Barrett Business Services, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. BBSI provides professional employer organization (PEO) and staffing services, with approximately 77% of revenue attributable to California operations in both periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $175.0 | $148.0 | $461.2 | $388.3 |
| Gross margin | $(42.8) | $30.2 | $(3.6) | $62.2 |
| Operating income (loss) | $(64.6) | $12.9 | $(59.0) | $17.6 |
| Net income (loss) | $(37.8) | $9.0 | $(34.1) | $12.3 |
| Diluted EPS | $(5.27) | $1.21 | $(4.76) | $1.67 |
| Gross margin percentage | (24.5%) | 20.4% | (0.8%) | 16.0% |
- Q3 revenue increased 18.2%; PEO service fees rose 19.0% and staffing revenue rose 16.2%. Nine-month revenue increased 18.8%; PEO fees rose 21.0% and staffing revenue 12.9%.
- The dominant unusual item was workers’ compensation claims expense of $101.2 million in Q3, including a $61.3 million increase in the estimate for prior-period claims. The revised estimate followed actuarial reviews and changes in claims administration that disrupted historical claims-development patterns. Total estimated claims liabilities reached $208.3 million at September 30, up from $112.4 million at year-end 2013.
- SG&A was $21.2 million in Q3, up 26.2%, and $53.5 million year to date, up 24.2%, mainly reflecting management payroll, technology spending and growth-related costs. The tax benefit was $26.5 million in Q3 and $24.4 million year to date; the company recorded no additional valuation allowance against its $23.6 million of net deferred tax assets.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $33.5 million, compared with $47.2 million in 2013. Investing used $69.7 million and financing used $5.4 million. Cash and cash equivalents fell $41.6 million to $52.0 million.
- At September 30, current assets were $251.3 million and current liabilities $199.9 million. Cash plus marketable securities totaled $102.7 million, but substantial amounts were restricted or held for insurance-related purposes. Trade receivables were $129.8 million.
- Long-term debt was $4.9 million, with another $0.2 million current; no revolving-credit borrowings were outstanding. The credit line had stated capacity of $16.5 million, subject to facility terms, and $25.1 million of standby letters of credit were outstanding.
- BBSI breached several financial covenants at September 30, 2014, following the reserve increase. On November 10, Wells Fargo agreed to waive the violations for a $20,000 fee and required an acceptable workers’ compensation reserve-funding plan by December 31. Until the plan is accepted, BBSI cannot repurchase shares or draw on the line to fund insurance reserves.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expected a full-year 2014 loss and estimated a Q4 effective tax rate of approximately 43%.
- Management expected to reach agreement with the bank on a reserve-funding plan and increased borrowing capacity by December 31. Conditional on such agreement, it expected cash on hand, tax refunds, operating cash generation and credit availability to cover working-capital needs for the next 12 months. These expectations are not assured.
- The company was transitioning California employees to an ACE “fronted” workers’ compensation program in response to state law, with transition complete expected by December 31, 2014. BBSI retains the first $5 million of risk per claim; management expected higher program costs and planned to offset them through selected customer price increases.
- Workers’ compensation estimates are judgmental and exposed to adverse development, medical-cost uncertainty, legal and legislative trends, and claims-data changes. Management stated actual claim costs could differ materially from reserves. Other risks include the ability to meet bank covenants, maintain surety deposits and retain customers following price increases.
- A putative securities class action was filed November 6, 2014, naming BBSI and two officers and alleging federal securities-law violations; similar additional suits were announced. The complaint seeks damages and related costs. The filing provides no clear estimate of potential loss.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How the $208.3 million workers’ compensation reserve was calculated, the actuarial assumptions used, and whether subsequent claim development supports the estimate.
- Whether the bank accepts the required reserve-funding plan, increases borrowing capacity, and whether BBSI can comply with covenants going forward.
- Availability and timing of tax refunds and operating cash, and the amount of cash and investments actually unrestricted for claims, collateral and working capital.
- Actual cost and risk allocation under the ACE California program, and whether price increases offset the additional costs without weakening customer retention.
- Developments in the securities litigation and any resulting financial exposure.