Insperity, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Interim financial statements are unaudited. Insperity provides HR and business services, primarily through its professional employer organization Workforce Optimization offering to small and medium-sized businesses.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and employee statistics.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $512.0 | $471.8 | $1,626.4 | $1,481.1 |
| Gross profit | $98.4 | $87.0 | $288.7 | $261.8 |
| Operating income | $19.1 | $14.1 | $51.6 | $40.6 |
| Net income | $11.5 | $4.1 | $31.0 | $19.6 |
| Diluted EPS | $0.45 | $0.16 | $1.20 | $0.74 |
| Gross / operating / net margin | 19.2% / 3.7% / 2.2% | 18.4% / 3.0% / 0.9% | 17.8% / 3.2% / 1.9% | 17.7% / 2.7% / 1.3% |
Revenue is reported net of worksite employee payroll cost; Q3 gross billings were $3.068 billion, with $2.556 billion of payroll cost. For the first nine months, gross billings were $9.339 billion and payroll cost was $7.712 billion.
- Cash flow: First-nine-month operating cash flow was $25.0 million, investing cash flow was negative $9.7 million, and financing cash flow was negative $24.4 million. Cash and cash equivalents declined $9.0 million from year-end to $202.2 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $253.9 million at September 30; working capital was $140.0 million. The filing notes that $96.5 million related to payroll taxes and deductions and $12.4 million of client prepayments were payable in early October. Restricted cash was $46.1 million.
- Debt: No borrowings were outstanding under the $100 million revolving facility, which matures in September 2015. A $285,000 letter of credit was issued under the facility. The company reported compliance with its financial covenants.
- Capital returns: The company paid $12.6 million in dividends and repurchased $13.8 million of stock during the first nine months.
Material changes versus prior periods
- Q3 revenue rose 8.5%; average monthly worksite employees increased 7.5% and revenue per worksite employee per month rose 1.0%. For the first nine months, revenue increased 9.8%, supported by 8.1% employee growth and 1.5% higher revenue per employee.
- Q3 gross profit increased 13.1%, and gross profit per worksite employee per month rose 5.3%. For the nine months, gross profit increased 10.3%, while per-employee gross profit rose 2.0%.
- Net income grew substantially year over year, partly reflecting the prior-year comparison: 2011 included a $4.4 million aircraft exchange loss and a $3.1 million California settlement loss. Q3 2012 also benefited from higher operating income and lower advertising expense than in the 2011 rebranding period.
- First-nine-month operating expenses rose 7.2%, slower than revenue growth; expense per worksite employee per month decreased 0.9%. The prior-year period included $9.7 million in brand-launch costs.
- In Q3, workers’ compensation costs per employee increased 46.9% year over year, while health benefit costs per employee decreased. For the nine-month period, health benefit costs per employee increased 3.1% on a cost-per-covered-employee basis.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand and operating cash flows were expected to meet liquidity requirements for the remainder of 2012. The filing provides no numerical earnings or revenue guidance.
- Management said Q3 net change in worksite employees at existing clients declined, while new-client sales and client retention were consistent with Q3 2011. For the first nine months, new-client worksite employee additions declined versus 2011, while retention and the net change at existing clients were consistent.
- Insperity recognized a $2.9 million Pennsylvania sales-tax refund receivable and corresponding reduction in payroll tax expense in Q2, following a court decision; it received the refund in Q3.
- Workers’ compensation estimates require significant judgment. The company reduced accrued costs for prior-period loss estimates by $10.4 million in the first nine months of 2012, compared with $8.6 million in 2011.
- Contingency: Following rehabilitation proceedings involving former workers’ compensation carrier Lumbermens Mutual, state guaranty associations may seek recovery from Insperity for certain open claims. The company estimated potentially disputed claims of $2.9 million to $5.0 million; any successful recovery could reduce net income and materially affect the reported period. Insperity intends to defend against such claims.
- Other stated risks include economic conditions, health and workers’ compensation costs and claims trends, insurer solvency and replacement coverage, regulatory and tax developments, client retention, competition, growth execution, payroll-related liabilities, privacy and security, and acquisition or adjacent-business performance.
Key facts for investors to verify
- Whether worksite employee growth, client retention and new-client sales sustain revenue growth, particularly given the reported slowdown in new-client additions.
- Whether health insurance and workers’ compensation cost trends, claim estimates and prior-period reserve reductions remain favorable or reverse.
- The availability of reported liquidity after payroll-related funds and client prepayments are paid, and the timing effects of payroll funding on operating cash flow.
- The status and potential financial effect of claims involving Lumbermens Mutual and state guaranty associations.
- The degree to which year-over-year earnings growth reflects recurring operations versus prior-year aircraft, California settlement and rebranding costs, and the Pennsylvania refund.