Barrett Business Services, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless otherwise noted. BBSI provides professional employer organization (PEO) and staffing services, primarily to small and mid-sized businesses. PEO fees are reported net of direct payroll costs.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $219.1 million | $218.2 million; up 0.4% |
| PEO service fees | $193.6 million | $190.5 million; up 1.6% |
| Staffing revenue | $25.5 million | $27.7 million; down 7.9% |
| Gross margin | $26.1 million; 11.9% of revenue | $28.3 million; 12.9% |
| Operating loss | $7.1 million | $5.8 million |
| Net loss / diluted loss per share | $3.4 million / $0.45 | $2.3 million / $0.31 |
| Operating cash flow | $1.0 million provided | $30.8 million provided |
- Revenue growth in PEO was more than offset by weaker staffing revenue. Gross billings were $1.439 billion, versus $1.360 billion; management reported 5.4% growth in gross billings to continuing PEO customers.
- Gross margin declined as payroll taxes and benefits rose to 54.5% of revenue from 52.6%; management cited service mix and increased payroll taxes and benefits. SG&A fell to $32.1 million from $33.2 million, partly due to lower incentive and stock compensation expenses.
- Workers’ compensation expense was $54.5 million, including a favorable $0.8 million prior-period claims adjustment, compared with a $1.7 million favorable adjustment in Q1 2019.
- Investment income was $3.0 million; interest expense was $0.2 million. The income tax benefit was $0.9 million, and the effective tax rate was 21.3%.
Financial position and liquidity
- At March 31, 2020, total assets were $859.6 million, total liabilities $698.3 million, and stockholders’ equity $161.3 million. Current assets were $398.4 million and current liabilities $343.4 million.
- Cash and cash equivalents were $14.3 million, and investments were $79.4 million. Reported cash, cash equivalents and restricted cash totaled $276.8 million; much of the broader cash and investment balance is restricted, principally for workers’ compensation obligations.
- Workers’ compensation claims liabilities were $445.3 million, including $282.5 million of incurred-but-not-reported claims. Safety incentive liabilities were $26.3 million. These estimates involve actuarial judgment and may change as claims develop.
- Operating cash flow was $1.0 million, down from $30.8 million. Cash generation included increases in accrued payroll and workers’ compensation liabilities, partly offset by the quarterly loss and working-capital uses. Investing activities provided $7.2 million; financing activities used $4.8 million, including $3.0 million of share repurchases and $2.3 million of dividends.
- Long-term debt was approximately $3.9 million, secured by the corporate office building. There were no borrowings on the $33 million revolving line at quarter-end. The company said it was in compliance with its financial covenants and expected operating funds, liquid assets and credit availability to cover working capital needs for the next 12 months.
Changes, outlook and risks
- COVID-19’s Q1 impact was concentrated in late March; management estimated approximately $8.0 million of revenue decline from the pandemic. The filing warns that the reported quarter does not reflect expected ongoing effects and states that full-year 2020 results are expected to be adversely affected. No quantified earnings or revenue guidance was provided.
- Management expected client business closures, reduced hours, furloughs, hiring freezes and economic slowdown to weigh on new customer additions and revenue from existing customers. The duration and full financial impact were described as uncertain.
- COVID-related risks identified include client payroll reductions, recession, increased workers’ compensation or unemployment claims, uncollectible receivables, investment portfolio declines, regulatory compliance challenges, remote-work service disruption and heightened cybersecurity exposure. The company also cautioned that these effects could impair covenant compliance or access to financing.
- In May 2020, the company reported an agreement in principle to increase its revolving credit line from $33 million to $50 million. The filing says the expiration would be extended to July 2021, while the existing facility is elsewhere stated to expire July 1, 2022; verify the proposed terms and date.
- Investments produced a $2.7 million unrealized after-tax loss in other comprehensive income, compared with a $3.7 million unrealized gain in Q1 2019. Management estimated that a 50-basis-point rise in market rates would affect investment portfolio fair value by $3.5 million.
- A California wage-and-hour case involving prevailing-wage requirements remained pending before the California Supreme Court; management could not estimate a potential loss range. The IRS was examining federal returns for 2011–2014; the company reported no material unrecognized tax benefits.
- The company historically incurs first-quarter losses and notes seasonal, payroll-tax, workers’ compensation and demand-related variability. Disclosure controls were deemed effective as of March 31, 2020; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How COVID-19 affected client payrolls, revenue, cash generation and covenant headroom after March 31, and whether the expected adverse full-year impact was quantified later.
- The precise terms and effective date of the proposed $50 million revolving facility, including the filing’s apparent July 2021 versus July 1, 2022 maturity-date inconsistency.
- Workers’ compensation reserve development, IBNR assumptions, collateral requirements and restricted asset coverage, given the size and estimation uncertainty of these obligations.
- Whether the California litigation, federal tax examination or other contingencies changed materially after quarter-end.
- The sustainability of dividends and repurchases amid a quarterly loss, limited operating cash flow and pandemic-related uncertainty.