Barrett Business Services, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are in U.S. dollars; financial statement amounts below are in millions.
Business context
BBSI provides professional employer organization (PEO) services and staffing to small and mid-sized businesses. PEO fees are reported net of client direct payroll costs, while staffing revenue is reported gross; reported revenue and gross margin percentages therefore reflect the service mix. California and Oregon generated 82% of net revenue in 2013, including approximately 74% from California.
Key financial results
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenue | $532.8 | $402.7 | +32.3% |
| PEO service fees | $389.0 | $276.0 | +40.9% |
| Staffing revenue | $143.9 | $126.6 | +13.6% |
| Gross margin | $86.5 | $66.7 | +29.7% |
| Gross margin / net revenue | 16.2% | 16.6% | Down 0.4 percentage points |
| Operating income | $24.4 | $18.8 | +30.0% |
| Net income | $17.9 | $13.1 | +36.3% |
| Diluted EPS | $2.42 | $1.67 | +44.9% |
| Operating cash flow | $70.2 | $45.7 | +$24.5 |
Growth reflected new PEO clients and increased employee headcount and hours at continuing clients; staffing revenue also grew. Diluted weighted-average shares fell to 7.397 million from 7.863 million, supporting EPS growth. PEO client growth and the increase in employee-related costs were significant drivers of the year-over-year changes.
Workers’ compensation expense rose to $108.6 million from $71.1 million, or 20.4% of net revenue versus 17.7%. Management cited higher provisions for current-year claims, increased estimates to close prior-year claims, and higher insurance broker commissions. SG&A increased 29.3% to $60.1 million, but declined as a share of revenue to 11.2% from 11.5%.
Fourth-quarter results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Revenue | $144.5 million | $113.7 million |
| Net income | $5.6 million | $5.8 million |
| Diluted EPS | $0.74 | $0.80 |
Revenue grew year over year, while net income and diluted EPS were lower. The filing does not provide a clear quarter-specific explanation for the earnings decline.
Liquidity, cash flow and debt
- Cash and cash equivalents were $93.6 million at year-end, versus $45.7 million; cash plus marketable securities totaled $119.3 million, versus $72.4 million.
- Working capital was $64.4 million, up from $28.1 million. Operating cash flow was $70.2 million; cash used in investing was $17.4 million and cash used in financing was $5.0 million.
- Operating cash flow benefited from increases in workers’ compensation liabilities and accrued payroll-related liabilities, partly offset by a $21.7 million increase in accounts receivable. The cash-flow increase therefore includes substantial working-capital and liability movements.
- Total debt was approximately $5.3 million, including a $5.1 million long-term portion. There were no revolver borrowings at year-end; the facility’s stated borrowing capacity was $19.0 million. The company reported compliance with its financial covenants.
- Workers’ compensation surety bonds and standby letters of credit totaled $70.8 million; outstanding standby letters of credit under the bank agreement were approximately $19.4 million. The company had $12.8 million of restricted certificates of deposit pledged as collateral.
Outlook, risks and unusual items
- California workers’ compensation: California Senate Bill 863 requires BBSI to transition from self-insurance. The company arranged a fronted program with ACE, effective in early 2014, with BBSI retaining the first $5.0 million of risk per claim through indemnification and ACE covering amounts above that level. Management expected increased costs during transition and after implementation; California coverage was to transition by December 31, 2014.
- Reserves and claims: Workers’ compensation claims liabilities reached $112.4 million, up from $70.6 million. The filing reports $23.4 million of 2013 claims expense accrual relating to prior years. Reserve estimates depend on actuarial assumptions and claims development; adverse development could materially affect earnings.
- Concentration and operating risks: The business is concentrated in California and Oregon and is exposed to regional economic and regulatory changes, client credit risk, unemployment taxes, competition, staffing demand, and client termination on generally 30 days’ notice. Worker injury frequency and severity, insurance availability, and claims costs are key uncertainties.
- Management outlook: BBSI stated that operating cash generation, liquid assets, and revolver availability were expected to fund working-capital needs for the next 12 months. It described growth plans centered on expanding existing branches, entering new markets, and potentially pursuing selective acquisitions; no specific earnings or revenue guidance was provided.
- Other items: The 2013 effective tax rate was 28.2%, versus 32.5% in 2012. The $10.0 million life-insurance proceeds included in 2011 results were not present in 2012 or 2013. Management said pending or threatened litigation was not expected to materially affect financial position or results. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether workers’ compensation reserves adequately reflect current and prior-year claim trends, and how subsequent actuarial estimates compare with amounts accrued.
- The actual cost, collateral requirements, and competitive effect of the ACE California fronted program as the transition proceeds.
- Whether operating cash flow remains strong when workers’ compensation and payroll liabilities do not increase at the 2013 pace, and whether receivables remain collectible.
- How revenue growth and profitability evolve given California/Oregon concentration, PEO-versus-staffing mix, and higher workers’ compensation expense.
- Liquidity available after considering restricted funds, surety requirements, letters of credit, and the terms and declining capacity of the revolving facility.