XNAS:BBSI Barrett Business Services Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012

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 July 31, 2012 was 7,003,931 shares.

 

 

 


Table of Contents

BARRETT BUSINESS SERVICES, INC.

INDEX

 

     Page  

Part I—Financial Information

  

Item 1. Unaudited Interim Consolidated Financial Statements

  

Consolidated Balance Sheets – June 30, 2012 and December 31, 2011

     3   

Consolidated Statements of Operations—Three Months Ended June 30, 2012 and 2011

     4   

Consolidated Statements of Operations—Six Months Ended June 30, 2012 and 2011

     5   

Consolidated Statements of Comprehensive Income—Three Months Ended June 30, 2012 and 2011

     6   

Consolidated Statements of Comprehensive Income—Six Months Ended June 30, 2012 and 2011

     6   

Consolidated Statements of Stockholders’ Equity—Six Months Ended June 30, 2012 and 2011

     7   

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2012 and 2011

     8   

Notes to Unaudited Interim Consolidated Financial Statements

     9   

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

     15   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4. Controls and Procedures

     25   

Part II—Other Information

  

Item 1A. Risk Factors

     26   

Item 6. Exhibits

     26   

Signatures

     27   

Exhibit Index

     28   

 

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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)

 

      June 30,
2012
     December 31,
2011
 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 36,358       $ 49,571   

Marketable securities

     14,240         16,878   

Trade accounts receivable, net

     63,433         46,520   

Income taxes receivable

     3,432         4,133   

Prepaid expenses and other

     2,914         5,897   

Deferred income taxes

     5,931         5,958   
  

 

 

    

 

 

 

Total current assets

     126,308         128,957   

Marketable securities

     17,439         15,395   

Property, equipment and software, net

     15,832         15,007   

Restricted marketable securities and workers’ compensation deposits

     9,932         9,923   

Other assets

     3,035         3,027   

Workers’ compensation receivables for insured losses and recoveries

     1,601         2,968   

Goodwill

     47,820         47,820   
  

 

 

    

 

 

 
   $ 221,967       $ 223,097   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

   $ 1,913       $ 1,639   

Accrued payroll, payroll taxes and related benefits

     68,385         52,340   

Income taxes payable

     193         0   

Other accrued liabilities

     350         300   

Workers’ compensation claims liabilities

     19,670         18,718   

Safety incentives liability

     7,541         6,321   
  

 

 

    

 

 

 

Total current liabilities

     98,052         79,318   

Long-term workers’ compensation claims liabilities

     35,231         30,596   

Long-term workers’ compensation claims liabilities for insured claims

     864         1,879   

Deferred income taxes

     8,152         8,152   

Mandatorily redeemable preferred stock, $.01 par value; 50 shares authorized; 35 and 0 shares issued and outstanding

     34,800         0   

Customer deposits and other long-term liabilities

     1,502         1,497   

Commitments and contingencies

     

Stockholders’ equity:

     

Preferred stock, $.01 par value; 450 shares authorized; no shares issued and outstanding

     0         0   

Common stock, $.01 par value; 20,500 shares authorized, 7,003 and 9,871 shares issued and outstanding

     70         99   

Additional paid-in capital

     316         20,943   

Accumulated other comprehensive income (loss)

     9         (34

Retained earnings

     42,971         80,647   
  

 

 

    

 

 

 
     43,366         101,655   
  

 

 

    

 

 

 
   $ 221,967       $ 223,097   
  

 

 

    

 

 

 

 

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 Operations

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended
June 30,
 
     2012     2011  

Revenues:

    

Staffing services

   $ 30,387      $ 30,518   

Professional employer service fees

     65,113        45,495   
  

 

 

   

 

 

 

Total revenues

     95,500        76,013   
  

 

 

   

 

 

 

Cost of revenues:

    

Direct payroll costs

     22,843        23,093   

Payroll taxes and benefits

     39,332        28,886   

Workers’ compensation

     16,984        10,753   
  

 

 

   

 

 

 

Total cost of revenues

     79,159        62,732   
  

 

 

   

 

 

 

Gross margin

     16,341        13,281   

Selling, general and administrative expenses

     10,549        8,871   

Depreciation and amortization

     357        331   
  

 

 

   

 

 

 

Income from operations

     5,435        4,079   
  

 

 

   

 

 

 

Other income:

    

Investment income, net

     205        273   

Other

     (9     (7
  

 

 

   

 

 

 

Other income

     196        266   
  

 

 

   

 

 

 

Income before income taxes

     5,631        4,345   

Provision for income taxes

     1,888        896   
  

 

 

   

 

 

 

Net income

   $ 3,743      $ 3,449   
  

 

 

   

 

 

 

Basic earnings per common share

   $ .54      $ .34   
  

 

 

   

 

 

 

Weighted average number of basic common shares outstanding

     6,995        10,196   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ .53      $ .34   
  

 

 

   

 

 

 

Weighted average number of diluted common shares outstanding

     7,078        10,245   
  

 

 

   

 

 

 

Dividends declared per common share

   $ .11      $ .09   
  

 

 

   

 

 

 

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 Operations

(Unaudited)

(In thousands, except per share amounts)

 

      Six Months Ended
June 30,
 
     2012     2011  

Revenues:

    

Staffing services

   $ 56,598      $ 58,850   

Professional employer service fees

     121,324        85,932   
  

 

 

   

 

 

 

Total revenues

     177,922        144,782   
  

 

 

   

 

 

 

Cost of revenues:

    

Direct payroll costs

     42,495        44,541   

Payroll taxes and benefits

     82,324        60,649   

Workers’ compensation

     30,205        20,713   
  

 

 

   

 

 

 

Total cost of revenues

     155,024        125,903   
  

 

 

   

 

 

 

Gross margin

     22,898        18,879   

Selling, general and administrative expenses

     20,313        17,698   

Depreciation and amortization

     704        666   
  

 

 

   

 

 

 

Income from operations

     1,881        515   
  

 

 

   

 

 

 

Other income:

    

Life insurance proceeds

     0        10,000   

Investment income, net

     428        628   

Other

     (16     92   
  

 

 

   

 

 

 

Other income

     412        10,720   
  

 

 

   

 

 

 

Income before income taxes

     2,293        11,235   

Provision for income taxes

     763        2,240   
  

 

 

   

 

 

 

Net income

   $ 1,530      $ 8,995   
  

 

 

   

 

 

 

Basic earnings per common share

   $ .18      $ .88   
  

 

 

   

 

 

 

Weighted average number of basic common shares outstanding

     8,435        10,198   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ .18      $ .88   
  

 

 

   

 

 

 

Weighted average number of diluted common shares outstanding

     8,511        10,246   
  

 

 

   

 

 

 

Dividends declared per common share

   $ .22      $ .18   
  

 

 

   

 

 

 

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 Comprehensive Income

(Unaudited)

(In thousands)

 

     Three Months Ended
June 30,
 
     2012      2011  

Net income

   $ 3,743       $ 3,449   

Unrealized gains on marketable securities, net of tax of $1 and $6 in 2012 and 2011, respectively

     2         10   
  

 

 

    

 

 

 

Comprehensive income

   $ 3,745       $ 3,459   
  

 

 

    

 

 

 
     Six Months Ended
June 30,
 
     2012      2011  

Net income

   $ 1,530       $ 8,995   

Unrealized gains on marketable securities, net of tax of $27 and $22 in 2012 and 2011, respectively

     43         35   
  

 

 

    

 

 

 

Comprehensive income

   $ 1,573       $ 9,030   
  

 

 

    

 

 

 

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

Six Months Ended June 30, 2012 and 2011

(In thousands)

 

    

Common Stock

    Additional
Paid-in
    Accumulated
Other
Comprehensive
(Loss)
    Retained        
     Shares     Amount     Capital     Income     Earnings     Total  

Balance, December 31, 2010

     10,202      $ 102      $ 25,164      $ (65   $ 70,164      $ 95,365   

Common stock issued on exercise of options

     3        0        5        0        0        5   

Stock option compensation expense, net of tax

     0        0        192        0        0        192   

Tax benefit of stock option exercises

     0        0        13        0        0        13   

Repurchase of common stock

     (65     (1     (922     0        0        (923

Cash dividend on common stock

     0        0        0        0        (1,837     (1,837

Unrealized holding gains on marketable securities, net of tax

     0        0        0        35        0        35   

Net income

     0        0        0        0        8,995        8,995   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

     10,140        101        24,452        (30     77,322        101,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

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

Common stock issued on exercise of options

     118        1        1,688        0        0        1,689   

Stock option compensation expense, net of tax

     0        0        285        0        0        285   

Tax benefit of stock option exercises

     0        0        264        0        0        264   

Repurchase of common stock

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

Cash dividend on common stock

     0        0        0        0        (1,868     (1,868

Unrealized holding gains on marketable securities, net of tax

     0        0        0        43        0        43   

Net income

     0        0        0        0        1,530        1,530   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     7,003        70      $ 316      $ 9      $ 42,971      $ 43,366   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 Cash Flows

(Unaudited)

(In thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 1,530      $ 8,995   

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

    

Depreciation and amortization

     704        666   

Gains recognized on marketable securities

     0        (100

Gain recognized on sale and leaseback

     (61     (61

Deferred income taxes

     53        292   

Share based compensation

     285        192   

Changes in certain assets and liabilities:

    

Trade accounts receivable, net

     (16,913     (22,142

Income taxes receivable

     701        0   

Prepaid expenses and other

     2,983        (628

Accounts payable

     274        (270

Accrued payroll, payroll taxes and related benefits

     16,045        22,830   

Other accrued liabilities

     50        364   

Income taxes payable

     193        498   

Workers’ compensation claims liabilities

     5,939        1,810   

Safety incentives liability

     1,220        33   

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

     56        23   
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,059        12,502   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (1,527     (445

Proceeds from sales and maturities of marketable securities

     22,924        18,562   

Purchase of marketable securities

     (22,313     (32,710

Proceeds from maturities of restricted marketable securities

     4,671        3,360   

Purchase of restricted marketable securities

     (4,680     (3,979
  

 

 

   

 

 

 

Net cash used in investing activities

     (925     (15,212
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of stock options

     1,689        5   

Dividends paid

     (1,868     (1,837

Repurchase of common stock

     (25,432     (923

Tax benefit of stock option exercises

     264        13   
  

 

 

   

 

 

 

Net cash used in financing activities

     (25,347     (2,742
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (13,213     (5,452

Cash and cash equivalents, beginning of period

     49,571        30,924   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 36,358      $ 25,472   
  

 

 

   

 

 

 

Supplemental schedule of noncash financing activities:

    

Issuance of mandatorily redeemable preferred stock

   $ 34,800      $ 0   
  

 

 

   

 

 

 
   $ 34,800      $ 0   
  

 

 

   

 

 

 

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 2011 Annual Report on Form 10-K at pages F1 – F28. 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. Staffing services are engaged by customers to meet short-term and long-term personnel needs. Professional employer organization (“PEO”) services are normally used by organizations to satisfy ongoing human resource management needs and typically involve contracts with a minimum term of one year, which cover all employees at a particular work site. Our PEO contracts are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party. Our PEO contracts provide for immediate termination upon any default of the client regardless of when notice is given. We report PEO revenues on a net basis because we are not the primary obligor for the services provided by our PEO clients to their customers pursuant to our PEO contracts. Consequently, our PEO service fee revenues represent the gross margin generated from our PEO services after deducting the amounts invoiced to PEO customers for direct payroll expenses such as salaries, wages, health insurance and employee out-of-pocket expenses incurred incidental to employment and safety incentives. These amounts are also excluded from cost of revenues. PEO service fees also include amounts invoiced to our clients for employer payroll-related taxes and workers’ compensation coverage.

 

Marketable securities

As of June 30, 2012, the Company’s marketable securities consisted of tax-exempt municipal securities, corporate bonds and U.S. treasuries. The Company classifies municipal securities, U.S. treasuries, 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. Certain of the Company’s corporate bonds are classified as held-to-maturity and are reported at amortized cost.

 

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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 $366,000 and $452,000 at June 30, 2012 and December 31, 2011, respectively. The Company must make estimates of the collectibility 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 subject to PEO contracts) 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 Chartis, formerly known as American Insurance Group, Inc., between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with Chartis is between $1.0 million and $25.0 million per occurrence, and in Colorado, where the coverage with Chartis is between $500,000 and statutory limits per occurrence. The Company continues to evaluate the financial capacity of our insurers to assess the recoverability of the related insurer receivables.

The Company has provided a total of $55.8 million and $51.2 million at June 30, 2012 and December 31, 2011, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. Included in the foregoing liabilities are insured claims that will be paid by the Company’s former excess workers’ compensation insurer and for which the Company has reported a receivable from the insurer for the insured claims liability. These insured claims totaled $864,000 at June 30, 2012 and $1.9 million at December 31, 2011. 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 PEO client companies for maintaining safe-work practices in order to minimize workplace injuries, thereby meeting agreed-upon loss objectives. The Company has provided $7.5 million at June 30, 2012 and $6.3 million at December 31, 2011 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 PEO services revenue in our consolidated statements of operations.

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. The preferred stock is entitled to receive cumulative preferential dividends at the rate of 5% per annum based upon the $1,000 liquidation preference with such rate increasing by 2% on each April 1 beginning April 1, 2013, until all of the outstanding preferred stock has been redeemed. The Company may pay the dividends in cash or in additional shares of preferred stock at its option. The Company may redeem all or a portion of the preferred stock at its option at any time at a price of $1,000 per share. The preferred stock is subject to mandatory redemption five years from the original issue date. Due to the mandatory redemption provision the preferred stock is classified as a liability on the Company’s consolidated balance sheet.

 

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BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 3—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. Basic and diluted common shares outstanding are summarized as follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Weighted average number of basic common shares outstanding

     6,995,066         10,195,989         8,434,962         10,198,440   

Assumed exercise of stock options, net of shares assumed repurchased at average market price during the period using proceeds received upon exercise of options

     83,010         48,725         76,313         47,805   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of diluted common shares outstanding

     7,078,076         10,244,714         8,511,275         10,246,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 4 – Stock Incentive Plans and Stock-Based Compensation

 

The following table summarizes stock option activity in 2012 under the Company’s 2009 Stock Incentive Plan:

 

     Number of
Options
    Weighted Average
Exercise Price
 

Outstanding at December 31, 2011

     671,294      $ 14.48   

Options granted

     7,500      $ 17.55   

Options exercised

     (118,472   $ 14.26   

Options cancelled or expired

     0     
  

 

 

   

Outstanding at June 30, 2012

     560,322      $ 14.57   
  

 

 

   

Exercisable at June 30, 2012

     252,797      $ 13.49   
  

 

 

   

Available for grant at June 30, 2012

     626,300     
  

 

 

   

During 2012, the Company granted 7,500 options at a fair value of $9.08 per share as determined under the Black-Scholes option-pricing model.

 

 

- 12 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 4 – Stock Incentive Plans and Stock-Based Compensation (Continued)

 

 

The following table presents information on stock options outstanding for the periods shown:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
($ in thousands, except per share data)    2012      2011      2012      2011  

Intrinsic value of options exercised in the period

   $ 91       $ 0       $ 680       $ 34   

 

     As of June 30,  
     2012      2011  

Stock options:

     

Aggregate intrinsic value

   $ 1,934       $ 415   

Weighted average contractual term of options

     7.07 years         7.41 years   

The aggregate intrinsic value of stock options represents the difference between the Company’s closing stock price at the end of the period and the relevant exercise price multiplied by the number of options outstanding at the end of the period at each such price.

Note 5—Workers’ Compensation

 

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Beginning balance

           

Workers’ compensation claims liabilities

   $ 52,794       $ 39,783       $ 51,193       $ 39,301   

Add: claims expense accrual:

           

Current period

     8,170         5,279         16,333         9,985   

Prior periods

     3,110         286         3,110         522   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expense accrual

     11,280         5,565         19,443         10,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: claim payments related to:

           

Current period

     1,304         962         1,583         1,219   

Prior periods

     7,005         3,390         13,288         7,593   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total paid

     8,309         4,352         14,871         8,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

           

Workers' compensation claims liabilities

   $ 55,765       $ 40,996       $ 55,765       $ 40,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Incurred but not reported (IBNR)

   $ 41,000       $ 29,738       $ 41,000       $ 29,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 13 -


Table of Contents

BARRETT BUSINESS SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 5—Workers’ Compensation (Continued)

 

During the three months ended June 30, 2012, the Company recorded $3.1 million of additional workers’ compensation expense related to increases in estimated costs to close prior year claims.

Note 6—Fair Value Measurement

 

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

 

     June 30, 2012      December 31, 2011         
     Cost      Gross
Unrealized
Gains
     Recorded
Basis
     Cost      Gross
Unrealized
Gains
(Losses)
    Recorded
Basis
     Fair
Value
Category
 

Current:

                   

Available-for-sale:

                   

Municipal bonds

   $ 3,374       $ 4       $ 3,378       $ 5,804       $ 8      $ 5,812         2   

Corporate bonds

     10,853         9         10,862         11,070         (4     11,066         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    
   $ 14,227       $ 13       $ 14,240       $ 16,874       $ 4      $ 16,878      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

Long term:

                   

Available-for-sale:

                   

Municipal bonds

   $ 299       $ 0       $ 299       $ 0       $ 0      $ 0         2   

Corporate bonds

     15,100         18         15,118         14,971         (33     14,938         2   

U.S. treasuries

     1,558         2         1,560         0         0        0         1   

Held-to-maturity:

                   

Corporate bonds

     462         0         462         457         0        457         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    
   $ 17,419       $ 20       $ 17,439       $ 15,428       $ (33   $ 15,395      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

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

 

     June 30, 2012      December 31, 2011         
     Cost      Gross
Unrealized
Gains
(Losses)
    Recorded
Basis
     Cost      Gross
Unrealized
Gains
(Losses)
    Recorded
Basis
     Fair
Value
Category
 

Available-for-sale:

                  

Municipal bonds

   $ 5,190       $ 20      $ 5,210       $ 5,580       $ 17      $ 5,597         2   

Corporate bonds

     927         (1     926         148         (1     147         2   

U.S. treasuries

     1,567         0        1,567         1,567         0        1,567         1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    
   $ 7,684       $ 19      $ 7,703       $ 7,295       $ 16      $ 7,311      
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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

 

Results of Operations

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

 

     Percentage of Total Revenues     Percentage of Total Revenues  
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Revenues:

        

Staffing services

     31.8     40.1     31.8     40.6

Professional employer service fees

     68.2        59.9        68.2        59.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0        100.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

        

Direct payroll costs

     23.9        30.4        23.9        30.8   

Payroll taxes and benefits

     41.2        38.0        46.2        41.9   

Workers’ compensation

     17.8        14.1        17.0        14.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     82.9        82.5        87.1        87.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     17.1        17.5        12.9        13.0   

Selling, general and administrative expenses

     11.0        11.7        11.4        12.2   

Depreciation and amortization

     0.4        0.4        0.4        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     5.7        5.4        1.1        0.4   

Other income

     0.2        0.3        0.2        7.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5.9        5.7        1.3        7.8   

Provision for income taxes

     2.0        1.2        0.4        1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3.9     4.5     0.9     6.2
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

 

   

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

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

 

     Unaudited      Unaudited  
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
(in thousands)    2012      2011      2012      2011  

Revenues:

           

Staffing services

   $ 30,387       $ 30,518       $ 56,598       $ 58,850   

Professional employer services

     463,671         336,380         869,521         639,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     494,058         366,898         926,119         697,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenues:

           

Direct payroll costs

     418,594         312,385         785,527         595,027   

Payroll taxes and benefits

     39,332         28,886         82,324         60,649   

Workers’ compensation

     19,791         12,346         35,370         23,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenues

     477,717         353,617         903,221         679,085   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

   $ 16,341       $ 13,281       $ 22,898       $ 18,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 17 -


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

 

Results of Operations (Continued)

 

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

 

     Unaudited  
     Three Months Ended June 30,  
     Gross Revenue            Net Revenue  
     Reporting Method      Reclassification     Reporting Method  
(in thousands)    2012      2011      2012     2011     2012      2011  

Revenues:

               

Staffing services

   $ 30,387       $ 30,518       $ 0      $ 0      $ 30,387       $ 30,518   

Professional employer services

     463,671         336,380         (398,558     (290,885     65,113         45,495   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

   $ 494,058       $ 366,898       $ (398,558   $ (290,885   $ 95,500       $ 76,013   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cost of revenues

   $ 477,717       $ 353,617       $ (398,558   $ (290,885   $ 79,159       $ 62,732   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

     Unaudited  
     Six Months Ended June 30,  
     Gross Revenue            Net Revenue  
     Reporting Method      Reclassification     Reporting Method  
(in thousands)    2012      2011      2012     2011     2012      2011  

Revenues:

               

Staffing services

   $ 56,598       $ 58,850       $ 0      $ 0      $ 56,598       $ 58,850   

Professional employer services

     869,521         639,114         (748,197     (553,182     121,324         85,932   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

   $ 926,119       $ 697,964       $ (748,197   $ (553,182   $ 177,922       $ 144,782   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cost of revenues

   $ 903,221       $ 679,085       $ (748,197   $ (553,182   $ 155,024       $ 125,903   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

Three months ended June 30, 2012 and 2011

Net income for the second quarter of 2012 amounted to $3.7 million, as compared to net income of $3.4 million for the second quarter of 2011. The increase in net income for the 2012 second quarter was primarily due to a 25.6% increase in revenues. The second quarter of 2011 included the benefit of a lower annual effective income tax rate as a result of the effect of the receipt of $10.0 million of key man life insurance proceeds. Diluted income per share for the second quarter of 2012 was $.53 compared to diluted income per share of $.34 for the comparable 2011 period.

 

- 18 -


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, 2012 and 2011 (Continued)

Revenues for the second quarter of 2012 totaled $95.5 million, an increase of approximately $19.5 million or 25.6%, which reflects an increase in the Company’s PEO service fee revenue of $19.6 million or 43.1% and a small decline in staffing services revenue of $130,000 or 0.4%.

Our growth in PEO revenues continues to be primarily attributable to new customers as PEO business from new customers during the second quarter of 2012 more than tripled our lost PEO business from former customers. PEO revenues from continuing customers reflected a 7.1% increase compared to the second quarter of 2011 primarily resulting from increases in employee headcount and hours worked. Staffing revenues remained at a similar level as lost business from former customers was nearly offset by business from new and continuing customers.

Gross margin for the second quarter of 2012 totaled approximately $16.3 million or an increase of 23.0% over the second quarter of 2011, primarily due to the 25.6% increase in revenues and a decline in direct payroll costs, partially offset by higher payroll taxes and benefits and workers’ compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 30.4% for the second quarter of 2011 to 23.9% for the second quarter of 2012 was primarily due to the increase in our mix of PEO services in the Company’s customer base over the second quarter of 2011 and the effect of each customer’s unique mark-up percent.

Payroll taxes and benefits, as a percentage of revenues, for the second quarter of 2012 was 41.2% compared to 38.0% for the second quarter of 2011. The percentage rate increase was largely due to the effect of significant growth in PEO services, where payroll taxes and benefits are presented at gross cost whereas the related direct payroll costs are netted against PEO services revenue, and to slightly higher effective state unemployment tax rates in various states in which the Company operates as compared to the second quarter of 2011. Management expects the trend in payroll taxes and benefits, as a percentage of revenues, to continue to increase as a result of continued growth in PEO services on a quarter over quarter basis.

Workers’ compensation expense, in terms of dollars and as a percentage of revenues, increased from $10.8 million or 14.1% in the second quarter of 2011 to $17.0 million or 17.8% in the second quarter of 2012. The percentage rate increase was primarily due to an increase in the provision for claim costs related to current year claims and increases in estimated costs to close prior year claims and higher insurance broker commissions as a result of increased worker’s compensation insurance rates.

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2012 totaled approximately $10.5 million, an increase of $1.7 million or 18.9% over the second quarter of 2011. The increase was primarily attributable to increases in management payroll and profit sharing based on increased branch performance as well as the variable expense components within SG&A to support the business growth.

 

- 19 -


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, 2012 and 2011 (Continued)

Other income for the second quarter of 2012 was $196,000 compared to other income of $266,000 for the second quarter of 2011. Other income for the 2012 second quarter was primarily attributable to investment income earned on the Company’s cash and marketable securities.

The income tax rate for the 2012 second quarter was 33.5%. We expect the effective income tax rate for the balance of 2012 to remain at a similar rate to the 2012 second quarter income tax rate. The income tax rate for the 2011 second quarter was 20.6% which included a favorable benefit from the effect of a much lower annual effective tax rate attributable to the non-taxable $10.0 million life insurance proceeds.

Six months ended June 30, 2012 and 2011

Net income for the six months ended June 30, 2012 amounted to $1.5 million, as compared to net income of $9.0 million for the first six months of 2011. The first six months of 2011 included $10.0 million of key man life insurance proceeds received following the passing of the Company’s former president and CEO and the related benefit of a lower annual effective income tax rate. Diluted income per share for the first six months ended June 30, 2012 was $.18 compared to diluted income per share of $.88 for the comparable 2011 period.

Revenues for the six months ended June 30, 2012 totaled $177.9 million, an increase of approximately $33.1 million or 22.9%, compared to the similar period in 2011 which reflects an increase in the Company’s PEO service fee revenue of $35.4 million or 41.2% and a small decline in staffing services revenue of $2.3 million or 3.8%. Our growth in PEO revenues was primarily attributable to the addition of new customers as PEO business from new customers during the first six months of 2012 more than tripled our lost PEO business from former customers. PEO revenues from continuing customers reflected a 8.4% increase compared to the first six months of 2011 primarily resulting from an increase in employee headcount and a slight increase in hours worked. Staffing revenues decreased because lost business from former customers exceeded the business from new and continuing customers.

Gross margin for the six months ended June 30, 2012 totaled approximately $22.9 million or an increase of $4.0 million over the comparable period of 2011, primarily due to the 22.9% increase in revenues and a decline in direct payroll costs, partially offset by higher payroll taxes and benefits and workers’ compensation expense, as a percentage of revenues.

The decrease in direct payroll costs, as a percentage of revenues, from 30.8% for the second quarter of 2011 to 23.9% for the first six months of 2012 was primarily due to the increase in our mix of PEO services in the Company’s customer base compared to the first six months of 2011 and the effect of each customer’s unique mark-up percent.

 

- 20 -


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, 2012 and 2011 (Continued)

Payroll taxes and benefits, as a percentage of revenues, for the first six months ended June 30, 2012 was 46.2% compared to 41.9% for the comparable period of 2011. The percentage rate increase was largely due to the effect of significant growth in PEO services and to higher effective state unemployment tax rates in various states in which the Company operates as compared to the same period of 2011.

Workers’ compensation expense, in terms of dollars and as a percentage of revenues, increased from $20.7 million or 14.3% in the first six months of 2011 to $30.2 million or 17.0% in the first six months of 2012. The percentage rate increase was primarily due to an increase in the provision for current year claim costs as well as increases in estimated costs to close prior year claims and higher insurance broker commissions as a result of increased worker’s compensation insurance rates.

SG&A expenses for the first six months of 2012 totaled approximately $20.3 million, an increase of $2.6 million or 14.7% over the first six moths of 2011. The increase was primarily attributable to increases in management payroll and profit sharing based on increased branch performance and to higher legal expenses.

Other income for the first six months of 2012 was $412,000 compared to other income of $10.7 million for the first six months of 2011. Other income for the first six months of 2012 was primarily attributable to investment income earned on the Company’s cash and marketable securities. The first six months of 2011 included the $10.0 million of key man life insurance proceeds.

The income tax rate for the first six months of 2012 was 33.3%. The income tax rate for the first six months of 2011 was 19.9% which included a favorable benefit from the effect of a much lower annual effective tax rate attributable to the non-taxable $10.0 million life insurance proceeds.

Factors Affecting Quarterly Results

The Company has historically experienced significant fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company’s operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers’ compensation, demand and competition for the Company’s services and the effect of acquisitions. The Company’s revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality on its staffing services business and on certain of its PEO clients in the agriculture, food processing and construction-related industries. As a result, the Company may have greater revenues and net income in the third quarter of its fiscal year. Revenue levels in the fourth quarter may be affected by many customers’ practice of operating on holiday-shortened schedules. Payroll

 

- 21 -


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

 

Factors Affecting Quarterly Results (Continued)

 

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 the 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, 2012 decreased $13.2 million from December 31, 2011, which compares to a decrease of $5.5 million for the comparable period in 2011. The decrease in cash at June 30, 2012 as compared to December 31, 2011, was primarily due to $25.4 million used to repurchase common stock, offset in part by the net income of $1.5 million, a $5.9 million increase in workers’ compensation claims liabilities and a decrease in prepaid expenses and other of $3.0 million.

Net cash provided by operating activities for the six months ended June 30, 2012 amounted to $13.1 million compared to $12.5 million for the comparable 2011 period. For the six months ended June 30, 2012, cash flow was principally provided by net income of $1.5 million, coupled with a $16.0 million increase in accrued payroll and payroll taxes, a $5.9 million increase in workers’ compensation claims liabilities, and a $3.0 million decrease in prepaid expense and other, offset in part by a $16.9 million increase in accounts receivable.

Net cash used in investing activities for the six months ended June 30, 2012 was $925,000 as compared to $15.2 million of net cash used in investing activities for the similar 2011 period. For the 2012 period, cash from investing activities was used in the purchase of marketable securities totaling $22.3 million, the purchase of restricted marketable securities of $4.7 million and the purchase of property and equipment of $1.5 million, partially offset by the proceeds from the sales and maturities of marketable securities of $22.9 million and $4.7 million from the proceeds of restricted marketable securities. The transactions related to restricted marketable securities were scheduled maturities and the replacement of such securities held for workers’ compensation surety deposit purposes. The Company presently has no material long-term capital commitments.

Net cash used in financing activities for the six months ended June 30, 2012 was $25.3 million as compared to $2.7 million for the similar 2011 period. For the 2012 period, the primary uses of cash for financing activities were the repurchases of the Company’s common stock totaling $25.4 million which included $514,000 of professional and legal fees and the payment of regular quarterly cash dividends totaling $1.9 million to holders of the Company’s common stock, partially offset by $1.7 million proceeds from the exercise of stock options.

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

 

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

 

Liquidity and Capital Resources (Continued)

 

The Company is a party to a Standby Letter of Credit Agreement dated as of June 30, 2009 (the “Credit Agreement”) with its principal bank. The Credit Agreement provides for standby letters of credit as to which there was $6.7 million outstanding at June 30, 2012 in connection with various surety deposit requirements for workers’ compensation purposes. Effective July 11, 2012, the outstanding standby letters of credit were increased by $17.2 million related to an increase in the California self insured workers’ compensation surety deposit requirement applicable to the Company in lieu of payment of assessment fees to the state of California.

Pursuant to the Credit Agreement, the Company is required to maintain compliance with the following covenants: (1) to maintain net income after taxes not less than $1.00 (one dollar) on an annual basis, determined as of each fiscal year end; (2) to maintain liquid assets (defined as unencumbered cash, cash equivalents, and publicly traded and quoted marketable securities) having an aggregate fair market value at all times not less than $10.0 million, determined as of the end of each fiscal quarter; and (3) to not borrow or permit to exist indebtedness (other than from or to the bank), or mortgage, pledge, grant, or permit to exist a security interest in, or a lien upon, all or any portion of the Company’s assets now owned or hereafter acquired, except for purchase money indebtedness (and related security interests) which does not at any time exceed $500,000. The Company was in compliance with all financial covenants at June 30, 2012.

As disclosed in Note 3 to the Consolidated Financial Statements in this report, effective March 28, 2012, the Company repurchased 2,485,929 shares of the Company’s common stock held by the Estate of William W. Sherertz and 500,000 common shares held by Nancy Sherertz. Mr. Sherertz, a founder and former president and CEO of the Company, died January 20, 2011. Nancy Sherertz is also a founder of the Company. The common shares were repurchased at a price of $20 per share, representing total consideration of $59.7 million. The Company used a 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. The preferred stock is entitled to receive cumulative preferential dividends at the rate of 5% per annum based upon the $1,000 liquidation preference with such rate increasing by 2% on each April 1 beginning April 1, 2013, until all of the outstanding preferred stock has been redeemed. The Company may pay the dividends in cash or in additional shares of preferred stock at its option. The Company may redeem all or a portion of the preferred stock at its option at any time at a price of $1,000 per share. The preferred stock is subject to mandatory redemption five years from the original issue date. Due to the mandatory redemption provision the preferred stock is classified as a liability on the Company’s consolidated balance sheet. Although no assurances can be given, the Company anticipates borrowing funds through a bank line of credit to redeem the preferred stock in full before September 28, 2012, in which event no dividend would be payable.

Management expects that current liquid assets and the funds anticipated to be generated from operations will be sufficient in the aggregate to fund the Company’s working capital needs for the next twelve months.

 

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

 

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 past and future 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 financial viability of the Company’s excess insurance carriers, the effectiveness of the Company’s management information systems, payment of future dividends, redemption of the Company’s preferred stock, and the availability of financing and 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, the availability of financing or other sources of capital, including the impact of such availability on the Company’s plans to redeem its preferred stock, difficulties associated with integrating acquired businesses and clients into the Company’s operations, economic trends in the Company’s service areas, material deviations from expected future workers’ compensation claims experience, the effect of changes in the workers’ compensation regulatory environment in one or more of the Company’s primary markets, collectibility of accounts receivable, the carrying values of deferred income tax assets and goodwill, which may be affected by the Company’s future operating results 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.

 

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. As of June 30, 2012, the Company’s investment portfolio consisted principally of approximately $27.4 million in corporate bonds, $12.0 million in tax-exempt money market funds, $8.9 million in tax-exempt municipal bonds and $3.1 million in U.S. treasuries. Based on the Company’s overall interest exposure at June 30, 2012, a 100

 

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Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk (Continued)

 

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 or its results of operations because of the predominantly short maturities of the securities within the investment portfolio.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2012 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’ 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 June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

Part II – Other Information

 

Item 1A. Risk Factors

In addition to the risk factors disclosed in Item 1A of our 2011 Annual Report on Form 10-K, the following risk factor should be considered in connection with our issuance of 34,800 shares of Series A Nonconvertible, Non-Voting Redeemable Preferred Stock (the “Series A Preferred Stock”) on March 28, 2012.

We may be unable to refinance the Series A Preferred Stock as planned.

The Series A Preferred Stock issued on March 28, 2012, has a liquidation preference of $1,000 per share, or a total of $34,800,000. Holders of the Series A Preferred Stock are entitled to receive cumulative preferential dividends at the rate of 5% per annum based upon the $1,000 liquidation preference, with such rate scheduled to increase by 2% on each April 1 beginning April 1, 2013. To the extent the Series A Preferred Stock is redeemed before September 28, 2012, no dividend will be payable. The Series A Preferred Stock is subject to mandatory redemption five years after issuance. Although the Company currently anticipates borrowing funds through a bank line of credit to fund a full redemption of the Series A Preferred Stock before September 28, 2012, there is no assurance that such financing will be available on terms acceptable to the Company or at all.

 

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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Table of Contents

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: August 8, 2012   /s/ James D. Miller
  James D. Miller
  Vice President-Finance, Treasurer and Secretary
  (Principal Financial and Accounting Officer)

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

    
10.1    Summary of Annual Cash Incentive Compensation Plan for Executives of the Registrant.
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.
99.1    Description of Capital Stock of the Registrant.
101.    INS XBRL Instance Document *
101.    SCH XBRL Taxonomy Extension Schema Document *
101.    CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.    LAB XBRL Taxonomy Extension Label Linkbase Document *
101.    PRE XBRL Taxonomy Extension Presentation Linkbase Document *

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended and, otherwise are not subject to liability under those sections.

 

- 28 -

XNAS:BBSI Barrett Business Services Inc Quarterly Report 10-Q Filling

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