Insperity, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Insperity provides HR and business services, primarily through professional employer organization (PEO) solutions for small and medium-sized businesses. Reported revenue is gross billings less worksite employee payroll costs.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Revenue | $795.6 million | $707.3 million | +12.5% |
| Gross profit | $130.6 million | $113.3 million | +15.3% |
| Operating income | $22.9 million | $16.0 million | +43.2% |
| Net income | $14.0 million | $9.7 million | +44.3% |
| Diluted EPS | $0.66 | $0.45 | +46.7% |
| Average worksite employees paid per month | 180,276 | 163,521 | +10.2% |
Q2 gross profit, operating income, and net income were approximately 16.4%, 2.9%, and 1.8% of reported revenue, respectively. Revenue per worksite employee per month rose 2.0% to $1,471; gross profit per employee per month increased 4.3% to $241. Management attributed revenue growth to higher worksite employee counts and increased revenue per employee. It reported improvement in new sales, retention, and net employee changes versus Q2 2016.
Six months ended June 30: Revenue was $1.678 billion (+11.2%); gross profit $289.9 million (+10.1%); operating income $76.4 million (+10.7%); net income $49.6 million (+17.1%); and diluted EPS $2.35 versus $1.98 (+18.7%). Average worksite employees paid per month increased 10.2% to 177,315. Gross profit per employee per month declined 0.4% to $272, while operating expenses per employee per month remained $201.
Cash flow, liquidity and debt
- Six-month operating cash flow was $13.0 million, down from $60.7 million in 2016. Investing cash outflow was $20.9 million, mainly property and equipment purchases; financing cash outflow was $36.3 million, including $25.5 million of share repurchases and $11.6 million of dividends.
- Cash and cash equivalents were $241.9 million at June 30, compared with $286.0 million at year-end; marketable securities were $1.9 million. Of total cash, cash equivalents and securities of $243.8 million, $173.3 million related to payroll taxes and deductions and $22.3 million to client prepayments. The company’s non-GAAP adjusted cash measure, excluding those amounts, was $48.2 million, versus $44.9 million at year-end.
- Working capital was $55.7 million, compared with $39.4 million at December 31, 2016. Management said available cash, operating cash flows and the credit facility were expected to meet liquidity needs for the remainder of 2017.
- Long-term debt was $104.4 million under a $200 million revolving facility, with $94.6 million available after a $1.0 million letter of credit. The facility matures February 2020; the June 30 interest rate was 2.78%. The company reported compliance with its financial covenants.
Material changes, outlook and risks
- Q2 operating expenses rose 10.7%, slower than revenue growth, though general and administrative costs increased 15.8% and commissions rose 30.7%. Six-month operating expenses increased 9.9%.
- Workers’ compensation costs benefited from $8.0 million of favorable revisions to prior-period estimates in the first half, versus $2.6 million in the prior-year period. Health benefit costs included a $0.5 million charge for prior-period claim run-off. These reserve and claim estimates are judgmental and can change.
- The effective tax rate was 38.6% for Q2 and 34.8% for the first half, compared with 38.0% in the comparable 2016 periods. First-half 2017 tax expense included a $3.3 million benefit related to vesting restricted stock awards.
- Insperity received IRS Certified Professional Employer Organization designation in Q2, providing a federal regulatory framework for specified payroll tax responsibilities.
- No formal numerical earnings or revenue guidance is provided in the filing. The company planned to adopt the new revenue standard on January 1, 2018, using the modified retrospective method; it expected revenue policies to remain substantially unchanged. It was assessing the effect of the new lease standard.
- Risks cited include economic and regulatory changes, health and workers’ compensation costs and claims, insurance contract renewals, client retention and acquisition, regional concentration, competition, payroll-related liabilities, data security and IT systems, litigation, and growth execution.
- A class action alleges fiduciary breaches concerning the worksite employee 401(k) plan, including recordkeeping fees and investment choices. Insperity disputes the claims and intends to defend them; it recorded no provision because the outcome is uncertain. Management did not expect other ordinary-course claims to have a material adverse effect.
Important facts for investors to verify
- Whether worksite employee growth and improved per-employee revenue and gross profit persist, particularly given first-half gross profit per employee was slightly lower year over year.
- The sustainability of favorable workers’ compensation reserve revisions and the adequacy of health and workers’ compensation claim estimates.
- Operating cash flow and the distinction between reported cash and funds associated with payroll obligations and client prepayments.
- Progress and potential exposure in the 401(k) class action, as well as compliance with credit-facility covenants and debt terms.
- How much reported earnings growth depends on non-GAAP adjustments, tax benefits, and other unusual or estimate-sensitive items.