10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 11, 2000
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, 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 July 31, 2000
was 7,295,298 shares.
BARRETT BUSINESS SERVICES, INC.
INDEX
2
Part I - Financial Information
Item 1. Financial Statements
BARRETT BUSINESS SERVICES, INC.
Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
3
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
4
BARRETT BUSINESS SERVICES, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
5
BARRETT BUSINESS SERVICES, INC.
Statements of Cash Flows
(Unaudited)
(In thousands)
The accompanying notes are an integral part of these financial statements.
6
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):
7
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
NOTE 2 - PROVISION FOR INCOME TAXES (Continued):
The provision for income taxes for the six months ended June 30, 2000
and 1999 is as follows (in thousands):
Six Months Ended
June 30,
--------------------
2000 1999
------- -------
Current:
Federal $ 1,423 $ 1,224
State 388 333
------- -------
1,811 1,557
------- -------
Deferred:
Federal (606) (54)
State (147) (14)
------- -------
(753) (68)
------- -------
Provision for income taxes $ 1,058 $ 1,489
======= =======
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 1,550,000.
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 181,078 $2.40 to $6.75
Options exercised (7,000) $3.50 to $4.40
Options canceled or expired (60,000) $8.56 to $10.13
---------
Outstanding at June 30 2000 1,007,796 $2.40 to $17.94
=========
Exercisable at June 30, 2000 600,593
=========
Available for grant at June 30, 2000 317,770
=========
The options listed in the table generally become exercisable in four
equal annual installments beginning one year after the date of grant.
8
BARRETT BUSINESS SERVICES, INC.
Notes to Financial Statements (Continued)
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 60 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 six months of 2000, the Company awarded deferred
compensation stock options for 10,022 shares at exercise prices ranging from
$2.40 to $2.60.
9
BARRETT BUSINESS SERVICES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth the percentages of total revenues
represented by selected items in the Company's Statements of Operations for the
three and six months ended June 30, 2000 and 1999.
Three months ended June 30, 2000 and 1999
Net income for the second quarter of 2000 was $794,000, a decrease of
$422,000 or 34.7% from the same period in 1999. The decrease in net income for
2000 was attributable primarily to a slowing in the Company's revenue growth
rate compared to recent quarters, combined with increased workers' compensation
and direct payroll costs, both in terms of dollars and as a percentage of
revenues, and higher depreciation and amortization and interest expense. Basic
and diluted earnings per share for the second quarter of 2000 were $.11, which
compares to basic and diluted earnings per share of $.16 for the 1999 second
quarter.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
- ---------------------------------
Revenues for the second quarter of 2000 totaled approximately $86.5
million, an increase of approximately $1.8 million or 2.1% over the second
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 represented a decline of 4.5%. 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. The Company's
revenue growth rate was affected in part by a progressive implementation of a
new, comprehensive pre-employment screening system beginning in April 2000 and
continuing through October 2000, which is designed to ensure that applicants are
appropriately qualified. Although the new pre-employment screening system may
result in lower revenues, management believes that in the long term the system
will enhance the quality of the Company's employees and thus strengthen its
competitive position in a low unemployment economy.
Staffing services revenue increased approximately $5.5 million or 11.9%
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 54.5% of total revenues for the second quarter of 1999
to 59.8% for the second quarter of 2000. Professional employer ("PEO") services
revenue decreased approximately $3.7 million or 9.7%, primarily due to
management's decision to discontinue the Company's business relationships with
certain customers who were not generating acceptable gross margins. The share of
revenues for PEO services had a corresponding decrease from 45.5% of total
revenues for the second quarter of 1999 to 40.2% for the second quarter of 2000.
Gross margin for the second quarter of 2000 totaled approximately $8.8
million, which represented a decrease of $364,000 or 4.0% from the second
quarter of 1999. The gross margin percent decreased from 10.8% of revenues for
the second quarter of 1999 to 10.1% for the second quarter of 2000. The decrease
in the gross margin percentage was due to higher workers' compensation expense
and direct payroll costs and slightly higher payroll taxes and benefits.
Workers' compensation expense for the second quarter of 2000 totaled $3.3
million or 3.8% of revenues, which compares to $2.8 million or 3.4% of revenues
for the same period in 1999. The increase in workers' compensation expense for
the 2000 second quarter, as a percentage of revenues, was generally attributable
to an increase in the expected total costs of claims and a higher incidence of
injuries in 2000 compared to the same period in 1999. The increase in direct
payroll costs, as a percentage of revenues for the second quarter of 2000, was
primarily due to increases in contract staffing and on-site management, which
generally have a lower mark-up rate (and thus higher direct payroll costs as a
percentage of revenues) relative to other staffing services provided by the
Company. The increase in payroll taxes and benefits, as a percentage of revenues
for the second 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.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
- ---------------------------------
Selling, general and administrative ("SG&A") expenses for the 2000
second quarter amounted to approximately $6.5 million, an increase of $61,000 or
1.0% over the comparable period in 1999. SG&A expenses, expressed as a
percentage of revenues, decreased from 7.5% for the second quarter of 1999 to
7.4% for the second quarter of 2000. The increase in total dollars over 1999 was
primarily attributable to the Company's acquisition of TSU effective May 31,
1999, which accounted for approximately $652,000 of noncomparable operating
expenses in the second quarter of 2000. Thus, comparable branch SG&A expenses
declined $591,000, or 9.2%, from the second quarter of 1999.
Depreciation and amortization totaled $822,000 or 0.9% of revenues for
the second quarter of 2000, which compares to $582,000 or 0.7% of revenues for
the same period in 1999. The increased expense was primarily due to (i)
amortization arising from the TSU acquisition and (ii) in part, to the March 1,
2000 implementation of the Company's new information system.
Other expense totaled $151,000 or 0.2% of revenues for the second
quarter of 2000, which compares to $15,000 for the second quarter of 1999. The
increase in expense was primarily attributable to net interest expense on higher
debt levels necessary to finance three acquisitions made during the first five
months of 1999.
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 and a group disability insurance 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.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
- ---------------------------------
Six Months Ended June 30, 2000 and 1999
Net income for the six months ended June 30, 2000 was $1,538,000, a
decrease of $418,000 or 21.4% from the same period in 1999. The decrease in net
income was attributable to a lower gross margin percent owing primarily to
higher direct payroll costs and payroll taxes and benefits, expressed as a
percentage of revenues, coupled with higher SG&A expenses, depreciation and
amortization and interest expense. Basic and diluted earnings per share for the
first six months of 2000 were $.21 as compared to $.26 for both basic and
diluted earnings per share for the same period of 1999.
Revenues for the six months ended June 30, 2000 totaled approximately
$173.6 million, an increase of approximately $17.9 million or 11.5% over the
similar period of 1999. The increase in total revenues was primarily due to the
TSU acquisition, which was effective May 31, 1999.
Gross margin for the six months ended June 30, 2000 totaled
approximately $17.4 million, which represented an increase of $924,000 or 5.6%
over the similar period of 1999. The gross margin percent decreased from 10.6%
of revenues for the six-month period of 1999 to 10.0% for the same period of
2000. The decrease in the gross margin percentage was primarily due to higher
direct payroll costs and payroll taxes and benefits. The increase in direct
payroll costs, as a percentage of revenues, was attributable to increases in
contract staffing and on-site management, of which payroll generally represents
a higher percentage of revenues. The increase in payroll taxes and benefits for
the six-month period 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.
SG&A expenses for the six months ended June 30, 2000 amounted to
approximately $12.9 million, an increase of $973,000 or 8.1% over the similar
period of 1999. SG&A expenses, however, expressed as a percentage of revenues,
decreased from 7.7% for the six-month period of 1999 to 7.4% for the same period
of 2000. The increase in total SG&A dollars was primarily due to increased
management payroll, advertising and rent expense in connection with the
additional branch offices acquired in the TSU acquisition.
Depreciation and amortization totaled $1.6 million or 0.9% of revenues
for the six months ended June 30, 2000, which compares to $1.1 million or 0.7%
of revenues for the same period of 1999. The increased expense was primarily due
to the amortization arising from the acquisition of TSU coupled with
depreciation and amortization from the March 1, 2000 implementation of the
Company's new information system.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other expense totaled $283,000 or 0.2% of revenues for the six-month
period ended June 30, 2000, which compares to $57,000 of other income for the
comparable 1999 period. The increase in expense was primarily due to net
interest expense on higher debt levels necessary to finance three acquisitions
in 1999.
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 federal and state statutory wage limits for unemployment and to a lesser
extent 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 $332,000 at June 30, 2000 decreased by
$218,000 from December 31, 1999, which compares to a decrease of $3,084,000 for
the comparable period in 1999. The decrease in cash at June 30, 2000, as
compared to December 31, 1999, was primarily attributable to payments on
long-term debt issued in connection with the 1999 TSU acquisition, cash used to
repurchase the Company's common stock and cash used to implement the Company's
new management information system, partially offset by cash provided by net
income and depreciation and amortization.
Net cash provided by operating activities for the six months ended June
30, 2000 amounted to $3,634,000, as compared to $2,589,000 for the comparable
1999 period. For the 2000 period, cash flow was primarily generated by net
income, together with noncash expenses of depreciation and amortization and a
decrease in accounts receivable, partially offset by an increase in deferred tax
assets and a decrease in accounts payable.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
Net cash used in investing activities totaled $762,000 for the six
months ended June 30, 2000, as compared to $14,036,000 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. For the 1999 period, the principal use of cash
was for the acquisition of three staffing service businesses.
Net cash used in financing activities for the six-month period ended
June 30, 2000 was $3,090,000, which compared to $8,363,000 net cash provided by
financing activities for the similar 1999 period. For the 2000 period, the
principal use of cash in financing activities was $1,389,000 of payments made on
long-term debt, primarily the $8,000,000 three-year term loan in connection with
the Company's acquisition of TSU, $974,000 of cash used to repurchase the
Company's common stock and $865,000 of cash used for payment of a note payable
issued in connection with the TSU acquisition.
The Company's business strategy is based in part 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 explores proposals for various
acquisition opportunities on an ongoing basis, but there can be no assurance
that any additional transactions will be consummated.
Effective May 31, 2000, the Company's credit arrangement with its
principal bank was renewed on terms and conditions which were generally more
favorable than the prior agreement. The amended agreement provides for an
increase in the unsecured credit facility from $12.0 million to $15.0 million.
This facility, which expires May 31, 2001, includes a subfeature for letters of
credit, as to which approximately $2.4 million were outstanding as of June 30,
2000. 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. Since inception, the board has approved two increases in the
total number of shares authorized to be repurchased under this program. The
repurchase program currently allows for the repurchase of up to 700,000 common
shares from time to time in open market purchases. During the first six months
of 2000, the Company repurchased 162,700 shares at an aggregate price of
$974,000. As of August 9, 2000, the Company has repurchased 391,800 shares for
an aggregate price of $2,525,000, since the
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
inception of the repurchase program. Management anticipates that the capital
necessary to execute this program will be provided by existing cash balances and
other available sources of financing.
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 the Company's operations, economic trends in the
Company's service areas, the availability of qualified applicants for employment
opportunities, 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.
16
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 June 30, 2000, the Company had interest-bearing debt obligations of
approximately $11.7 million, of which approximately $10.1 million bears interest
at a variable rate and approximately $1.6 million at a fixed rate of interest.
The variable rate debt is comprised of approximately $5.0 million outstanding
under an unsecured revolving credit facility, which bears interest at the
Federal Funds rate plus 1.25% or LIBOR plus 1.00%. 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 June 30,
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 June 30, 2000, the Company had not entered into any interest
rate instruments to reduce its exposure to interest rate risk.
17
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 annual meeting of stockholders on May 16,
2000. The following directors were elected at the annual meeting:
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 June 30, 2000.
18
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 10, 2000 By:/s/ Michael D. Mulholland
-------------------------
Michael D. Mulholland
Vice President-Finance
(Principal Financial Officer)
19
EXHIBIT INDEX
Exhibit
- -------
4.1 Loan Agreement between the registrant and Wells Fargo Bank, N.A. and
Revolving Line of Credit Note, each dated May 31, 2000.
11 Statement of Calculation of Basic and Diluted Common Shares Outstanding
27 Financial Data Schedule