Barrett Business Services, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. BBSI provides management and human-resources services, including professional employer organization (PEO) and staffing services, primarily to small and midsized businesses. Amounts below are in millions except per-share data.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $224.0 | $210.0 |
| Gross margin | $16.3 (7.2% of revenue) | $10.5 (5.0%) |
| Operating loss | $(14.2) | $(17.1) |
| Net loss | $(9.1) | $(11.2) |
| Diluted loss per share | $(1.25) | $(1.55) |
| Operating cash flow | $(2.2) | $(0.9) |
- PEO service fees rose 9.7% to $189.0 million; staffing revenue fell 7.3% to $35.0 million. Management attributed PEO growth to new and existing customers, including a 6.3% increase from continuing customers driven mainly by higher headcount and hours worked. New-customer business exceeded business lost from former customers.
- Gross margin improved as a share of revenue, primarily because direct payroll and workers’ compensation costs were lower as a percentage of revenue; higher payroll taxes and benefits partly offset the improvement. SG&A increased 10.6% to $29.4 million, primarily due to employee-related expenses.
- Investment income contributed to other income of $2.0 million, versus $0.1 million a year earlier. The effective tax rate was 25.1%, compared with 34.1%; the company reported a $3.1 million income tax benefit.
- PEO revenue is reported net of direct payroll costs and safety incentives, while staffing revenue is reported gross. Accordingly, reported revenue and gross-margin percentages reflect service mix; management also provides gross billings as an operating measure. Gross billings increased 10.0% to $1,319.8 million.
Financial position and liquidity
- At March 31, cash and cash equivalents were $24.0 million, versus $59.8 million at year-end. Cash, cash equivalents and restricted cash totaled $54.8 million, down $65.4 million during the quarter, primarily reflecting purchases of restricted investments. Restricted cash and investments on the balance sheet totaled $407.6 million, much of it held for workers’ compensation obligations and not freely available for general purposes.
- Operating cash use was $2.2 million; investing cash use was $61.3 million, including $81.3 million of restricted-investment purchases, partly offset by investment-sale and maturity proceeds. Financing cash use was $1.9 million, principally $1.8 million of dividends.
- Total debt was approximately $4.3 million, consisting principally of the office mortgage; there were no revolver borrowings. The revolving facility provided $40 million through June 15, 2018 and $25 million thereafter, and was scheduled to expire July 1, 2018. The company reported compliance with its covenants at quarter-end.
- Current assets were $290.2 million and current liabilities $330.2 million. This includes restricted assets and substantial workers’ compensation-related liabilities; the filing does not present a separate unrestricted-liquidity measure.
- Workers’ compensation claims liabilities were $378.9 million, up from $363.5 million at December 31, 2017. The reserve included $217.5 million of incurred-but-not-reported claims, 57% of the total, versus 50% a year earlier. Reserve estimates depend on actuarial assumptions and actual ultimate costs may differ materially.
Outlook, risks and notable items
- Management said cash from operations, liquid assets and revolver availability were expected to be sufficient for working-capital needs over the next 12 months. No specific revenue or earnings guidance was provided.
- Management notes that quarterly results have historically fluctuated and that first-quarter losses are typical. Seasonality, payroll-tax wage limits, customer activity and workers’ compensation claims experience can affect results.
- The company recorded a $4.0 million after-tax unrealized investment loss in other comprehensive income. Management estimated that a 50-basis-point increase in market rates would reduce investment-portfolio fair value by $6.5 million; the impact on outstanding borrowings would be immaterial.
- The SEC’s investigations concerning reported financial-statement errors and workers’ compensation reserve accounting continued, and BBSI was cooperating with a Department of Justice investigation. The company was discussing a potential resolution with SEC Enforcement staff. Management could not estimate the probability or potential loss from the investigations or a shareholder derivative lawsuit.
- The IRS was examining federal tax returns for 2011–2014. The company continued evaluating provisional effects of the 2017 Tax Act and expected to complete its analysis by year-end 2018.
- Management stated disclosure controls were effective as of March 31, 2018; no material change in internal control over financial reporting was reported for the quarter. The company adopted the new revenue-recognition standard with no material financial-statement impact.
Important facts for investors to verify
- Progress on renewal or replacement of the revolving credit facility before its July 1, 2018 expiration, and continued covenant compliance.
- Workers’ compensation reserve development, actuarial assumptions, and the adequacy and availability of assets restricted for claims.
- Updates on the SEC and DOJ investigations and the derivative litigation, including any resolution or estimate of potential financial exposure.
- Whether PEO growth continues to offset staffing declines, and whether gross-margin gains persist as service mix and payroll-related costs change.
- Effects of investment-market movements and finalization of the company’s Tax Act estimates.