Barrett Business Services, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. BBSI provides professional employer organization (PEO) and staffing services, primarily to small and midsized businesses. PEO revenue is reported net of certain client payroll costs, so reported revenue and gross-margin percentages reflect service mix.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $82.4 million | $68.8 million |
| Gross margin | $6.6 million; 7.9% | $5.6 million; 8.1% |
| Operating loss | $3.6 million | $3.6 million |
| Net income (loss) | $(2.2) million | $5.5 million |
| Diluted EPS | $(0.22) | $0.54 |
| Operating cash flow | $11.5 million | $11.1 million |
- Staffing revenue declined 7.5% to $26.2 million; PEO service-fee revenue rose 39.0% to $56.2 million. On a non-GAAP gross-revenue presentation, total revenue increased 30.5% to $432.1 million.
- Gross margin dollars increased $959,000, while gross margin as a share of reported revenue eased 0.2 percentage points. Workers’ compensation expense rose to $13.2 million from $10.0 million; SG&A increased 10.6% to $9.8 million.
- Cash and cash equivalents were $38.2 million at March 31, down from $49.6 million at year-end. Current assets were $123.3 million and current liabilities $97.2 million. Marketable securities totaled $29.7 million, excluding restricted securities.
- Cash from operations was $11.5 million; investing activities provided $1.9 million; financing activities used $24.7 million. The cash decline primarily reflected the share repurchase and higher receivables, partly offset by increased accrued payroll and taxes.
- Workers’ compensation claims liabilities totaled $52.8 million, including $38.3 million of incurred-but-not-reported claims. The filing reports no conventional borrowing balance; $6.7 million of standby letters of credit was outstanding for workers’ compensation surety requirements.
Material changes and unusual items
- Q1 2011 results included $10.0 million of key-man life insurance proceeds and a related favorable effect on the effective tax rate. Their absence, along with ordinary operating results, principally explains the year-over-year swing from income to loss.
- On March 28, 2012, BBSI repurchased 2,985,929 shares from the Sherertz estate and Nancy Sherertz for $59.7 million, or $20 per share. Consideration included $24.9 million in cash and 34,800 Series A redeemable preferred shares with a $34.8 million liquidation preference; transaction fees were $514,000. Common shares outstanding fell from 9.871 million at December 31 to 6.991 million at March 31.
- The preferred stock is classified as a liability, carries a 5% cumulative annual dividend rate that rises by 2 percentage points each April beginning in 2013, and is mandatorily redeemable five years after issuance. BBSI said it was exploring financing and planned to redeem it in full before September 28, 2012, but gave no assurance financing would be available.
Outlook, risks, and controls
- Management expected the effective tax rate for the rest of 2012 to remain near Q1’s 33.7%. It expects payroll taxes and benefits as a percentage of reported revenue to continue rising as PEO grows.
- Management believed liquid assets and anticipated operating cash flows would fund working-capital needs for the next 12 months. It also stated the company was in compliance with its financial covenants at March 31. No specific revenue or earnings guidance was provided.
- Management cited seasonality, customer retention and new-business growth, workers’ compensation claim frequency and severity, adverse prior-claim development, regulatory changes, receivable collectibility, and access to financing and surety capacity as risks. Results may be seasonal, with higher revenue and income historically possible in Q3.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether BBSI obtained financing and redeemed the $34.8 million preferred-stock liability on the stated timetable, and the actual cost and terms of any financing.
- Subsequent workers’ compensation claims development, reserve adequacy, and recoverability of insurer receivables.
- Whether PEO growth and staffing trends continued, and how the changing service mix affected margins and payroll-tax costs.
- Cash conversion and working-capital trends, especially accounts receivable and accrued payroll, as well as continued compliance with credit-agreement covenants.