Insperity, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Insperity provides PEO-based HR outsourcing and related payroll, benefits, workers’ compensation, and business services. Financial statements are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,585.1m (+10.7%) | $1,432.1m | $3,354.8m (+11.5%) | $3,009.9m |
| Gross profit | $224.6m (-6.3%) | $239.9m | $556.8m (+5.9%) | $525.6m |
| Operating income | $15.8m (-67.3%) | $48.4m | $136.8m (-6.8%) | $146.7m |
| Net income | $12.9m (-61.6%) | $33.6m | $107.5m (+3.9%) | $103.5m |
| Diluted EPS | $0.33 (-62.1%) | $0.87 | $2.78 (+3.7%) | $2.68 |
| Adjusted EBITDA (non-GAAP) | $50.9m (-32.2%) | $75.0m | $203.3m (+5.0%) | $193.6m |
| Adjusted EPS (non-GAAP) | $0.64 (-44.8%) | $1.16 | $3.30 (+4.8%) | $3.15 |
Quarterly gross, operating, and net margins were approximately 14.2%, 1.0%, and 0.8%, respectively, compared with 16.8%, 3.4%, and 2.3% in Q2 2022. For the first six months, those margins were approximately 16.6%, 4.1%, and 3.2%, versus 17.5%, 4.9%, and 3.4%. Revenue is gross billings less worksite employee (WSEE) payroll costs.
Cash flow, balance sheet, and capital
- Operating cash flow was a use of $69.6m for the first six months, versus $22.8m provided in the prior-year period. Investing activities used $16.3m and financing activities used $85.0m. Cash, cash equivalents, restricted cash, and client funds totaled $843.0m at period end.
- Cash, cash equivalents, and marketable securities were $616.1m, including $365.9m associated with payroll taxes and deductions and $31.3m of client prepayments. Management’s non-GAAP adjusted cash measure, excluding those amounts, was $218.9m.
- Working capital was $228.0m, up from $158.5m at December 31, 2022. Long-term debt was $369.4m; the $650m revolving facility had $279.6m available after borrowings and a letter of credit. The facility matures June 30, 2027; the company was in compliance with its financial covenants.
- Six-month cash returns to shareholders included $41.6m of dividends and $45.4m of stock repurchases or withholding. The company repurchased 190,338 shares under its program and had authorization for 841,822 additional shares at June 30.
Changes and management commentary
- Average WSEEs paid rose 7.2% in Q2 and 8.6% year to date. Management attributed revenue growth to higher WSEE counts and revenue per WSEE. New-client sales and net client-base gains were lower than in the comparable periods; retention was consistent.
- Q2 gross profit per WSEE per month fell 12.4% to $241. Higher direct costs, especially health claims and pharmacy costs, more than offset pricing gains. Health benefit costs per covered employee rose 9.7%; large claims were the main driver, with increased use of diabetes/weight-loss and behavioral-health drugs also contributing.
- Operating expenses rose 9.0% in Q2 and 10.8% year to date, including higher general and administrative costs. YTD interest income increased $15.7m with higher investment rates, while interest expense increased $8.3m as borrowing rates rose.
- Reported benefit costs included a $9.8m reduction from prior-period health-claim estimates in the first six months of 2023, compared with a $10.2m increase in 2022. Workers’ compensation estimates were reduced by $15.0m in the 2023 period versus $26.8m in 2022. These estimate changes aided results but were smaller for workers’ compensation than in the prior year.
Outlook, risks, and contingencies
No quantified earnings or revenue guidance is provided in the supplied filing text. Management said cash on hand, securities, operating cash flows, and facility availability should meet liquidity requirements for the remainder of 2023. It cautioned that interim results may not indicate full-year performance. Key exposures include health-claim severity and costs, workers’ compensation estimates, variable-rate debt and interest rates, economic conditions and client retention, and access to banking services. The filing added risk disclosure on potential bank failures: deposits exceed FDIC insurance limits, and disruptions could affect liquidity, payroll processing, borrowing, or client collections. Insperity is involved in ordinary-course litigation; management does not expect the outcomes to materially adversely affect its financial position or results.
Important facts for investors to verify
- Whether health and pharmacy claims remain elevated and how subsequent claim development affects benefit expense.
- Whether WSEE growth, new-client sales, client retention, and pricing can offset rising direct costs and operating expenses.
- How operating cash flow trends after payroll-tax, client-payment, and workers’ compensation funding timing effects.
- Debt-service sensitivity to variable interest rates, facility availability, and continued covenant compliance.
- Assumptions behind prior-period health and workers’ compensation estimate releases; non-GAAP adjusted measures should be assessed alongside GAAP results.