Insperity, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results; dollar amounts below are in millions unless noted. Insperity provides HR and business services, principally through its professional employer organization (PEO) offering, to small and medium-sized businesses.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $519.3 | $472.9 | $1,114.4 | $1,009.3 |
| Gross profit | $87.3 | $83.8 | $190.3 | $174.8 |
| Operating income | $9.4 | $11.4 | $32.5 | $26.5 |
| Net income | $5.6 | $6.7 | $19.5 | $15.5 |
| Diluted EPS | $0.22 | $0.25 | $0.75 | $0.59 |
Q2 gross, operating and net margins were approximately 16.8%, 1.8% and 1.1%, respectively, versus 17.7%, 2.4% and 1.4% a year earlier. For the first half, the corresponding margins were approximately 17.1%, 2.9% and 1.8%, versus 17.3%, 2.6% and 1.5%.
- Q2 revenue rose 9.8%, driven primarily by an 8.3% increase in average monthly worksite employees and a 1.3% increase in revenue per employee. Gross profit rose 4.1%, while operating income fell 17.4% and net income fell 16.6%.
- First-half revenue increased 10.4%; operating income rose 22.4%, net income 25.6%, and diluted EPS 27.1%. Average monthly worksite employees increased 8.4%.
- Q2 gross profit per worksite employee per month declined 4.1% to $234; for the first half it edged up 0.4% to $258. Q2 direct costs per employee rose 2.5%, faster than revenue per employee.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $180.6; marketable securities $57.2; and restricted cash $44.6. Cash, cash equivalents and marketable securities totaled $237.8, including $111.9 of payroll tax/deduction funds and $10.5 of client prepayments. Working capital was $133.5, versus $126.6 at December 31, 2011.
- First-half operating cash flow was negative $2.7, versus positive $54.3 in 2011. Management cited payroll-cycle timing and changes in working-capital accounts; the period ended on a Friday. Investing cash outflow was $10.9, including $8.3 of capital expenditures, primarily for technology. Financing cash outflow was $16.9, including $11.7 of share repurchases and $8.3 of dividends.
- No facility borrowings were outstanding. The company had a $100 million revolving credit facility, potentially expandable to $150 million, with a $0.285 million standby letter of credit issued under it. The company reported compliance with covenants. No other debt balance is reported in the supplied filing text.
- Management believed cash on hand and operating cash flows would meet liquidity requirements for the remainder of 2012. The filing provides no specific earnings or revenue guidance.
Changes, commentary and notable items
- Q2 profitability weakened despite higher revenue, reflecting cost growth and lower gross profit per employee. Health benefit costs rose $26 per worksite employee per month; the quarter included $2.4 million of higher-than-expected runoff claims from prior periods. Health-plan participation declined to 72.2% from 73.8%.
- Workers’ compensation costs benefited from $3.4 million of favorable prior-period estimate revisions in Q2 and $6.7 million in the first half. Such estimates involve actuarial judgment. The company reported a $108.2 million accrued claims balance, including current and long-term portions.
- A Pennsylvania sales-tax court ruling supported the company’s refund position. Insperity recognized a $2.9 million receivable and reduction to payroll tax expense in Q2; written confirmation on the second of two refund claims was still pending.
- A former workers’ compensation carrier, Lumbermens Mutual (Kemper), entered rehabilitation in July 2012. If liquidation occurs and states seek to return open-claim liabilities to Insperity, the company estimates exposure of $2.9–$5.0 million and has no similar insurance coverage for these claims. Any payment could materially reduce net income in the period incurred. Management intends to defend against such claims.
- Other risks include health and workers’ compensation claims and carrier terms, economic conditions, regulatory and tax changes, client retention and sales execution, competition, growth management, and execution of the adjacent-business strategy. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the pending Pennsylvania refund confirmation was received and whether the $2.9 million receivable was collected.
- Developments in Lumbermens Mutual rehabilitation/liquidation and any state guaranty association claims or resulting exposure.
- Subsequent health-plan claim trends and workers’ compensation reserve revisions, which materially affect direct costs and reported margins.
- Cash-flow conversion after payroll-cycle timing effects, and the portion of reported cash and investments available after payroll-related funds and client prepayments.
- Whether worksite employee growth, client sales and retention, and per-employee gross profit trends support sustained earnings improvement.