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BBSI > SEC Filings for BBSI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for BARRETT BUSINESS SERVICES INC

Form 10-Q for BARRETT BUSINESS SERVICES INC


8-Nov-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:

Delivering expertise to help our clients more effectively leverage their internal resources

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.

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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, 2013 and 2012.



                                          Percentage of Total Revenue               Percentage of Total Revenue
                                               Three Months Ended                        Nine Months Ended
                                                 September 30,                             September 30,
                                           2013                  2012                2013                  2012
Revenues:
Professional employer service fees             71.8 %                67.4 %              72.5 %                67.9 %
Staffing services                              28.2                  32.6                27.5                  32.1

Total revenues                                100.0                 100.0               100.0                 100.0

Cost of revenues:
Direct payroll costs                           21.3                  24.5                20.8                  24.1
Payroll taxes and benefits                     39.2                  38.6                43.9                  43.3
Workers' compensation                          19.1                  17.5                19.3                  17.2

Total cost of revenues                         79.6                  80.6                84.0                  84.6

Gross margin                                   20.4                  19.4                16.0                  15.4

Selling, general and
administrative expenses                        11.4                  11.5                11.1                  11.4
Depreciation and amortization                   0.3                   0.3                 0.4                   0.4

Income from operations                          8.7                   7.6                 4.5                   3.6
Other income                                    0.1                   0.1                 0.1                   0.2

Income before income taxes                      8.8                   7.7                 4.6                   3.8
Provision for income taxes                      2.7                   2.5                 1.4                   1.3

Net income                                      6.1 %                 5.2 %               3.2 %                 2.5 %

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                     Unaudited
                                      Three Months Ended             Nine Months Ended
   (in thousands)                        September 30,                 September 30,
                                      2013          2012           2013            2012
   Revenues:
   Professional employer services   $ 722,387     $ 521,836     $ 1,923,533     $ 1,391,357
   Staffing services                   41,727        36,195         106,764          92,793

   Total revenues                     764,114       558,031       2,030,297       1,484,150

   Cost of revenues:
   Direct payroll costs               643,482       470,950       1,711,020       1,256,477
   Payroll taxes and benefits          57,977        42,915         170,583         125,239
   Workers' compensation               32,469        22,602          86,471          57,972

   Total cost of revenues             733,928       536,467       1,968,074       1,439,688

   Gross margin                     $  30,186     $  21,564     $    62,223     $    44,462

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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 September 30,
                                        Gross Revenue                                                      Net Revenue
(in thousands)                        Reporting Method                  Reclassification                Reporting Method
                                    2013            2012             2013              2012            2013          2012
Revenues:
Professional employer services   $   722,387     $   521,836     $   (616,143 )    $   (446,962 )    $ 106,244     $  74,874
Staffing services                     41,727          36,195                0                 0         41,727        36,195

Total revenues                   $   764,114     $   558,031     $   (616,143 )    $   (446,962 )    $ 147,971     $ 111,069

Cost of revenues                 $   733,928     $   536,467     $   (616,143 )    $   (446,962 )    $ 117,785     $  89,505

                                                                          Unaudited
                                                               Nine Months Ended September 30,
                                        Gross Revenue                                                      Net Revenue
(in thousands)                        Reporting Method                  Reclassification                Reporting Method
                                    2013            2012             2013              2012            2013          2012
Revenues:
Professional employer services   $ 1,923,533     $ 1,391,357     $ (1,641,977 )    $ (1,195,159 )    $ 281,556     $ 196,198
Staffing services                    106,764          92,793                0                 0        106,764        92,793

Total revenues                   $ 2,030,297     $ 1,484,150     $ (1,641,977 )    $ (1,195,159 )    $ 388,320     $ 288,991

Cost of revenues                 $ 1,968,074     $ 1,439,688     $ (1,641,977 )    $ (1,195,159 )    $ 326,097     $ 244,529

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

Three months ended September 30, 2013 and 2012

Net income for the third quarter of 2013 amounted to $9.0 million, as compared to net income of $5.8 million for the third quarter of 2012. Diluted income per share for the third quarter of 2013 was $1.21 compared to diluted income per share of $.81 for the comparable 2012 period.

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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, 2013 and 2012 (Continued)

Revenues for the third quarter of 2013 totaled $148.0 million, an increase of approximately $36.9 million or 33.2% over the third quarter of 2012, which reflects an increase in the Company's professional employer service fee revenue of $31.4 million or 41.9%, coupled with an increase in staffing services revenue of $5.5 million or 15.3%. Approximately 74% and 69% respectively, of our revenue during the three months ended September 30, 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 third quarter of 2013 nearly tripled our lost business from former customers. Professional employer service revenues from continuing customers reflected a 13% increase compared to the third quarter of 2012, primarily resulting from increases in employee headcount and hours worked. The increase in staffing revenues was due primarily to an increase in revenue from the addition of new business, as the business from existing customers reflected a small increase.

Gross margin for the third quarter of 2013 totaled approximately $30.2 million or an increase of 40.0% over the third quarter of 2012, primarily due to the 33.2% 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 24.5% for the third quarter of 2012 to 21.3% for the third quarter of 2013 was primarily due to the increase in our mix of professional employer services in the Company's customer base compared to the third 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 third quarter of 2013 was 39.2% compared to 38.6% for the third 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. 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 $19.4 million or 17.5% in the third quarter of 2012 to $28.2 million or 19.1% in the third 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.

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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, 2013 and 2012 (Continued)

Selling, general and administrative ("SG&A") expenses for the third quarter of 2013 totaled approximately $16.8 million, an increase of $4.1 million or 31.9% over the third quarter of 2012. The increase was primarily attributable to higher branch incentive pay based upon increased branch performance and increases in management payroll and other variable expense components within SG&A to support our business growth.

The income tax rate for the 2013 third quarter was 30.6% compared to the 2012 third quarter rate of 32.4%. The lower tax rate for the 2013 third quarter was primarily due to higher employment tax credits. We expect the effective income tax rate for the balance of 2013 to remain at a similar rate to the 2013 third quarter income tax rate.

Nine months ended September 30, 2013 and 2012

Net income for the nine months ended September 30, 2013 amounted to $12.3 million, as compared to net income of $7.3 million for the first nine months of 2012. Diluted income per share for the first nine months of 2013 was $1.67 compared to diluted income per share of $.91 for the comparable 2012 period. The first nine months of 2013 reflected approximately 700,000 fewer diluted common shares outstanding when compared to the comparable period of 2012 primarily 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.

Revenues for the nine months ended September 30, 2013 totaled $388.3 million, an increase of approximately $99.3 million or 34.4% over the comparable period in 2012, which reflects an increase in the Company's professional employer service fee revenue of $85.4 million or 43.5% coupled with an increase in staffing services revenue of $14.0 million or 15.1%. Approximately 74% and 68%, respectively, of our revenue during the nine months ended September 30, 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 nine months of 2013 tripled our lost business from former customers. Professional employer service revenues from continuing customers reflected a 11% increase compared to the first nine months of 2012, primarily resulting from increases in employee headcount and hours worked. Staffing revenues increased primarily from an increase in revenue due to the addition of new business as well as to an increase in business from existing customers.

Gross margin for the nine months ended September 30, 2013 totaled approximately $62.2 million or an increase of 39.9% over the comparable period of 2012, primarily due to the 34.4% 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.

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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, 2013 and 2012 (Continued)

The decrease in direct payroll costs, as a percentage of revenues, from 24.1% for the first nine months of 2012 to 20.8% for the first nine months of 2013 was primarily due to the increase in our mix of professional employer services in the Company's customer base over the third 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 nine months of 2013 was 43.9% compared to 43.3% for the comparable period 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 comparable period of 2012.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $49.6 million or 17.2% in the first nine months of 2012 to $75.0 million or 19.3% in the first nine months 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.

SG&A expenses for the first nine months of 2013 totaled approximately $43.1 million, an increase of $10.1 million or 30.4% over the first nine months of 2012. The increase was primarily attributable to increases in management payroll, as well as increases in branch incentive pay resulting from increased branch performance and other variable expense components within SG&A to support our business growth.

The income tax rate for the first nine months of 2013 was 31.2% compared to the income tax rate for the first nine months of 2012 of 32.6%. The decline in the 2013 rate was primarily due to higher employment tax credits.

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 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

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

Nine months ended September 30, 2013 and 2012 (Continued)

Factors Affecting Quarterly Results (Continued)

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, 2013 decreased $10.8 million from December 31, 2012, which compares to a decrease of $27.4 million for the comparable period in 2012. The decrease in cash at September 30, 2013 as compared to December 31, 2012, was primarily due to the purchase of restricted certificates of deposit of $63.9 million and an increase in trade accounts receivable of $34.8 million, partially offset by net income of $12.3 million, a $37.5 million increase in accrued payroll and payroll taxes, a $25.4 million increase in workers' compensation claims liabilities, and net proceeds from the sales and maturities of marketable securities of $13.7 million.

Net cash provided by operating activities for the nine months ended September 30, 2013 amounted to $47.2 million compared to $32.4 million for the comparable 2012 period. For the nine months ended September 30, 2013, cash flow was principally provided by net income of $12.3 million, increases in accrued payroll, payroll taxes and benefits of $37.5 million and a $25.4 million increase in workers' compensation claims liabilities, partially offset by an increase in trade accounts receivable of $34.8 million.

Net cash used in investing activities for the nine months ended September 30, 2013 was $54.4 million as compared to $1.0 million of net cash provided by investing activities for the comparable 2012 period. For the 2013 period, cash from investing activities was used to purchase restricted certificates of deposit and restricted marketable securities totaling $71.1 million and to purchase marketable securities of $45.1 million, partially offset by the sales and maturities of marketable securities of $58.7 million. The Company presently has no material long-term capital commitments.

Net cash used in financing activities for the nine months ended September 30, 2013 was $3.5 million as compared to $60.8 million used in financing activities 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 $2.8 million to holders of the Company's common stock, partially offset by excess tax benefits from share-based compensation of $2.1 million coupled with $1.9 million for 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.

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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)

As disclosed in Note 3 to the Consolidated Financial Statements in this report, . . .

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