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BBSI > SEC Filings for BBSI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BARRETT BUSINESS SERVICES INC

Form 10-Q for BARRETT BUSINESS SERVICES INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Barrett Business Services, Inc. ("Barrett", the "Company," "our" or "we"), a Maryland corporation, offers a comprehensive range of human resource management services to help small and medium-sized businesses manage the increasing costs and complexities of a broad array of employment-related issues. The Company's principal services, professional employer organization ("PEO") services and staffing services, assist its clients in leveraging their investment in human capital. The Company believes that the combination of these two principal services enables it to provide clients with a unique blend of services not offered by the Company's competition. Barrett's platform of outsourced human resource management services is built upon expertise in payroll processing, employee benefits and administration, workers' compensation coverage, effective risk management and workplace safety programs, and human resource administration.

To provide PEO services to a client, the Company enters into a contract to become a co-employer of the client's existing workforce and Barrett assumes responsibility for some or all of the client's human resource management responsibilities. PEO services are normally used by organizations to satisfy ongoing human resource management needs and typically involve contracts with a minimum term of one year, renewable annually, which cover all employees at a particular work site. Staffing services include on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and comprehensive on-site management. The Company's staffing services also include direct placement services, which involve fee-based search efforts for specific employee candidates at the request of PEO clients, staffing customers or other businesses.

The Company's ability to offer clients a broad mix of services allows Barrett to effectively become the human resource department and a strategic business partner for its clients. The Company believes its approach to human resource management services is designed to positively affect its clients' business results by:

allowing clients to focus on core business activities instead of human resource matters;

increasing clients' productivity by improving employee satisfaction and generating greater employee retention;

reducing overall payroll expenses due to lower workers' compensation and health insurance costs; and

assisting clients in complying with complex and evolving human resource-related regulatory and tax issues.

The Company serves a growing and diverse client base of small and medium-sized businesses in a wide variety of industries through a network of branch offices in California, Oregon, Washington, Idaho, Arizona, Utah, Colorado, Maryland, Delaware and North Carolina. Barrett also has several smaller recruiting offices in its general market areas, which are under the direction of a branch office.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations

The following table sets forth percentages of total revenues represented by
selected items in the Company's Consolidated Statements of Operations for the
three and nine months ended September 30, 2012 and 2011.



                                                               Percentage of Total Revenues
                                                     Three Months Ended             Nine Months Ended
                                                       September  30,                September  30,
                                                    2012            2011           2012           2011
Revenues:
Staffing services                                      32.6 %         40.5 %          32.1 %        40.6 %
Professional employer service fees                     67.4           59.5            67.9          59.4


Total revenues                                        100.0          100.0           100.0         100.0


Cost of revenues:
Direct payroll costs                                   24.5           30.8            24.1          30.8
Payroll taxes and benefits                             38.6           35.5            43.3          39.5
Workers' compensation                                  17.5           14.8            17.2          14.5


Total cost of revenues                                 80.6           81.1            84.6          84.8


Gross margin                                           19.4           18.9            15.4          15.2

Selling, general and administrative expenses           11.5           11.6            11.4          12.0
Depreciation and amortization                           0.3            0.4             0.4           0.4


Income from operations                                  7.6            6.9             3.6           2.8

Other income                                            0.1            0.4             0.2           4.8


Income before income taxes                              7.7            7.3             3.8           7.6

Provision for income taxes                              2.5            1.0             1.3           1.3


Net income                                              5.2 %          6.3 %           2.5 %         6.3 %

We report PEO revenues on a net basis because we are not the primary obligor for the services provided by our PEO clients to their customers pursuant to our PEO contracts. The presentation of revenues on a net basis and the relative contributions of staffing and PEO revenues can create volatility in our gross margin percentage. The general impact of fluctuations in our revenue mix is described below.

A relative increase in staffing revenues will typically result in a lower gross margin percentage. Staffing revenues are presented at gross with the related direct costs reported in cost of sales. While staffing relationships typically have higher margins than PEO relationships, an increase in staffing revenues and related costs presented at gross dilutes the impact of the net PEO revenue on gross margin percentage.

A relative increase in PEO revenue will result in a higher gross margin percentage. Improvement in gross margin percentage occurs because incremental PEO revenue dollars are reported as revenue net of all related direct costs.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

We present for comparison purposes the gross revenues and cost of revenues information set forth in the table below. Although not in accordance with GAAP, management believes this information is more informative as to the level of our business activity and more illustrative of how we manage our operations, including the preparation of our internal operating forecasts, because it presents our PEO services on a basis comparable to our staffing services.

                                           Unaudited                     Unaudited
                                      Three Months Ended             Nine Months Ended
   (in thousands)                        September 30,                 September 30,
                                      2012          2011           2012            2011
   Revenues:
   Staffing services                $  36,195     $  34,589     $    92,793     $    93,439
   Professional employer services     521,836       371,382       1,391,357       1,010,496


   Total revenues                     558,031       405,971       1,484,150       1,103,935


   Cost of revenues:
   Direct payroll costs               470,950       344,719       1,256,477         939,746
   Payroll taxes and benefits          42,915        30,321         125,239          90,970
   Workers' compensation               22,602        14,778          57,972          38,187


   Total cost of revenues             536,467       389,818       1,439,688       1,068,903


   Gross margin                     $  21,564     $  16,153     $    44,462     $    35,032

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)



A reconciliation of non-GAAP gross PEO revenues to net PEO revenues is as
follows:



                                                                       Unaudited
                                                            Three Months Ended September 30,
                                        Gross Revenue                                               Net Revenue
(in thousands)                        Reporting Method              Reclassification              Reporting Method
                                     2012          2011           2012            2011           2012          2011
Revenues:
Staffing services                  $  36,195     $  34,589     $        0      $        0      $  36,195     $ 34,589
Professional employer services       521,836       371,382       (446,962 )      (320,587 )       74,874       50,795

Total revenues                     $ 558,031     $ 405,971     $ (446,962 )    $ (320,587 )    $ 111,069     $ 85,384


Cost of revenues                   $ 536,467     $ 389,818     $ (446,962 )    $ (320,587 )    $  89,505     $ 69,231

                                                                         Unaudited
                                                              Nine Months Ended September 30,
                                        Gross Revenue                                                    Net Revenue
(in thousands)                        Reporting Method                 Reclassification               Reporting Method
                                    2012            2011             2012             2011           2012          2011
Revenues:
Staffing services                $    92,793     $    93,439     $          0      $        0      $  92,793     $  93,439
Professional employer services     1,391,357       1,010,496       (1,195,159 )      (873,769 )      196,198       136,727

Total revenues                   $ 1,484,150     $ 1,103,935     $ (1,195,159 )    $ (873,769 )    $ 288,991     $ 230,166


Cost of revenues                 $ 1,439,688     $ 1,068,903     $ (1,195,159 )    $ (873,769 )    $ 244,529     $ 195,134

The amount of the reclassification is comprised of direct payroll costs and safety incentives attributable to our PEO client companies.

Three months ended September 30, 2012 and 2011

Net income for the third quarter of 2012 amounted to $5.8 million, as compared to net income of $5.4 million for the third quarter of 2011. The increase in net income for the 2012 third quarter was primarily due to a 30.1% increase in revenues. The third quarter of 2011 included the benefit of a lower annual effective income tax rate as a result of the effect of the receipt of $10.0 million of key man life insurance proceeds during 2011. Diluted income per share for the third quarter of 2012 was $.81 compared to diluted income per share of $.54 for the comparable 2011 period.

Revenues for the third quarter of 2012 totaled $111.1 million, an increase of approximately $25.7 million or 30.1%, which reflects an increase in the Company's PEO service fee revenue of $24.1 million or 47.4% coupled with an increase in staffing services revenue of $1.6 million or 4.6%. Approximately 69% and 60%, respectively, of our revenue during the three months ended September 30, 2012 and 2011 was attributable to our California operations.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Three months ended September 30, 2012 and 2011 (Continued)

Our growth in PEO revenues continues to be primarily attributable to new customers as PEO business from new customers during the third quarter of 2012 more than quadrupled our lost PEO business from former customers. PEO revenues from continuing customers reflected a 4.3% increase compared to the third quarter of 2011 primarily resulting from increases in employee headcount and hours worked. Staffing revenues increased primarily from an increase in revenue from existing customers as the addition of new business nearly offset lost business from former customers.

Gross margin for the third quarter of 2012 totaled approximately $21.6 million or an increase of 33.5% over the third quarter of 2011, primarily due to the 30.1% increase in revenues and a decline in direct payroll costs, partially offset by higher workers' compensation expense and payroll taxes and benefits, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 30.8% for the third quarter of 2011 to 24.5% for the third quarter of 2012 was primarily due to the increase in our mix of PEO services in the Company's customer base over the third quarter of 2011 and the effect of each customer's unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the third quarter of 2012 was 38.6% compared to 35.5% for the third quarter of 2011. The percentage rate increase was largely due to the effect of significant growth in PEO services, where payroll taxes and benefits are presented at gross cost whereas the related direct payroll costs are netted against PEO services revenue, and to slightly higher effective state unemployment tax rates in various states in which the Company operates as compared to the third quarter of 2011. Management expects the trend in payroll taxes and benefits, as a percentage of revenues, to continue to increase as a result of continued growth in PEO services on a quarter-over-quarter basis.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $12.6 million or 14.8% in the third quarter of 2011 to $19.4 million or 17.5% in the third quarter of 2012. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims and increases in estimated costs to close prior year claims and higher insurance broker commissions as a result of increased worker's compensation insurance rates.

Selling, general and administrative ("SG&A") expenses for the third quarter of 2012 totaled approximately $12.7 million, an increase of $2.9 million or 29.0% over the third quarter of 2011. The increase was primarily attributable to higher profit sharing based on increased branch performance and increases in management payroll and other variable expense components within SG&A to support our business growth.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Three months ended September 30, 2012 and 2011 (Continued)

The income tax rate for the 2012 third quarter was 32.4%. We expect the effective income tax rate for the balance of 2012 to remain at a similar rate to the 2012 third quarter income tax rate. The income tax rate for the 2011 third quarter was 13.7%, which included a favorable benefit from the effect of a much lower annual effective tax rate attributable to the non-taxable $10.0 million life insurance proceeds.

Nine months ended September 30, 2012 and 2011

Net income for the nine months ended September 30, 2012 amounted to $7.3 million, as compared to net income of $14.4 million for the first nine months of 2011. The first nine months of 2011 included $10.0 million of key man life insurance proceeds received following the passing of the Company's former president and CEO and the related benefit of a lower annual effective income tax rate. Diluted income per share for the first nine months ended September 30, 2012 was $.91 compared to diluted income per share of $1.41 for the comparable 2011 period.

Revenues for the nine months ended September 30, 2012 totaled $289.0 million, an increase of approximately $58.8 million or 25.6%, compared to the similar period in 2011, which reflected an increase in the Company's PEO service fee revenue of $59.5 million or 43.5% and a small decline in staffing services revenue of $646,000 or 0.7%. Approximately 68% and 60%, respectively, of our revenue during the nine months ended September 30, 2012 and 2011 was attributable to our California operations. Our growth in PEO revenues was primarily attributable to the addition of new customers as PEO business from new customers during the first nine months of 2012 more than tripled our lost PEO business from former customers. PEO revenues from continuing customers reflected a 6.9% increase compared to the first nine months of 2011 primarily resulting from an increase in employee headcount and a slight increase in hours worked. Staffing revenues decreased slightly because lost business from former customers exceeded the business from new and continuing customers.

Gross margin for the nine months ended September 30, 2012 totaled approximately $44.5 million or an increase of $9.4 million or 26.9% over the comparable period of 2011, primarily due to the 25.6% increase in revenues and a decline in direct payroll costs, partially offset by higher payroll taxes and benefits and workers' compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 30.8% for the third quarter of 2011 to 24.1% for the first nine months of 2012 was primarily due to the increase in our mix of PEO services in the Company's customer base compared to the first nine months of 2011 and the effect of each customer's unique mark-up percent.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Nine months ended September 30, 2012 and 2011 (Continued)

Payroll taxes and benefits, as a percentage of revenues, for the first nine months ended September 30, 2012 was 43.3% compared to 39.5% for the comparable period of 2011. The percentage rate increase was largely due to the effect of significant growth in PEO services and to higher effective state unemployment tax rates in various states in which the Company operates as compared to the same period of 2011.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $33.3 million or 14.5% in the first nine months of 2011 to $49.6 million or 17.2% in the first nine months of 2012. The percentage rate increase was primarily due to an increase in the provision for current year claim costs as well as increases in estimated costs to close prior year claims and higher insurance broker commissions as a result of increased worker's compensation insurance rates.

SG&A expenses for the first nine months of 2012 totaled approximately $33.1 million, an increase of $5.5 million or 19.9% over the first nine months of 2011. The increase was primarily attributable to an increase in management payroll to support the business growth and to higher profit sharing based on increased branch performance.

Other income for the first nine months of 2012 was $568,000 compared to other income of $11.1 million for the first nine months of 2011. Other income for the first nine months of 2012 was primarily attributable to investment income earned on the Company's cash and marketable securities. The first nine months of 2011 included the $10.0 million of key man life insurance proceeds and approximately $1.0 million of investment income.

The income tax rate for the first nine months of 2012 was 32.6%. The income tax rate for the first nine months of 2011 was 17.7% which included a favorable benefit from the effect of a much lower annual effective tax rate attributable to the non-taxable $10.0 million life insurance proceeds.

During September 2012, California Senate Bill 863 ("SB 863"), designed to reform California's workers' compensation system, was signed into law. Section 3701.9 of Section 16 of SB 863 was added to the Labor Code and includes a provision whereby the California Director of Self-Insurance is required not to issue certificates of consent to self-insure after January 1, 2013 to any employer engaged in the activities of a professional employer organization, a leasing employer, a temporary services employer or any employer the director determines to be in the business of providing employees to other employers. Additionally, a certificate of consent to self-insure that previously had been issued to any employer engaged in these types of activities is required to be revoked by the Director not later than January 1, 2015. The Company, which has a certificate of consent to self-insure in place, is currently exploring several potential alternatives to address the impact of SB 863 on the Company's ability to continue its self-insurance program in California.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Factors Affecting Quarterly Results

The Company has historically experienced significant fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company's operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers' compensation, demand and competition for the Company's services and the effect of acquisitions. The Company's revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality on its staffing services business and on certain of its PEO clients in the agriculture, food processing and construction-related industries. As a result, the Company may have greater revenues and net income in the third quarter of its fiscal year. Revenue levels in the fourth quarter may be affected by many customers' practice of operating on holiday-shortened schedules. Payroll taxes and benefits fluctuate with the level of direct payroll costs, but tend to represent a smaller percentage of revenues and direct payroll later in the Company's fiscal year as federal and state statutory wage limits for unemployment and social security taxes are exceeded on a per employee basis. Workers' compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. Adverse loss development of prior period claims during a subsequent quarter may also contribute to volatility in the Company's estimated workers' compensation expense.

Liquidity and Capital Resources

The Company's cash position for the nine months ended September 30, 2012 decreased $27.4 million from December 31, 2011, which compares to an increase of $11.3 million for the comparable period in 2011. The decrease in cash at September 30, 2012 as compared to December 31, 2011, was primarily due to the repurchase of the Company's common stock for an amount totaling $60.2 million which included the redemption of $34.8 million of preferred shares issued during 2012 to finance the repurchase, offset in part by net income of $7.3 million, a $11.8 million increase in workers' compensation claims liabilities and a decrease in prepaid expenses and other of $4.4 million.

Net cash provided by operating activities for the nine months ended September 30, 2012 amounted to $32.4 million compared to $24.8 million for the comparable 2011 period. For the nine months ended September 30, 2012, cash flow was principally provided by net income of $7.3 million, coupled with a $25.2 million increase in accrued payroll and payroll taxes, a $11.8 million increase in workers' compensation claims liabilities, and a $4.4 million decrease in prepaid expense and other, offset in part by a $24.5 million increase in accounts receivable.

Net cash provided in investing activities for the nine months ended September 30, 2012 was $1.0 million as compared to $6.9 million of net cash used in investing activities for the similar 2011 period. For the 2012 period, cash from investing activities was provided by proceeds from the sales and maturities of marketable securities of $32.7 million and $6.5 million from the proceeds of sales of restricted marketable securities, partially offset by the purchase of marketable securities totaling $29.0 million, the purchase of restricted marketable securities of $6.5 million and the purchase of property and equipment of $2.7 million. The transactions related to restricted marketable securities were scheduled maturities and the replacement of such securities held for workers' compensation surety deposit purposes. The Company presently has no material long-term capital commitments.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity and Capital Resources (Continued)

Net cash used in financing activities for the nine months ended September 30, 2012 was $60.8 million as compared to $6.6 million for the similar 2011 period. For the 2012 period, the primary uses of cash for financing activities were the repurchases of the Company's common stock totaling $60.2 million which included the redemption of $34.8 million of preferred shares issued during 2012 to finance the repurchases and the payment of regular quarterly cash dividends totaling $2.6 million to holders of the Company's common stock, partially offset by $1.8 million proceeds from the exercise of stock options.

The Company's business strategy continues to focus on growth through the expansion of operations at existing offices, together with the selective acquisition of additional personnel-related businesses, both in its existing markets and other strategic geographic markets. The Company periodically evaluates proposals for various acquisition opportunities, but there can be no assurance that any additional transactions will be consummated.

As disclosed in Note 2 to the Consolidated Financial Statements in this report, effective March 28, 2012, the Company repurchased 2,485,929 shares of the Company's common stock held by the Estate of William W. Sherertz and 500,000 common shares held by Nancy Sherertz. Mr. Sherertz, a founder and former president and CEO of the Company, died January 20, 2011. Nancy Sherertz is also a founder of the Company. The common shares were repurchased at a price of $20 per share, representing total consideration of $59.7 million. The Company used a . . .

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