Barrett Business Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statement amounts below are in millions of dollars unless stated otherwise. Comparisons are with Q1 2014, except balance-sheet comparisons, which are with December 31, 2014.
Business context and results
BBSI provides human-resources outsourcing, staffing, risk-management and related services, primarily to small and mid-sized businesses. It reports professional employer organization (PEO) service fees net of certain client payroll costs because it is not the primary obligor for those services. Approximately 78% of revenue came from California operations in both quarters.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $166.9 | $135.1 | +23.5% |
| PEO service fees | $127.8 | $101.7 | +25.6% |
| Staffing services revenue | $39.2 | $33.5 | +17.1% |
| Gross margin | $9.0 | $9.3 | Down $0.3 |
| Gross margin as % of revenue | 5.4% | 6.9% | Down 1.5 percentage points |
| SG&A | $17.0 | $14.4 | +18.1% |
| Operating loss | $(8.7) | $(5.6) | Loss increased |
| Net loss | $(5.8) | $(3.6) | Loss increased |
| Diluted loss per share | $(0.81) | $(0.50) | — |
| Cash dividends per share | $0.22 | $0.18 | — |
Management attributed PEO growth mainly to new customers and a 7.6% increase in revenue from continuing customers, reflecting higher employee headcount and hours. New-customer business nearly doubled lost business from former customers. Staffing growth reflected new and continuing customers, partially offset by lost business.
Cash flow, liquidity and debt
- Operating cash flow: $5.5 million, down from $7.7 million. Working-capital movements included a $27.7 million increase in receivables and increases of $34.4 million in accrued payroll and related benefits and $6.3 million in workers’ compensation liabilities.
- Investing cash flow: $6.2 million used, compared with $33.7 million used in Q1 2014. The quarter included $29.9 million of purchases of restricted marketable securities and $24.7 million of proceeds from marketable securities sales and maturities.
- Financing cash flow: $4.4 million provided, including $5.8 million net credit-line borrowing and $1.6 million of dividends paid.
- Cash: $15.2 million at March 31, up $3.7 million from year-end. Current assets were $215.8 million and current liabilities were $262.8 million; these include restricted assets and liabilities associated with the business.
- Debt: $40.0 million term loan under the principal facility, $5.8 million drawn on its $14.0 million revolving line, and approximately $5.0 million on a separate building-secured loan. The balance sheet classifies $25.2 million of long-term debt as current and $19.8 million as long-term. The principal term loan has scheduled 2015 principal payments of $25.0 million and matures December 31, 2016.
- Collateral and covenants: $114.3 million of certificates of deposit secure workers’ compensation-related letters of credit. BBSI reported compliance with all applicable financial covenants at quarter-end. Management expected operations and revolver availability to fund working-capital needs for the next 12 months.
Material changes, risks and outlook
- Workers’ compensation expense rose to $39.9 million from $27.6 million and to 23.9% of revenue from 20.4%. Management cited the completed transition to California’s ACE fronted program, increased provision for current-year claims and higher surety-bond and letter-of-credit costs. The estimated liability for unsettled claims was $222.3 million at March 31, versus $216.0 million at year-end; estimates are actuarial and subject to significant uncertainty. Prior-period claims produced a $3.2 million reduction in claims expense in Q1 2015, compared with a $3.8 million increase in Q1 2014.
- BBSI ceased self-insuring California workers’ compensation effective January 1, 2015 and uses ACE policies, retaining the first $5.0 million of risk per claim under an indemnity arrangement. The ACE arrangement runs through January 2016, with potential annual renewals. Restricted funds held in trust for the program increased to $78.0 million from $50.1 million at year-end.
- SG&A increased $2.6 million, mainly from management payroll, IT investment and other growth-related expenses. Management expects the 2015 effective tax rate to remain near the Q1 rate of 36.4% for the balance of the year.
- Management expects working capital to improve as California collateral requirements decline with the run-off of self-insured liabilities. The company also described growth through existing offices and possible selective acquisitions, but gave no quantified revenue or earnings guidance. Results are subject to seasonality, customer demand, workers’ compensation claims experience and other factors.
- Three consolidated shareholder securities class actions concern disclosures related to workers’ compensation reserves; BBSI intended to move to dismiss. Management could not estimate the probability or range of loss and had recorded no liability. A shareholder demand alleging fiduciary-duty breaches could lead to derivative litigation. BBSI also disclosed that SEC enforcement staff had obtained a Formal Order of Investigation into its workers’ compensation reserve accounting; the company said it was cooperating.
- The filing identifies potential exposure under healthcare-reform requirements, including penalties if eligible employees were not offered required coverage, and uncertainty about coverage availability and cost recovery. BBSI had begun offering coverage to eligible staffing employees.
Important facts for investors to verify
- Whether workers’ compensation reserve assumptions and subsequent claims development support the $222.3 million estimate, including the effect of the California program transition.
- Developments in the SEC investigation and shareholder litigation, including insurance coverage, defense costs and any potential financial exposure.
- Whether higher revenue can translate into improved gross margins and earnings as workers’ compensation costs, staffing mix and operating expenses evolve.
- The timing and amount of scheduled debt repayments, covenant headroom, and the release of restricted collateral as California claims liabilities run off.
- Whether healthcare-related costs and compliance obligations remain recoverable through customer pricing, and whether management’s liquidity outlook is achieved.