Barrett Business Services, Inc. — FY 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. BBSI provides professional employer organization (PEO) and staffing services to small and mid-sized businesses through 62 branches. California generated 79% of 2018 revenue. PEO services represented 84.3% of revenue, up from 82.4% in 2017.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $940.7 million | $920.4 million |
| PEO service fees | $793.4 million | $758.0 million |
| Staffing revenue | $147.3 million | $162.4 million |
| Gross margin | $186.7 million; 19.8% | $158.5 million; 17.2% |
| Operating income | $37.0 million; 3.9% of revenue | $29.9 million; 3.2% of revenue |
| Net income | $38.1 million; 4.0% of revenue | $25.2 million; 2.7% of revenue |
| Diluted EPS | $4.98 | $3.33 |
| Operating cash flow | $69.8 million | $112.9 million |
Revenue increased 2.2%; PEO fees rose 4.7%, while staffing revenue fell 9.3%, mainly amid tight labor-market conditions. Gross margin improved as payroll taxes and workers’ compensation costs declined as a share of revenue, and the service mix shifted toward PEO. SG&A rose 18.1% to $145.5 million, mainly due to employee-related expenses and litigation costs. Net income also benefited from investment income of $9.1 million, compared with $4.7 million in 2017, and a lower effective tax rate of 15.0%, versus 26.8%.
Fourth quarter: Revenue was $237.8 million, versus $244.7 million in Q4 2017; net income was $16.9 million, versus $10.5 million. The filing reports these quarterly figures but does not provide a separate Q4 management discussion.
Liquidity, debt, and workers’ compensation
- Cash, cash equivalents, and restricted cash totaled $140.7 million at year-end, up from $120.2 million. Operating cash flow was $69.8 million; investing activities used $39.3 million and financing activities used $9.9 million.
- Current assets were $321.7 million and current liabilities $326.7 million, a $5.1 million working-capital deficit. Much of the reported cash and investments is restricted for claims, insurance collateral, or other purposes and is not freely available for general use.
- The $28.0 million revolving credit facility was undrawn. Mortgage debt was approximately $4.2 million, due July 2022. BBSI reported compliance with its credit covenants at year-end; management expected operating funds, liquid assets, and the revolver to cover working-capital needs for the next 12 months.
- Workers’ compensation claims liabilities were $413.4 million, up from $363.5 million. IBNR reserves were $260.5 million, or 63% of claims liabilities, versus 56% a year earlier. Prior-period claims development was favorable by $3.8 million in 2018, compared with an unfavorable $5.2 million adjustment in 2017.
- Effective July 1, 2018, BBSI restructured its Chubb fronted insurance program, retaining up to $5.0 million per occurrence in most jurisdictions. The arrangement required additional collateral, including a $63.7 million letter of credit and a $30.0 million surety bond. Chubb trust-account balances were $451.0 million at year-end.
Outlook, risks, and unusual items
- The filing gives no specific revenue or earnings guidance. Management cited client growth and referrals as PEO drivers, while warning that labor shortages constrained staffing revenue. It expects continued dependence on California and notes that seasonal factors have historically contributed to first-quarter losses.
- Key exposures include workers’ compensation claim frequency, severity, and reserve estimation; availability and cost of excess insurance; California economic and regulatory conditions; client retention and credit risk; employment and healthcare regulation; and cybersecurity and technology disruptions.
- The Chubb coverage arrangement for specified states extended through June 30, 2019, with possible annual renewals. Failure to renew on acceptable terms could materially affect operations.
- BBSI paid a $1.5 million civil penalty in September 2018 under an SEC settlement resolving an investigation into reported financial-statement errors and workers’ compensation reserve accounting. The U.S. Attorney’s Office announced criminal charges against the former CFO; the company said it continued to cooperate. A shareholder derivative action was dismissed for lack of personal jurisdiction.
- In the Kaanaana wage-and-hour case, a California appellate court reversed the trial court’s dismissal; the California Supreme Court granted BBSI’s petition for review on February 27, 2019. BBSI had accrued $2.9 million for legal actions but said it could not estimate a potential loss range.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls as of December 31, 2018.
Most important facts for investors to verify
- Whether the Chubb workers’ compensation program was renewed after June 30, 2019, and the resulting collateral and retention terms.
- Claims reserve development, especially IBNR growth and the assumptions underlying the $413.4 million workers’ compensation liability.
- Cash available for operations after excluding restricted balances, and compliance with credit-facility covenants and collateral-deposit requirements.
- Developments in the Kaanaana litigation and the former CFO investigation, including any change in the company’s legal accrual or estimated exposure.
- Whether PEO growth can offset staffing declines and high SG&A, while reducing reliance on California.