Insperity, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited. Insperity provides PEO and other HR services to small and medium-sized businesses; its PEO revenue is reported after deducting worksite employee (WSEE) payroll costs from gross billings.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,185.4 million (+19.3%) | $993.4 million | $2,472.2 million (+11.2%) | $2,222.8 million |
| Gross profit | $199.6 million (-9.4%) | $220.2 million | $451.0 million (-0.7%) | $454.3 million |
| Operating income | $35.2 million (-51.7%) | $73.0 million | $119.0 million (-24.8%) | $158.2 million |
| Net income | $25.2 million (-51.5%) | $51.9 million | $87.1 million (-23.6%) | $113.9 million |
| Diluted EPS | $0.65 (-51.1%) | $1.33 | $2.24 (-23.0%) | $2.91 |
| Adjusted EBITDA (non-GAAP) | $60.2 million (-34.5%) | $92.0 million | $164.4 million (-14.9%) | $193.2 million |
- Gross margin was approximately 16.8% in Q2 versus 22.2% a year earlier; operating margin was 3.0% versus 7.3%. For the first half, gross margin was 18.2% versus 20.4%, and operating margin was 4.8% versus 7.1%.
- Average WSEEs paid per month rose 6.7% in Q2 and 2.3% for the first half. Revenue per WSEE per month increased 11.8% in Q2 and 8.8% for the first half.
- Q2 operating expenses increased 11.6% to $164.3 million; first-half operating expenses rose 12.1% to $332.0 million.
- First-half operating cash flow was $7.0 million, down from $114.9 million. Investing used $21.2 million, and financing used $67.3 million. Financing included $32.8 million of dividends and $38.5 million of treasury stock purchases/withholdings.
Liquidity and debt
At June 30, cash and cash equivalents were $455.4 million, restricted cash was $46.1 million, and marketable securities were $34.6 million. Management’s non-GAAP adjusted cash, cash equivalents and marketable securities measure was $212.8 million after excluding payroll-related withholdings and client prepayments. Working capital was $198.6 million. Long-term debt was $369.4 million under a $500 million revolving facility; $129.6 million of capacity remained available after a $1.0 million letter of credit. The facility matures September 2024, and Insperity reported compliance with its financial covenants.
Changes, outlook and notable items
- Revenue growth reflected higher average pricing, more WSEEs and the non-recurrence of 2020 FICA deferrals and comprehensive service fee credits. Revenue growth did not translate into higher gross profit, as direct costs increased faster.
- Benefits costs rose as medical utilization normalized from pandemic-related deferrals. Q2 benefits costs per covered employee increased 23.9% year over year; the company recorded a $15.3 million increase in prior-period claims run-off costs in Q2, compared with a $10.4 million reduction in Q2 2020. First-half prior-period health claims adjustments added $5.7 million to costs, versus a $3.0 million reduction in 2020.
- Workers’ compensation reserve estimates provided offsets: the company reduced prior-period estimated costs by $23.0 million in the first half, compared with $22.2 million in 2020. Management said claim frequency had declined during the pandemic but COVID-related claims increased, leaving the ultimate program impact uncertain.
- Management expected average paid WSEEs to increase 9.5%–10.5% year over year in Q3 2021, equivalent to sequential growth of 4.3%–5.3% from Q2. It anticipated continued elevated health costs as utilization normalized. Management believed available cash, operating cash flow and facility capacity would meet liquidity needs for the remainder of 2021.
- Key risks include pandemic effects and healthcare claims trends, client retention and new sales, insurance costs and availability, regulatory and tax changes, regional economic concentration, credit facility covenants, litigation, cybersecurity and IT disruptions, and acquisition execution.
- A federal securities class action filed in 2020 alleges materially misleading statements and seeks unspecified damages and other relief. Insperity moved to dismiss, said it would defend the case, and recorded no provision because the outcome was uncertain. Management said other routine litigation was not expected to materially affect results.
Important facts for investors to verify
- Whether WSEE growth and pricing can offset rising benefit and other direct costs, and whether gross profit per WSEE recovers.
- Actual healthcare utilization, claims development and future changes to prior-period claims estimates; also monitor workers’ compensation reserve assumptions and releases.
- Cash conversion and working-capital movements, given first-half operating cash flow of $7.0 million and the timing-sensitive payroll funding cycle.
- Availability under the revolver, variable-rate borrowing costs and continued covenant compliance.
- Developments in the securities class action and any potential financial exposure.
- Management’s Q3 WSEE outlook and the assumptions behind non-GAAP adjusted EBITDA and adjusted EPS.