Barrett Business Services, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Unaudited results for the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. BBSI provides professional employer organization (PEO) and staffing services, primarily to small and mid-sized businesses. PEO service fees are reported net of direct payroll costs and safety incentives.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $227.5 million | $248.0 million | $647.6 million | $697.2 million |
| Gross margin | $59.2 million (26.1%) | $70.8 million (28.5%) | $131.9 million (20.4%) | $154.2 million (22.1%) |
| Operating income | $22.3 million | $28.4 million | $27.5 million | $37.8 million |
| Net income | $18.5 million | $25.0 million | $26.6 million | $36.6 million |
| Diluted earnings per share | $2.40 | $3.24 | $3.46 | $4.76 |
- Q3 revenue fell 8.2% year over year: PEO fees decreased 7.0% and staffing revenue decreased 15.9%. Nine-month revenue declined 7.1%, with PEO fees down 5.7% and staffing down 16.6%.
- Q3 gross margin percentage declined 2.4 percentage points; nine-month gross margin percentage declined 1.7 points. SG&A decreased year over year to $35.6 million in Q3 and $101.0 million for nine months, partly reflecting reduced headcount and incentive compensation.
- Operating cash flow was negative $78.9 million for the nine months, versus positive $57.5 million in 2019. The company attributed the outflow principally to a $93.1 million decrease in workers’ compensation liabilities, primarily related to a claims transfer, and a $48.8 million increase in receivables.
Liquidity, debt and balance sheet
- At September 30, 2020, cash and cash equivalents were $61.2 million; investments were $86.7 million; and restricted cash and investments totaled $335.6 million. Cash, cash equivalents and restricted cash combined were $188.3 million, down $85.1 million from year-end 2019.
- Trade receivables were $212.4 million, compared with $163.6 million at December 31, 2019. Total assets were $823.3 million and stockholders’ equity was $197.3 million.
- Long-term debt was approximately $3.8 million, with no revolving-credit borrowings. The revolving facility was reduced to $33 million and expires July 1, 2022; $5.8 million of its $8 million letter-of-credit sublimit was in use. The separate Chubb letter of credit was $63.7 million. BBSI reported compliance with all credit covenants at quarter-end.
- Management said available liquidity, expected operating funds and revolving-credit availability should cover working-capital needs for the next 12 months. This is subject to business, claims and financing risks described in the filing.
Material changes, outlook and risks
- COVID-19 effects: Management attributed lower revenue to client business disruption, closures, furloughs, hiring freezes and reduced hours. It expected these impacts to continue. Employee-related expenses were expected to remain lower through the first half of 2021. The filing provides no specific revenue or earnings guidance.
- Workers’ compensation transfer: A June 2020 loss portfolio transfer removed obligations for specified fronted-program claims incurred from February 2014 through December 2017, reducing claims liabilities and Chubb trust balances by $115.7 million. Lower third-party collateral requirements also released $48.9 million from restricted to unrestricted cash and investments. Total estimated workers’ compensation liabilities were $347.3 million at quarter-end, versus $439.0 million at year-end 2019; reserve estimates remain actuarial and uncertain.
- Tax contingency: The IRS issued a draft audit report indicating it may disallow certain wage-based credits for 2012–2014, implying approximately $2.3 million in additional tax. BBSI disputes the position and plans to contest it; no reserve was recorded.
- Litigation: A California wage-and-hour case involving prevailing-wage requirements for certain public works was pending before the California Supreme Court; no hearing date was provided. Management could not estimate a potential loss range for this or other ordinary-course matters.
- Other risks and events: The company identified pandemic-related risks to client collections, payroll-linked fees, workers’ compensation exposure, service delivery and cybersecurity. A 50-basis-point rise in interest rates was estimated to affect investment-portfolio fair value by $3.4 million. In October 2020, BBSI reinstated its share-repurchase plan and bought 57,018 shares at an average $53.61 per share.
Important facts for investors to verify
- Whether client payroll, PEO fees and staffing demand continued to recover or weaken after quarter-end amid COVID-19 conditions.
- Subsequent receivables collection trends and the drivers of the sharp swing in operating cash flow.
- Workers’ compensation reserve adequacy, claims development, collateral requirements and the ongoing effects of the loss portfolio transfer.
- Developments in the IRS audit and California litigation, including any change to the company’s no-reserve position for the tax matter.
- Liquidity and covenant headroom, including restrictions tied to the credit facility and collateral arrangements, and the use of cash for dividends and repurchases.