Business Context and Reporting Period
Company: Barrett Business Services, Inc. (BBSI)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2010
Business Overview: BBSI provides human resource management services, primarily Professional Employer Organization (PEO) services and staffing services, to small and medium-sized businesses. The company operates through a network of branch offices in the western and mid-Atlantic United States.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenues | $67,432 | $125,692 |
| Gross Margin | $11,745 (17.4%) | $17,122 (13.6%) |
| Net Income (Loss) | $2,278 | $592 |
| Diluted EPS | $0.22 | $0.06 |
| Cash and Cash Equivalents | $17,444 | $17,444 (Ending Balance) |
| Operating Cash Flow (6mo) | $1,584 | |
| Workers' Comp Liability | $29,274 (Total Reserve) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17.6% in Q2 2010 compared to Q2 2009, driven by a 21.2% increase in PEO service fees and a 14.2% increase in staffing services. For the six-month period, revenue grew 16.0%.
- Profitability Turnaround: The company reported a net income of $2.3 million for Q2 2010, a significant improvement from a net loss of $6.7 million in Q2 2009. This turnaround is largely attributed to a $11.8 million increase in workers' compensation expense recorded in Q2 2009 due to a change in actuarial estimates.
- Workers' Compensation Expense: Expense decreased from $18.9 million in Q2 2009 to $8.6 million in Q2 2010. As a percentage of revenue, this dropped from 33.1% to 12.7%.
- Cash Position: Cash and cash equivalents decreased by $19.2 million during the six months ended June 30, 2010, primarily due to net purchases of marketable securities ($13.0 million), restricted securities ($2.9 million), stock repurchases ($2.1 million), and dividends ($1.7 million).
Outlook, Risks, and Unusual Items
- Unusual Item (2009 Comparison): The prior year's results were significantly impacted by a $11.8 million adjustment to workers' compensation reserves following a review by a new actuary. This non-recurring charge distorted the year-over-year comparison for 2010.
- New Insurance Subsidiary: Effective January 5, 2010, the company formed "Ecole Insurance Company," a wholly-owned, fully licensed insurance company in Arizona to provide workers' compensation coverage. Capitalization costs were approximately $6.1 million.
- Liquidity and Covenants: The company maintains a Standby Letter of Credit Agreement requiring liquid assets of at least $10.0 million and annual net income of at least $1.00. The company was in compliance with all covenants as of June 30, 2010.
- Risks: Key risks include volatility in quarterly results due to seasonality, the frequency and severity of workers' compensation claims, and the collectibility of accounts receivable. The company also faces risks related to the financial viability of its excess insurance carriers.
- Capital Allocation: The company repurchased 157,842 shares of common stock in June 2010 at an average price of $12.89. Approximately 1.65 million shares remain available for repurchase under the current plan.
Investor Verification Checklist
- Workers' Compensation Reserves: Verify the stability of the $29.3 million liability reserve and the impact of the new Arizona insurance subsidiary on future claims experience.
- Revenue Mix: Monitor the ratio of PEO fees (reported net) to staffing services (reported gross) as this significantly impacts gross margin percentages.
- Liquidity Covenants: Confirm continued compliance with the $10.0 million liquid asset covenant and the $1.00 annual net income requirement.
- Accounts Receivable: Review the allowance for doubtful accounts ($464,000) given the increase in trade receivables to $50.3 million.
- Investment Portfolio: Assess the fair value of the $30.9 million in marketable securities, noting the mix of trading and available-for-sale assets.