Insperity, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Insperity provides HR and business services, primarily through PEO co-employment arrangements. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $1,432.1 | $1,185.4 | $3,009.9 | $2,472.2 |
| Gross profit | $239.9 | $199.6 | $525.6 | $451.0 |
| Operating income | $48.4 | $35.2 | $146.7 | $119.0 |
| Net income | $33.6 | $25.2 | $103.5 | $87.1 |
| Diluted EPS | $0.87 | $0.65 | $2.68 | $2.24 |
| Adjusted EBITDA (non-GAAP) | $75.0 | $60.2 | $193.6 | $164.4 |
Year-over-year, Q2 revenue rose 20.8%, net income 33.6%, and diluted EPS 33.8%. For the first six months, revenue rose 21.8%, net income 18.8%, and diluted EPS 19.6%. Average worksite employees (WSEEs) paid per month increased 19.4% in Q2 and 19.5% YTD. Revenue per WSEE per month increased 1.2% in Q2 and 1.9% YTD.
Margins: Based on reported revenue, Q2 gross, operating, and net margins were approximately 16.8%, 3.4%, and 2.3%, respectively, compared with 16.8%, 3.0%, and 2.1% in Q2 2021. YTD margins were approximately 17.5%, 4.9%, and 3.4%, compared with 18.2%, 4.8%, and 3.5% in YTD 2021.
Cash flow, liquidity and capital
- YTD operating cash flow was $22.8 million, versus $7.0 million in 2021. Investing activities used $8.6 million; financing activities used $91.6 million, including $37.1 million of dividends and $56.8 million of stock purchases/withholdings.
- At June 30, cash and cash equivalents were $510.9 million, restricted cash $53.3 million, and marketable securities $30.8 million. The company’s adjusted cash, cash equivalents and securities measure was $166.8 million after excluding payroll-related funds and client prepayments.
- Working capital was $164.0 million, up from $116.3 million at December 31, 2021. Management said available cash, operating cash flow, and facility capacity should meet liquidity needs for the remainder of 2022.
- Long-term debt was $369.4 million. The June amendment increased revolving facility capacity from $500 million to $650 million, with potential capacity up to $700 million; $279.6 million was available at quarter-end. Facility maturity is June 30, 2027. Insperity reported covenant compliance.
- Stockholders’ equity was $35.1 million, compared with a $1.8 million deficit at year-end 2021. The company repurchased 517,083 shares under its program YTD and had authority to repurchase 1,186,545 additional shares at June 30. The quarterly dividend was $0.52 per share.
Material changes and management commentary
- Q2 growth reflected higher WSEE counts and modestly higher revenue per WSEE. Management attributed WSEE growth to new sales, client retention, and gains among existing clients.
- Q2 gross profit per WSEE per month increased to $275 from $273; YTD it decreased to $308 from $316. YTD direct costs per WSEE increased, including higher benefits costs and payroll taxes; payroll taxes also reflected nonrecurrence of prior-year refunds and adjustments.
- Benefits and workers’ compensation estimates materially affected reported costs. Q2 included a $7.2 million reduction in health claim run-off costs versus a $15.3 million increase in Q2 2021, and a $12.8 million reduction in workers’ compensation costs versus $10.8 million in Q2 2021. YTD health claim run-off increased costs by $10.2 million; workers’ compensation estimate changes reduced costs by $26.8 million.
- Operating expenses rose 16.5% in Q2 and 14.1% YTD, slower than revenue growth; per-WSEE monthly operating expenses declined 2.2% and 4.3%, respectively. Management cited higher staffing and compensation, commissions, advertising, travel, events, and technology costs.
- Management expected average paid WSEEs to increase 17%–18% year over year in Q3 2022, equivalent to 3.7%–4.6% sequential growth from Q2 if achieved. No earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Management noted uncertainty around COVID-19’s effects, healthcare utilization and claims, inflation, labor availability, economic conditions, and the company’s geographic concentration. Other cited risks include client cancellations, insurance pricing and availability, regulatory changes, cyber and technology disruptions, and credit-facility covenant compliance.
- Benefits costs depend on estimates of incurred claims and run-off; workers’ compensation reserves also rely on actuarial estimates and assumptions. Actual outcomes may differ from these estimates.
- The company is involved in ordinary-course lawsuits and claims; management believes their resolution will not materially adversely affect financial position or results. The filing reports no material changes to previously disclosed risk factors.
- Cash balances include substantial client prepayments and payroll tax/deduction funds payable after quarter-end; these amounts are not equivalent to unrestricted operating cash.
Important facts for investors to verify
- Whether projected Q3 WSEE growth is achieved and translates into sustained revenue and profit growth.
- Health-benefit claims experience, coverage participation, and future run-off adjustments; workers’ compensation reserve development and recoveries.
- Underlying liquidity after excluding payroll obligations and client prepayments, and the effect of working-capital timing on cash flow.
- Variable-rate debt costs, facility availability, and continued compliance with financial covenants.
- How stock repurchases and dividends affect equity, cash resources, and per-share results.