Barrett Business Services, Inc. — Q1 2019 Form 10-Q
Business context and period. BBSI provides human-resources, professional employer organization (PEO), staffing, risk-management and related services, primarily to small and mid-sized businesses. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $218.2 million | $224.0 million; down 2.6% |
| PEO service fees | $190.5 million | $189.0 million; up 0.8% |
| Staffing revenue | $27.7 million | $35.0 million; down 20.9% |
| Gross margin | $28.3 million; 12.9% of revenue | $16.3 million; 7.2% |
| Operating loss | $5.8 million | $14.2 million |
| Net loss / diluted loss per share | $2.3 million / $0.31 | $9.1 million / $1.25 |
| Operating cash flow | $30.8 million provided | $2.2 million used |
| Cash, cash equivalents and restricted cash | $196.6 million at March 31 | Up $55.9 million from year-end |
| Total debt | Approximately $4.1 million | No revolving-credit borrowings |
Investment income was $3.1 million, compared with $2.0 million. Interest expense was $0.5 million. The income-tax benefit was $0.9 million; the reported effective tax rate was 27.6%. The company paid $0.25 per share in dividends, or $1.9 million in total.
Total assets were $817.9 million and stockholders’ equity was $119.9 million at March 31, 2019. Current assets were $336.7 million and current liabilities $359.9 million. The $196.6 million cash-flow measure includes restricted cash; cash and cash equivalents not identified as restricted were $38.2 million. Restricted cash and investments largely support workers’ compensation obligations and should not be treated as freely available liquidity.
Operating cash flow benefited primarily from a $30.6 million increase in accrued payroll and related liabilities and a $9.5 million increase in workers’ compensation claims liabilities. Investing cash flow provided $27.0 million, mainly from sales and maturities of restricted investments. Financing activities used $2.0 million, mainly for dividends.
Material changes and management commentary
- Revenue declined despite modest PEO growth. Management attributed the overall decrease mainly to one fewer business day in Q1 2019; staffing revenue also weakened amid tight labor-market conditions.
- Gross margin expanded substantially. Management cited lower payroll-tax and workers’ compensation costs as a percentage of revenue, a more PEO-weighted service mix, firm pricing and reduced frictional costs. Workers’ compensation expense also included a favorable $1.7 million adjustment for prior-period claims.
- SG&A rose to $33.2 million from $29.4 million, primarily due to higher employee-related expenses; SG&A increased to 15.2% of revenue from 13.2%.
- Gross billings increased 3.1% to $1.36 billion. Gross billings to continuing PEO customers rose 2.7%, attributed to employee headcount growth and wage inflation, partly offset by the shorter quarter.
- Management noted that first-quarter losses are historical and expects quarterly results to continue fluctuating with seasonality, payroll-tax wage limits, customer demand, labor-market conditions and workers’ compensation claims.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects operating cash generation, liquid assets and the revolving facility to be sufficient for working-capital needs over the next 12 months.
- The company adopted lease-accounting guidance effective January 1, 2019, recognizing $24.9 million of operating lease right-of-use assets and $25.3 million of operating lease liabilities at March 31. Q1 total lease cost was $2.1 million.
- Workers’ compensation claims liabilities were $422.9 million, including $268.3 million of incurred-but-not-reported reserves (63% of the total). Management cautions that reserve estimates involve significant judgment and actual claim costs may differ materially.
- BBSI had a $28.0 million revolving credit facility, expiring July 1, 2020, with no borrowings outstanding. It also had a $63.7 million Chubb letter of credit and other surety bonds and letters of credit supporting insurance and state requirements. The Chubb letter of credit was due to expire July 1, 2019, subject to specified automatic-renewal provisions. The company reported compliance with all credit covenants at quarter-end.
- A California wage-and-hour case involving prevailing-wage requirements was under review by the California Supreme Court, which granted BBSI’s petition for review in February 2019. Management could not estimate a potential loss range. The IRS was examining federal tax returns for 2011–2014.
- Key disclosed risks include workers’ compensation reserve development, client retention and acquisition, tight labor markets, investment-market and interest-rate exposure, availability of collateral and letters of credit, receivables collection, and litigation. A 50-basis-point increase in market rates was estimated to affect investment-portfolio fair value by $5.1 million.
Important facts for investors to verify
- Whether PEO growth and the margin expansion persist, particularly after the favorable prior-claims adjustment and changes in service mix.
- How staffing revenue and labor-market conditions develop, and whether the shorter quarter materially affected comparisons.
- Workers’ compensation reserve adequacy, claims development, collateral requirements and renewal status and cost of the Chubb letter of credit.
- Actual availability of unrestricted liquidity, given that much of reported cash and investments is restricted or pledged.
- Developments in the California litigation and IRS examinations, including any later estimate or recognition of exposure.