Business context and reporting period
Administaff, Inc. (now known as Insperity) filed this Form 10-K for the fiscal year ended December 31, 2010. It provides professional employer organization (PEO) services to small and midsize businesses, alongside a small and expanding portfolio of HR software and other services. The filing reports full-year results; fourth-quarter figures are also provided, but this is not a standalone Q4 filing.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue, excluding worksite employee payroll | $1,719.8 million | $1,653.1 million |
| Gross profit | $298.5 million | $288.0 million |
| Operating income | $37.1 million | $27.0 million |
| Net income | $22.4 million | $16.6 million |
| Diluted EPS | $0.86 | $0.65 |
| Operating cash flow | $78.8 million | $0.8 million |
| Capital expenditures | $6.8 million | $8.0 million |
- Revenue grew 4.0%; gross profit grew 3.7%, operating income 37.1%, and net income 35.4%. Approximate gross, operating, and net margins were 17.4%, 2.2%, and 1.3%, respectively, based on reported revenue.
- Average paid worksite employees declined 1.6% for the year to 107,014, but increased 8.0% from Q1 to 111,249 in Q4. Revenue per worksite employee per month rose 5.7% to $1,339; gross profit per employee per month rose 5.0% to $232.
- Cash, cash equivalents, and marketable securities totaled $278.2 million at year-end; working capital was $144.5 million. The company reported no debt or capital-lease obligations. Cash includes $128.8 million of payroll-related withholdings and $8.1 million of customer prepayments payable in early 2011.
- Cash flow from investing was negative $58.6 million, including $39.0 million net investment in marketable securities, $12.9 million for acquisitions, and $6.8 million of capital expenditures. Financing cash flow was negative $12.5 million, primarily reflecting $13.5 million of dividends.
Material changes versus the prior comparable period
- Results recovered from the sharp 2009 downturn, when revenue fell 4.1% and net income fell 63.8% versus 2008. Despite 2010 earnings growth, annual average paid worksite employees remained below 2009.
- Revenue per employee improved through pricing increases intended to cover higher costs. Direct costs per employee rose 5.8%; higher medical and payroll tax costs offset much of the revenue-per-employee gain.
- State unemployment tax rates increased substantially, with payroll taxes as a percentage of payroll rising to 7.11% from 6.96%. Health-benefit costs per covered employee increased 6.0%.
- Operating expenses were nearly flat at $261.5 million, but included about $5.0 million of acquisition-related costs and ongoing costs. The company acquired ExpensAble and Galaxy Technologies in 2010; combined non-PEO adjacent-business revenues were less than 1% of total revenue.
- Operating cash flow rose from $0.8 million to $78.8 million. The filing cautions that payroll timing, insurance funding, and balance-sheet movements can materially affect reported cash flow.
Outlook, risks, contingencies, and unusual items
- Management expected average paid worksite employees of 112,500–113,000 in Q1 2011 and stated that cash, marketable securities, and operating cash flows should meet 2011 liquidity needs. No full-year revenue or earnings guidance is provided.
- Key risks include economic weakness and client attrition; the company’s obligation to pay worksite wages, payroll taxes, and benefits even if clients do not pay; medical claims and health-cost inflation; and higher unemployment taxes that may not be fully recoverable through pricing.
- UnitedHealthcare provided approximately 91% of health coverage under a contract expiring December 31, 2013, subject to cancellation on 180 days’ notice. ACE workers’ compensation coverage was due to expire September 30, 2011; replacement on competitive terms was not assured.
- Workers’ compensation estimates are significant: accrued claims were $96.9 million at year-end. The company reduced prior-period claim estimates by $6.2 million in 2010. Health-claim estimates also require judgment; a 1% change in the completion-rate assumption would change estimated benefit costs by about $5.1 million and net income by about $3.0 million in the opposite direction.
- A California unemployment-tax assessment of $5.6 million remains disputed. A related appellate decision could weaken one of the company’s defenses; an unfavorable outcome could increase payroll-tax expense. Management said ordinary-course litigation was not expected to have a material adverse effect, apart from disclosed matters.
- Healthcare reform had no material adverse effect in 2010, and management did not expect one in 2011, but future effects were unclear. The company also disclosed potential exposure if its captive insurer’s tax status is challenged or certain former insurance carriers fail.
- In January 2011, the company acquired OrgPlus assets for $10.8 million, with an additional $1.2 million expected to be paid in 2011. The filing identifies integration and return-on-investment risks for its adjacent-business strategy.
Important facts for investors to verify
- Whether worksite-employee growth continued after Q4 and whether the stated Q1 2011 range was achieved.
- Whether pricing kept pace with health, payroll-tax, and workers’ compensation costs, and whether gross profit per employee remained sustainable.
- Renewal terms for ACE coverage and ongoing dependence on UnitedHealthcare, including resulting premiums and claims costs.
- Developments in the California $5.6 million assessment and the measurement of workers’ compensation and health-claim liabilities.
- Acquisition performance, integration costs, contingent earn-outs, and revenue contribution from adjacent businesses.
- Cash available after payroll-related obligations, dividends, acquisitions, and other contractual commitments.