Insperity, Inc. (filed as Administaff, Inc.) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Administaff provided bundled personnel-management services as a professional employer organization (PEO), including payroll, benefits, and workers’ compensation administration. Reported revenue is gross billings less worksite employee payroll cost.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $412.4 | $404.3 | $870.1 | $866.3 |
| Gross profit | $71.4 | $72.0 | $144.0 | $155.5 |
| Operating income | $8.6 | $8.6 | $12.3 | $21.5 |
| Net income | $5.1 | $5.4 | $7.4 | $13.6 |
| Diluted earnings per share | $0.20 | $0.22 | $0.29 | $0.54 |
| Gross margin | 17.3% | 17.8% | 16.6% | 18.0% |
| Operating margin | 2.1% | 2.1% | 1.4% | 2.5% |
| Net margin | 1.2% | 1.3% | 0.9% | 1.6% |
Liquidity, cash flow, and balance sheet
- At June 30, 2010, cash and cash equivalents were $169.4 million, restricted cash $37.7 million, and marketable securities $40.9 million. Management reported $210.3 million in cash, cash equivalents, and marketable securities; this excludes restricted cash.
- Working capital was $144.3 million, versus $127.6 million at December 31, 2009. Total assets were $607.8 million and stockholders’ equity $230.1 million. No debt line item appears on the balance sheet provided.
- Six-month operating cash flow was negative $10.2 million, compared with negative $58.8 million in 2009. Investing cash flow was negative $43.6 million, including $35.5 million net investment in marketable securities and $5.6 million for the ExpensAble acquisition. Financing cash flow was negative $3.9 million.
- Cash and cash equivalents declined $57.7 million to $169.4 million over the six months. The filing notes that payroll-cycle timing affects reported operating cash flow; period-end cash included $66.2 million of payroll-related withholdings and $20.5 million of client prepayments payable in July.
Material changes and management commentary
- Q2 revenue rose 2.0%, while average paid worksite employees fell 2.9%; revenue per worksite employee per month increased 5.1%. For the first half, revenue increased 0.4%, but average paid worksite employees declined 5.4%.
- First-half gross profit fell 7.4% and net income fell 45.3%. Management attributed pressure on gross profit principally to direct costs rising faster than revenue per worksite employee: health-benefit costs increased amid higher utilization and COBRA enrollment, and state unemployment tax rates were higher. Workers’ compensation costs declined.
- Operating expenses declined 1.7% for the first half, but increased per worksite employee. Lower stock-based compensation and depreciation partly offset higher advertising and per-employee corporate costs.
- Management said client retention and net changes among existing clients improved during the first half, although new-client sales declined. It believed cash on hand and operating cash flows would meet liquidity requirements for the remainder of 2010; no specific earnings or revenue guidance was provided.
Acquisitions, risks, and contingencies
- In June, the company acquired ExpensAble, a SaaS and desktop expense-reporting business, for $5.6 million at closing. It expected to pay another $1.0 million in 2011 and could owe up to $3.0 million of additional revenue-based consideration through 2013. Purchase-price allocation was preliminary.
- After quarter-end, it acquired certain Galaxy Technologies assets, including time-and-attendance software and customers, for $6.3 million at closing. It expected another $1.1 million in 2012 and could pay up to $2.8 million of additional revenue-based consideration in 2011–2012.
- Workers’ compensation liabilities depend on actuarial estimates. The company reduced prior-period loss estimates by $3.7 million in the first half of 2010; the comparable 2009 reduction was $3.9 million. Health-plan costs likewise rely on estimates of incurred claims.
- Management said health-care reform’s longer-term effects were uncertain and could raise costs, constrain pricing, or affect client retention. COBRA enrollment and claims were also identified as potential cost pressures; contractual limits may delay passing cost increases to clients.
- The company was involved in lawsuits and claims arising in the ordinary course. Management believed their outcome would not materially adversely affect financial position or results. Disclosure controls were deemed effective as of June 30, 2010.
Most important facts for investors to verify
- Whether worksite employee counts and new-client sales recover, and whether improved retention continues.
- Whether health-benefit, COBRA, and unemployment-tax costs can be contained or passed through in pricing; assess sensitivity to claims estimates.
- How much operating cash flow reflects payroll timing and insurance funding versus underlying earnings and working-capital trends.
- Integration, purchase-price allocation, and performance-based payments for ExpensAble and the post-quarter Galaxy acquisition.
- Implementation of health-care reform, including the effects of plan requirements and uncertain rules on costs and client demand.