Barrett Business Services, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. The interim statements are unaudited.
Business context and results
BBSI provides business management, professional employer organization (PEO), staffing, and workers’ compensation services, principally to small and mid-sized businesses. It reported operations across 22 states and the District of Columbia; California accounted for approximately 78% of Q1 2014 revenue.
Reported PEO service revenue is presented net of certain direct payroll costs. Accordingly, reported revenue and gross-margin percentages are affected by the mix of PEO and staffing services; management also presents a non-GAAP gross-revenue view in the filing.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $135.1 million | $111.6 million; up 21.1% |
| PEO service fees | $101.7 million | $81.8 million; up 24.3% |
| Staffing services | $33.5 million | $29.7 million; up 12.5% |
| Gross margin | $9.3 million; 6.9% of reported revenue | $8.3 million; 7.4% |
| Operating loss | $5.6 million | $4.0 million |
| Net loss | $3.6 million; $0.50 per diluted share | $2.5 million; $0.36 per diluted share |
| Operating cash flow | $7.7 million | $13.0 million |
| Cash and cash equivalents | $66.3 million at March 31 | $93.6 million at December 31, 2013 |
| Debt | $5.2 million long-term debt, including current portion; no revolver borrowings | Revolver capacity was $19.0 million at quarter-end |
SG&A was $14.4 million, up 21.7%, primarily reflecting management payroll and other variable costs supporting growth. The income tax benefit was $2.0 million; management expected the effective tax rate for the rest of 2014 to remain similar to Q1’s 35.5%. Dividends were $0.18 per share, versus $0.13 a year earlier.
Liquidity, workers’ compensation, and material changes
- Cash declined $27.3 million during the quarter. Investing activities used $33.7 million, including a $20.0 million initial deposit into a trust for the California workers’ compensation insurance arrangement and additional purchases of marketable securities. Financing activities used $1.3 million, principally for dividends.
- Working capital was approximately $42.9 million at March 31, based on current assets of $208.4 million and current liabilities of $165.5 million. The company said operating cash generation and its revolver were expected to fund working-capital needs for the next 12 months.
- Estimated workers’ compensation claims liabilities were $120.1 million, up from $112.4 million at year-end; $69.2 million was incurred but not reported. Q1 included $16.4 million of current-year claims provision and $3.8 million of additional expense for prior-year claims.
- Workers’ compensation expense rose to $27.6 million from $21.8 million, and increased from 19.6% to 20.4% of reported revenue. Management attributed the rate increase primarily to current-year claim costs.
- California SB 863 requires BBSI to transition away from its self-insurance program by January 1, 2015. Under a fronted arrangement with ACE, BBSI retains the first $5.0 million of risk per claim, with ACE covering amounts above that and bearing specified credit risk. The transition began in Q1; management expected increased costs during the transition and likely afterward. All California employees were expected to be covered by the arrangement by December 31, 2014.
- BBSI was in compliance with its credit-facility covenants at quarter-end. The facility also supported $19.4 million of standby letters of credit; state workers’ compensation requirements involved $72.9 million of specified investments or financial instruments.
Outlook, risks, and other disclosures
Management cited new-customer growth, supported by referral channels, and increased headcount and hours at continuing PEO clients. New-customer business in PEO during the quarter was reported as double lost business from former customers. Management also noted that growth in PEO can increase payroll taxes and benefits as a share of reported revenue, while service mix can affect reported gross margin.
Results are subject to seasonality, particularly in staffing and certain client industries; BBSI noted that revenue and net income may be higher in the third quarter. Other stated risks include workers’ compensation claim frequency, severity and reserve development; regulatory changes; client retention and acquisition; receivables collection; and access to capital or surety instruments required for self-insurance. Management was engaging an additional actuarial firm to help refine its understanding of workers’ compensation valuations. The filing reported no material change in risk factors from the 2013 Form 10-K, no Q1 share repurchases, and effective disclosure controls.
Investor facts to verify
- Whether workers’ compensation reserves adequately reflect current and prior-period claim development, especially the $69.2 million IBNR estimate.
- The cost, funding requirements, and execution of the California ACE transition, including the $20.0 million trust deposit and ongoing payments beginning in April 2014.
- Whether operating cash flow and available credit remain sufficient amid receivables growth, restricted insurance assets, and state surety requirements.
- Whether revenue growth converts to improved profitability despite higher workers’ compensation costs, SG&A, and the reported gross-margin decline.
- How much reported revenue and margin trends reflect underlying business activity versus PEO/staffing mix and the company’s net revenue presentation.