Barrett Business Services, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. BBSI provides professional employer organization (PEO) services and staffing to small and mid-sized businesses, with substantial exposure to California and Oregon.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net revenue | $402.7 million | $314.9 million |
| PEO service fees | $276.0 million | $190.1 million |
| Staffing revenue | $126.6 million | $124.8 million |
| Gross margin | $66.7 million; 16.6% of revenue | $43.5 million; 13.8% |
| Operating income | $18.8 million | $3.9 million |
| Net income | $13.1 million | $14.3 million |
| Diluted EPS | $1.67 | $1.41 |
| Operating cash flow | $45.7 million | $31.4 million |
- Fourth-quarter revenue was $113.7 million and net income was $5.8 million, compared with revenue of $84.7 million and a net loss of $0.1 million in Q4 2011. Diluted EPS was $0.80 versus a loss of $0.01.
- Revenue increased 27.9%, driven primarily by 45.2% growth in PEO service fees; staffing revenue increased 1.5%. Revenue from continuing PEO clients grew 7.3%.
- Workers’ compensation expense rose to $71.1 million from $53.8 million and increased to 17.7% of net revenue from 17.1%. The company cites current-year claims, higher estimated costs on prior-year claims, and higher insurance broker commissions.
- FY 2011 earnings included $10.0 million of key-person life insurance proceeds and a related lower effective tax rate. In 2012, the effective tax rate was 32.5%, versus 5.5% in 2011. Thus, 2012 net income declined despite stronger operating results.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $45.7 million; marketable securities totaled $26.6 million, for $72.4 million in cash and marketable securities. Working capital was $28.1 million, down from $49.6 million.
- Year-end debt was approximately $10.0 million: $4.5 million drawn on the revolving facility and $5.3 million long-term debt, plus $0.2 million current debt. The company reported compliance with its credit covenants.
- Operating cash flow was $45.7 million. Cash used in financing was $51.6 million, including $25.4 million of common-share repurchases, redemption of $34.8 million of preferred shares, and $3.6 million of dividends; borrowing and option exercises partly offset outflows.
- The 2012 repurchase of shares from the former CEO’s estate and a founder totaled approximately $59.7 million in consideration, financed partly with cash and redeemable preferred stock. The preferred stock was redeemed in September 2012. The separate open-market repurchase program had no repurchases in 2012.
Outlook, risks and unusual items
- The filing gives no specific numerical earnings or revenue guidance. Management expects operating cash generation, liquid assets and revolving-credit availability to fund working-capital needs for the next 12 months.
- California SB 863 could require revocation of BBSI’s California self-insurance certificate by January 1, 2015. Management was evaluating alternatives, including potentially licensing its insurance subsidiary in California; alternatives could require more capital, restricted assets or borrowing. Management did not anticipate revocation significantly before the statutory deadline but gave no assurance of a resolution.
- Workers’ compensation reserves are based on actuarial estimates and include incurred-but-not-reported claims, but exclude unknown catastrophic claims. At year-end, recorded claims liabilities were $70.6 million, including $48.0 million of IBNR. Adverse claims development could materially affect earnings.
- California and Oregon generated 79% of 2012 net revenue. Other key risks include economic sensitivity, client credit exposure, unemployment-tax increases, regulatory changes, competition, and reliance on referral partners and key personnel.
- The company had $23.8 million of standby letters of credit supporting workers’ compensation surety requirements. Its reported controls were effective, and the auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress and cost of the plan to address California SB 863 and any impact on self-insurance, collateral requirements, or borrowing.
- Workers’ compensation reserve development, particularly prior-year claims, IBNR assumptions and claim closure trends.
- Whether PEO growth and improved gross margin persist, given the influence of service mix and the net presentation of PEO revenue. The filing also presents $2.08 billion of gross-basis revenue as a non-GAAP management measure; GAAP net revenue was $402.7 million.
- Liquidity and covenant headroom as the revolving facility’s maximum availability is scheduled to decline by $2.5 million every six months beginning April 2013.
- The impact of the substantial 2012 repurchase on share count, equity and future capital allocation.