding those amounts, were $76.1 million. Management said available cash, investments, operating cash flows, and credit availability should meet liquidity needs for the remainder of 2015.
Operating cash use was primarily affected by working-capital movements, including an $84.7 million increase in accounts receivable. Investing cash use was $2.9 million; financing cash use was $7.0 million, including $5.7 million of treasury-stock purchases and $4.8 million of dividends. No shares were repurchased under the announced repurchase program; 113,050 shares were withheld for restricted-stock tax obligations. The quarterly dividend was $0.19 per share, up from $0.17.
Material changes, outlook, and risks
- Revenue growth reflected higher worksite employee counts and a modest increase in revenue per employee. Management cited improvement in new-client sales and retention, while net employee changes within existing clients declined slightly.
- Gross profit growth benefited from lower health-benefit costs per employee, reflecting favorable claims and lower COBRA participation. Workers’ compensation costs per employee increased 22.8%, primarily due to higher incurred claims.
- In Q1, Insperity adopted a plan to sell two aircraft and recorded a $9.8 million charge for the write-down and other costs, including a provision for a potential Texas sales-and-use-tax settlement. The aircraft were classified as assets held for sale at $13.5 million.
- Potential additional 2015 FUTA taxes associated with worksite employees in seven states were estimated at approximately $3.5 million. Insperity may not fully recover increases through client fees, which could adversely affect results.
- Workers’ compensation and health-plan costs depend on claims experience and estimates. Other identified risks include economic and regulatory changes, insurance contract renewals and rates, competition, growth execution, payroll-related liabilities, information security and systems, litigation, and stockholder-related business disruption. Management said ordinary-course litigation was not expected to have a material adverse effect.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management’s stated liquidity expectation covers the remainder of 2015. The filing also disclosed a March 2015 agreement with Starboard Value and related stockholder-advisory expenses.
Key facts for investors to verify
- Whether employee growth and improved client sales and retention continue, and how pricing and per-employee gross profit evolve.
- Whether favorable health claims persist and workers’ compensation claims, reserves, and funding requirements remain controlled.
- The conversion of reported earnings into operating cash flow, given payroll-cycle timing and large working-capital movements.
- The aircraft sale proceeds and any final Texas sales-and-use-tax settlement relative to the recorded charge.
- Whether the potential FUTA increases are imposed and recovered from clients, and whether the revolving facility and liquidity remain adequate.
- How the Starboard agreement and related stockholder matters affect expenses, capital allocation, or operations.