Barrett Business Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results are compared with the corresponding 2019 periods. BBSI provides professional employer organization (PEO) and staffing services, principally to small and mid-sized businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $201.0m | $231.0m | $420.1m | $449.2m |
| Gross margin | $46.6m; 23.2% | $55.1m; 23.9% | $72.7m; 17.3% | $83.5m; 18.6% |
| Operating income | $12.2m | $15.1m | $5.2m | $9.4m |
| Net income | $11.5m | $13.9m | $8.1m | $11.6m |
| Diluted EPS | $1.51 | $1.81 | $1.06 | $1.51 |
| Operating margin | 6.1% | 6.6% | 1.2% | 2.0% |
Q2 revenue fell 13.0% year over year: PEO service fees declined 11.2% to $180.5m and staffing revenue declined 26.2% to $20.5m. For the first half, revenue decreased 6.5%; PEO fees fell 5.0% and staffing revenue fell 17.0%. Gross billings to continuing PEO customers decreased 4.5% in Q2, while increasing 0.5% for the first half.
Q2 SG&A declined to $33.3m from $39.0m, reflecting lower employee-related costs, including reduced headcount, profit sharing and incentive compensation. Workers’ compensation expense also declined, with favorable prior-period claims adjustments of $1.4m in Q2 and $2.2m for the first half. Investment income declined as interest rates fell. First-half net income includes a $3.4m Q1 net loss, followed by Q2 net income of $11.5m.
Cash flow, balance sheet and debt
- Cash flow: First-half operating cash flow was negative $114.4m, versus positive $38.9m in 2019. The principal drivers were a $102.6m reduction in workers’ compensation claims liabilities and a $24.8m increase in receivables. Investing activities provided $2.0m; financing activities used $5.4m, including $4.5m of dividends and $3.0m of share repurchases.
- Liquidity: At June 30, cash and cash equivalents were $62.2m and current investments were $67.5m. Restricted cash and investments totaled $321.6m. Cash, cash equivalents and restricted cash—the cash-flow statement measure—totaled $155.5m, down $117.8m from year-end 2019.
- Debt and facility: Long-term debt was approximately $3.8m, with no revolving-line borrowings. The amended revolving facility increased capacity from $33m to $50m and expires July 1, 2022; $5.8m of its $8m standby-letter-of-credit sublimit was in use. A separate $63.7m Chubb letter of credit supports the workers’ compensation program. The company reported covenant compliance at quarter-end.
- Capital and obligations: Total assets were $772.3m, total liabilities $592.5m and stockholders’ equity $179.9m. Estimated workers’ compensation claims liabilities were $336.5m, down from $439.0m at December 31, 2019.
Material changes, outlook and risks
- COVID-19: Management attributed lower revenue primarily to the pandemic’s effects on clients, including closures, furloughs, hiring freezes and reduced hours. It expected these pressures to continue and warned that they could materially adversely affect business, cash flows, results and financial condition. No numerical earnings or revenue guidance was provided.
- Workers’ compensation transfer: On June 29, BBSI entered a loss portfolio transfer covering specified fronted-program claims incurred from February 1, 2014 through December 31, 2017. The transaction reduced claims liabilities and trust account balances by $115.7m; the filing also cites a $48.9m reduction in third-party collateral requirements. A $2.2m receivable from Chubb was recorded for claim payments made on transferred obligations.
- Tax contingency: In July 2020, the company received a draft IRS report proposing approximately $2.3m of additional tax for 2012–2014, related to wage-based credits. BBSI disputes the position and intends to challenge it; no reserve was recorded.
- Litigation: A California wage-and-hour case involving prevailing-wage requirements remained under review by the California Supreme Court. Management could not estimate a potential loss range for litigation matters.
- Other exposures: Risks include pandemic-related client credit losses, changes in workers’ compensation claims and regulations, remote-work and cybersecurity issues, investment-market volatility, and access to collateral or financing. A 50-basis-point rise in market rates was estimated to affect investment portfolio fair value by $3.4m. Management said available funds, expected operating cash and credit availability should cover working-capital needs for the next 12 months.
- Capital allocation: The company paid $0.30 per share in dividends in each quarter and repurchased $3.0m of common stock during the first half. The credit agreement limits dividends and share purchases subject to stated exceptions and bank approval requirements.
Investor facts to verify
- Whether COVID-19-related customer payroll declines, staffing demand and receivable collections persist or worsen.
- How the claims transfer, lower collateral requirements and subsequent claims development affect cash, restricted assets and reserve adequacy.
- The outcome and potential financial impact of the IRS examination and California litigation.
- Whether BBSI continues to meet credit covenants and has sufficient accessible liquidity after considering restricted funds and collateral obligations.
- Whether reported earnings remain supported by operating cash generation, given the unusually large first-half operating cash outflow.