Insperity, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; quarterly figures below are unaudited. Dollar amounts are in U.S. dollars.
Business context
Insperity provides HR outsourcing and related business services, primarily through its professional employer organization (PEO) solutions for small and medium-sized businesses. Under client agreements, Insperity and clients share employer responsibilities; Insperity bills payroll-related amounts and recognizes revenue principally as a markup on worksite employee payroll. The company operated as one reportable segment and averaged 165,850 paid worksite employees per month in 2016.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $2,941.3 million | $2,603.6 million | +13.0% |
| Gross profit | $491.6 million | $437.9 million | +12.3% |
| Operating income | $106.3 million | $65.7 million | +61.8% |
| Net income | $66.0 million | $39.4 million | +67.5% |
| Diluted EPS | $3.09 | $1.58 | +95.6% |
| Adjusted EBITDA (non-GAAP) | $141.2 million | $110.0 million | +28.3% |
- Gross margin was approximately 16.7% of revenue, versus 16.8% in 2015; operating margin increased to approximately 3.6% from 2.5%. Net margin was approximately 2.2%, versus 1.5%.
- Average paid worksite employees increased 13.7%. Revenue per worksite employee per month declined 0.7% to $1,478, and gross profit per employee per month declined 1.2% to $247. Operating expenses per employee per month fell 8.5% to $194.
- Operating cash flow was $132.7 million, compared with $65.1 million in 2015. Investing activities used $26.0 million, including $34.0 million of capital expenditures; financing activities used $90.2 million.
- At year-end, cash, cash equivalents and marketable securities totaled $287.9 million, but included $221.7 million of payroll tax and other withholdings and $21.3 million of client prepayments. Management reported adjusted cash of $44.9 million after excluding those amounts. Working capital was $39.4 million, down from $54.3 million.
- Debt was $104.4 million under a $200 million revolving credit facility, which matures in 2020; $1.0 million of letters of credit was also outstanding. The company was in compliance with facility covenants. Management said available cash, operating cash flow and credit availability should meet 2017 liquidity needs.
- Year-end total assets were $907.2 million and stockholders’ equity was $60.5 million. Dividends paid were $20.6 million.
Material changes and quarterly results
Annual revenue growth mainly reflected higher worksite employee counts. Client retention improved to approximately 86% from 84%; middle-market worksite employees averaged 24.5% of the total, up from 23.3%. Operating income and net income grew faster than revenue, aided in part by the absence of the $10.5 million of impairment and other charges recorded in 2015. The 2016 results also included a $10.9 million reduction in workers’ compensation costs for favorable prior-period claim estimates. The January 2016 tender offer repurchased and retired about 3.0 million shares for $143.1 million, contributing to a lower weighted-average share count and higher EPS.
For the fourth quarter of 2016, revenue was $729.1 million, gross profit $110.5 million, operating income $14.5 million, net income $9.5 million and diluted EPS $0.45. In fourth-quarter 2015, these were $650.0 million, $97.0 million, $10.0 million, $6.3 million and $0.26, respectively. Management notes that medical claims costs typically rise through the year and are highest in the fourth quarter, which can weigh on earnings.
Outlook, risks and unusual items
- Management expected average paid worksite employees of 174,200–175,800 per month in the first quarter of 2017. No full-year 2017 earnings or revenue guidance is provided in the filing text.
- Health insurance costs and workers’ compensation claims are significant direct costs and rely on estimates. In 2016, the company recorded a $5.1 million charge for changes in estimated prior-period health claims run-off, while favorable workers’ compensation estimates reduced costs by $10.9 million.
- Key risks include economic weakness among small and midsize businesses; client cancellations and nonpayment; rising health, workers’ compensation or unemployment costs; competition and pricing pressure; regulatory uncertainty involving PEO employer status, health care rules and pending IRS certification as a certified PEO; and cyber, data-security and systems disruptions.
- The primary United health insurance contract covers approximately 86% of health coverage and runs through December 31, 2019, subject to cancellation on 180 days’ notice. Workers’ compensation coverage with Chubb expires September 30, 2017, with a possible extension to September 30, 2018 subject to conditions.
- A worksite employee 401(k) class-action lawsuit alleges fiduciary breaches involving recordkeeping fees, monitoring and investment choices. Insperity intends to defend the case; it made no provision because the matter is at an early stage and loss uncertainty remains.
- The company spent $175.9 million on share repurchases in 2016, including the tender offer, and paid $20.6 million in dividends. It also continued construction of a new corporate-campus facility, estimated to cost approximately $28 million and expected to be completed in 2017.
Important facts for investors to verify
- Whether worksite employee growth and client retention remain strong, and whether per-employee revenue and gross profit stabilize.
- How much 2016 earnings growth reflects underlying operations versus the absence of 2015 impairment charges, favorable workers’ compensation reserve revisions and the lower share count.
- Actual unrestricted liquidity after payroll-related obligations and client prepayments, and debt levels following repurchases and capital spending.
- Developments in health and workers’ compensation claims, insurer contract renewals, and the company’s ability to pass cost increases through to client fees.
- Progress on IRS certified-PEO status and the outcome or potential financial exposure of the 401(k) class-action litigation.