Barrett Business Services, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Amounts below are in millions unless stated otherwise. The company provides professional employer organization (PEO) and staffing services to small and midsize businesses. PEO revenue is reported net of certain payroll costs, so revenue and margin percentages are affected by service mix.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $111.6 | $82.4 |
| Gross margin | $8.3 (7.4% of revenue) | $6.6 (7.9%) |
| Operating loss | $(4.0) | $(3.6) |
| Net loss | $(2.5) | $(2.2) |
| Diluted loss per share | $(0.36) | $(0.22) |
| Cash provided by operating activities | $13.0 | $11.5 |
- Revenue increased 35.3%: PEO service fees rose 45.6% to $81.8 million and staffing revenue rose 13.4% to $29.7 million.
- Gross margin dollars increased 26.8%, but gross margin as a share of reported revenue declined 0.5 percentage points. Workers’ compensation and payroll tax/benefit costs rose as a share of revenue.
- SG&A increased 21.0% to $11.8 million, primarily reflecting management payroll and other costs supporting growth. Investment income was $0.2 million; interest expense was $0.1 million.
- The weighted-average share count fell to 7.0 million from 9.9 million, chiefly due to the 2012 repurchase of approximately 3.0 million shares. This contributed to the higher per-share loss despite the relatively smaller increase in the net loss.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $48.0 million; marketable securities were $30.3 million, including $11.3 million classified as long-term. Total assets were $248.9 million and stockholders’ equity was $51.1 million.
- Cash increased $2.3 million during the quarter. Operating cash flow of $13.0 million was partly offset by $5.7 million used in investing and $5.0 million used in financing. Operating cash flow benefited from increases in accrued payroll-related liabilities and workers’ compensation claims liabilities; receivables and income taxes receivable were cash uses.
- Long-term debt was $5.2 million and current debt was $0.2 million. The revolving credit facility had no borrowings outstanding at quarter-end; initial capacity was up to $24.0 million. Standby letters of credit for workers’ compensation surety requirements totaled approximately $23.8 million.
- Workers’ compensation claims liabilities totaled $77.2 million, up from $70.6 million at year-end 2012. The company accrued $3.5 million for prior-period claims during the quarter. The safety incentives liability was $10.3 million.
Changes, outlook and risks
- Management attributed PEO growth to new customers, strong referral channels, customer retention and an 8% increase in revenue from continuing customers. New-customer business during the quarter more than tripled lost business from former customers. Staffing growth reflected existing and new business exceeding lost business.
- The company historically records first-quarter losses because payroll taxes are higher early in the year. Results are seasonal, and management said revenue and net income may be higher in the third quarter; fourth-quarter activity may be affected by holiday-shortened schedules.
- Management expected the effective tax rate for the remainder of 2013 to be similar to Q1’s 34.2%. It gave no specific revenue or earnings forecast, but expected operations and credit-facility availability to fund working-capital needs for the next 12 months.
- Workers’ compensation costs rose due to current-year claims, higher estimates to close prior-year claims and increased insurance broker commissions. Reserve adequacy depends on actuarial estimates and actual claims development. Other identified risks include customer retention and collections, economic and regulatory conditions, investment-market risk, and access to capital or letters of credit for surety requirements.
- The company reported compliance with credit-facility financial covenants at March 31, 2013. The facility requires, among other terms, minimum fixed-charge coverage and a minimum ratio of cash and marketable securities to workers’ compensation and safety incentive liabilities.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to risk factors from the 2012 Form 10-K and no common-stock repurchases during the quarter.
Important facts for investors to verify
- Whether workers’ compensation claim estimates, particularly prior-period claims, develop adversely and require further expense or reserve increases.
- Whether revenue growth translates into improved operating profitability, given the lower reported gross-margin percentage and higher workers’ compensation costs.
- How much usable borrowing capacity remains as the facility’s maximum availability steps down by $2.5 million every six months beginning April 1, 2013, and how letters of credit affect liquidity.
- Whether operating cash flow remains supported by timing-related increases in payroll and claims liabilities, and how receivables and tax balances evolve.
- Reported GAAP revenue is net for PEO services. The filing also presents non-GAAP gross-basis total revenue of $591.2 million versus $432.1 million in Q1 2012; investors should not confuse this presentation with reported revenue.