Insperity, Inc. — Q2 2014 Form 10-Q
Business and period. Insperity provides HR and professional employer organization services, plus adjacent business offerings. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $564.6m | $547.3m | $1,201.6m | $1,159.1m |
| Gross profit | $95.5m | $97.7m | $201.6m | $205.9m |
| Operating income | $3.4m | $10.2m | $20.0m | $32.2m |
| Net income | $1.9m | $3.5m | $11.5m | $16.7m |
| Diluted EPS | $0.07 | $0.14 | $0.45 | $0.65 |
| Gross / operating / net margin | 16.9% / 0.6% / 0.3% | 17.9% / 1.9% / 0.6% | 16.8% / 1.7% / 1.0% | 17.8% / 2.8% / 1.4% |
Revenue is presented net of worksite employee payroll costs; gross billings were $3.281bn in Q2 and $6.869bn for the six months. Average worksite employees paid monthly grew 1.2% in Q2 and 1.8% year to date. Approximate margins are calculated from reported revenue and income figures.
- Cash flow: Six-month operating cash outflow was $29.4m, versus $21.1m in 2013; investing outflow was $4.7m versus $43.5m; financing outflow was $22.8m versus $21.4m. Cash and cash equivalents fell $56.9m to $168.9m.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $212.3m at June 30, excluding $53.4m restricted cash. Working capital was $121.6m, down from $128.6m at year-end. The $100m revolving credit facility was undrawn, and the company reported compliance with its covenants.
- Capital returns: Six-month share repurchases were $14.7m and dividends paid were $9.2m. The board declared a Q2 dividend of $0.19 per share, up from $0.17 a year earlier.
Material changes and management commentary
- Q2 revenue rose 3.2%, but gross profit fell 2.3%, operating income fell 66.6%, and net income fell 45.8%. For the first half, revenue rose 3.7%, while gross profit declined 2.1%, operating income 37.9%, and net income 31.2%.
- Management attributed revenue growth to more worksite employees and higher revenue per employee. Profit pressure reflected direct costs rising faster than revenue per employee: direct costs per employee increased 3.0% in both comparative periods, versus revenue per employee growth of 1.9% in Q2 and 1.8% year to date.
- Health-benefit costs increased, including additional taxes primarily related to health-care reform; workers’ compensation costs also rose due to higher incurred claims. Prior-period claim-cost estimate reductions were smaller than in 2013. Operating expenses increased 5.2% in Q2 and 4.6% for the first half.
- Q2 operating expenses included a $2.5m non-cash impairment charge for Employment Screening assets: $0.7m of intangible assets and $1.8m of goodwill. The impairment followed management changes, weaker results and customer losses, and reflected lower projected growth and profitability.
- Other income was $36,000 in Q2 2014, compared with $2.6m of other expense in Q2 2013, when a $2.7m non-cash impairment of the company’s minority investment in The Receivables Exchange was recorded.
Outlook, risks and contingencies
- Management said available cash, marketable securities, operating cash flows and credit-facility availability should meet liquidity needs through the remainder of 2014. The filing provides no specific earnings or revenue guidance.
- Potential 2014 additional federal unemployment taxes related to 11 states with outstanding federal unemployment loans were estimated at approximately $3.8m. The company generally can adjust client service fees, but may not fully recover increases; most state waiver decisions were expected in Q4 2014.
- Management cited risks including health and workers’ compensation costs and claims, insurance contract renewals, unemployment taxes and regulatory changes, client retention and growth, competition, payroll-related liabilities, data privacy, IT systems, acquisitions, and litigation. It believes pending ordinary-course litigation will not materially affect financial position or results.
- Cash flow is affected by payroll and client-payment timing, workers’ compensation funding and health-plan funding. At period-end, $95.3m of cash related to tax withholdings, employment taxes and payroll deductions, and $13.7m related to client prepayments, both payable in July.
- The company was evaluating the impact of the new revenue-recognition standard (ASU 2014-09) and had not determined its effect on the financial statements.
Investor verification priorities
- Assess whether revenue growth can translate into improved gross profit per worksite employee as health, workers’ compensation and payroll-tax costs evolve.
- Track health-claim estimates, funding rates and the workers’ compensation reserve, including the assumptions and prior-period adjustments behind those estimates.
- Monitor Employment Screening performance and whether further impairment indicators arise after the customer losses and reported charge.
- Check the outcome of state FUTA waiver decisions and the extent to which any tax increases are passed through to clients.
- Reconcile reported cash and operating cash flows with payroll timing, restricted cash, client prepayments and payroll-related obligations; confirm continued access to the undrawn credit facility.