Insperity, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Insperity provides PEO human-resources outsourcing and related business services. Financial statements are unaudited.
Financial performance and position
Amounts below are in millions, except per-share figures and worksite-employee statistics.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue (gross billings less worksite payroll costs) | $802.4 | $699.5 | +14.7% |
| Gross profit | $150.0 | $129.9 | +15.5% |
| Operating income | $53.0 | $23.5 | +125.5% |
| Net income | $32.7 | $13.8 | +137.1% |
| Diluted EPS | $1.53 | $0.54 | +183.3% |
| Adjusted EBITDA (non-GAAP) | $61.2 | $42.3 | +44.7% |
| Net cash from operating activities | $95.2 | $(38.0) | Turned positive |
- Approximate gross, operating and net margins on reported revenue were 18.7%, 6.6% and 4.1%, respectively, versus 18.6%, 3.4% and 2.0% in Q1 2015.
- Average worksite employees paid monthly rose 14.8% to 158,391. Revenue per employee per month was nearly flat at $1,689; gross profit per employee rose 0.6% to $316.
- Operating expenses fell 8.8% to $97.0 million. However, excluding 2015 impairment and stockholder advisory expenses, adjusted operating expenses increased 1.7% to $97.0 million.
- Cash, cash equivalents and marketable securities totaled $320.7 million at March 31. Adjusted cash, which excludes payroll-related funds and client prepayments, was $40.4 million, down from $76.7 million at year-end. Working capital was $46.0 million, versus $54.3 million at December 31, 2015.
- Long-term debt was $104.4 million under a $200 million revolving facility; an additional $0.6 million letter of credit was outstanding. The facility interest rate was 2.19%, and the company reported compliance with its financial covenants.
Material changes and capital allocation
- Revenue growth primarily reflected the 14.8% increase in average worksite employees paid. Management reported improvement in new client sales, retention and net hiring/layoffs at existing clients.
- Operating income benefited from higher gross profit and the absence of $9.8 million in Q1 2015 impairment and other charges, related principally to the planned aircraft sale and a tax-assessment provision. The aircraft were sold in July 2015.
- Q1 2016 net income included a $1.0 million, or $0.05 per diluted share, income-tax benefit from early adoption of new stock-compensation accounting guidance. The effective tax rate was 38.0%, compared with 41.4%.
- In January, Insperity repurchased 3.01 million shares through a modified Dutch auction tender offer at $47.50 per share, for $143.1 million plus transaction costs. It funded the offer with $104.4 million of borrowings and cash on hand. It also paid $4.7 million in dividends and spent $4.8 million on treasury stock purchases; the quarterly dividend was $0.22 per share, up from $0.19.
- Operating cash flow was affected by payroll-cycle timing, including $99.2 million in client prepayments and $267.7 million in accrued worksite payroll at quarter-end. Management cautions that period-end timing can materially affect reported operating cash flows.
Outlook, risks and contingencies
- Management believed cash on hand, marketable securities, operating cash flow and availability under the revolving facility would be adequate for liquidity needs through the remainder of 2016. No specific earnings or revenue guidance was provided in the filing.
- Key disclosed risks include economic and regional concentration, client cancellations or failure to attract and retain clients, competition, health and workers’ compensation costs and claims trends, insurance-contract renewals, regulatory and tax changes, payroll-related liabilities, data security and IT-system failures, and litigation.
- A class action filed in December 2015 alleges fiduciary breaches concerning the Insperity 401(k) plan, including recordkeeping fees and investment choices. Insperity says it intends to defend the case; no provision was recorded because the outcome is uncertain. Management said other ordinary-course claims were not expected to materially affect financial position or results.
- Health and workers’ compensation expenses rely on estimates, including claims development and actuarial assumptions. Q1 benefits expense included a $2.4 million increase for prior-period health-claims run-off; workers’ compensation liabilities were $170.6 million, including current and long-term portions.
Important facts for investors to verify
- Whether worksite-employee growth, client retention and new sales continue to support revenue growth.
- Health-insurance claims trends, workers’ compensation reserve development and the effect of insurance funding rates on costs and cash flow.
- Unrestricted liquidity after excluding payroll funds and client prepayments, alongside debt levels, facility capacity, interest costs and covenant headroom.
- The sustainability of earnings growth after separating operating performance from the prior-year impairment comparison and the Q1 2016 tax benefit.
- Developments and potential financial exposure in the 401(k) class action and other legal matters.