BARRETT BUSINESS SERVICES, INC. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results are compared with the corresponding 2018 periods. BBSI provides PEO, staffing, payroll, workers’ compensation and related business-management services, primarily to small and mid-sized companies.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $248.0M | $247.3M | $697.2M | $702.9M |
| Gross margin | $70.8M (28.5%) | $59.7M (24.1%) | $154.2M (22.1%) | $124.4M (17.6%) |
| Operating income | $28.4M | $22.1M | $37.8M | $19.5M |
| Net income | $25.0M | $19.1M | $36.6M | $21.2M |
| Diluted EPS | $3.24 | $2.50 | $4.76 | $2.77 |
- Q3 revenue increased 0.3% year over year; PEO fees rose 3.8% to $214.2M while staffing revenue fell 17.5% to $33.8M. For the first nine months, revenue decreased 0.8%; PEO fees grew 2.6% while staffing revenue declined 19.0%.
- Q3 and nine-month net income increased approximately 31% and 72%, respectively. Gross margin expansion reflected lower workers’ compensation costs, including favorable prior-period claims adjustments of $5.6M in Q3 and $10.2M year to date. SG&A increased 12.8% in Q3 and 11.6% year to date, primarily due to employee-related expenses.
- Investment income was $2.9M in Q3 and $9.3M year to date, contributing to higher other income. Effective tax rates were 19.3% for Q3 and 20.0% year to date.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $57.5M, versus $46.9M in 2018. Investing activities provided $46.1M, compared with $53.7M used in the prior period; financing activities used $8.8M, mainly for dividends and stock-award share repurchases.
- Cash, cash equivalents and restricted cash totaled $235.5M at September 30, 2019, up $94.8M from year-end. This measure includes restricted cash; substantial cash and investments are pledged or otherwise restricted, including for workers’ compensation obligations.
- Current and noncurrent workers’ compensation claims liabilities totaled $430.0M; safety incentive liability was $27.7M. Total investments were $353.8M, including restricted investments. Shareholders’ equity was $160.2M.
- Total debt was approximately $4.0M, including a $4.0M mortgage; the $33.0M revolving line had no borrowings outstanding. The credit agreement includes financial covenants and collateral requirements; BBSI reported compliance at quarter-end. Management said operating cash generation, liquid assets and revolver availability should fund working capital needs for the next 12 months.
Changes, outlook and risks
- PEO growth was attributed to new and existing customers, wage inflation, employee headcount growth and, in Q3, one additional business day. Staffing revenue weakness reflected tight labor-market conditions. Management cited continued strength in referral channels.
- BBSI reported no quantitative earnings or revenue guidance. Management expects seasonal quarterly fluctuations, including historically weaker first quarters; customer activity and workers’ compensation claims experience can materially affect results.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $23.8M of operating lease right-of-use assets and $24.4M of lease liabilities at September 30. The prior-year comparison was not restated.
- Workers’ compensation reserves depend on actuarial estimates and are subject to uncertainty, including claims severity, medical-cost inflation, litigation and adverse development. Restricted collateral and letters of credit support insurance programs and self-insured obligations.
- A California wage-and-hour case, Kaanaana, was under review by the California Supreme Court after it granted BBSI’s petition. Management could not estimate a potential loss range for this or other ordinary-course litigation. The IRS was examining federal tax returns for 2011–2014.
- Management identified risks including client retention and growth, labor-market conditions, receivable collectability, claims estimates, investment-market and interest-rate movements, regulatory changes, and availability of collateral and financing. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether lower workers’ compensation expense and favorable prior-period reserve adjustments are sustainable.
- Whether PEO growth can offset continued staffing revenue declines and whether labor-market conditions improve.
- The adequacy of $430.0M in workers’ compensation reserves and the level and terms of insurance collateral, including the $63.7M Chubb letter of credit.
- How much reported cash and investments are available for general operations versus restricted or pledged purposes.
- Developments and potential exposure in the Kaanaana litigation and the IRS examination.
- Operating performance and cash generation against credit-agreement covenants and lease obligations.