Barrett Business Services, Inc. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; the filing also reports fourth-quarter results. BBSI provides professional employer organization (PEO) and staffing services to small and midsized businesses. PEO service fees are reported net of certain client payroll costs; staffing revenue is reported gross. California generated 77% of 2014 net revenue.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net revenue | $636.2 million | $532.8 million |
| PEO service fees | $470.4 million | $389.0 million |
| Staffing revenue | $165.8 million | $143.9 million |
| Gross margin | $30.4 million; 4.8% | $86.5 million; 16.2% |
| Operating income (loss) | $(45.9) million | $24.4 million |
| Net income (loss) | $(27.1) million | $17.9 million |
| Diluted EPS | $(3.78) | $2.42 |
| Cash from operating activities | $69.6 million | $70.2 million |
- Net revenue rose 19.4%. PEO fees grew 20.9%, and staffing revenue grew 15.3%.
- Workers’ compensation expense increased to $212.5 million from $108.6 million. BBSI recorded $101.2 million of claims expense in Q3, including a $61.3 million prior-period reserve estimate increase. Total estimated claims liabilities were $216.0 million at year-end, versus $112.4 million a year earlier.
- SG&A increased 22.9% to $73.8 million, mainly reflecting management payroll, IT and growth-related costs. The tax benefit was $18.3 million; the effective tax rate was (40.3%).
- Q4 revenue was $175.0 million versus $144.5 million in Q4 2013; net income was $7.0 million versus $5.6 million, and diluted EPS was $0.97 versus $0.74.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $11.5 million, down from $93.6 million. Cash and marketable securities together were $62.4 million; working capital was a deficit of $39.3 million. Significant assets were restricted or pledged for workers’ compensation collateral, including $114.3 million of restricted certificates of deposit.
- Net cash used in investing activities was $182.5 million, primarily reflecting purchases of restricted deposits and securities. Operating cash flow was supported in part by a $103.5 million increase in workers’ compensation liabilities and a $27.6 million increase in accrued payroll-related liabilities.
- Total debt was approximately $45.1 million: a new $40.0 million term loan and a separate building loan of about $5.1 million. The $14.0 million revolving facility had no outstanding balance at year-end. The term loan bears interest at one-month LIBOR plus 4.0% and has scheduled principal payments through 2016.
- The credit agreement requires a minimum 1.5:1 fixed-charge coverage ratio and at least 1.0:1 coverage of workers’ compensation and safety-incentive liabilities by restricted and unrestricted cash and securities. BBSI reported compliance at year-end. The agreement prohibits share repurchases and permits dividends up to $0.22 per quarter subject to covenant compliance; 2014 dividends totaled $0.76 per share.
Changes, outlook and risks
- The main year-over-year change was the sharp reserve strengthening for workers’ compensation claims, which erased operating profit despite revenue growth. Management cited changes in claims-handling practices that disrupted historical actuarial trends, along with business growth, possible adverse development and rising healthcare-cost uncertainty.
- California legislation ended BBSI’s ability to self-insure there after December 31, 2014. Clients were transitioned to an ACE fronted insurance program, with BBSI retaining the first $5.0 million of loss per claim under an indemnity agreement. Management expects higher program costs in 2015 and plans to offset these and higher loss accruals through selected customer price increases.
- Management expects collateral requirements to decline as California self-insured liabilities run off, potentially improving working capital. It stated that operating funds, current liquid assets and the revolving facility should be sufficient for working capital needs over the next 12 months. No numerical earnings or revenue guidance was provided.
- Key risks include reserve inadequacy and claims volatility, concentration in California, renewal or availability of workers’ compensation insurance, client credit exposure, economic sensitivity, regulatory changes, and financing covenant compliance. The company’s client contracts are generally terminable on 30 days’ notice.
- Three shareholder securities class actions were consolidated; a shareholder also threatened a derivative action. BBSI intends to defend the matters, but management could not estimate the probability or range of loss and recorded no liability. Insurance coverage remained subject to insurers’ reservations of rights.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial controls were effective at year-end.
Important facts for investors to verify
- Subsequent workers’ compensation reserve development, claim payments and actuarial assumptions supporting the $216.0 million year-end liability.
- The actual cost and renewal terms of the ACE California program, and the timing and amount of any release of collateral.
- Available unrestricted liquidity, the impact of the working-capital deficit, and compliance with credit-facility covenants and scheduled debt repayments.
- Whether planned customer price increases offset higher insurance and claims costs without harming retention or growth.
- Developments in the consolidated securities litigation and threatened derivative claim, including insurance coverage and any eventual financial exposure.