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BBSI > SEC Filings for BBSI > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for BARRETT BUSINESS SERVICES INC

Form 10-Q for BARRETT BUSINESS SERVICES INC


8-Aug-2014

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"), is a leading provider of business management solutions for small-and mid-sized companies. The Company has developed a management platform that integrates tools from the human resource outsourcing industry and a knowledge-based approach from the management consulting industry. This platform, through the effective leveraging of human capital, assists our business owner clients in more effectively running their business. We believe this platform, delivered through local teams of professionals, differentiates BBSI from our competitors. BBSI was incorporated in Maryland in 1965.

Business Strategy

Our strategy is to align with the mission of small-and mid-sized business owners, driving value to their business. To do so, BBSI:

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

partners with business owners to leverage their investment in human capital through a high-touch, results-oriented approach; and

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

Business Organization

We operate a decentralized delivery model using locally based teams, typically located within 50 miles of our client companies. We recruit senior level managers to oversee, develop and expand our business at the branch-office level. Additionally, we recruit professionals with expertise in human resources, risk management and workplace safety and various types of administration, including payroll, to field our client delivery teams. This structure fosters autonomous decision-making, allowing local teams of professionals to deliver plans that most closely align with the needs of each business owner client. It also assists us by incubating talent to support increased growth and capacity. We have clients with employees located in 22 states and the District of Columbia, through a network of 52 branch locations in California, Oregon, Washington, Idaho, Arizona, Nevada, Utah, Colorado, Maryland, Delaware and North Carolina. We also have several smaller recruiting locations in our general market areas, which are under the direction of a branch office.

BBSI believes that making significant investments in the best talent available allows us to leverage the value of this investment many times over. We motivate our management employees through a compensation package that includes a competitive base salary and the opportunity for profit sharing. At the branch level, profit sharing is in direct correlation to client performance, reinforcing a culture focused on achievement of client goals.

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

Our Services

BBSI's core purpose is to advocate for business owners, particularly in the small-and mid-sized business segment. Our evolution from an entrepreneurially run company to a professionally managed organization has helped to form our view that all businesses experience inflection points at key stages of growth. 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.

BBSI's business teams align with each business owner client through a structured three-tiered progression. In doing so, business teams focus on the objectives of each business owner and deliver planning, guidance and resources in support of those objectives.

Tier 1: Tactical Alignment

The first stage focuses on the mutual setting of expectations and is essential to a successful client relationship. It begins with a process of assessment and alignment in which the business owners' attitudes, objectives and culture are aligned with BBSI's processes, controls and culture. This stage includes an implementation process, which addresses the administrative components of managing employees.

Tier 2: Dynamic Relationship

The second stage of the relationship focuses on the development of the client's organization. There is a focus on process improvement, development of best practices, supervisor development and leadership training.

Tier 3: Strategic Counsel

With a focus on advocating for the business owner, activities in the third stage of the relationship are more strategic and forward-looking with a goal of cultivating an environment in which all efforts are directed by the mission and objectives of the business owner.

In addition to serving as resource and guide, BBSI has the ability to provide workers' compensation coverage as a means of meeting statutory requirements and protecting our clients from employment-related injury claims. Through our internal claims managers and our third-party administrators, we provide claims management services for our co-employed clients. We work aggressively to manage and reduce job injury claims, identify fraudulent claims and structure optimal work programs, including modified duty employees.

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 six months ended June 30, 2014 and 2013.

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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               Percentage of Total Revenue
                                            Three Months Ended                         Six Months Ended
                                                 June 30,                                  June 30,
                                        2014                   2013                2014                  2013
Revenues:
Professional employer service
fees                                        74.5 %                72.6 %              74.8 %                72.9 %
Staffing services                           25.5                  27.4                25.2                  27.1

Total revenues                             100.0                 100.0               100.0                 100.0

Cost of revenues:
Direct payroll costs                        19.4                  20.7                19.1                  20.3
Payroll taxes and benefits                  40.4                  41.5                46.8                  46.9
Workers' compensation                       20.4                  19.4                20.4                  19.5

Total cost of revenues                      80.2                  81.6                86.3                  86.7

Gross margin                                19.8                  18.4                13.7                  13.3
Selling, general and
administrative expenses                     12.0                  11.2                11.4                  10.9
Depreciation and amortization                0.4                   0.4                 0.4                   0.4

Income from operations                       7.4                   6.8                 1.9                   2.0
Other income                                 0.1                   0.1                 0.1                   0.1

Income before income taxes                   7.5                   6.9                 2.0                   2.1
Provision for income taxes                   2.7                   2.3                 0.7                   0.7

Net income                                   4.8 %                 4.6 %               1.3 %                 1.4 %

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 generally increase our 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 decrease our 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             Six Months Ended
   (in thousands)                          June 30,                      June 30,
                                      2014          2013           2014            2013
   Revenues:
   Professional employer services   $ 759,838     $ 639,663     $ 1,453,764     $ 1,201,146
   Staffing services                   38,566        35,304          72,017          65,037

   Total revenues                     798,404       674,967       1,525,781       1,266,183

   Cost of revenues:
   Direct payroll costs               672,078       568,799       1,285,398       1,067,538
   Payroll taxes and benefits          61,130        53,483         133,947         112,606
   Workers' compensation               35,344        28,959          67,278          54,002

   Total cost of revenues             768,552       651,241       1,486,623       1,234,146

   Gross margin                     $  29,852     $  23,726     $    39,158     $    32,037

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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 June 30,
                                       Gross Revenue                                                Net Revenue
(in thousands)                       Reporting Method              Reclassification              Reporting Method
                                    2014          2013           2014            2013           2014          2013
Revenues:
Professional employer services    $ 759,838     $ 639,663     $ (647,335 )    $ (546,169 )    $ 112,503     $  93,494
Staffing services                    38,566        35,304              0               0         38,566        35,304

Total revenues                    $ 798,404     $ 674,967     $ (647,335 )    $ (546,169 )    $ 151,069     $ 128,798

Cost of revenues                  $ 768,552     $ 651,241     $ (647,335 )    $ (546,169 )    $ 121,217     $ 105,072

                                                                           Unaudited
                                                                   Six Months Ended June 30,
                                         Gross Revenue                                                      Net Revenue
(in thousands)                         Reporting Method                  Reclassification                Reporting Method
                                     2014            2013             2014              2013            2014          2013
Revenues:
Professional employer services    $ 1,453,764     $ 1,201,146     $ (1,239,572 )    $ (1,025,834 )    $ 214,192     $ 175,312
Staffing services                      72,017          65,037                0                 0         72,017        65,037

Total revenues                    $ 1,525,781     $ 1,266,183     $ (1,239,572 )    $ (1,025,834 )    $ 286,209     $ 240,349

Cost of revenues                  $ 1,486,623     $ 1,234,146     $ (1,239,572 )    $ (1,025,834 )    $ 247,051     $ 208,312

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

Three months ended June 30, 2014 and 2013

Net income for the second quarter of 2014 amounted to $7.3 million, as compared to a net income of $5.9 million for the second quarter of 2013. Diluted income per share for the second quarter of 2014 was $0.98 compared to diluted income per share of $0.80 for the comparable 2013 period.

Revenues for the second quarter of 2014 totaled $151.1 million, an increase of approximately $22.3 million or 17.3% over the second quarter of 2013, which reflects an increase in the Company's professional employer service fee revenue of $19.0 million or 20.3%, coupled with an increase in staffing services revenue of $3.3 million or 9.2%.

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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 June 30, 2014 and 2013 (Continued)

Approximately 76% and 73%, respectively, of our revenue during the three months ended June 30, 2014 and 2013 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 as business from new customers during the second quarter of 2014 nearly doubled our lost business from former customers. Professional employer service revenues from continuing customers reflected a 9.2% increase compared to the second quarter of 2013, 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, partially offset by lost business from former customers.

Gross margin for the second quarter of 2014 totaled approximately $29.9 million or an increase of 25.8% over the second quarter of 2013, primarily due to the 17.3% increase in revenues and a decline in direct payroll cost and payroll taxes and benefits, as a percentage of revenues, partially offset by higher workers' compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 20.7% for the second quarter of 2013 to 19.4% for the second quarter of 2014 was primarily due to the increase in our mix of professional employer services in the Company's customer base compared to the second quarter of 2013 and the effect of each customer's unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the second quarter of 2014 was 40.4% compared to 41.5% for the second quarter of 2013. The percentage rate decrease was primarily due to optimizing the use of prior wages applied against the state statutory unemployment taxable wage basis as new PEO customers are brought on board and to a slight rise in the overall average wage rates which allowed the tax ceilings to be reached sooner in the year 2014 as compared to 2013.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $25.0 million or 19.4% in the second quarter of 2013 to $30.8 million or 20.4% in the second quarter of 2014. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims. Our total provision for current year claims of $17.5 million was based on the loss rate as a percentage of payroll calculated by our independent actuary at December 31, 2013. We also accrued $1.3 million in additional expense during the quarter related to prior year claims.

In September 2012, California Senate Bill 863 ("SB 863") was signed into law. Under SB 863, the California Director of Self-Insurance was ordered 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.

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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 June 30, 2014 and 2013 (Continued)

Additionally, the Director is required to revoke any previously issued certificate of consent to self-insure in favor of any employer engaged in these types of activities not later than January 1, 2015. To address this issue, BBSI entered into an arrangement typically known as a "fronted" program with ACE Group ("ACE") in February 2014. Under this arrangement, the risk of loss up to the first $5.0 million per claim will be retained by BBSI through an indemnity agreement, although ACE will be responsible for any claims BBSI is unable to satisfy. In addition, ACE continues to be BBSI's carrier for costs in excess of $5.0 million per claim. During the first quarter of 2014, we began the transition to the ACE program so that by December 31, 2014, all of our employees working in California will be covered by this new arrangement. We expect to incur increased costs during this transition that will likely continue following implementation of the fronted insurance program.

As described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2013, we maintain reserves (recorded as accrued liabilities on our balance sheet) to cover our estimated liabilities for our self-insured workers' compensation claims. The adequacy of reserves can be affected by both internal and external events, including adverse development on existing claims, changes in medical, administrative and legal costs, and legislative or systemic changes. We have undertaken a number of steps during the past two years to improve our workers' compensation claims administration and reserving practices. These steps include hiring additional claim administrators in response to our business growth, and working to close litigated claims more quickly. In order to further refine our reserving practices, the Company has engaged an additional actuarial firm to assist management in gaining an enhanced understanding of actuarial valuation in light of the Company's specific workers' compensation claims experience.

Selling, general and administrative ("SG&A") expenses for the second quarter of 2014 totaled approximately $18.0 million, an increase of $3.5 million or 23.9% over the second quarter of 2013. The increase was primarily attributable to increases in management payroll, increased information technology ("IT") expenses and other variable expense components within SG&A to support our business growth. The increased IT expenses relate to projects designed to enhance access and delivery of information to the field as well as improve efficiencies over time.

The income tax rate for the 2014 second quarter was 36.0% compared to the 2013 second quarter rate of 33.4%. We expect the effective income tax rate for the balance of 2014 to remain at a similar rate to the 2014 second quarter income tax rate.

Six months ended June 30, 2014 and 2013

Net income for the six months ended June 30, 2014 amounted to $3.7 million, as compared to a net income of $3.3 million for the first six months of 2013. Diluted income per share for the first six months of 2014 was $0.50 compared to diluted income per share of $0.45 for the comparable 2013 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)

Six months ended June 30, 2014 and 2013 (Continued)

Revenues for the six months ended June 30, 2014 totaled $286.2 million, an increase of approximately $45.9 million or 19.1% over the comparable period in 2013, which reflects an increase in the Company's professional employer service fee revenue of $38.9 million or 22.2%, coupled with an increase in staffing services revenue of $7.0 million or 10.7%. Approximately 77% and 74% respectively, of our revenue during the six months ended June 30, 2014 and 2013 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 as business from new customers during the first six months of 2014 nearly doubled our lost business from former customers. Professional employer service revenues from continuing customers reflected a 9.1% increase compared to the first six months of 2013, 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, partially offset by lost business from former customers.

Gross margin for the six months ended June 30, 2014 totaled approximately $39.2 million or an increase of 22.2% over the comparable period of 2013, primarily due to the 19.1% increase in revenues and a decline in direct payroll costs, as a percentage of revenues, partially offset by higher workers' compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 20.3% for the first six months of 2013 to 19.1% for the first six months of 2014 was primarily due to the increase in our mix of professional employer services in the Company's customer base compared to the same period of 2013 and the effect of each customer's unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the first six months of 2014 was 46.8% compared to 46.9% for the comparable period of 2013.

Workers' compensation expense, in terms of dollars and as a percentage of revenues, increased from $46.8 million or 19.5% in the first six months of 2013 to $58.4 million or 20.4% in the first six months of 2014. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims. Our total provision for current year claims of $33.9 million was based on the loss rate as a percentage of payroll calculated by our independent actuary at December 31, 2013. We also accrued $5.1 million in additional expense during the first six months of 2014 related to prior year claims.

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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)

Six months ended June 30, 2014 and 2013 (Continued)

Selling, general and administrative ("SG&A") expenses for the first six months of 2014 totaled approximately $32.3 million, an increase of $6.0 million or 22.9% over the first six months of 2013. The increase was primarily attributable to increases in management payroll, IT expenses and other variable expense components within SG&A to support our business growth.

The income tax rate for the first six months of 2014 was 36.5% compared to the income tax rate for the first six months of 2013 of 32.8%.

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 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 six months ended June 30, 2014 decreased $45.7 million from December 31, 2013, which compares to a decrease of $36.9 million for the comparable period in 2013. The decrease in cash at June 30, 2014 as compared to December 31, 2013, was primarily due to the purchase of restricted marketable securities and restricted certificates of deposit of $35.7 million, the purchase of marketable securities of $24.0 million, and an increase in trade accounts receivable of $18.4 million, partially offset by net income of $3.7 million, a $13.2 million increase in accrued payroll and payroll taxes, and a $10.1 million increase in workers' compensation claims liabilities. . . .

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