Barrett Business Services, Inc. — Q2 2013 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods. Dollar amounts below are in millions except per-share data. BBSI provides professional employer (co-employment) services and staffing; professional employer service revenue is reported net of certain payroll costs.
Financial performance
- Q2 revenue: $128.8, up 34.9% year over year. Professional employer service fees were $93.5, up 43.6%; staffing revenue was $35.3, up 16.2%.
- Q2 profitability: Gross margin was $23.7, or 18.4% of reported revenue, versus $16.3, or 17.1%, a year earlier. Operating income was $8.7 versus $5.4; net income was $5.9 versus $3.7. Diluted EPS was $0.80 versus $0.53.
- First-half revenue and earnings: Revenue was $240.3, up 35.1%; gross margin was $32.0, or 13.3% of reported revenue, versus $22.9, or 12.9%. Operating income was $4.8 versus $1.9; net income was $3.3 versus $1.5. Diluted EPS was $0.45 versus $0.18.
- Cash flow, first half: Operating cash flow was $17.4 versus $13.1. Investing used $50.2, largely reflecting purchases of restricted deposits and securities; financing used $4.1. Cash and cash equivalents fell $36.9 to $8.8.
- Balance sheet and liquidity: At June 30, cash was $8.8, marketable securities were $9.7, and restricted certificates of deposit were $63.9. Total assets were $261.3. The company had no revolver borrowings and $5.4 of long-term debt, including current maturities. Revolver availability was $21.5; standby letters of credit totaled $70.6.
- Workers’ compensation exposure: Estimated claims liabilities were $84.5, up from $70.6 at year-end 2012; the reported balance included $56.4 of incurred-but-not-reported claims. Safety-incentive liabilities were $10.9. Q2 workers’ compensation expense rose to $25.0 from $17.0.
Changes, drivers, and outlook
- Growth reflected new professional employer clients, strong referral channels, high retention, and increased employee headcount and hours among continuing clients. New-client business nearly tripled lost business in Q2; continuing-client professional employer revenue increased 12%.
- Gross-margin improvement was supported by lower direct payroll costs as a share of reported revenue and a higher professional employer revenue mix. Higher workers’ compensation costs and payroll taxes and benefits partly offset the improvement. SG&A increased 37.4% in Q2 to $14.5, mainly from branch incentive pay, management payroll, and other growth-related costs.
- Approximately 73% of Q2 revenue and 74% of first-half revenue came from California. California workers’ compensation surety requirements drove a $46.7 increase in standby letters of credit; $63.9 of certificates of deposit were pledged as collateral.
- Management expected the effective tax rate for the remainder of 2013 to stay near Q2’s 33.4% and said operating cash generation plus revolver availability should cover working-capital needs for the next 12 months. Management also expected payroll taxes and benefits as a percentage of revenue to rise as professional employer services grew.
- Management noted seasonality, including potential stronger third-quarter results, and volatility from staffing demand, client industries, statutory payroll-tax wage limits, and workers’ compensation claims experience. It cited risks including adverse claims development, client retention and acquisition, receivable collection, regulatory changes, and availability of capital or letters of credit for self-insurance requirements. The company reported compliance with credit covenants at June 30.
Investor verification points
- Review the actuarial assumptions and adverse-development sensitivity underlying the $84.5 million workers’ compensation reserve, especially the $56.4 million IBNR component.
- Assess the effect of California’s increased surety requirement and the $63.9 million of restricted collateral on usable liquidity and future credit capacity.
- Reconcile the strong Q2 profit with first-half results: first-half net income of $3.3 million is below Q2 net income of $5.9 million, implying a first-quarter loss; review the quarterly statements and claims-cost drivers.
- Track whether revenue growth converts to cash, given the $16.9 million first-half increase in receivables, and monitor the concentration of revenue in California.
- Distinguish reported net professional employer revenue from the filing’s non-GAAP gross-revenue presentation; the latter shows Q2 gross-reported revenue of $675.0 million and is not the GAAP revenue figure.