Insperity, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated financial statements. Insperity provides HR and business services, principally its Workforce Optimization professional employer organization (PEO) offering, to small and medium-sized businesses.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $595.2 million | $536.4 million | +11.0% |
| Gross profit | $103.0 million | $91.0 million | +13.2% |
| Operating expenses | $80.0 million | $75.8 million | +5.4% |
| Operating income | $23.0 million | $15.1 million | +52.3% |
| Net income | $13.9 million | $8.8 million | +58.0% |
| Diluted EPS | $0.54 | $0.33 | +63.6% |
| Operating cash flow | $33.3 million | $59.1 million | Decreased |
Gross margin, calculated on reported revenue, was approximately 17.3% versus 17.0%; operating margin was approximately 3.9% versus 2.8%. Growth reflected an 8.5% rise in average monthly worksite employees paid and a 2.3% increase in revenue per employee. Average gross profit per worksite employee per month increased 4.4% to $282. Operating expenses per worksite employee per month fell 2.7% to $219.
Q1 revenue represented gross billings of $3.231 billion less worksite employee payroll costs of $2.636 billion. Direct costs were $492.2 million. The effective tax rate was 40.5%, compared with 43.0% a year earlier.
Cash, liquidity and capital
- At March 31, 2012, cash and cash equivalents were $234.5 million and marketable securities were $57.0 million. Working capital was $135.9 million, up from $126.6 million at December 31, 2011.
- Cash, cash equivalents and marketable securities totaled $291.5 million, but included $165.8 million of payroll-related withholdings and deductions and $10.7 million of client prepayments payable in early April.
- Operating cash flow was $33.3 million; investing activities used $5.2 million, principally for $3.4 million of property and equipment; financing activities used $4.7 million. Cash increased $23.3 million during the quarter.
- The company reported no drawn borrowings under its $100 million revolving credit facility, which may be increased to $150 million subject to conditions. A $285,000 standby letter of credit was issued under the facility. Insperity reported compliance with financial covenants.
- Financing outflows included $3.9 million of dividends and $3.3 million related to shares withheld for employee tax obligations. The quarterly dividend was $0.15 per share. No shares were repurchased under the public repurchase program.
Material changes, outlook and risks
- Workforce Optimization revenue increased 11.0%. Management said net changes in existing clients improved year over year; new-client worksite employee growth declined, while client retention was consistent.
- Gross profit growth exceeded revenue growth. Direct costs per worksite employee rose 1.8%; health benefit costs per covered employee increased 3.6%, while workers’ compensation costs per worksite employee declined. Prior-period workers’ compensation estimates were reduced by $3.5 million, versus $1.9 million in Q1 2011.
- Operating cash flow was lower than the prior-year quarter. Management cited quarter-end payroll and client-payment timing as a significant factor; the quarter ended on a Friday, compared with Thursday in 2011. Working-capital movements and insurance funding also affect cash flows.
- Management believed cash on hand and operating cash flows would meet liquidity needs for the remainder of 2012. The filing provides no specific earnings or revenue guidance.
- Key disclosed risks include economic conditions; regulatory and tax developments; health and workers’ compensation costs, claims and insurer arrangements; client retention and sales execution; competition; payroll-related liabilities; data privacy; and execution or returns from adjacent businesses and acquisitions. Management said there were no material changes to the risk factors in the 2011 Form 10-K.
- Insperity is defending ordinary-course lawsuits and claims; management did not expect their outcomes to materially adversely affect financial position or results. A $2.9 million Pennsylvania sales-tax refund claim remained under review; recovery and timing were uncertain, and no asset was recorded.
- Financial results include estimates for partially self-funded health plan costs and workers’ compensation claims. Management noted these estimates may differ from actual outcomes. The interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether worksite employee growth, new-client sales and client retention sustain the reported revenue increase.
- Whether gross profit gains persist given health benefit and workers’ compensation claims experience, including the impact of the $3.5 million prior-period reserve reduction.
- How much reported cash is available for corporate uses after payroll withholdings, client prepayments and insurance-related funding requirements.
- Whether operating cash flow improves as payroll timing and working-capital balances normalize.
- The outcome of the Pennsylvania refund claim and any material developments in litigation, insurance arrangements or credit-facility covenants.