Insperity(NSP) - 2019 Q3 - Quarterly Report

Part I Financial Statements Insperity, Inc.'s unaudited condensed consolidated financial statements for Q3 and YTD September 30, 2019, report revenues of $3.24 billion and net income of $130.7 million Condensed Consolidated Balance Sheets As of September 30, 2019, total assets reached $1.29 billion, liabilities $1.25 billion, and stockholders' equity decreased to $41.0 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $243,439 | $326,773 | | Accounts receivable, net | $483,890 | $400,623 | | Right-of-use leased assets | $58,185 | $— | | Total current assets | $893,743 | $866,536 | | Total assets | $1,292,122 | $1,191,816 | | Liabilities & Equity | | | | Total current liabilities | $761,212 | $772,332 | | Long-term debt | $239,400 | $144,400 | | Total liabilities | $1,251,134 | $1,114,140 | | Total stockholders' equity | $40,988 | $77,676 | Consolidated Statements of Operations Q3 2019 revenues increased to $1.04 billion, net income decreased to $25.9 million; YTD revenues grew to $3.24 billion, net income rose to $130.7 million Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,043,388 | $925,126 | $3,239,714 | $2,861,793 | | Gross Profit | $170,546 | $166,054 | $570,998 | $520,318 | | Operating Income | $34,733 | $48,133 | $158,914 | $146,417 | | Net Income | $25,859 | $36,207 | $130,704 | $110,758 | | Diluted EPS | $0.63 | $0.86 | $3.18 | $2.63 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, operating cash flow was $47.1 million, investing used $35.6 million, and financing used $88.2 million Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $47,076 | $70,329 | | Net cash used in investing activities | ($35,598) | ($57,324) | | Net cash used in financing activities | ($88,230) | ($39,793) | | Net decrease in cash, cash equivalents and restricted cash | ($76,752) | ($26,788) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies, key financial components, and significant events including a pending class action lawsuit - The company's most comprehensive offerings are its PEO services, Workforce Optimization® and Workforce Synchronization™, which include payroll, benefits, workers' compensation, and other HR functions[15] - For the nine months ended September 30, 2019, the company reduced accrued workers' compensation costs by $26.0 million due to favorable changes in estimated losses for prior periods, compared to a $13.4 million reduction in the same period of 2018[26] - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the recognition of $50.8 million in right-of-use assets and $63.7 million in lease liabilities[46] - A class action lawsuit alleges breach of fiduciary duties related to the company's 401(k) plan, with plaintiffs alleging damages up to $128 million[59] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q3 and YTD 2019 financial results, noting WSEE growth, Q3 net income decline from health claims, and strong YTD net income and EPS Q3 2019 vs Q3 2018 Performance Highlights | Metric | Q3 2019 | Change vs Q3 2018 | | :--- | :--- | :--- | | Avg. WSEEs paid/month | 240,939 | +12.0% | | Net Income | $25.9M | -28.6% | | Diluted EPS | $0.63 | -26.7% | | Adjusted EBITDA | $51.2M | -16.9% | YTD 2019 vs YTD 2018 Performance Highlights | Metric | YTD 2019 | Change vs YTD 2018 | | :--- | :--- | :--- | | Avg. WSEEs paid/month | 232,825 | +13.6% | | Net Income | $130.7M | +18.0% | | Diluted EPS | $3.18 | +20.9% | | Adjusted EBITDA | $209.3M | +9.0% | Results of Operations Q3 and YTD 2019 revenues increased from WSEE growth, but Q3 gross profit per WSEE decreased to $236 due to higher health claims, while operating expenses rose 15.2% - Q3 2019 gross profit per WSEE per month decreased by 8.2% to $236, down from $257 in Q3 2018[85] - Benefits costs increased by $33 per WSEE per month in Q3 2019 due to a second consecutive quarter of large claim activity[87][88] - Workers' compensation costs decreased by 9.6% per WSEE per month in Q3 2019, including a $7.5 million reduction from closing out prior-period claims at lower-than-expected costs[96] - Total operating expenses for Q3 2019 increased 15.2% to $135.8 million, driven by higher salaries from a 12.2% increase in corporate headcount, increased advertising, and higher G&A costs[103][104] Non-GAAP Financial Measures The company uses non-GAAP measures; Q3 2019 Adjusted EBITDA was $51.2 million, Adjusted EPS $0.75; YTD Adjusted EBITDA $209.3 million, Adjusted EPS $3.57 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income (GAAP) | $25,859 | $36,207 | $130,704 | $110,758 | | Adjustments | $15,979 | $19,591 | $57,754 | $61,591 | | Adjusted EBITDA (Non-GAAP) | $51,154 | $61,572 | $209,277 | $192,005 | Reconciliation of Diluted EPS to Adjusted EPS | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Diluted EPS (GAAP) | $0.63 | $0.86 | $3.18 | $2.63 | | Adjustments (net of tax) | $0.12 | $0.10 | $0.39 | $0.43 | | Adjusted EPS (Non-GAAP) | $0.75 | $0.96 | $3.57 | $3.06 | Liquidity and Capital Resources As of September 30, 2019, the company had $304.3 million in cash, $132.5 million working capital, and $259.6 million available on its $500 million credit facility - Working capital increased to $132.5 million at September 30, 2019, from $94.2 million at December 31, 2018[116] - The revolving credit facility was increased to $500 million in Q3 2019. As of September 30, 2019, the outstanding balance was $239.4 million, with an additional $1.0 million letter of credit, leaving $259.6 million available[42][117] - Net cash used in financing activities for the first nine months of 2019 was $88.2 million, reflecting $153.7 million in stock repurchases and $36.8 million in dividends, partially offset by $95.0 million in new borrowings[121] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations, impacting marketable securities and its variable-rate credit facility, with $240.4 million outstanding - The company is exposed to market risks from interest rate fluctuations, which impact its marketable securities and borrowings under its variable-rate credit facility[123] - As of September 30, 2019, the company had $240.4 million in outstanding borrowings and letters of credit under its variable-rate facility[123] Controls and Procedures The CEO and CFO concluded disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls during Q3 2019 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2019[126] - No material changes were made to internal controls over financial reporting during the third quarter of 2019[127] Part II Legal Proceedings The company is defending a class action lawsuit regarding its 401(k) plan, alleging fiduciary duty breaches with potential damages up to $128 million - A class action lawsuit alleges breach of fiduciary duties related to the company's 401(k) plan, with plaintiffs seeking damages up to $128 million[59] - The company has not recorded a provision for the lawsuit, as it believes it has strong defenses and the outcome is uncertain[59] Risk Factors This section updates risk factors, including a new risk from an April 2019 IRS memorandum on reporting self-employed owner remuneration, requiring Insperity to transition its payroll - Key risks include adverse economic conditions, regulatory changes, increases in health insurance and workers' compensation costs, and competition[131] - A new risk has emerged from an April 2019 IRS memorandum regarding the tax reporting for self-employed owners of client companies. The company is transitioning its processes to align with the new guidance[134] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2019, Insperity repurchased 1,166,000 shares at an average price of $98.52, with 1,056,945 shares remaining available for repurchase Share Repurchases for Q3 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2019 | 129,000 | $106.32 | | August 2019 | 835,000 | $97.10 | | September 2019 | 202,000 | $99.41 | | Total Q3 2019 | 1,166,000 | $98.52 | - As of September 30, 2019, 1,056,945 shares remained available for repurchase under the authorized program[135] Exhibits This section lists exhibits filed with Form 10-Q, including the Credit Agreement amendment, CEO/CFO certifications, and XBRL data files - Exhibits filed include the First Amendment to the Amended and Restated Credit Agreement, CEO/CFO certifications, and XBRL data files[137]