10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 15, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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 (IRS Employer
incorporation or organization) Identification No.)
4724 SW Macadam Avenue
Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
(503) 220-0988
(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 [ ]
Number of shares of Common Stock, $.01 par value, outstanding at April 28, 2000
was 7,459,998 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
Part I - Financial Information
Page
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Item 1. Financial Statements
Balance Sheets - March 31, 2000 and
December 31, 1999........................................3
Statements of Operations - Three Months
Ended March 31, 2000 and 1999............................4
Statements of Cash Flows - Three Months
Ended March 31, 2000 and 1999............................5
Notes to Financial Statements............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.............................................14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K........................15
Signatures ........................................................16
Exhibit Index ........................................................17
2
Part I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
3
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
-------------------------
2000 1999
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Revenues:
Staffing services $ 47,767 $ 37,229
Professional employer services 39,355 33,786
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87,122 71,015
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Cost of revenues:
Direct payroll costs 68,004 55,163
Payroll taxes and benefits 7,918 6,251
Workers' compensation 2,597 2,286
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78,519 63,700
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Gross margin 8,603 7,315
Selling, general and administrative expenses 6,485 5,573
Depreciation and amortization 731 511
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Income from operations 1,387 1,231
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Other (expense) income:
Interest expense (221) (24)
Interest income 86 95
Other, net 3 1
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(132) 72
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Income before provision for income taxes 1,255 1,303
Provision for income taxes (Note 2) 511 563
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Net income $ 744 $ 740
======== =========
Basic earnings per share $ .10 $ .10
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Weighted average number of basic shares outstanding 7,459 7,666
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Diluted earnings per share $ .10 $ .10
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Weighted average number of diluted shares outstanding 7,509 7,707
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The accompanying notes are an integral part of these financial statements.
4
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
5
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements
NOTE 1 - BASIS OF PRESENTATION OF INTERIM PERIOD STATEMENTS:
The accompanying financial statements are unaudited and have been prepared
by Barrett Business Services, Inc. (the "Company") 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 generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the 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 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 financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's 1999
Annual Report on Form 10-K at pages F1-F21. The results of operations for an
interim period are not necessarily indicative of the results of operations for a
full year.
Certain prior year amounts have been reclassified to conform with the 2000
presentation. Such reclassifications had no effect on gross margin, net income
or stockholders' equity.
NOTE 2 - PROVISION FOR INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
The accompanying notes are an integral part of these financial statements.
6
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
NOTE 2 - PROVISION FOR INCOME TAXES (CONTINUED):
The provision for income taxes for the three months ended March 31, 2000 and
1999 is as follows (in thousands):
Three Months Ended
March 31,
----------------------
2000 1999
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Current:
Federal $ 383 $ 542
State 120 150
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503 692
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Deferred
Federal 9 (103)
State (1) (26)
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8 (129)
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Provision for income taxes $ 511 $ 563
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NOTE 3 - STOCK INCENTIVE PLAN:
The Company has a Stock Incentive Plan (the "Plan") which provides for
stock-based awards to the Company's employees, directors and outside consultants
or advisers. The number of shares of common stock reserved for issuance under
the Plan is 1,300,000.
The following table summarizes options granted under the Plan in 2000:
Outstanding at December 31, 1999 893,718 $2.80 to $17.94
Options granted 159,459 $2.60 to $6.75
Options exercised -
Options canceled or expired (47,500) $8.56 to $10.13
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Outstanding at March 31, 2000 1,005,677 $2.60 to $17.94
==============
Exercisable at March 31, 2000 562,143
==============
Available for grant at March 31, 2000 76,889
==============
The options listed in the table generally become exercisable in four equal
annual installments beginning one year after the date of grant.
7
NOTE 3 - STOCK INCENTIVE PLAN (CONTINUED):
Certain of the Company's zone and branch management employees elect to
receive a portion of their quarterly cash profit sharing distribution in the
form of nonqualified deferred compensation stock options. Such options are
awarded at a sixty percent discount from the then-fair market value of the
Company's stock and are fully vested and immediately exercisable upon grant.
Such discounts are recorded as compensation expense. The amount of the grantee's
deferred compensation (discount from fair market value) is subject to market
risk. During the first quarter of 2000, the Company awarded deferred
compensation stock options for 7,503 shares at an exercise price of $2.60 per
share.
8
BARRETT BUSINESS SERVICES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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The following table sets forth the percentages of total revenues represented
by selected items in the Company's Statements of Operations for the three months
ended March 31, 2000 and 1999.
Percentage of
Total Revenues
Three Months Ended
March 31,
-----------------------
2000 1999
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Revenues:
Staffing services 54.8 % 52.4 %
Professional employer services 45.2 47.6
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100.0 100.0
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Cost of revenues:
Direct payroll costs 78.0 77.7
Payroll taxes and benefits 9.1 8.8
Workers' compensation 3.0 3.2
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Total cost of revenues 90.1 89.7
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Gross margin 9.9 10.3
Selling, general and administrative expenses 7.4 7.9
Depreciation and amortization 0.9 0.7
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Income from operations 1.6 1.7
Other income (expense) (0.1) 0.1
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Income before provision for income taxes 1.5 1.8
Provision for income taxes 0.6 0.8
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Net income 0.9 % 1.0 %
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THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net income for the first quarter of 2000 was $744,000, an increase of $4,000
over the same period in 1999. The increase in net income for 2000 was
attributable to higher gross margin dollars as a result of a 22.7% increase in
revenue, offset in part by higher selling, general and administrative expenses,
together with higher depreciation and amortization expense. Basic and diluted
earnings per share for the first quarter of 2000 were $.10, the same amount as
in the first quarter of 1999.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Continued)
- ---------------------------------
Revenues for the firstquarter of 2000 totaled approximately $87.1 million,
an increase of approximately $16.1 million or 22.7% over the first quarter of
1999. The increase in revenues was primarily generated from the Company's
Northern California operations. The quarter-over-quarter internal growth rate of
revenues was 12.0%. The percentage increase in total revenues exceeded the
internal growth rate of revenues primarily due to the TSU Staffing ("TSU")
acquisition effective May 31, 1999.
Staffing services revenue increased approximately $10.5 million or 28.3%
primarily due to robust growth in the Company's Northern California operations.
The increase in staffing services revenue resulted in an increase in the share
of staffing services from 52.4% of total revenues for the first quarter of 1999
to 54.8% for the first quarter of 2000. Professional employer ("PEO") services
revenue increased approximately $5.6 million or 16.4%, which was also attributed
to strong growth in Northern California. The share of revenues for PEO services
had a corresponding decrease from 47.6% of total revenues for the first quarter
of 1999 to 45.2% for the first quarter of 2000.
Gross margin for the first quarter of 2000 totaled approximately $8.6
million, which represented an increase of $1.3 million or 17.6% over the first
quarter of 1999. The gross margin percent decreased from 10.3% of revenues for
the first quarter of 1999 to 9.9% for the first quarter of 2000. The decrease in
the gross margin percentage was due to higher direct payroll costs and higher
payroll taxes and benefits, offset in part by slightly lower workers'
compensation expense. The increase in direct payroll costs, as a percentage of
revenues for the first quarter of 2000, was primarily due to substantial
increases in contract staffing, on-site management and PEO business, which
generally have a lower mark-up rate (and thus higher direct payroll costs as a
percentage of revenues) relative to other services provided by the Company. The
increase in payroll taxes and benefits, as a percentage of revenues for the
first quarter of 2000, was primarily attributable to increased direct payroll in
California, which has a higher state unemployment tax rate as compared to other
states in which the Company operates.
Workers' compensation expense for the first quarter of 2000 totaled $2.6
million or 3.0% of revenues, which compares to $2.3 million or 3.2% of revenues
for the same period in 1999. The small decrease in workers' compensation expense
for the 2000 first quarter as a percentage of revenues was generally
attributable to a lower incidence of injuries in 2000 compared to the same
period in 1999.
Selling, general and administrative ("SG&A") expenses for the 2000 first
quarter amounted to approximately $6.5 million, an increase of $912,000 or 16.4%
over the comparable period in 1999. SG&A expenses, expressed as a percentage of
revenues, decreased from 7.9% for the first quarter of 1999 to 7.4% for the
first quarter of 2000.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Continued)
- ---------------------------------
The increase in total dollars over 1999 was primarily attributable to the
Company's acquisition of TPM Staffing ("TPM") on February 15, 1999 and TSU
effective May 31, 1999, both of which accounted for approximately twelve
noncomparable offices in terms of SG&A expenses for the first quarter of 2000.
Depreciation and amortization totaled $731,000 or 0.9% of revenues for the
first quarter of 2000, which compares to $511,000 or 0.7% of revenues for the
same period in 1999. The increased expense was primarily due to (i) amortization
arising from the TPM and TSU acquisitions, and (ii) in part to the March 1, 2000
implementation of the Company's new information system.
The Company offers various qualified employee benefit plans to its
employees, including its worksite employees. These qualified employee benefit
plans include a savings plan under Section 401(k) of the Internal Revenue Code
(the "Code"), a cafeteria plan under Code Section 125, a group health plan, a
group life insurance plan, a group disability insurance plan and an employee
assistance plan. Generally, qualified employee benefit plans are subject to
provisions of both the Code and the Employee Retirement Income Security Act
("ERISA"). In order to qualify for favorable tax treatment under the Code,
qualified plans must be established and maintained by an employer for the
exclusive benefit of its employees. In the event the tax exempt status of the
Company's benefit plans were to be discontinued and the benefit plans were to be
disqualified, such actions could have a material adverse effect on the Company's
business, financial condition and results of operations. Reference is made to
pages 19-20 of the Company's 1999 Annual Report on Form 10-K for a more detailed
discussion of this issue.
Fluctuations in Quarterly Operating 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 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 fluctuate from quarter
to quarter primarily due to the impact of seasonality in its staffing services
business and on certain of its PEO clients in the agriculture and forest
products related industries. As a result, the Company may have greater revenues
and net income in the third and fourth quarters of its fiscal year. Payroll
taxes and benefits fluctuate with the level of direct payroll costs but may tend
to represent a smaller percentage of revenues later in the Company's fiscal year
as
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Fluctuations in Quarterly Operating Results (Continued)
- -------------------------------------------------------
federal and state statutory wage limits for unemployment and social security
taxes are exceeded by some employees. Workers' compensation expense varies with
both the frequency and severity of workplace injury claims reported during a
quarter, as well as adverse loss development of prior period claims during the
current or subsequent quarters.
Liquidity and Capital Resources
- -------------------------------
The Company's cash position of $198,000 at March 31, 2000 decreased by
$352,000 from December 31, 1999, which compares to a decrease of $2,316,000 for
the comparable period in 1999. The decrease in cash at March 31, 2000, as
compared to December 31, 1999, was primarily attributable to cash used to
implement the Company's new management information system and payments on
long-term debt issued in connection with the TSU acquisition, partially offset
by cash provided by credit-line borrowings.
Net cash provided by operating activities for the three months ended March
31, 2000 amounted to $45,000, as compared to $3,069,000 for the comparable 1999
period. For the 2000 period, cash flow generated by net income, together with
depreciation and amortization, was offset in part by a $1,352,000 increase in
trade accounts receivable.
Net cash used in investing activities totaled $803,000 for the three months
ended March 31, 2000, as compared to $3,834,000 for the similar 1999 period. For
the 2000 period, the principal use of cash for investing activities was for
costs associated with the March 1, 2000 implementation of the Company's new
management information system. The Company presently has no material long-term
capital commitments.
Net cash provided by financing activities for the three-month period ended
March 31, 2000 was $406,000, which compared to $1,551,000 net cash used in
financing activities for the similar 1999 period. For the 2000 period, the
principal source of cash provided by financing activities was $1,123,000 of
credit-line borrowings, offset in part by payments made on long-term debt,
primarily the $8,000,000 three-year term loan in connection with the Company's
acquisition of TSU.
The Company's business strategy continues to focus on growth through the
expansion of operations at existing offices, together with the acquisition of
additional personnel-related businesses, both in its existing markets and other
strategic geographic areas. The Company actively explores proposals for various
acquisition opportunities on an ongoing basis, but there can be no assurance,
however, that any additional transactions will be consummated.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Company maintains a credit arrangement with its principal bank, which
provides for an unsecured revolving credit facility of $12.0 million. This
facility, which expires May 31, 2000, includes a subfeature for letters of
credit, as to which approximately $2.0 million was outstanding as of March 31,
2000. Management anticipates that the renewal of such credit facility will be in
an amount and on such terms and conditions as will be not less favorable than
the current credit arrangement. Management believes that the credit facility and
other potential sources of financing, together with anticipated funds generated
from operations, will be sufficient in the aggregate to fund the Company's
working capital needs for the foreseeable future.
During 1999, the Company's board of directors authorized a stock repurchase
program. The repurchase program allows for the purchase of up to 450,000 common
shares from time to time in open market purchases. During the first quarter of
2000, the Company repurchased 3,000 shares at an aggregate price of $19,000. As
of March 31, 2000, the Company has repurchased 222,000 shares at an aggregate
price of $1,517,000, since the inception of the repurchase program. Management
anticipates that the capital necessary to execute this program will be provided
by existing cash balances.
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, the potential
for and effect of 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 allowance for doubtful accounts, the tax-qualified
status of the Company's 401(k) savings plan, 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 results 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 difficulties associated with integrating acquired
businesses and customers into
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Forward-Looking Information (Continued)
- ---------------------------------------
the Company's operations, economic trends in the Company's service areas,
uncertainties regarding government regulation of PEOs, including the possible
adoption by the IRS of an unfavorable position as to the tax-qualified status of
employee benefit plans maintained by PEOs, future workers' compensation claims
experience, and the availability of and costs associated with potential sources
of financing. 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 the Company's short-term and long-term debt obligations. As of March
31, 2000, the Company had interest-bearing debt obligations of approximately
$14.3 million, of which approximately $11.8 million bears interest at a variable
rate and approximately $2.5 million at a fixed rate of interest. The variable
rate debt is comprised of approximately $6.0 million outstanding under an
unsecured revolving credit facility, which bears interest at the Federal Funds
rate plus 1.25%. The Company also has an unsecured three-year term note with its
principal bank, which bears interest at LIBOR plus 1.35%. Based on the Company's
overall interest exposure at March 31, 2000, a 10 percent change in market
interest rates would not have a material effect on the fair value of the
Company's long-term debt or its results of operations. As of March 31, 2000, the
Company had not entered into any interest rate instruments to reduce its
exposure to interest rate risk.
14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed herewith are listed in the Exhibit Index
following the signature page of this report.
(b) No Current Reports on Form 8-K were filed by the Registrant
during the quarter ended March 31, 2000.
15
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: May 12, 2000 By: /s/Michael D. Mulholland
------------------------
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
16
EXHIBIT INDEX
Exhibit
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11 Statement of Calculation of Basic and Diluted Shares Outstanding
27 Financial Data Schedule
17