Business context and reporting period
Barrett Business Services, Inc. (BBSI) filed this unaudited Form 10-Q for the three months ended March 31, 2016. BBSI provides human-resources, payroll, workers’ compensation and related business-management services, primarily to small and mid-sized companies. Unless noted otherwise, dollar amounts below are in millions; the financial statements report amounts in thousands.
The 2015 comparison is restated. BBSI cautioned investors not to rely on other previously filed reports or communications for the restated periods.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015, restated |
|---|---|---|
| Revenue | $191.0 | $166.4 |
| Gross margin | $10.4 (5.4%) | $8.9 (5.4%) |
| Operating loss | $(12.3) | $(8.7) |
| Net loss | $(8.0) | $(5.8) |
| Diluted loss per share | $(1.11) | $(0.82) |
| Cash from operating activities | $(7.8) | $5.5 |
- Revenue rose 14.8%. Professional employer organization (PEO) service fees increased 21.6% to $154.7 million; staffing revenue fell 7.3% to $36.3 million.
- Workers’ compensation expense increased to $49.4 million from $39.6 million. SG&A rose 29.1% to $21.9 million, including $1.8 million of legal and accounting costs tied to restatements, investigations and legal proceedings.
- Cash and cash equivalents were $43.5 million at March 31, up $18.2 million from year-end. Operating cash use reflected an increase in receivables of $73.3 million, partly offset by higher accrued payroll and related liabilities of $66.8 million.
- Investing activities provided $27.4 million, primarily from restricted-security maturities; financing activities used $1.3 million, including $1.6 million of dividends. The quarterly dividend was $0.22 per share.
- Current assets were $278.3 million versus current liabilities of $308.3 million. Much of the company’s investments are restricted or committed to workers’ compensation obligations; restricted investments and workers’ compensation deposits totaled approximately $240.5 million on the balance sheet.
- Workers’ compensation claims liabilities totaled $265.1 million, including $132.9 million of incurred-but-not-reported claims. Stockholders’ equity was $45.7 million.
- Debt included a $15.0 million term loan and an approximately $4.8 million mortgage; no revolving-credit borrowings were outstanding at quarter-end. The term loan and mortgage were classified as current, with the mortgage due in November 2017.
Material changes versus the prior comparable period
- PEO growth more than offset lower staffing revenue; management attributed PEO growth to new and existing customers, with continuing-customer PEO revenue up 6.2% from increased headcount and hours.
- Net loss widened by $2.2 million. Workers’ compensation expense included a $0.8 million adverse prior-period claims accrual in Q1 2016, versus a $2.9 million favorable prior-period adjustment in Q1 2015.
- Operating cash flow shifted from $5.5 million provided to $7.8 million used, largely reflecting working-capital movements.
- The March 2015 restatement reduced retained earnings at March 31, 2015 by $5.9 million. It also adjusted Q1 2015 net loss from $5.802 million to $5.828 million. The filing describes unsupported journal entries and errors in workers’ compensation and payroll-related accounting; the 2015 comparison shown here is restated.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected operating cash generation, liquid assets and revolving-credit availability to fund working-capital needs for the next 12 months.
- Management noted historical first-quarter losses and seasonal fluctuations, including effects from customer industries, payroll-tax wage limits and workers’ compensation claims experience.
- Controls and disclosure procedures were deemed ineffective as of March 31, 2016. The filing identifies material weaknesses involving management oversight and override, workers’ compensation estimates and reconciliations, journal entries, IT controls, and payroll-tax accounting. BBSI described remediation efforts, including a forensic investigation, governance and staffing changes, and strengthened review procedures.
- BBSI was in default under its Wells Fargo credit agreement for late financial reporting and was also in breach of the fixed-charge coverage covenant at March 31. The bank had agreed to forbear from enforcement through June 30, 2016. A June 28 amendment waived the covenant breach and revised the minimum fixed-charge coverage ratio to 2.25:1.0; it also made Nasdaq delisting an event of default. BBSI accelerated a $2.5 million term-loan payment to May 24 and agreed to pay another $2.5 million by the earlier of December 31, 2016 or receipt of federal unemployment-tax refunds.
- Nasdaq had notified BBSI of potential delisting because of late filings. BBSI requested a hearing, and Nasdaq stayed suspension and delisting pending the Panel’s written decision; the hearing occurred June 16. The filing does not state the Panel’s decision.
- Shareholder securities litigation and a derivative lawsuit remained pending. The SEC had issued subpoenas, and the Department of Justice had commenced an investigation. BBSI said it was cooperating; management could not estimate the probability or potential loss from the legal actions.
- Subsequent events included a $9.5 million agreement for 2016 workers’ compensation medical-cost-containment services, payable in quarterly installments of $593,250 through January 2020, and an increase in surety letter-of-credit requirements and related collateral to $42.3 million and $44.0 million, respectively.
- Management highlighted uncertainty in workers’ compensation reserve estimates, client retention and growth, liquidity and lender relations, Nasdaq listing status, litigation and investigations, and remediation of internal-control weaknesses.
Important facts for investors to verify
- Review the 2015 Form 10-K and restatement disclosures; do not rely on superseded 2015 reporting.
- Track whether BBSI remediates the material weaknesses and files subsequent reports on time.
- Confirm the status of the Wells Fargo credit agreement, covenant compliance, scheduled debt payments and Nasdaq listing decision.
- Monitor workers’ compensation reserve development, collateral requirements and restricted funds available to meet claims obligations.
- Follow the outcomes and potential financial effects of the shareholder cases, SEC and DOJ investigations.