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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013

Commission File No. 0-21886

BARRETT BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   52-0812977

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

8100 NE Parkway Drive, Suite 200

Vancouver, Washington

  98662
(Address of principal executive offices)   (Zip Code)

(360) 828-0700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock, $.01 par value, outstanding at October 31, 2013 was 7,165,231 shares.


Table of Contents

BARRETT BUSINESS SERVICES, INC.

INDEX

 

      Page  
Part I - Financial Information   
        Item 1.   Unaudited Interim Consolidated Financial Statements   
  Consolidated Balance Sheets – September 30, 2013 and December 31, 2012      3   
  Consolidated Statements of Operations - Three Months Ended September 30, 2013 and 2012      4   
  Consolidated Statements of Operations - Nine Months Ended September 30, 2013 and 2012      5   
  Consolidated Statements of Comprehensive Income - Three Months Ended September 30, 2013 and 2012      6   
  Consolidated Statements of Comprehensive Income - Nine Months Ended September 30, 2013 and 2012      6   
  Consolidated Statements of Stockholders’ Equity - Nine Months Ended September 30, 2013 and 2012      7   
  Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2013 and 2012      8   
  Notes to Unaudited Interim Consolidated Financial Statements      9   
        Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
        Item 3.   Quantitative and Qualitative Disclosures About Market Risk      27   
        Item 4.   Controls and Procedures      27   
Part II - Other Information   
        Item 1A.   Risk Factors      28   
        Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      28   
        Item 6.   Exhibits      28   
Signatures      29   
Exhibit Index      30   

 

- 2 -


Table of Contents

Part I - Financial Information

 

Item 1. Financial Statements

BARRETT BUSINESS SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)

 

     September 30,
2013
    December 31,
2012
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 34,978      $ 45,747   

Marketable securities

     7,108        16,748   

Trade accounts receivable, net

     98,717        63,921   

Income taxes receivable

     2,307        0   

Prepaid expenses and other

     1,444        4,854   

Restricted certificates of deposit

     63,944        0   

Deferred income taxes

     8,172        8,148   
  

 

 

   

 

 

 

Total current assets

     216,670        139,418   

Marketable securities

     5,876        9,899   

Property, equipment and software, net

     20,383        18,489   

Restricted marketable securities and workers’ compensation deposits

     10,472        9,726   

Other assets

     3,132        3,509   

Goodwill

     47,820        47,820   
  

 

 

   

 

 

 
   $ 304,353      $ 228,861   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 220      $ 220   

Line of credit

     0        4,532   

Accounts payable

     2,721        1,995   

Accrued payroll, payroll taxes and related benefits

     107,060        69,568   

Income taxes payable

     0        272   

Other accrued liabilities

     953        306   

Workers’ compensation claims liabilities

     32,068        24,541   

Safety incentives liability

     11,947        9,842   
  

 

 

   

 

 

 

Total current liabilities

     154,969        111,276   

Long-term workers’ compensation claims liabilities

     63,912        46,023   

Long-term debt

     5,108        5,273   

Deferred income taxes

     10,607        10,607   

Customer deposits and other long-term liabilities

     1,789        1,786   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $.01 par value; 500 shares authorized; no shares issued and outstanding

     0        0   

Common stock, $.01 par value; 20,500 shares authorized, 7,165 and 7,017 shares issued and outstanding

     72        70   

Additional paid-in capital

     5,456        913   

Accumulated other comprehensive (loss) income

     (16     23   

Retained earnings

     62,456        52,890   
  

 

 

   

 

 

 
     67,968        53,896   
  

 

 

   

 

 

 
   $ 304,353      $ 228,861   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

- 3 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended
September 30,
 
     2013     2012  

Revenues:

    

Professional employer service fees

   $ 106,244      $ 74,874   

Staffing services

     41,727        36,195   
  

 

 

   

 

 

 

Total revenues

     147,971        111,069   
  

 

 

   

 

 

 

Cost of revenues:

    

Direct payroll costs

     31,585        27,158   

Payroll taxes and benefits

     57,977        42,915   

Workers’ compensation

     28,223        19,432   
  

 

 

   

 

 

 

Total cost of revenues

     117,785        89,505   
  

 

 

   

 

 

 

Gross margin

     30,186        21,564   

Selling, general and administrative expenses

     16,808        12,745   

Depreciation and amortization

     521        372   
  

 

 

   

 

 

 

Income from operations

     12,857        8,447   
  

 

 

   

 

 

 

Other income (expense):

    

Investment income, net

     154        172   

Interest expense

     (48     (10

Other

     3        (6
  

 

 

   

 

 

 

Other income

     109        156   
  

 

 

   

 

 

 

Income before income taxes

     12,966        8,603   

Provision for income taxes

     3,972        2,791   
  

 

 

   

 

 

 

Net Income

   $ 8,994      $ 5,812   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 1.26      $ .83   
  

 

 

   

 

 

 

Weighted average number of basic common shares outstanding

     7,150        7,007   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 1.21      $ .81   
  

 

 

   

 

 

 

Weighted average number of diluted common shares outstanding

     7,425        7,184   
  

 

 

   

 

 

 

Cash dividends per common share

   $ .13      $ .11   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

- 4 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

     Nine Months Ended
September 30,
 
     2013     2012  

Revenues:

    

Professional employer service fees

   $ 281,556      $ 196,198   

Staffing services

     106,764        92,793   
  

 

 

   

 

 

 

Total revenues

     388,320        288,991   
  

 

 

   

 

 

 

Cost of revenues:

    

Direct payroll costs

     80,492        69,653   

Payroll taxes and benefits

     170,583        125,239   

Workers’ compensation

     75,022        49,637   
  

 

 

   

 

 

 

Total cost of revenues

     326,097        244,529   
  

 

 

   

 

 

 

Gross margin

     62,223        44,462   

Selling, general and administrative expenses

     43,113        33,058   

Depreciation and amortization

     1,487        1,076   
  

 

 

   

 

 

 

Income from operations

     17,623        10,328   
  

 

 

   

 

 

 

Other income (expense):

    

Investment income, net

     499        613   

Interest expense

     (191     (23

Other

     (2     (22
  

 

 

   

 

 

 

Other income

     306        568   
  

 

 

   

 

 

 

Income before income taxes

     17,929        10,896   

Provision for income taxes

     5,598        3,554   
  

 

 

   

 

 

 

Net Income

   $ 12,331      $ 7,342   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 1.74      $ .92   
  

 

 

   

 

 

 

Weighted average number of basic common shares outstanding

     7,085        7,959   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 1.67      $ .91   
  

 

 

   

 

 

 

Weighted average number of diluted common shares outstanding

     7,371        8,069   
  

 

 

   

 

 

 

Cash dividends per common share

   $ .39      $ .33   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

- 5 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

     Three Months Ended
September 30,
 
     2013      2012  

Net income

   $ 8,994       $ 5,812   

Unrealized gains (losses) on marketable securities, net of tax of $5 and $(12) in 2013 and 2012, respectively

     7         (19
  

 

 

    

 

 

 

Comprehensive income

   $ 9,001       $ 5,793   
  

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
 
     2013     2012  

Net income

   $ 12,331      $ 7,342   

Unrealized (losses) gains on marketable securities, net of tax of $(25) and $15 in 2013 and 2012, respectively

     (39     24   
  

 

 

   

 

 

 

Comprehensive income

   $ 12,292      $ 7,366   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2013 and 2012

(Unaudited)

(In thousands)

 

           Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive

Income (Loss)
    Retained
Earnings
    Total  
     Common Stock          
     Shares     Amount          

Balance, December 31, 2011

     9,871      $ 99      $ 20,943      $ (34   $ 80,647      $ 101,655   

Common stock issued on exercise of options

     128        1        1,767        0        0        1,768   

Stock option compensation expense, net of tax

     0        0        490        0        0        490   

Tax benefit of stock option exercises

     0        0        259        0        0        259   

Repurchase of common stock

     (2,986     (30     (22,864     0        (37,338     (60,232

Cash dividends on common stock

     0        0        0        0        (2,639     (2,639

Unrealized holding gains on marketable securities, net of tax

     0        0        0        24        0        24   

Net income

     0        0        0        0        7,342        7,342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     7,013      $ 70      $ 595      $ (10   $ 48,012      $ 48,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     7,017        70        913        23        52,890        53,896   

Common stock issued on exercise of options

     148        2        1,858        0        0        1,860   

Stock option compensation expense, net of tax

     0        0        602        0        0        602   

Excess tax benefits from share-based compensation

     0        0        2,083        0        0        2,083   

Cash dividends on common stock

     0        0        0        0        (2,765     (2,765

Unrealized holding losses on marketable securities, net of tax

     0        0        0        (39     0        (39

Net income

     0        0        0        0        12,331        12,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

     7,165      $ 72      $ 5,456      $ (16   $ 62,456      $ 67,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

- 7 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Nine Months Ended
September 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net Income

   $ 12,331      $ 7,342   

Reconciliations of net income to net cash provided by operating activities:

    

Depreciation and amortization

     1,487        1,076   

Gains recognized on marketable securities

     (1     (1

Gain recognized on sale and leaseback

     (61     (92

Deferred income taxes

     (48     30   

Share-based compensation

     602        490   

Changes in certain assets and liabilities:

    

Trade accounts receivable, net

     (34,796     (24,498

Income taxes receivable

     (2,307     701   

Prepaid expenses and other

     3,410        4,361   

Accounts payable

     726        496   

Accrued payroll, payroll taxes and related benefits

     37,492        25,193   

Other accrued liabilities

     647        55   

Income taxes payable

     (272     2,969   

Workers’ compensation claims liabilities

     25,416        11,835   

Safety incentives liability

     2,105        2,357   

Customer deposits, long-term liabilities and other assets, net

     441        133   
  

 

 

   

 

 

 

Net cash provided by operating activities

     47,172        32,447   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (3,381     (2,666

Proceeds from sales and maturities of marketable securities

     58,740        32,676   

Purchase of marketable securities

     (45,091     (28,959

Purchase of restricted certificates of deposit

     (63,944     0   

Proceeds from maturities of restricted marketable securities

     6,429        6,495   

Purchase of restricted marketable securities

     (7,175     (6,539
  

 

 

   

 

 

 

Net cash used in investing activities

     (54,422     1,007   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from credit-line borrowings

     132,664        12,186   

Payments on credit-line borrowings

     (137,196     (12,186

Redemption of mandatorily redeemable preferred stock

     0        (34,800

Payments on long-term debt

     (165     0   

Repurchase of common stock

     0        (25,432

Dividends paid

     (2,765     (2,639

Proceeds from exercise of stock options

     1,860        1,768   

Excess tax benefits from share-based compensation

     2,083        259   
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,519     (60,844
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (10,769     (27,390

Cash and cash equivalents, beginning of period

     45,747        49,571   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 34,978      $ 22,181   
  

 

 

   

 

 

 

Supplemental schedule of noncash financing activities:

    

Issuance of mandatorily redeemable preferred stock

   $ 0      $ 34,800   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation of Interim Period Statements

The accompanying consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“Barrett”, “BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from such estimates and assumptions. The consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K at pages F1 – F29. The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Revenue recognition

We recognize revenue as services are rendered by our workforce. Professional employer services are normally used by organizations to satisfy ongoing human resource management needs and typically involve contracts with a minimum term of one year, which cover all employees at a particular work site. Our client services agreements are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party. Our client services agreements provide for immediate termination upon any default of the client regardless of when notice is given. 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 services agreements. Consequently, our professional employer service revenues represent the gross margin generated from our professional employer services after deducting the amounts invoiced to clients for direct payroll expenses such as salaries and wages and safety incentives. These amounts are also excluded from cost of revenues. Professional employer service revenues also include amounts invoiced to our clients for employer payroll-related taxes and workers’ compensation coverage. Staffing services are engaged by customers to meet short-term and long-term personnel needs.

Marketable securities

As of September 30, 2013, the Company’s marketable securities consisted of certificates of deposit, tax-exempt municipal securities and corporate bonds. The Company classifies certificates of deposit, municipal securities and certain of its corporate bonds as available for sale; they are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the statement of operations.

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 1 - Basis of Presentation of Interim Period Statements (Continued)

 

Allowance for doubtful accounts

The Company had an allowance for doubtful accounts of $427,000 and $381,000 at September 30, 2013 and December 31, 2012, respectively. The Company must make estimates of the collectability of accounts receivable. Management analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic conditions and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts. The Company deems an account balance uncollectible only after it has pursued all available assets of the customer and, where applicable, the assets of the personal guarantor.

Workers’ compensation claims

The Company is a self-insured employer with respect to workers’ compensation coverage for all of its employees (including employees co-employed through our client service agreements) working in California, Oregon, Maryland, Delaware and Colorado. In the state of Washington, state law allows only the Company’s staffing services and internal management employees to be covered under the Company’s self-insured workers’ compensation program. Additionally, the Company operates a wholly-owned fully licensed insurance company, Ecole Insurance Company (“Ecole”), in Arizona to provide workers’ compensation coverage to our employees in Arizona.

To manage our financial exposure, in the event of catastrophic injuries or fatalities, the Company maintains excess workers’ compensation insurance through our wholly owned captive insurance company, Associated Insurance Company for Excess (“AICE”), with a per occurrence retention of $5.0 million, except in Maryland and Colorado, where our per occurrence retention is $1.0 million and $500,000, respectively. AICE maintains excess workers’ compensation insurance coverage with ACE American Insurance Company (“ACE”), between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with ACE is between $1.0 million and $25.0 million per occurrence, and in Colorado, where the coverage with ACE is between $500,000 and statutory limits per occurrence. The Company continues to evaluate the financial capacity of its insurers to assess the recoverability of the related insurer receivables.

The Company has provided a total of $96.0 million and $70.6 million at September 30, 2013 and December 31, 2012, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. The estimated liability for unsettled workers’ compensation claims represents management’s best estimate based upon an actuarial valuation provided by a third party actuary. Included in the claims liabilities are case reserve estimates for reported losses, plus additional amounts based on projections for incurred but not reported claims and anticipated increases in case reserve estimates. Also included in these estimates are amounts for unallocated loss adjustment expenses, including legal costs. These estimates are continually reviewed and adjustments to liabilities are reflected in current operating results as they become known.

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 1 - Basis of Presentation of Interim Period Statements (Continued)

 

Safety incentives liability

Safety incentives represent cash incentives paid to certain client companies under client service agreements for maintaining safe-work practices in order to minimize workplace injuries, thereby meeting agreed-upon loss objectives. The Company has provided $11.9 million at September 30, 2013 and $9.8 million at December 31, 2012 as an estimate of the liability for unpaid safety incentives. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The liability is estimated and accrued each month based upon the incentive earned less the then-current amount of the customer’s estimated workers’ compensation claims reserves as established by the Company’s internal and third-party claims administrators, and the expected payout as determined by historical incentive payment trends. Safety incentive expense is netted against professional employer services revenue in our consolidated statements of operations.

Statements of cash flows

Interest paid during the nine months ended September 30, 2013 and 2012 did not materially differ from interest expense. Income taxes paid by the Company during the nine months ended September 30, 2013 and 2012 totaled $6.1 million and $246,000, respectively.

Reclassifications

Certain prior year amounts have been reclassified to conform with the 2013 presentation. Such reclassifications had no impact on the Company’s financial condition, operating results, cash flows, working capital or stockholders’ equity.

Note 2 – Stock Repurchase

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 combination of $24.9 million in cash and issued 34,800 shares of Series A Nonconvertible, Non-Voting Redeemable Preferred Stock with a liquidation preference of $1,000 per share. Additionally, the Company incurred professional and legal fees totaling $514,000 related to the transaction.

Effective September 21, 2012, the Company redeemed all of the outstanding shares of its Series A Nonconvertible, Non-Voting Redeemable Preferred Stock for $34.8 million using a combination of cash on hand and availability under a new revolving credit facility provided by its principal bank. By redeeming the preferred stock within six months of issuance, the Company was not required to pay a semi-annual dividend of approximately $870,000 due September 28, 2012.

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 3 – Revolving Credit Facility

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, which had a maximum capacity of $21.5 million, at September 30, 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 $70.6 million at September 30, 2013. As part of the letter of credit related to California workers’ compensation, the Company posted $63.9 million of certificates of deposit with the Bank as collateral. These certificates of deposit are classified as restricted within current assets on the Company’s Consolidated Balance Sheet.

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 September 30, 2013.

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 4 - Basic and Diluted Earnings Per Share

Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share reflect the potential effects of the exercise of outstanding stock options and vesting of restricted stock units. Basic and diluted common shares outstanding are summarized as follows:

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2013      2012      2013      2012  

Weighted average number of basic common shares outstanding

     7,149,502         7,007,333         7,084,593         7,959,086   

Effect of dilutive securities

     275,026         176,180         285,926         109,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of diluted common shares outstanding

     7,424,528         7,183,513         7,370,519         8,068,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5- Workers’ Compensation

The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Beginning balance

           

Workers’ compensation claims liabilities

   $ 84,543       $ 55,765       $ 70,564       $ 51,193   

Add: claims expense accrual:

           

Current period

     17,396         9,891         44,825         26,224   

Prior periods

     5,002         3,835         12,688         6,945   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expense accrual

     22,398         13,726         57,513         33,169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: claim payments related to:

           

Current period

     3,124         2,207         5,998         3,790   

Prior periods

     7,837         5,656         26,099         18,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total paid

     10,961         7,863         32,097         22,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

           

Workers’ compensation claims liabilities

   $ 95,980       $ 61,628       $ 95,980       $ 61,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

Incurred but not reported (IBNR)

   $ 59,412       $ 44,311       $ 59,412       $ 44,311   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 6 - Fair Value Measurement

Marketable securities consist of the following investments (in thousands):

 

     September 30, 2013      December 31, 2012         
     Cost      Gross
Unrealized
Losses
    Recorded
Basis
     Cost      Gross
Unrealized
Gains
     Recorded
Basis
     Fair
Value
Category
 

Current:

                   

Available-for-sale:

                   

Certificate of deposits

   $ 6,860       $ (9   $ 6,851       $ 0       $ 0       $ 0         2   

Municipal bonds

     5         0        5         409         1         410         2   

Corporate bonds

     256         (4     252         14,764         16         14,780         2   

US treasuries

     0         0        0         1,555         3         1,558         1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    
   $ 7,121       $ (13   $ 7,108       $ 16,728       $ 20       $ 16,748      
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

Long term:

                   

Available-for-sale:

                   

Municipal bonds

   $ 4,290       $ (12   $ 4,278       $ 292       $ 1       $ 293         2   

Corporate bonds

     1,613         (15     1,598         9,111         28         9,139         2   

Held-to-maturity:

                   

Corporate bonds

     0         0        0         467         0         467         2   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    
   $ 5,903       $ (27   $ 5,876       $ 9,870       $ 29       $ 9,899      
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

The Company’s current restricted certificates of deposit are summarized as follows (in thousands):

 

     September 30, 2013      December 31, 2012         
     Cost      Gross
Unrealized
Gains
     Recorded
Basis
     Cost      Gross
Unrealized
Gains
     Recorded
Basis
        

Restricted certificates of deposit

   $ 63,944       $ 0       $ 63,944       $ 0       $ 0       $ 0         2   

 

- 14 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 6 - Fair Value Measurement (Continued)

 

The Company’s long term restricted marketable securities component of restricted marketable securities and workers’ compensation deposits consists of the following (in thousands):

 

     September 30, 2013      December 31, 2012         
     Cost      Gross
Unrealized
Gains
     Recorded
Basis
     Cost      Gross
Unrealized
Gains
     Recorded
Basis
     Fair
Value
Category
 

Available-for-sale:

                    

Municipal bonds

   $ 4,855       $ 8       $ 4,863       $ 4,920       $ 17       $ 4,937         2   

Corporate bonds

     2,685         6         2,691         2,035         5         2,040         2   

U.S. treasuries

     2,472         0         2,472         1,780         0         1,780         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
   $ 10,012       $ 14       $ 10,026       $ 8,735       $ 22       $ 8,757      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

- 15 -


Table of Contents
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.

 

- 17 -


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
September 30,
    Nine Months Ended
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.

 

(in thousands)    Unaudited
Three Months Ended
September 30,
     Unaudited
Nine Months Ended
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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 19 -


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,
 
(in thousands)    Gross Revenue
Reporting Method
     Reclassification     Net Revenue
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,
 
(in thousands)    Gross Revenue
Reporting Method
     Reclassification     Net Revenue
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.

 

- 20 -


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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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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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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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, 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 September 30, 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 $70.6 million as of September 30, 2013.

Effective June 14, 2013, the Company increased its outstanding standby letters of credit by $46.7 million to a total of $70.6 million. This increase resulted from the California self-insured workers’ compensation surety deposit requirement. The total letter of credit related to California workers’ compensation was $63.9 million as of September 30, 2013. As part of the increased letter of credit related to California workers’ compensation, the Company posted $63.9 million of certificates of deposit with the Bank as collateral. These certificates of deposit are classified as restricted within current assets on the Company’s Consolidated Balance Sheet.

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 maximum principal amount available at September 30, 2013 was $21.5 million.

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.

 

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

 

Liquidity and Capital Resources (Continued)

 

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 September 30, 2013.

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, collectability 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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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates primarily relates to its investment portfolio of liquid assets and its outstanding borrowings on its line of credit and long-term debt. As of September 30, 2013, the Company’s investment portfolio consisted principally of approximately $70.8 million in certificates of deposit, $9.1 million in tax-exempt municipal bonds, and approximately $4.5 million in corporate bonds. The Company’s outstanding borrowings on its line of credit and long-term debt totaled approximately $5.3 million at September 30, 2013. Based on the Company’s overall interest exposure at September 30, 2013, a 100 basis point increase in market interest rates would not have a material effect on the fair value of the Company’s investment portfolio of liquid assets, its outstanding borrowings or its results of operations because of the predominantly short maturities of the securities within the investment portfolio and the relative size of the outstanding borrowings.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2013 the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II – Other Information

 

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2012 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no common stock repurchases during the quarter ended September 30, 2013. In November 2006, the Board adopted a stock repurchase program and authorized the repurchase of up to 500,000 common shares of the Company’s common stock from time to time in open market purchases. In November 2007, the Board approved an increase in the authorized shares to be repurchased up to 1.0 million common shares. In October 2008, the Board approved a second increase in the authorized common shares to be repurchased up to 3.0 million shares. At September 30, 2013, 1,208,200 shares could be repurchased under the program.

 

Item 6. Exhibits

The exhibits filed with this report are listed in the Exhibit Index following the signature page of this report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    BARRETT BUSINESS SERVICES, INC.
    (Registrant)
Date: November 8, 2013    

/s/ James D. Miller

    James D. Miller
    Vice President-Finance, Treasurer and Secretary
    (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

Exhibit

 

  31.1    Certification of the Chief Executive Officer under Rule 13a-14(a).
  31.2    Certification of the Chief Financial Officer under Rule 13a-14(a).
  32    Certification pursuant to 18 U.S.C. Section 1350.
101.    INS XBRL Instance Document
101.    SCH XBRL Taxonomy Extension Schema Document
101.    CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.    DEF XBRL Taxonomy Extension Definition Linkbase Document
101.    LAB XBRL Taxonomy Extension Label Linkbase Document
101.    PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

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