Barrett Business Services, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2011. Barrett provides staffing and professional employer organization (PEO) services. PEO fees are reported net of specified client payroll costs, so reported revenue and gross-margin percentages reflect the company’s service mix. Comparative 2010 financial statements were restated for workers’ compensation claims-administration legal expenses.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $76.0 | $67.4 | $144.8 | $125.7 |
| Gross margin | $13.3 | $11.7 | $18.9 | $17.1 |
| Gross margin % | 17.5% | 17.4% | 13.0% | 13.6% |
| Operating income (loss) | $4.1 | $3.0 | $0.5 | ($0.2) |
| Net income | $3.4 | $2.3 | $9.0 | $0.6 |
| Diluted EPS | $0.34 | $0.22 | $0.88 | $0.05 |
- Q2 revenue increased 12.7% year over year: PEO fees rose 28.3% to $45.5 million, while staffing revenue fell 4.6% to $30.5 million. Six-month revenue increased 15.2%, primarily from PEO growth; staffing revenue was down 0.3%.
- Q2 operating income rose to $4.1 million. Six-month operating income was $0.5 million, compared with a $0.2 million loss a year earlier.
- Six-month net income included a one-time $10.0 million life-insurance benefit related to the January 2011 death of CEO William W. Sherertz. The proceeds were non-taxable and reduced the effective tax rate. Q2 effective tax rate was 20.6%; management expected a similar rate for the balance of 2011.
- Q2 workers’ compensation expense increased to $10.8 million from $8.6 million; as a share of revenue it rose to 14.1% from 12.8%. The company attributed the increase primarily to more injury claims. Six-month expense was $20.7 million versus $16.4 million.
- At June 30, cash was $25.5 million and unrestricted marketable securities totaled $44.7 million. Current assets were $130.5 million and current liabilities $82.3 million. Workers’ compensation claims liabilities totaled approximately $41.0 million, including $2.6 million of insured claims.
- Operating cash flow for the first half was $12.5 million, up from $1.6 million. The $22.1 million increase in receivables partly offset cash generated, alongside a $22.8 million increase in accrued payroll, taxes and benefits. Cash declined $5.5 million after investment purchases and financing outflows.
- Investing cash outflow was $15.2 million; financing cash outflow was $2.7 million, including $1.8 million in dividends and $0.9 million in share repurchases. The filing reports no material long-term capital commitments.
Changes, outlook and risks
- PEO growth was driven mainly by new customers; new PEO business exceeded lost business from former customers. PEO revenue from continuing customers rose 3.6% in Q2 and 4.9% for the first half. Management said the staffing business remained pressured by prior economic weakness and lost customers.
- Management expected payroll taxes and benefits as a percentage of revenue to continue increasing as PEO business grows, and cited higher effective state unemployment tax rates. Seasonality may make Q3 stronger; the filing provides no formal revenue or earnings guidance.
- Management said current liquid assets and expected operating cash flow should meet working-capital needs for 12 months. The company had $6.7 million of standby letters of credit outstanding for workers’ compensation surety requirements and reported compliance with its credit covenants. Its covenant requires at least $10 million in liquid assets and restricts borrowing and liens.
- Key exposures include the frequency and severity of workers’ compensation claims, adverse development of prior claims, customer retention and collections, economic conditions, regulatory changes, and the financial capacity of excess insurers. Workers’ compensation reserves depend on actuarial estimates.
- The filing reports a previously identified material weakness in internal control over financial reporting related to accounting for claims-administration legal expenses; it led to restatement of prior periods. Remediation was underway, with testing anticipated before year-end 2011. Management separately concluded disclosure controls were effective at June 30.
- Management’s discussion notes that quarterly results can fluctuate with seasonality, statutory payroll-tax wage limits, claims experience, demand and acquisitions. There were no material changes to the risk factors disclosed in the 2010 Form 10-K.
Important facts for investors to verify
- Whether PEO customer growth persists and offsets continued weakness in staffing revenue.
- Workers’ compensation claim frequency, reserve development and the adequacy and recoverability of insurer-related receivables.
- How much reported first-half earnings depended on the nonrecurring $10.0 million insurance proceeds, and the company’s ongoing tax rate.
- Receivables collection trends, working-capital needs and continued compliance with the $10.0 million liquid-asset covenant.
- Progress and effectiveness of remediation for the internal-control material weakness, including completion of planned testing.