Insperity(NSP) - 2019 Q2 - Quarterly Report

Part I - Financial Information: Item 1. Financial Statements Condensed Consolidated Balance Sheets The company's balance sheet expanded, with total assets reaching $1.32 billion, driven by increased equity and liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $919,177 | $866,536 | | Total assets | $1,316,995 | $1,191,816 | | Total current liabilities | $769,848 | $772,332 | | Long-term debt | $169,400 | $144,400 | | Total liabilities | $1,182,106 | $1,114,140 | | Total stockholders' equity | $134,889 | $77,676 | Consolidated Statements of Operations Revenues and net income grew significantly in the first half of 2019, with year-to-date net income up 40.6% to $104.8 million Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,043,316 | $922,295 | $2,196,326 | $1,936,667 | | Gross Profit | $173,735 | $154,544 | $400,452 | $354,264 | | Operating Income | $38,720 | $33,581 | $124,181 | $98,284 | | Net Income | $28,556 | $24,560 | $104,845 | $74,551 | | Diluted EPS | $0.69 | $0.58 | $2.54 | $1.77 | Consolidated Statements of Cash Flows Operating cash flow increased substantially to $72.4 million, while financing activities used cash for buybacks and dividends Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Category | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $72,428 | $17,289 | | Net cash used in investing activities | ($17,207) | ($19,310) | | Net cash used in financing activities | ($34,773) | ($31,903) | | Net increase (decrease) in cash | $20,448 | ($33,924) | Consolidated Statements of Stockholders' Equity Stockholders' equity grew to $134.9 million, primarily driven by net income, partially offset by share repurchases and dividends Changes in Stockholders' Equity (Six Months Ended June 30, 2019, in thousands) | Component | Amount | | :--- | :--- | | Balance at Dec 31, 2018 | $77,676 | | Net Income | $104,845 | | Purchase of treasury stock | ($38,796) | | Dividends paid | ($24,740) | | Stock-based compensation | $14,296 | | Balance at June 30, 2019 | $134,889 | Notes to Consolidated Financial Statements The notes detail key accounting policies, the adoption of the new lease standard, and information on legal proceedings - The company's most comprehensive offering is its Professional Employer Organization (PEO) services, which include payroll, benefits, workers' compensation, and other HR functions[14] - For the six months ended June 30, 2019, the company reduced accrued workers' compensation costs by $19.0 million due to favorable changes in estimated losses for prior periods[24] - The company is a defendant in a class action lawsuit alleging breach of fiduciary duties related to its 401(k) plan; management believes it has meritorious defenses[59][61] - On January 1, 2019, the company adopted the new lease accounting standard ASC 842, resulting in the recording of operating lease Right-of-Use (ROU) assets of approximately $50.8 million[47] Part I - Financial Information: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Summary Strong performance in H1 2019 was driven by growth in worksite employees, leading to significant increases in net income and EPS Q2 2019 Highlights vs. Q2 2018 | Metric | Growth Rate | | :--- | :--- | | Average WSEEs paid per month | 13.8% | | Net Income | 16.3% | | Adjusted EPS | 22.1% | | Adjusted EBITDA | 21.6% | First Six Months 2019 Highlights vs. First Six Months 2018 | Metric | Growth Rate | | :--- | :--- | | Average WSEEs paid per month | 14.5% | | Net Income | 40.6% | | Adjusted EPS | 34.4% | | Adjusted EBITDA | 21.2% | Results of Operations Revenue growth was driven by a 14.5% increase in worksite employees, while operating expenses decreased on a per-employee basis - Growth in WSEEs paid from new client sales increased due to a 9.9% increase in the number of Business Performance Advisors in the first six months of 2019[75] - For YTD 2019, revenues per WSEE per month decreased by 0.9% ($15) due to lower WSEE medical participation[80] - Workers' compensation costs for YTD 2019 decreased 10.4% per WSEE per month, benefiting from a $19.0 million reduction from prior period estimates[101] - Operating expenses per WSEE per month for YTD 2019 decreased 6.1%, primarily because YTD 2018 included a $9.3 million one-time bonus[106][109] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA and Adjusted EPS to provide a management-centric view of performance Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net income (GAAP) | $104,845 | $74,551 | | Income tax expense | $22,063 | $24,818 | | Interest expense | $3,320 | $2,178 | | Depreciation and amortization | $13,599 | $10,693 | | EBITDA (Non-GAAP) | $143,827 | $112,240 | | Stock-based compensation | $14,296 | $8,887 | | One-time tax reform bonus | $— | $9,306 | | Adjusted EBITDA (Non-GAAP) | $158,123 | $130,433 | Liquidity and Capital Resources The company maintains strong liquidity with $386.1 million in cash and equivalents and significant available credit - At June 30, 2019, the company had working capital of $149.3 million, up from $94.2 million at year-end 2018[121] - The company had $169.4 million outstanding on its revolving credit facility and an available borrowing capacity of $179.6 million as of June 30, 2019[43][122] - Cash flows from operations are significantly impacted by the timing of client payroll processing[126] Part I - Financial Information: Item 3. Quantitative and Qualitative Disclosures About Market Risk - The company's primary market risk exposure is from interest rate fluctuations affecting its cash, investments, and variable-rate debt[128] - As of June 30, 2019, the company had $170.4 million in borrowings and letters of credit outstanding under its variable-rate facility[128] - The investment policy is designed to preserve principal and maximize after-tax income, focusing on tax-exempt debt securities[130] Part I - Financial Information: Item 4. Controls and Procedures - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[131] - There were no material changes in internal controls over financial reporting during the second quarter of 2019[132] Part II - Other Information: Item 1. Legal Proceedings - The company refers to Note 9 for details on legal proceedings, including a class action lawsuit related to its 401(k) plan[133][59] Part II - Other Information: Item 1A. Risk Factors - The report identifies risks including economic conditions, regulatory changes, and a specific IRS memorandum concerning tax reporting[134][135] - A specific risk update was provided regarding an IRS advice memorandum from April 2019 that could adversely impact the business if its required transition is not successful[138] Part II - Other Information: Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - As of June 30, 2019, the company was authorized to repurchase an additional 1,522,945 shares under its program[140] Share Repurchases (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased Under Program | Max Shares Available for Purchase | | :--- | :--- | :--- | :--- | :--- | | May 2019 | 85,046 | $114.75 | 85,000 | 1,522,945 | Part II - Other Information: Item 6. Exhibits - The report includes CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002, as well as XBRL data files[141]