Insperity(US:NSP)2020-05-04 22:51markdown Part I [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Insperity, Inc.'s unaudited consolidated financial statements for Q1 2020, covering balance sheets, operations, cash flows, and equity, along with detailed notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of March 31, 2020, total assets increased to **$1.52 billion**, liabilities grew, and stockholders' equity shifted to a **$3.3 million deficit** Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $404,728 | $367,342 | | Accounts receivable, net | $520,745 | $465,779 | | Total current assets | $1,079,280 | $974,746 | | Total assets | $1,522,408 | $1,394,996 | | **Liabilities & Equity** | | | | Total current liabilities | $888,458 | $869,045 | | Long-term debt | $369,400 | $269,400 | | Total liabilities | $1,525,718 | $1,390,917 | | Total stockholders' equity (deficit) | $(3,310) | $4,079 | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Q1 2020 revenues grew **6.6% to $1.23 billion**, but net income decreased **18.6% to $62.1 million** due to higher expenses and tax Q1 2020 vs Q1 2019 Performance (in thousands, except per share) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Revenues | $1,229,483 | $1,153,010 | | Gross Profit | $234,022 | $226,717 | | Operating Income | $85,221 | $85,461 | | Net Income | $62,092 | $76,289 | | Diluted EPS | $1.58 | $1.85 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly decreased to **$23.8 million** in Q1 2020, while financing activities provided **$25.6 million** from borrowings Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $23,787 | $117,697 | | Net cash provided by (used in) investing activities | $(314) | $1,713 | | Net cash provided by (used in) financing activities | $25,603 | $(40,338) | | **Net increase in cash, cash equivalents and restricted cash** | **$49,076** | **$79,072** | [Consolidated Statements of Stockholders' Equity (Deficit)](index=9&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity%20%28Deficit%29) Stockholders' equity declined to a **$3.3 million deficit** by March 31, 2020, primarily due to **$61.2 million** in treasury stock repurchases - Key activities impacting stockholders' equity in Q1 2020 include the purchase of **$61.2 million** in treasury stock, payment of **$15.6 million** in dividends, and the addition of **$62.1 million** in net income[11](index=11&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including revenue recognition, health insurance, workers' compensation, long-term debt, equity activities, and legal contingencies - The company's most comprehensive offering is its Professional Employer Organization (PEO) services, which include payroll, benefits, workers' compensation, and other HR functions[12](index=12&type=chunk) - Effective January 1, 2020, under an amended agreement with UnitedHealthcare, Insperity no longer has financial responsibility for a participant's annual health claim costs exceeding **$1 million**[18](index=18&type=chunk) - In Q1 2020, the company reduced accrued workers' compensation costs by **$10.1 million** due to favorable changes in estimated losses for prior periods, compared to a **$7.8 million** reduction in Q1 2019[24](index=24&type=chunk) - A class action lawsuit alleging breach of fiduciary duties related to the company's 401(k) plan went to a bench trial in March 2020, with plaintiffs alleging damages up to approximately **$146 million**[54](index=54&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2020 financial results, noting **5.5% WSEE growth** and **6.6% revenue increase**, with expected negative COVID-19 impacts on future periods - The COVID-19 pandemic did not significantly impact Q1 2020 financial results but is expected to have a negative impact for the remainder of 2020, with paid WSEEs declining by **3.3%** in April 2020[60](index=60&type=chunk) Q1 2020 vs Q1 2019 Key Metrics | Metric | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Average WSEEs paid | 238,014 | 225,525 | 5.5% | | Revenues | $1,229.5M | $1,153.0M | 6.6% | | Net Income | $62.1M | $76.3M | (18.6)% | | Diluted EPS | $1.58 | $1.85 | (14.6)% | | Adjusted EBITDA | $101.3M | $101.4M | (0.2)% | [Results of Operations](index=25&type=section&id=Results%20of%20Operations) Q1 2020 revenue grew **6.6% to $1.2 billion** driven by WSEE increase, but gross profit per WSEE declined due to higher benefits costs - Q1 2020 revenue growth of **6.6%** was primarily driven by a **5.5%** increase in the average number of WSEEs paid and a **1.1%** increase in revenues per WSEE per month[77](index=77&type=chunk)[79](index=79&type=chunk) - Gross profit per WSEE per month decreased by **$7** to **$328**, as a **$25** increase in direct costs per WSEE per month outpaced an **$18** increase in revenue per WSEE per month[87](index=87&type=chunk)[88](index=88&type=chunk) - Benefits costs increased by **$32** per WSEE per month, primarily due to a higher number of large individual healthcare claimants compared to the low level in Q1 2019[90](index=90&type=chunk) - Commissions expense increased **21.7%** due to growth in PEO solutions, higher sales channel referral fees, and bonuses from an extended sales campaign[99](index=99&type=chunk) - The effective income tax rate for Q1 2020 was **26.7%**, a significant increase from **12.3%** in Q1 2019, with the 2019 rate lower due to a much larger tax benefit (**$14.5M** vs **$2.0M** in 2020) related to the vesting of stock awards[101](index=101&type=chunk) [Non-GAAP Financial Measures](index=33&type=section&id=Non-GAAP%20Financial%20Measures) The company utilizes non-GAAP measures like Adjusted EBITDA and Adjusted EPS, with Q1 2020 Adjusted EBITDA at **$101.3 million** and Adjusted EPS down **14.1%** Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net income | $62,092 | $76,289 | | Income tax expense | $22,646 | $10,736 | | Interest expense | $2,362 | $1,681 | | Depreciation and amortization | $7,602 | $6,691 | | **EBITDA** | **$94,702** | **$95,397** | | Stock-based compensation | $6,552 | $6,040 | | **Adjusted EBITDA** | **$101,254** | **$101,437** | Reconciliation of Diluted EPS to Adjusted EPS | | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Diluted EPS | $1.58 | $1.85 | | Stock-based compensation | $0.17 | $0.15 | | Tax effect | $(0.05) | $(0.02) | | **Adjusted EPS** | **$1.70** | **$1.98** | [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 31, 2020, liquidity was strong with **$424.2 million** in cash and equivalents, bolstered by a **$100 million** precautionary borrowing - In March 2020, the company borrowed **$100.0 million** under its **$500 million** revolving credit facility, increasing working capital and leaving **$129.6 million** in available borrowing capacity as of March 31, 2020[43](index=43&type=chunk)[108](index=108&type=chunk) - Net cash from operating activities decreased significantly to **$23.8 million** in Q1 2020 from **$117.7 million** in Q1 2019, primarily due to the timing of client payments and payroll tax cycles[110](index=110&type=chunk) - Financing activities in Q1 2020 included **$100.0 million** in borrowings, **$61.2 million** in stock repurchases, and **$15.6 million** in dividend payments[113](index=113&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuations, impacting investments and variable-rate debt, managed through diversification - The company is primarily exposed to market risks from interest rate fluctuations, which impact its investment income and interest expense on its variable-rate debt[115](index=115&type=chunk) - As of March 31, 2020, the company had **$370.4 million** in borrowings and letters of credit outstanding under its variable-rate credit facility[115](index=115&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) As of March 31, 2020, disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting - Management, including the CEO and CFO, concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[118](index=118&type=chunk) - No changes occurred in internal controls over financial reporting during Q1 2020 that materially affected, or are reasonably likely to materially affect, these controls[119](index=119&type=chunk) Part II [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is defending a class action lawsuit regarding its 401(k) plan, with alleged damages up to **$146 million**, awaiting judgment - The company is defending a class action lawsuit related to its 401(k) plan, where plaintiffs allege damages up to **$146 million**, with a bench trial concluded in March 2020 and a court judgment awaited[54](index=54&type=chunk)[120](index=120&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) Significant risks include COVID-19 impacts on WSEEs, health insurance costs, client payments, and operations, alongside economic and regulatory challenges - The COVID-19 pandemic is a primary risk, with the company experiencing a **3.3%** decline in paid WSEEs in April 2020 and expecting the trend to continue, which is likely to have a material adverse effect on results[127](index=127&type=chunk) - The pandemic creates significant uncertainty in estimating health insurance costs due to deferred elective procedures and potential increases in claims from COBRA participants[129](index=129&type=chunk) - Economic disruptions from COVID-19 may increase client business failures and bad debt, as Insperity assumes the obligation to pay WSEE salaries and benefits regardless of client payment[131](index=131&type=chunk) - The company's Texas market, accounting for ~**20%** of revenues, faces heightened risk due to the pandemic's impact on oil prices and the regional economy[135](index=135&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In Q1 2020, Insperity repurchased **878,305 shares** of common stock, including **728,000** under its program, with **685,833** shares remaining authorized Share Repurchases in Q1 2020 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Jan 2020 | 30 | $92.70 | — | | Feb 2020 | 709,675 | $70.93 | 559,400 | | Mar 2020 | 168,600 | $64.44 | 168,600 | | **Total** | **878,305** | **$69.68** | **728,000** | - In February 2020, the Board of Directors authorized an additional **1,000,000** shares for the repurchase program, with **685,833** shares still available for repurchase as of March 31, 2020[138](index=138&type=chunk) [Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists Form 10-Q exhibits, including agreements with United Healthcare, severance plans, and CEO/CFO Sarbanes-Oxley certifications - Filed exhibits include a letter agreement with United Healthcare, the Executive Severance Plan, and CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906[139](index=139&type=chunk)