Barrett Business Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; compared with the corresponding 2013 periods. Amounts are in millions except per-share data. Financial statements are unaudited.
Business context
BBSI provides business management, professional employer organization (PEO), staffing, payroll, human resources, and workers’ compensation services, primarily to small and midsized businesses. Its decentralized network included 52 branches, and California generated about 76% of second-quarter revenue and 77% of first-half revenue. PEO service revenue is reported net of certain client payroll costs, so reported revenue and gross margin percentages are affected by service mix.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $151.1 | $128.8 | $286.2 | $240.3 |
| Gross margin | $29.9 | $23.7 | $39.2 | $32.0 |
| Gross margin as % of reported revenue | 19.8% | 18.4% | 13.7% | 13.3% |
| Operating income | $11.3 | $8.7 | $5.6 | $4.8 |
| Net income | $7.3 | $5.9 | $3.7 | $3.3 |
| Diluted earnings per share | $0.98 | $0.80 | $0.50 | $0.45 |
| Net cash from operating activities | Not provided separately | Not provided separately | $8.7 | $17.4 |
Q2 revenue rose 17.3% year over year: PEO service fees increased 20.3% and staffing revenue increased 9.2%. First-half revenue grew 19.1%, with PEO fees up 22.2% and staffing up 10.7%. Q2 net income increased about 23.7%; first-half net income increased about 10.9%. The reported net margin was 4.8% for Q2 2014 versus 4.6% in Q2 2013, and 1.3% for first-half 2014 versus 1.4% in first-half 2013. The company paid dividends of $0.18 per share in Q2 and $0.36 per share in the first half, versus $0.13 and $0.26, respectively, in 2013.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $47.9; current marketable securities were $32.0 and long-term marketable securities were $10.6. Restricted certificates of deposit were $20.9, and restricted marketable securities and workers’ compensation deposits were $34.7.
- Cash declined $45.7 during the first half, from $93.6 at year-end 2013. Operating cash flow was $8.7, investing cash outflow was $51.0, and financing cash outflow was $3.3. Investing outflows included $35.7 for restricted investments/deposits and $24.0 for marketable securities; receivables increased $18.4.
- Total debt was approximately $5.2, including $0.2 current and $4.9 long term. There were no revolver borrowings at June 30; the facility had up to $16.5 available and $27.6 of standby letters of credit outstanding. BBSI reported compliance with its financial covenants.
- Current assets were $198.1 and current liabilities were $163.6. Management said operating cash generation and revolver availability were expected to be sufficient for working capital needs over the next 12 months.
Material changes, outlook and risks
- Workers’ compensation expense rose to $30.8 in Q2 from $25.0, and to $58.4 for the first half from $46.8. Expense as a share of reported revenue increased to 20.4% from 19.4% for both comparable periods, primarily reflecting higher provisions for current-year claims. First-half expense also included $5.1 of additional prior-year claim accruals.
- Estimated workers’ compensation claims liabilities were $122.5 at June 30, up from $112.4 at December 31, 2013. Reserve estimates depend on claims development, medical, legal and administrative costs, and actuarial assumptions; actual outcomes may differ.
- California legislation requires BBSI to transition away from self-insurance by January 1, 2015. Under a fronted program with ACE, BBSI retains the first $5.0 of loss per claim and ACE bears costs above that amount. BBSI expected increased transition costs that could continue after implementation. The ACE trust held $21.9 at June 30.
- SG&A increased 23.9% in Q2 and 22.9% for the first half, mainly due to management payroll, IT investment, and other growth-related costs. Management expected the effective tax rate for the balance of 2014 to remain near Q2’s 36.0%.
- No specific revenue or earnings forecast was provided. Management cited potential growth through existing offices and selective acquisitions, without assurance that acquisitions would occur. The company noted seasonality, workers’ compensation claims volatility, client retention and acquisition, economic conditions, receivable collectability, and access to capital or surety support as risks.
- The filing describes the first-half operating results as seasonal and cautions that interim results are not necessarily indicative of full-year results. It also says no material changes occurred in disclosed risk factors, and disclosure controls were effective.
Important facts for investors to verify
- Track workers’ compensation reserve development, claim costs, and the effect and cost of the California ACE fronted program.
- Assess cash conversion: first-half operating cash flow fell to $8.7 from $17.4, with receivables growth and restricted investment funding among the drivers.
- Monitor PEO and staffing growth, client retention, California concentration, and the impact of revenue mix on reported margins.
- Review liquidity and collateral requirements, including surety deposits, restricted assets, standby letters of credit, and revolver covenant headroom.
- Confirm full-year performance against the seasonal pattern and management’s stated tax-rate expectation; the filing provides no formal earnings guidance.