Barrett Business Services, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparative results are for FY2010 unless otherwise stated. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
BBSI provides professional employer organization (PEO) and staffing services, including payroll, benefits administration, human resources and workers’ compensation risk management. PEO fees are reported net of specified payroll costs, so reported revenue is not directly comparable to staffing revenue presented gross. California and Oregon generated 75% of FY2011 net revenue. The company operated 43 branch offices.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net revenue | $314.9 million | $273.1 million |
| Staffing revenue | $124.8 million | $125.7 million |
| PEO service-fee revenue | $190.1 million | $147.4 million |
| Gross margin | $43.5 million (13.8%) | $44.7 million (16.4%) |
| Operating income | $3.9 million | $7.9 million |
| Net income | $14.3 million | $7.4 million |
| Diluted earnings per share | $1.41 | $0.71 |
| Operating cash flow | $31.4 million | $17.9 million |
- Net revenue rose 15.3%, led by 29% growth in PEO fees; staffing revenue declined 0.8%.
- Workers’ compensation expense increased to $53.8 million from $36.3 million. The company recorded an additional $8.5 million of expense in Q4 for estimated claim costs, primarily for 2005–2009 claims. Total workers’ compensation claims liabilities were $51.2 million at year-end, versus $39.3 million a year earlier; reported IBNR was $37.3 million versus $27.2 million.
- Cash and cash equivalents were $49.6 million; marketable securities totaled $32.3 million, including restricted balances. Working capital was $49.6 million. The company reported no long-term debt and had $6.7 million of standby letters of credit outstanding for workers’ compensation surety requirements.
- Operating cash flow improved year over year, in part from increases in accrued payroll and workers’ compensation liabilities; accounts receivable also increased by $8.9 million. Investing activities used $4.2 million and financing activities used $8.5 million, including $4.8 million of share repurchases and $3.8 million of dividends.
- Dividends declared were $0.38 per share for FY2011, compared with $0.33 in FY2010.
Changes, unusual items and outlook
- Net income included $10.0 million of key-person life insurance proceeds following the January 2011 death of former CEO William W. Sherertz. The proceeds were a major reason net income increased; operating income declined year over year. The effective tax rate was 5.5%, influenced by the non-taxable insurance proceeds, a California tax refund and employment tax credits.
- Fourth-quarter 2011 revenue was $84.7 million and net loss was $96,000, compared with fourth-quarter 2010 revenue of $73.6 million and net income of $3.1 million. The Q4 result reflected the workers’ compensation reserve adjustment.
- Management cited new PEO client growth but continued economic pressure on staffing demand. No specific numerical revenue or earnings guidance was provided. Management expected existing liquid assets and operating cash flows to cover working-capital needs for the next 12 months, while noting that the planned share repurchase described below would materially affect cash.
- On March 9, 2012, BBSI agreed to repurchase 2,485,929 shares from the Sherertz estate and 500,000 shares from Nancy Sherertz for $59.7 million, or $20 per share. Consideration included $24.9 million cash and 34,800 redeemable preferred shares. The preferred shares carry cumulative dividends initially at 5%, increasing by 2 percentage points each April 1 beginning in 2013, and are mandatorily redeemable after five years; the company said they would be classified as a liability. Management anticipated no material effect on working-capital capacity but said the transaction would materially affect cash balances.
- Key risks include workers’ compensation reserve uncertainty and the $5 million per-occurrence retention in most relevant states; dependence on California and Oregon; economic and regulatory exposure; client credit and retention risks; and reliance on excess insurance coverage, including Chartis.
- Management reported that disclosure controls and internal control over financial reporting were effective at year-end and that a previously identified material weakness related to captive-insurance legal-fee accounting had been remediated. The auditor issued an unqualified opinion on the financial statements and internal controls. Management said pending litigation was not expected to have a material effect.
Important facts for investors to verify
- Workers’ compensation claim development, actuarial assumptions and the adequacy of the $51.2 million reserve, particularly the Q4 adjustment and increase in IBNR.
- Funding, closing and subsequent liquidity effects of the $59.7 million March 2012 repurchase, including the preferred-stock dividend escalation and mandatory redemption.
- PEO client counts: the filing reports approximately 1,935 clients at December 31, 2011 in one section, but approximately 2,355 clients served during 2011 elsewhere; clarify the differing measurement or reconcile the figures.
- Underlying earnings and cash generation excluding the $10.0 million insurance proceeds, and the extent to which operating cash flow benefited from rising accrued liabilities.
- Continued PEO growth, staffing demand, California/Oregon concentration, and workers’ compensation insurance availability and cost.