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BBSI > SEC Filings for BBSI > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for BARRETT BUSINESS SERVICES INC


9-May-2013

Quarterly Report


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

Overview

Barrett Business Services, Inc. ("BBSI," the "Company," "our" or "we"), was incorporated in the state of Maryland in 1965. We are a leading provider of business management solutions, combining human resource outsourcing and professional management consulting to create an operational platform that differentiates us from our competitors. Our integrated platform is grounded in expertise in payroll processing, employee benefits, workers' compensation coverage, risk management and workplace safety programs, human resource administration, recruiting and permanent placement. BBSI helps small-to medium-sized businesses improve the efficiency of their operations. Our principal services assist our clients in leveraging their investment in human capital. We believe that our combination of business management solutions and expertise in human capital management enables us to provide our clients with a unique blend of services not offered by our competitors.

Our Services

Our passage from an entrepreneurially run company to a professionally managed organization has helped to form our view that all businesses experience the same success factors in their growth, as well as the same potential pitfalls. The insights gained through our own growth, along with the trends we see in working with more than 3,000 companies each day, define our approach to guiding business owners through the challenges associated with being an employer.

Through our client services agreement, the Company enters into a contract to become a co-employer of the client's existing workforce assuming responsibility for payroll, payroll taxes, workers' compensation coverage and certain other administrative functions, while the business owner client maintains physical care, custody and control of their workforce, including the authority to hire and terminate employees. Staffing services include on-demand or short-term staffing assignments, and long or indefinite-term contract staffing. The Company's staffing services also include recruiting, which involves fee-based search efforts for specific employee candidates at the request of co-employed clients, staffing customers or other businesses.

We believe the expert knowledge of our teams combined with tools from the HR outsourcing industry helps our clients more effectively leverage their internal resources. We assist our clients by:

Partnering with the business owner to frame a three-tiered management platform that brings predictability to their organization

Leveraging our client's investment in human capital through a unique, high-touch, results-oriented approach

Enabling business owners to focus on their core business by reducing organizational complexity and maximizing productivity

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

Our Services (Continued)

Prior to entering into a client services agreement, we perform an in-depth analysis of the potential client's operations, including evaluation of needs and objectives, risk assessment and financial review. Once the client service agreement has been signed, we pair each of our clients with a dedicated, local branch-based business unit comprised of management professionals with expertise in Human Resource Consulting, Risk Consulting, Payroll, Benefits Administration and Recruiting. We believe our hands-on model allows our clients to more quickly adopt processes to develop a more productive workforce, mitigate workplace injury and risk and encourage workplace compliance with a broad range of employment and safety regulations.

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.

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 months ended March 31, 2013 and 2012.

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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)



                                                           Percentage of Total Revenue
                                                               Three Months Ended
                                                                    March 31,
                                                        2013                        2012
Revenues:
Professional employer service fees                           73.3 %                      68.2 %
Staffing services                                            26.7                        31.8

Total revenues                                              100.0                       100.0

Cost of revenues:
Direct payroll costs                                         20.0                        23.9
Payroll taxes and benefits                                   53.0                        52.2
Workers' compensation                                        19.6                        16.0

Total cost of revenues                                       92.6                        92.1

Gross margin                                                  7.4                         7.9

Selling, general and administrative expenses                 10.6                        11.8
Depreciation and amortization                                 0.4                         0.4

Loss from operations                                         (3.6 )                      (4.3 )
Other income                                                  0.1                         0.3

Loss before income taxes                                     (3.5 )                      (4.0 )
Benefit from income taxes                                    (1.2 )                      (1.3 )

Net loss                                                     (2.3 )%                     (2.7 )%

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

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

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 co-employment relationships, an increase in staffing revenues and related costs presented at gross dilutes the impact of the net professional employer services revenue on gross margin percentage.

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 professional employer services on a basis comparable to our staffing services.

                                                       Unaudited
                                                  Three Months Ended
                                                       March 31,
               (in thousands)                     2013          2012
               Revenues:
               Professional employer services   $ 561,483     $ 405,851
               Staffing services                   29,733        26,210

               Total revenues                     591,216       432,061

               Cost of revenues:
               Direct payroll costs               498,738       366,934
               Payroll taxes and benefits          59,123        42,992
               Workers' compensation               25,044        15,578

               Total cost of revenues             582,905       425,504

               Gross margin                     $   8,311     $   6,557

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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 professional employer services revenues to
net professional employer services revenues is as follows:



                                                                       Unaudited
                                                              Three Months Ended March 31
                                        Gross Revenue                                               Net Revenue
                                      Reporting Method              Reclassification              Reporting Method
(in thousands)                       2013          2012           2013            2012           2013          2012
Revenues:
Professional employer services     $ 561,483     $ 405,851     $ (479,665 )    $ (349,639 )    $  81,818     $ 56,212
Staffing services                     29,733        26,210              0               0         29,733       26,210

Total revenues                     $ 591,216     $ 432,061     $ (479,665 )    $ (349,639 )    $ 111,551     $ 82,422

Cost of revenues                   $ 582,905     $ 425,504     $ (479,665 )    $ (349,639 )    $ 103,240     $ 75,865

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

Three months ended March 31, 2013 and 2012

Net loss for the first quarter of 2013 amounted to $2.5 million, as compared to net loss of $2.2 million for the first quarter of 2012. Diluted loss per share for the first quarter of 2013 was $.36 compared to diluted loss per share of $.22 for the comparable 2012 period. The first quarter of 2013 reflected approximately 3.0 million fewer common shares outstanding when compared to the year-ago quarter due to the Company's repurchase of approximately 2.5 million shares from the Estate of William W. Sherertz, as well as 500,000 shares from Nancy Sherertz, on March 28, 2012. The Company historically incurs losses in the first quarter due to the higher effective payroll taxes at the beginning of each year.

Revenues for the first quarter of 2013 totaled $111.6 million, an increase of approximately $29.1 million or 35.3%, which reflects an increase in the Company's professional employer service fee revenue of $25.6 million or 45.6% coupled with an increase in staffing services revenue of $3.5 million or 13.4%. Approximately 75% and 68%, respectively, of our revenue during the three months ended March 31, 2013 and 2012 was attributable to our California operations.

Our growth in professional employer service revenues continues to be primarily attributable to new customers, resulting from continued strength in our referral channels and a high retention rate, as business from new customers during the first quarter of 2013 more than tripled our lost business from former customers. Professional employer service revenues from continuing customers reflected an 8% increase compared to the first quarter of 2012 primarily resulting from increases in employee headcount and hours worked. Staffing revenues increased primarily from an increase in revenue from existing customers and the addition of new business exceeding lost business from former customers.

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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 March 31, 2013 and 2012 (Continued)

Gross margin for the first quarter of 2013 totaled approximately $8.3 million or an increase of 26.8% over the first quarter of 2012, primarily due to the 35.3% increase in revenues and a decline in direct payroll costs, as a percentage of revenues, 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 23.9% for the first quarter of 2012 to 20.0% for the first quarter of 2013 was primarily due to the increase in our mix of professional employer services in the Company's customer base over the first quarter of 2012 and the effect of each customer's unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the first quarter of 2013 was 53.0% compared to 52.2% for the first quarter of 2012. The percentage rate increase was largely due to the effect of significant growth in professional employer services, where payroll taxes and benefits are presented at gross cost whereas the related direct payroll costs are netted against professional employer services revenue, and to slightly higher effective state unemployment tax rates in various states in which the Company operates as compared to the first quarter of 2012. 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 professional employer services on a quarter-over-quarter basis.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $13.2 million or 16.0% in the first quarter of 2012 to $21.8 million or 19.6% in the first quarter of 2013. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims, increases in estimated costs to close prior year claims, and increased insurance broker commissions resulting from increased workers' compensation insurance rates.

Selling, general and administrative ("SG&A") expenses for the first quarter of 2013 totaled approximately $11.8 million, an increase of $2.0 million or 21.0% over the first quarter of 2012. The increase was primarily attributable to increases in management payroll and other variable expense components within SG&A to support our business growth.

The income tax rate for the 2013 first quarter was 34.2%. We expect the effective income tax rate for the balance of 2013 to remain at a similar rate to the 2013 first quarter income tax rate. The income tax rate for the 2012 first quarter was 33.7%.

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 for the Company's services, competition, 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 co-employed clients in the agriculture, food processing

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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 (Continued)

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 three months ended March 31, 2013 increased $2.3 million over December 31, 2012, which compares to a decrease of $11.4 million for the comparable period in 2012. The increase in cash at March 31, 2013 as compared to December 31, 2012, was primarily due to increases in accrued payroll, payroll taxes and benefits of $19.9 million and a $6.6 million increase in workers' compensation claims liabilities, partially offset by the net loss of $2.5 million, a $7.2 million increase in income taxes receivable, a $6.4 million increase in accounts receivable and net payments on credit-line borrowings of $4.5 million.

Net cash provided by operating activities for the three months ended March 31, 2013 amounted to $13.0 million compared to $11.5 million for the comparable 2012 period. For the three months ended March 31, 2013, cash flow was principally provided by increases in accrued payroll, payroll taxes and benefits of $19.9 million and a $6.6 million increase in workers' compensation claims liabilities, partially offset by the net loss of $2.5 million, a $7.2 million increase in income taxes receivable and a $6.4 million increase in accounts receivable.

Net cash used in investing activities for the three months ended March 31, 2013 was $5.7 million as compared to $1.9 million of net cash provided by investing activities for the comparable 2012 period. For the 2013 period, cash from investing activities was used by the purchase of marketable securities totaling $11.3 million, the purchase of restricted marketable securities totaling $1.5 million and the purchase of property and equipment of $1.2 million, partially offset by the sales and maturities of marketable securities of $7.7 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.

Net cash used in financing activities for the three months ended March 31, 2013 was $5.0 million as compared to $24.7 million for the comparable 2012 period. For the 2013 period, the primary uses of cash for financing activities were the net payments on credit-line borrowings of $4.5 million and the payment of regular quarterly cash dividends totaling $912,000 to holders of the Company's common stock.

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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)

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 3 to the Consolidated Financial Statements in this report, the Company maintains a credit agreement (the "Agreement") with its principal bank, Wells Fargo Bank, National Association (the "Bank"). The Agreement, which expires October 1, 2017, provides for a revolving credit facility with initial borrowing capacity of up to $24.0 million. The Company had no outstanding borrowings on the revolving credit facility as of March 31, 2013. The Agreement also provides for the continuance of existing standby letters of credit in connection with various surety deposit requirements for workers' compensation purposes, as to which the amount outstanding totaled approximately $23.8 million as of March 31, 2013.

Advances under the revolving credit facility bear interest, at the Company's option, at either (a) a fixed rate for a term selected by the Company from time-to-time or (b) a fluctuating rate. In each case, the rate is calculated based on LIBOR plus 1.75%. The Agreement also provides for an unused commitment fee of 0.25% per annum on the average daily unused amount of the revolving credit facility.

The credit facility is collateralized by the Company's accounts receivable and other rights to receive payment, general intangibles, inventory and equipment. Under the Agreement, the maximum principal amount available will be reduced by $2.5 million every six months commencing April 1, 2013.

The Agreement, as amended, requires the satisfaction of certain financial covenants as follows:

Minimum Fixed Charge Coverage ratio of no less than 1.25:1.0, measured quarterly on a rolling four-quarter basis;

Funded Debt: EBITDA of no more than 2.25:1 through September 30, 2013; 1.75:1 through September 30, 2014; 1.5:1 through September 30, 2015; and 1.25:1 thereafter, measured quarterly on a rolling four-quarter basis;

Ratio of restricted and unrestricted cash and marketable securities to workers' compensation and safety incentive liabilities of at least 1.0:1.0, measured quarterly; and

Prohibition on incurring additional indebtedness without the prior approval of the Bank, other than up to $200,000 per year in purchase money financing.

The Agreement also contains customary events of default. If an event of default under the Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Agreement to be immediately due and payable. The Company was in compliance with all applicable financial covenants at March 31, 2013.

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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)

Management expects that the funds anticipated to be generated from operations and availability under its revolving credit facility will be sufficient in the aggregate to fund the Company's working capital needs for the next twelve months.

Inflation

Inflation generally has not been a significant factor in the Company's operations during the periods discussed above. The Company has taken into account the impact of escalating medical and other costs in establishing reserves for future expenses for self-insured workers' compensation claims.

Forward-Looking Information

Statements in this report which are not historical in nature, including discussion of economic conditions in the Company's market areas and effect on revenue levels, the potential for and effect of acquisitions, the effect of changes in the Company's mix of services on gross margin, the adequacy of the Company's workers' compensation reserves and the effect of changes in estimate of its claims liabilities, the adequacy of the Company's allowance for doubtful accounts, the effect of the Company's formation and operation of two wholly owned, fully licensed captive insurance subsidiaries and becoming self-insured for certain business risks, the availability of alternatives to being self-insured as to workers' compensation liabilities in California, the financial viability of the Company's excess insurance carriers, the effectiveness of the Company's management information systems, payment of future dividends, and the availability of working capital to meet the Company's funding requirements, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include the ability to retain current clients and attract new clients, difficulties associated with integrating acquired businesses and clients into the Company's operations, economic trends in the Company's service areas, material deviations from expected future workers' compensation claims experience, the effect of changes in the workers' compensation regulatory environment in one or more of the Company's primary markets, collectibility of accounts receivable, the carrying values of deferred income tax assets and goodwill, which may be affected by the Company's future operating results, the effect of conditions in the global capital markets on the Company's investment portfolio, and the availability of capital or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining the Company's status as a qualified self-insured employer for workers' compensation coverage, among others. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

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Table of Contents

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