Business Context and Reporting Period
Company: Barrett Business Services, Inc. (BBSI)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2008
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 across the western and mid-Atlantic United States.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $77,461 | $215,838 |
| Gross Margin | $14,909 (19.2%) | $37,525 (17.4%) |
| Net Income | $650 | $3,991 |
| Diluted EPS | $0.06 | $0.36 |
| Cash and Cash Equivalents | $28,302 | $28,302 (Ending Balance) |
| Operating Cash Flow (9mo) | $7,658 | |
| Debt/Credit Facility | $7.0M Revolving Line (Unsecured); $5.78M utilized for letters of credit |
Material Changes vs. Prior Period
- Revenue Decline (Q3): Total revenues decreased 6.6% to $77.5 million compared to $82.9 million in Q3 2007. This was driven by a 15.4% drop in PEO service fees, partially offset by a 1.3% increase in staffing services revenue.
- Significant Profit Drop: Net income plummeted 89.7% in Q3 2008 ($650k vs. $6.3M in Q3 2007) and 69.0% for the nine-month period ($4.0M vs. $12.9M in 2007).
- Investment Impairment: The company recorded a non-cash, other-than-temporary impairment charge of approximately $3.5 million on four closed-end bond funds in Q3 2008. No tax benefit was recognized on this charge.
- Margin Compression: Gross margin percentage declined from 22.7% in Q3 2007 to 19.2% in Q3 2008. This was primarily due to higher workers' compensation expenses (rising from 8.0% to 10.9% of revenue) and a shift in revenue mix toward lower-margin staffing services.
- Acquisitions: The company completed three acquisitions since July 2007 (Strategic Staffing, Phillips Temps, First Employment Services), contributing to staffing revenue growth but adding to SG&A expenses.
Outlook, Risks, and Management Commentary
- Economic Conditions: Management notes that general economic conditions continue to adversely affect the growth of the existing PEO customer base and staffing demand.
- Workers' Compensation Risk: The company is self-insured in several states. Increased claim costs and higher estimates for existing claims drove a significant rise in workers' compensation expenses. The company monitors its excess insurance coverage with AIG, noting AIG's exposure to subprime markets but stating no material impact is currently expected.
- Internal Controls: The company disclosed that its disclosure controls and procedures remained ineffective as of September 30, 2008, due to a material weakness in IT general controls (program development, access, and segregation of duties) identified in 2006. Remediation efforts are ongoing.
- Liquidity: Cash increased by $18.5 million during the nine-month period, driven by proceeds from the sale of marketable securities ($81.9M) and operating cash flow, offset by stock repurchases ($6.4M) and acquisitions ($5.9M).
- Stock Repurchases: The company repurchased 178,000 shares in July 2008. In October 2008, the Board approved an increase in the authorized repurchase program to 3.0 million shares.
Investor Verification Checklist
- Investment Portfolio Health: Verify the current status and valuation of the remaining closed-end bond funds and equity securities following the $3.5M impairment charge.
- Workers' Compensation Reserves: Assess the adequacy of the $15.4 million reserve for unsettled claims, given the trend of increasing claim costs and the company's self-insured status in key states.
- IT Control Remediation: Review progress on the remediation plan for the material weakness in IT general controls to ensure financial reporting reliability.
- PEO Customer Retention: Monitor the rate of decline in PEO service fees and the impact of economic conditions on client retention.
- Acquisition Integration: Evaluate the financial performance of the three recent acquisitions (Strategic Staffing, Phillips Temps, First Employment) against their projected contributions.