Barrett Business Services, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results. BBSI provides professional employer organization (PEO) and staffing services; PEO service fees are reported net of certain client payroll costs, so reported revenue is not comparable to gross payroll volume.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $111.1m | $85.4m | $289.0m | $230.2m |
| Gross margin | $21.6m (19.4%) | $16.2m (18.9%) | $44.5m (15.4%) | $35.0m (15.2%) |
| Operating income | $8.4m | $5.9m | $10.3m | $6.5m |
| Net income | $5.8m | $5.4m | $7.3m | $14.4m |
| Diluted EPS | $0.81 | $0.54 | $0.91 | $1.41 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $32.4m | $24.8m |
- Q3 revenue grew 30.1%, driven by PEO service-fee growth of 47.4%; staffing revenue rose 4.6%. For the nine months, revenue increased 25.6%, with PEO fees up 43.5% while staffing revenue decreased 0.7%.
- Workers’ compensation expense rose to $19.4m in Q3 from $12.6m and to $49.6m for nine months from $33.3m. As a share of revenue, it increased to 17.5% in Q3 and 17.2% year to date. Management cited current-claim costs, unfavorable estimates on prior claims, and higher insurance broker commissions.
- Q3 SG&A increased 29.0% to $12.7m, mainly from profit sharing and staffing management/business-growth costs. Nine-month SG&A rose 19.9% to $33.1m.
- Q3 effective tax rate was 32.4%, versus 13.7% a year earlier; management expected a similar rate for the remainder of 2012. Nine-month 2012 net income fell year over year largely because 2011 included $10.0m of non-taxable key-person life-insurance proceeds and a related lower tax rate.
Liquidity, capital and balance sheet
- At September 30, cash was $22.2m and marketable securities totaled $28.6m (including $10.0m restricted). Current assets were $119.7m and current liabilities $112.5m. No revolving-credit borrowings were outstanding at quarter-end.
- Cash declined $27.4m from year-end 2011. Operating cash flow of $32.4m was offset chiefly by $60.8m of financing outflows, including the share repurchase and preferred-stock redemption, plus $2.6m of dividends. Receivables increased $24.5m and were a significant operating cash use.
- Workers’ compensation liabilities totaled an estimated $61.6m, up from $51.2m at year-end. Estimates include incurred-but-not-reported claims and are based on actuarial valuation; the filing notes that future claim experience and reserve revisions may differ.
- In March, BBSI repurchased approximately 3.0m shares for total consideration of $59.7m at $20 per share, funded with $24.9m cash and $34.8m of redeemable preferred stock. It redeemed the preferred stock in September using cash and revolving-facility availability, avoiding an approximately $0.9m dividend. The cash-flow statement reports common-stock repurchases of $25.4m and preferred-stock redemption of $34.8m; the equity statement reports total repurchase consideration of $60.2m including related amounts.
- A new revolving facility effective September 18 provided up to $24.0m through October 2017, with $23.8m of standby letters of credit outstanding for workers’ compensation surety requirements. Borrowings bear interest at LIBOR plus 1.75%; the facility is secured by specified assets and has financial covenants. The company reported covenant compliance at September 30.
- Subsequent to quarter-end, BBSI entered into a $5.5m term loan secured by its Vancouver office building, at one-month LIBOR plus 2.25%, due November 2017. The filing says this increased total credit capacity to approximately $29.5m. Management expected operating cash generation and facility availability to cover working-capital needs for the next 12 months.
Outlook, risks and notable items
- Management cited continued PEO growth, driven primarily by new customers; PEO revenue from continuing customers also increased. It expects payroll taxes and benefits as a percentage of reported revenue to continue rising as PEO services grow.
- California SB 863 changes self-insurance rules for PEO and similar employers: new certificates generally cannot be issued after January 1, 2013, and existing certificates are to be revoked by January 1, 2015. BBSI was evaluating alternatives to maintain workers’ compensation coverage in California.
- Quarterly results are subject to seasonality, customer demand, payroll-tax wage limits, workers’ compensation claim frequency and severity, prior-period claim development, and acquisition factors. About 69% of Q3 revenue and 68% of nine-month revenue came from California.
- The filing identifies risks including client retention and acquisition, economic conditions, workers’ compensation reserve estimates, regulatory changes, receivable collectibility, insurer capacity, and access to capital or letters of credit for surety requirements. No material change to previously disclosed risk factors was reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No formal earnings guidance was provided.
Key facts for investors to verify
- Progress and cost of BBSI’s alternatives to California self-insurance in response to SB 863.
- Workers’ compensation reserve development, particularly the $44.3m incurred-but-not-reported component and prior-year claim estimates.
- Receivable collections and working-capital needs as PEO activity expands; distinguish net reported PEO fees from gross payroll volume.
- Actual availability under the revolving facility after standby letters of credit and scheduled capacity reductions, and compliance with its covenants.
- Whether the share repurchase amounts and financing presentation reconcile across the equity, cash-flow, and transaction disclosures.