Insperity, Inc. — Q2 2016 Form 10-Q
Business and period: Insperity provides HR and business services, primarily through its professional employer organization (PEO) solutions. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $707.3 | $627.8 | $1,509.7 | $1,327.3 |
| Gross profit | $113.3 | $104.2 | $263.3 | $234.1 |
| Operating income | $16.0 | $12.2 | $69.1 | $35.7 |
| Net income | $9.7 | $7.3 | $42.4 | $21.1 |
| Diluted earnings per share | $0.45 | $0.29 | $1.98 | $0.83 |
| Operating cash flow | Not separately reported | Not separately reported | $60.7 | $(71.5) |
- Q2 revenue rose 12.7%, with average worksite employees paid up 14.2% to 163,521; revenue per employee per month fell 1.4%. For the half-year, employee count rose 14.5% and revenue increased 13.7%.
- Gross profit grew more slowly than revenue: 8.7% in Q2 and 12.5% for the first half. Gross profit per worksite employee per month declined 4.9% in Q2 and 1.8% for the half-year. Q2 gross margin was approximately 16.0%, versus 16.6% a year earlier; first-half gross margin was approximately 17.4%, versus 17.6%.
- Operating expenses increased 5.7% in Q2 but declined 2.1% for the half-year, partly because 2015 included $11.1 million of impairment and other charges. Excluding specified items, adjusted operating expenses increased 7.3% in Q2 and 4.4% for the half-year. These adjusted measures are non-GAAP.
- Cash and cash equivalents were $271.6 million and marketable securities $1.9 million at June 30. The company reported $273.5 million of combined cash, equivalents and securities, but $121.4 million related to payroll and tax deductions and $100.7 million to client prepayments. Its non-GAAP adjusted amount after those exclusions was $51.3 million.
- Working capital was $69.9 million, compared with $54.3 million at year-end 2015. Current liabilities were $541.5 million; restricted cash was $41.2 million. Reported assets totaled $846.5 million and stockholders’ equity $64.9 million.
- Long-term debt was $104.4 million under a $200 million revolving facility, bearing 2.19% interest at quarter-end and maturing in 2020. A further $1.0 million letter of credit was outstanding. The company reported compliance with financial covenants.
Changes, capital allocation, and unusual items
- First-half net income more than doubled year over year, while diluted EPS increased to $1.98 from $0.83. Results benefited from revenue and worksite employee growth, lower operating expenses versus a prior-year period with aircraft-related charges, and a $1.0 million income-tax benefit from adopting new stock-compensation guidance.
- In January, Insperity repurchased 3.0 million shares for $143.1 million, excluding transaction costs, in a modified Dutch auction tender offer. The purchase was funded partly with $104.4 million of facility borrowings. It also paid $10.0 million in first-half dividends and made $4.8 million of treasury-stock purchases. The quarterly dividend rose to $0.25 per share from $0.22 in Q2 2015.
- First-half operating cash flow was $60.7 million. Investing activities used $4.7 million, primarily reflecting $12.6 million of property and equipment purchases. Financing activities used $53.9 million, principally reflecting the tender offer, dividends and other share purchases.
- Health-insurance costs included $3.7 million of charges for revisions to prior-period claims estimates in the first half. Workers’ compensation costs included $2.6 million of reductions from revised prior-period loss estimates.
Outlook, risks, and contingencies
- Management said cash, marketable securities, operating cash flows and available credit were expected to meet liquidity needs for the remainder of 2016. The filing provides no specific earnings or revenue guidance.
- Management identified exposure to economic conditions, regulatory and tax developments, health and workers’ compensation claims and insurance renewals, client retention and sales, competition, geographic concentration, payroll-related liabilities, data security, IT systems, acquisitions and litigation.
- A December 2015 class action alleges fiduciary-duty breaches concerning the worksite employee 401(k) plan, including recordkeeping fees and investment choices. Insperity disputes the allegations, intends to defend the case, and recorded no provision because the outcome is uncertain. Management said other ordinary-course claims were not expected to have a material adverse effect.
- Health and workers’ compensation liabilities rely on estimates and actuarial assumptions; actual claims experience may differ. Variable-rate borrowings expose the company to interest-rate changes. The filing also notes that client payment timing and payroll cycles can materially affect reported operating cash flows.
Investor verification points
- Assess whether employee growth can sustain revenue and offset declining revenue and gross profit per worksite employee.
- Review the quality and repeatability of earnings, including prior-period insurance estimate adjustments, the tax benefit, and non-GAAP exclusions.
- Distinguish operating cash and liquidity from client prepayments and payroll/tax withholding funds; verify the timing effects on cash flows.
- Monitor debt, variable interest expense, facility capacity and covenant headroom following the large tender-offer repurchase.
- Track developments in the 401(k) class action and the estimation of health and workers’ compensation claims.