Insperity, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial figures below are in millions of dollars unless noted. Insperity provides HR and business solutions, principally through its Workforce Optimization PEO services, alongside adjacent businesses. The company changed its name from Administaff effective March 3, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $471.8 | $414.1 | $1,481.1 | $1,284.2 |
| Gross profit | $87.0 | $73.7 | $261.8 | $217.7 |
| Operating income | $14.1 | $12.1 | $40.6 | $24.4 |
| Net income | $4.1 | $7.2 | $19.6 | $14.7 |
| Diluted EPS | $0.16 | $0.28 | $0.74 | $0.56 |
- Q3 revenue grew 13.9%, driven by 9.0% growth in average worksite employees paid per month and 4.5% higher revenue per employee. Gross profit rose 18.1%; operating income rose 16.7%, while net income fell 43.3%.
- For the first nine months, revenue increased 15.3%, gross profit 20.3%, operating income 66.4%, and net income 34.0%. Average worksite employees paid per month increased 9.0% in both comparative periods.
- Gross margin, calculated on reported revenue, was approximately 18.4% in Q3 2011 versus 17.8% in Q3 2010, and 17.7% for the nine months versus 17.0%. Operating margin was approximately 3.0% versus 2.9% in Q3, and 2.7% versus 1.9% year to date.
- Gross profit per worksite employee per month improved to $245 from $227 in Q3 and to $253 from $229 year to date. Adjacent Businesses contributed $12 and $11 per employee per month, respectively, versus $7 and $5 in the comparable periods.
- Q3 direct costs per worksite employee per month rose 3.7%, slower than revenue per employee growth of 4.5%. Health benefit costs per covered employee increased, while workers’ compensation costs fell; prior-period claim estimate reductions benefited workers’ compensation expense.
Cash flow, liquidity and capital
- Cash and cash equivalents were $169.9 at September 30, 2011, down from $234.8 at December 31, 2010. Marketable securities were $55.4, bringing cash, equivalents and securities to $225.3. This includes $93.1 of payroll tax and other withholding funds and $3.9 of client prepayments due to be paid in early October.
- Working capital was $129.1, compared with $144.5 at year-end 2010. Nine-month operating cash flow was $13.2, down from $47.7 in 2010; investing cash use was $50.0 and financing cash use was $28.1. Management cited payroll timing and insurance funding as significant influences on operating cash flow.
- The company reported no borrowings at quarter-end. A new four-year $100 million revolving facility, entered into in September, may be increased to $150 million subject to conditions; it matures September 15, 2015. The company was in compliance with its financial covenants.
- Nine-month financing included $22.5 of share repurchases and $11.9 of dividends. The board authorized an additional 1 million shares for repurchase in September; 1,352,089 shares remained authorized at quarter-end. The quarterly dividend was $0.15 per share in 2011, versus $0.13 in 2010.
- Capital and strategic spending included $23.4 of property and equipment purchases, $10.8 for the OrgPlus acquisition, and an aircraft purchase as part of an exchange. The company had no reported debt balance.
Material changes, outlook and risks
- Q3 other expense included a $4.4 non-cash loss on an aircraft exchange and a $3.1 charge for a settlement with California’s Employment Development Department. The settlement was subject to administrative law judge approval; Insperity continued to deny liability. The agreement resolved a dispute for $3.1 million versus an EDD account statement of approximately $8.1 million.
- Operating expenses increased 18.4% in Q3 and 14.4% year to date. Drivers included rebranding costs ($1.8 million in Q3 and $9.7 million year to date) and acquisition-related expenses ($1.0 million and $6.8 million, respectively). Advertising increased substantially, largely due to rebranding.
- Management said cash on hand and operating cash flow should be adequate for liquidity needs through the remainder of 2011. No specific revenue, earnings or EPS guidance was provided in the supplied filing text.
- Management described Q3 existing-client employee trends as improved year over year; new-client sales worksite employees declined and client retention was consistent. Year-to-date, existing-client employee changes, new-client sales and retention all improved versus 2010.
- Key stated risks include economic conditions; regulatory and tax changes; health and workers’ compensation costs, claims and insurer contracts; competition and client retention; payroll and benefits obligations; data privacy; and integration or returns from adjacent-business acquisitions. Workers’ compensation liabilities rely on actuarial estimates; the company reduced prior-period loss estimates by $8.6 million year to date, versus $5.0 million in 2010.
- Management reported effective disclosure controls as of September 30, 2011, with no material change in internal control over financial reporting during the quarter. The filing stated there were no material changes to the risk factors disclosed in the 2010 Form 10-K.
Important facts for investors to verify
- Whether worksite employee growth, client retention and new-client sales trends persist, and whether revenue and gross profit per employee continue to improve.
- How repeatable reported earnings are after excluding the aircraft-exchange loss, EDD settlement, rebranding and acquisition-related costs, and favorable workers’ compensation estimate changes.
- Whether health insurance claims, workers’ compensation reserves and funding requirements develop as estimated; these involve significant judgments and can affect margins and cash flows.
- The timing and drivers of operating cash flow, given substantial payroll-cycle effects and the decline from the prior-year nine-month result.
- Progress integrating OrgPlus and other adjacent businesses, their contribution to profit, and any remaining acquisition payment of $1.2 million expected in Q1 2012.
- Compliance with revolving-credit covenants and the effect of continued repurchases and dividends on liquidity and capital allocation.