Insperity, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Insperity provides HR, payroll, benefits, workers’ compensation and related services, primarily through its PEO business serving small and midsize businesses. This unaudited report covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $627.8 million | $564.6 million | $1,327.3 million | $1,201.6 million |
| Gross profit | $104.2 million | $95.5 million | $234.1 million | $201.6 million |
| Operating income | $12.2 million | $3.4 million | $35.7 million | $20.0 million |
| Net income | $7.3 million | $1.9 million | $21.1 million | $11.5 million |
| Diluted EPS | $0.29 | $0.07 | $0.83 | $0.45 |
Revenue is reported after deducting worksite employee payroll cost from gross billings. Q2 gross billings were $3.703 billion and payroll costs were $3.075 billion. Revenue rose 11.2% in Q2 and 10.5% for the first half; average worksite employees paid per month increased 11.6% and 10.4%, respectively.
Margins. Q2 gross margin was approximately 16.6% versus 16.9%; operating margin was 1.9% versus 0.6%, and net margin was 1.2% versus 0.3%. For the first half, gross margin was approximately 17.6% versus 16.8%; operating margin was 2.7% versus 1.7%, and net margin was 1.6% versus 1.0%. Q2 gross profit per worksite employee per month fell 2.0% to $243, while first-half gross profit per employee-month rose 5.3% to $278.
Cash flow and liquidity. Operating cash flow was negative $71.5 million for the first half, compared with negative $29.4 million a year earlier; management cited working-capital movements, including a $90.5 million increase in accounts receivable, as well as payroll and insurance funding timing. Investing activities provided $0.5 million; financing activities used $37.7 million, including $31.4 million of share repurchases and $10.4 million of dividends. Cash and cash equivalents were $167.7 million at June 30, down from $276.5 million at year-end; cash, equivalents and marketable securities totaled $189.4 million. Of that total, $106.2 million related to payroll taxes and deductions payable and $19.4 million to client prepayments. Adjusted cash, excluding these amounts, was $63.8 million. Adjusted working capital was $79.3 million.
Debt and capital. Insperity had not drawn on its $125 million revolving credit facility, which matures in February 2020, and was in compliance with its covenants. A $0.6 million letter of credit was outstanding. The filing reports no funded borrowings at quarter-end.
Material changes versus the prior period
- Q2 operating income increased 257.9% and net income increased 286.8%; first-half operating income increased 78.6% and net income increased 84.2%.
- Management attributed revenue growth mainly to worksite employee growth. First-half gross profit also benefited from lower benefits costs and lower direct costs per employee; in Q2, workers’ compensation costs rose 25.0% per employee-month due primarily to higher incurred claims.
- First-half operating expenses increased 9.2%, including $11.1 million of impairment and other charges, compared with $2.5 million of Employment Screening impairment charges in the prior-year period. Excluding specified impairment and shareholder advisory expenses, adjusted operating expenses increased 3.6%.
- Insperity recorded $9.8 million of aircraft-related impairment and other charges in Q1 and an additional $1.3 million in Q2. The two aircraft were sold in July for $12.2 million net of selling costs.
- The board authorized an additional one million shares for repurchase in May. Insperity repurchased 530,933 shares under the program in the first half and paid a quarterly dividend of $0.22 per share for Q2, up from $0.19 a year earlier.
Outlook, commentary and risks
- Management stated that cash on hand, marketable securities, operating cash flows and credit-facility availability were expected to meet liquidity requirements for the remainder of 2015. The filing provides no specific earnings or revenue guidance.
- Management reported improvement in worksite employees paid from new client sales and client retention during the first half. Favorable health-insurance claim trends supported benefits costs, while workers’ compensation claims costs increased.
- Potential additional 2015 federal unemployment tax assessments in five states were estimated at approximately $3.1 million as of June 30. Insperity generally may adjust client service fees, but says full recovery could be limited and unrecovered increases could materially affect results.
- Workers’ compensation liabilities depend on actuarial estimates of claims development and future costs. The company reported accrued workers’ compensation costs of $147.8 million at June 30, 2015.
- Other disclosed risks include health and workers’ compensation cost trends and insurance renewals, regulatory and tax developments, economic and competitive conditions, payroll-related liabilities, data security, IT systems, litigation and shareholder actions. Management believed pending ordinary-course litigation would not materially affect financial position or results.
- The aircraft-related charge includes a provision for a potential Texas sales and use tax assessment; the filing text does not provide a clear separate amount for that provision.
Important facts for investors to verify
- Whether worksite employee growth and client retention continue, and whether revenue and gross profit per employee-month stabilize.
- Whether workers’ compensation claims costs and health-plan claim experience develop in line with management’s estimates.
- Whether the five states receive FUTA waivers and whether any resulting tax increases can be passed through to clients.
- How much of reported cash is available for corporate use after payroll-related obligations and client prepayments, and whether operating cash flow improves.
- The final aircraft disposal accounting and outcome of the related Texas sales and use tax assessment provision.