Business context and reporting period
Insperity, Inc. (NYSE: NSP) filed this Form 10-K for the fiscal year ended December 31, 2015. The company provides HR outsourcing and related business services, primarily to small and midsize businesses. Its PEO model combines payroll and benefits administration, workers’ compensation, compliance support and HR services; reported revenue excludes worksite employee payroll costs.
The filing also reports fourth-quarter results. Insperity averaged 153,144 paid worksite employees per month in Q4 2015, up 12.0% from Q4 2014.
Financial and operating performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $2,603.6 million | $2,357.8 million | +10.4% |
| Gross profit | $437.9 million | $403.8 million | +8.4% |
| Operating income | $65.7 million | $47.5 million | +38.4% |
| Net income | $39.4 million | $28.0 million | +40.7% |
| Diluted EPS | $1.58 | $1.05 | +50.5% |
| Adjusted net income (non-GAAP) | $54.5 million | $36.7 million | +48.4% |
| Adjusted EBITDA (non-GAAP) | $110.0 million | $84.1 million | +30.8% |
| Cash provided by operating activities | $65.1 million | $141.7 million | Down |
Gross and operating margins were approximately 16.8% and 2.5%, respectively, versus 17.1% and 2.0% in 2014. Growth in paid worksite employees averaged 11.6% for the year, while gross profit per worksite employee per month fell to $250 from $257. Revenue per worksite employee per month declined 1.0% to $1,488, which management attributed primarily to lower benefits and service-fee pricing. Lower operating expenses per employee helped lift operating income.
Q4 2015 revenue was $650.0 million, gross profit $97.0 million, operating income $10.0 million and net income $6.3 million. The comparable Q4 2014 figures were $595.9 million, $101.4 million, $13.0 million and $8.2 million, respectively. The filing notes that medical claims costs typically peak in Q4, weighing on earnings.
Liquidity, debt and capital allocation
At December 31, 2015, cash, cash equivalents and marketable securities totaled $279.4 million; this included $185.7 million of payroll-related withholdings and $17.0 million of client prepayments. Management’s non-GAAP adjusted cash measure, which excludes these amounts, was $76.7 million. Working capital was $54.3 million, down from $66.7 million a year earlier. The company had no borrowings under its $125 million revolving facility at year-end and was in compliance with its covenants.
In 2015, Insperity used $84.4 million in financing activities, including $67.1 million of share repurchases and $21.2 million of dividends. In January 2016, it repurchased and retired 3,013,531 shares for $143.1 million, plus transaction costs, funded with $104.4 million of facility borrowings and cash on hand. The filing states that cash, operating cash flow and available credit were expected to meet 2016 liquidity needs.
Changes, outlook and notable items
- Management expected average paid worksite employees of 155,900–157,300 per month in Q1 2016; the filing provides no earnings or revenue guidance.
- Net impairment and other charges were $10.5 million in 2015, primarily related to the sale of two aircraft and a Texas sales-and-use-tax assessment. Aircraft sale proceeds were $12.2 million.
- Insperity began building a 100,000-square-foot Kingwood office facility, estimated to cost $25 million and expected to be completed in 2017.
- The 2015 Small Business Efficiency Act framework for certified PEOs became effective for qualifying wages from January 1, 2016; the IRS delayed accepting certification applications until July 1, 2016. Insperity intends to seek certification.
- A December 2015 class-action suit alleges fiduciary breaches concerning the worksite employee 401(k) plan, including recordkeeping fees and investment choices. The company intends to defend the case; no provision was recorded because the outcome was uncertain.
- In 2015, the company’s largest stockholder criticized performance and strategy; an agreement resulted in three stockholder-nominated directors joining the board. Standstill restrictions were due to expire in February 2016. Management identified possible proxy activity and strategic disruption as risks.
Principal risks and contingencies
Key exposures include rising health claims and workers’ compensation costs, client cancellations and nonpayment, and the company’s obligation to pay worksite employee wages, taxes and benefits even if clients fail to pay. The UnitedHealthcare arrangement provides approximately 85% of health coverage and may be canceled on 180 days’ notice; the contract expires December 31, 2019. ACE workers’ compensation coverage expires September 30, 2016, with a possible extension subject to conditions. Other material risks include regulatory uncertainty around PEO co-employment and health reform, competition and pricing pressure, cyber and data-security incidents, regional economic concentration, and insurance-carrier or payment-system failures.
Most important facts for investors to verify
- Whether employee growth can continue without further erosion in gross profit per worksite employee and service-fee pricing.
- The drivers of the sharp year-over-year decline in operating cash flow and the portion of reported cash unavailable for general use.
- The cost, timing and covenant implications of the January 2016 tender offer and related $104.4 million borrowing.
- Renewal terms for UnitedHealthcare and ACE coverage, and sensitivity of earnings to medical and workers’ compensation claim estimates.
- Developments in the 401(k) class action, PEO certification rules and stockholder governance matters.