Insperity, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the quarter and six months ended June 30, 2011, with comparisons to 2010. Insperity provides HR and business solutions, principally its Workforce Optimization PEO services, alongside adjacent businesses. The company changed its name from Administaff effective March 3, 2011. Financial statements are unaudited interim statements.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $472.9m | $412.4m | $1,009.3m | $870.1m |
| Gross profit | $83.8m | $71.4m | $174.8m | $144.0m |
| Operating income | $11.4m | $8.6m | $26.5m | $12.3m |
| Net income | $6.7m | $5.1m | $15.5m | $7.4m |
| Diluted earnings per share | $0.25 | $0.20 | $0.59 | $0.28 |
Revenue is presented net of worksite employee payroll cost; Q2 gross billings were $2.731bn and the six-month total was $5.619bn. Q2 revenue grew 14.7%, gross profit 17.5%, operating income 33.0% and net income 31.7% year over year. For the first half, the respective increases were 16.0%, 21.4%, 115.2% and 109.3%.
Approximate gross margin was 17.7% in Q2 2011 versus 17.3% in Q2 2010, and 17.3% for the first half versus 16.6%. Approximate operating margin was 2.4% versus 2.1% in Q2 and 2.6% versus 1.4% for the first half. Average monthly worksite employees increased 8.8% in Q2 and 9.0% in the first half. Management attributed growth to higher employee counts and revenue per worksite employee, as well as improvement in new-client sales, retention and employment changes at existing clients.
Cash, liquidity and capital
Six-month operating cash flow was $54.3m, compared with cash used of $10.2m in the prior-year period. Investing used $15.0m, including $8.4m of capital expenditures and the OrgPlus acquisition; financing used $8.9m, including $8.0m of dividends and $6.6m of treasury-stock purchases. Cash and cash equivalents were $265.2m and marketable securities $37.6m at June 30. Working capital was $152.2m, up from $144.5m at year-end.
Reported cash and marketable securities include substantial client-related amounts: $83.6m of payroll tax and other withholdings and $81.1m of client prepayments were payable in early July. Management said cash on hand and operating cash flows should meet liquidity needs through the remainder of 2011. The balance sheet reports no debt balance; the filing does not provide a separate debt or credit-facility figure.
Changes, outlook, risks and unusual items
- Operating expenses rose 15.4% in Q2 and 12.6% in the first half, driven partly by rebranding costs ($3.1m in Q2; $7.9m in the first half) and acquisition-related costs ($2.9m and $5.8m, respectively). Advertising was a notable contributor to expense growth.
- January 2011 acquisition of HumanConcepts’ OrgPlus software product line: $10.8m paid at closing, with a further $1.2m expected in 2012 subject to the agreement.
- Health-benefit costs per covered employee increased 5.0% in Q2, while management cited lower COBRA participation as a favorable factor. Workers’ compensation costs included reductions in prior-period estimates of $2.2m in Q2 and $4.0m in the first half; results therefore depend in part on claims estimates and actuarial assumptions.
- A California unemployment-tax dispute relates to a 2003 assessment of $5.6m; the state account showed taxes, penalties and interest of approximately $8.1m. Settlement discussions were ongoing, and the company said the outcome could not then be determined. Management believed other ordinary-course litigation would not materially affect results.
- No numerical earnings or revenue guidance was provided. Key risks include economic conditions, health and workers’ compensation costs and contract renewals, regulation and tax matters, client retention and competition, data privacy, acquisition integration and litigation outcomes. The filing reported no material changes to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- Whether worksite-employee growth, client sales and retention trends continued after June 30.
- How health-benefit claims, COBRA participation and workers’ compensation estimates developed; prior-period claim-estimate reductions benefited reported costs.
- The outcome and potential financial effect of the California EDD matter.
- Whether the company’s cash-flow outlook remains adequate after accounting for payroll-related balances and client prepayments.
- Whether the OrgPlus acquisition and other adjacent-business investments generate returns sufficient to offset added costs.