Business Context and Reporting Period
Company: Barrett Business Services, Inc. (BBSI)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2009
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 branch offices in the Western and Mid-Atlantic United States.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $51,072 | $66,194 |
| Gross Margin | $3,689 | $8,562 |
| Gross Margin % | 7.2% | 12.9% |
| Net (Loss) Income | $(3,174) | $91 |
| Diluted EPS | $(0.30) | $0.01 |
| Cash and Cash Equivalents | $45,139 | $1,527 |
| Net Cash from Operating Activities | $707 | $(1,052) |
| Workers' Compensation Claims Liability | $15,739 | $13,118 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by 22.8% ($15.1 million) compared to Q1 2008. Staffing services revenue dropped 32.9% due to reduced demand, while PEO service fees declined 11.0% due to decreased hours worked at client sites.
- Profitability: The company reported a net loss of $3.2 million, a significant deterioration from a net income of $91,000 in the prior year. This was driven by lower revenues and a compression in gross margin.
- Margin Compression: Gross margin percentage fell from 12.9% to 7.2%. This was caused by higher payroll taxes and benefits (increasing from 36.9% to 44.3% of revenue due to statutory rate changes) and higher workers' compensation costs as a percentage of revenue (13.1% vs 10.3%).
- Liquidity Improvement: Despite the net loss, cash and cash equivalents increased by $2.9 million to $45.1 million. This was primarily due to $6.0 million in proceeds from the sale and maturity of marketable securities.
- Share Repurchases: The company repurchased 233,600 shares of common stock for $2.2 million during the quarter.
Outlook, Risks, and Management Commentary
- Outlook: Management expects demand for staffing services to continue reflecting overall economic conditions. The company anticipates continued volatility in quarterly results due to seasonality and economic factors.
- Covenant Waiver: The company violated a financial covenant requiring pre-tax profit of at least $1.00 on a quarterly basis. The bank has agreed to waive this violation for the quarter ended March 31, 2009. Management is negotiating revised terms, potentially eliminating the line of credit and revising covenants to focus on liquidity and annual profitability.
- Internal Controls: The company disclosed that its disclosure controls and procedures remained ineffective as of March 31, 2009, due to a material weakness in IT general controls (program changes and development). Management completed a software upgrade in late March 2009 and expects to demonstrate remediation effectiveness in Q2 2009.
- Insurance Risk: The company noted that its excess workers' compensation insurer, AIG, has been impacted by financial market disruptions. However, AIG's commercial subsidiary remains fully accepted, and the company does not expect a material impact on coverage at this time.
Investor Verification Checklist
- Covenant Compliance: Verify the final terms of the renegotiated credit agreement and the status of the financial covenant waiver.
- IT Remediation: Monitor Q2 2009 filings to confirm the successful remediation of the material weakness in internal controls over financial reporting.
- Workers' Compensation Reserves: Review future quarters for adverse loss development, as the company is self-insured in several states and reserves increased significantly.
- Revenue Mix: Track the ratio of PEO fees to staffing revenue, as shifts in this mix significantly impact gross margin percentages.
- Insurer Solvency: Continue to monitor the financial health of AIG and the company's ability to recover insured claims.