BARRETT BUSINESS SERVICES INC annual report, FY2019

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Barrett Business Services, Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. BBSI provides professional employer organization (PEO) and staffing services, primarily to small and mid-sized businesses. Figures below are in U.S. dollars; financial amounts are in millions unless noted.

Financial performance and liquidity

  • Revenue: $942.3, up 0.2% from $940.7 in 2018. PEO service fees rose 3.3% to $819.9; staffing revenue fell 16.9% to $122.4.
  • Profit: Net income was $48.3, up from $38.1. Diluted EPS was $6.27 versus $4.98. Operating income was $50.5, compared with $37.0.
  • Margins: Gross margin increased to $208.3, or 22.1% of revenue, from $186.7, or 19.8%. Operating margin was 5.4%, versus 3.9%; net margin was 5.2%, versus 4.0%.
  • Cash flow: Operating cash flow was $77.1, up from $69.8. Investing activities provided $66.3, versus $39.3 used in 2018; financing activities used $10.8. Cash, cash equivalents and restricted cash totaled $273.3 at year-end, compared with $140.7 a year earlier.
  • Liquidity: Current assets were $423.8 and current liabilities $342.1, leaving working capital of $81.7, versus a $5.1 deficit in 2018. Cash and cash equivalents were $44.6; current investments were $82.6. A substantial portion of cash and investments is restricted or pledged for workers’ compensation obligations.
  • Debt and obligations: Long-term debt, including current portion, was about $4.0, secured by the corporate office building. There were no revolving-credit borrowings at year-end; the revolving line was $33.0 and expires July 1, 2022. Workers’ compensation claims liabilities totaled $439.0. Operating lease liabilities were $24.6.
  • Other metrics: Investment income, net, increased to $12.5 from $9.1. The effective tax rate rose to 21.0% from 15.0%. Cash dividends were $1.10 per share; no open-market repurchases were made in 2019.

Material changes versus 2018

  • Revenue growth was nearly flat as PEO growth was mostly offset by lower staffing revenue. Management attributed staffing weakness to tight labor-market conditions and reported difficulty finding qualified workers.
  • Gross margin improved, helped by lower workers’ compensation expense and a greater PEO share of the business. Workers’ compensation expense declined to $211.9 from $235.6; the year included a favorable $13.4 adjustment for prior-period claims, compared with a favorable $3.8 adjustment in 2018.
  • SG&A increased to $153.9 from $145.5, primarily due to employee-related expenses. Payroll taxes and benefits rose to $429.7 from $407.0.
  • The company adopted the lease accounting standard ASC 842 in 2019, recognizing operating lease right-of-use assets and liabilities; prior-year figures were not restated.
  • California represented 77% of revenue, down from 79% in 2018. PEO clients increased to more than 7,200 from more than 6,400.

Fourth quarter: Revenue was $245.2, compared with $237.8 in Q4 2018. Net income was $11.7, down from $16.9; diluted EPS was $1.51 versus $2.21.

Outlook, risks and unusual items

  • Management provided no specific revenue or earnings guidance. It said anticipated operating cash generation, current liquid assets and revolving-credit availability should be sufficient for working-capital needs over the next 12 months.
  • The Chubb workers’ compensation fronting arrangement extended through June 30, 2020, with potential annual renewals. The related $63.7 standby letter of credit was due to expire July 1, 2020, subject to specified automatic-renewal terms.
  • Workers’ compensation reserves require significant actuarial estimates and can differ materially from ultimate claim costs. The company retained risk up to $5.0 per occurrence in most states, with lower limits in Maryland and Colorado. Restricted collateral in Chubb trust accounts was $393.5 at year-end.
  • Geographic concentration is a significant risk: California generated approximately 77% of revenue. Other disclosed risks include economic weakness among small-business clients, client termination on 30 days’ notice, payroll and client credit exposure, regulatory changes, cyber and technology incidents, investment-market risks, and the ability to renew insurance and maintain collateral.
  • In the Kaanaana California wage-and-hour case, the California Supreme Court granted BBSI’s petition for review of an appellate decision. Management said it could not estimate a potential loss range. Other ordinary-course claims also exist.
  • Reported results benefited from the favorable prior-claims reserve adjustment and higher investment income. The company reported no subsequent events requiring recognition or disclosure through the filing date.
  • The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.

Important facts for investors to verify

  • Whether workers’ compensation reserve development, particularly the $13.4 favorable prior-period adjustment, persists and how actual claims compare with actuarial estimates.
  • Renewal terms and collateral requirements for the Chubb arrangement and letter of credit, and the extent to which reported liquidity is restricted or pledged.
  • Whether PEO growth can offset continued weakness in staffing revenue and whether tight labor-market conditions constrain service delivery.
  • Effects of California economic, regulatory or insurance changes given the state’s share of revenue.
  • Developments and potential exposure in the Kaanaana litigation; the filing provides no clear estimate of possible loss.