BBSI

Business Context and Reporting Period

Company: Barrett Business Services, Inc. (BBSI)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 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 a network of branch offices across the western and eastern United States.

Key Financial Metrics

All figures in thousands, except per share data.

Liquidity: Cash and cash equivalents decreased from $42.2 million at December 31, 2008, to $27.1 million at June 30, 2009. Total liquid assets (cash, cash equivalents, and marketable securities) remained above the $10.0 million covenant requirement.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 20.7% for the quarter and 21.7% for the six-month period compared to 2008. Staffing services revenue dropped 31.0% (quarter) and 31.9% (six months) due to reduced demand. PEO service fees declined 7.3% (quarter) and 9.1% (six months) due to decreased hours worked at client sites.
• Profitability Reversal: The company reported a net loss of $6.7 million for the quarter and $9.9 million for the six months, compared to net income of $3.3 million and $3.3 million, respectively, in the prior year periods.
• Workers' Compensation Adjustment: The primary driver of the loss was an $11.8 million increase in workers' compensation expense. Management engaged a new actuary and determined the previous liability estimates were insufficient due to economic erosion, healthcare cost uncertainty, and unexpected claim developments.
• Cash Flow: Net cash used in operating activities was $4.3 million for the six months ended June 30, 2009, compared to cash provided by operating activities of $0.7 million in the prior year period.

Outlook, Risks, and Unusual Items

• Unusual Item: The $11.8 million charge to workers' compensation reserves is a non-cash adjustment to liabilities that significantly impacted the current period's earnings but does not represent a cash outflow in the period.
• Management Commentary: Management expects demand for staffing services to continue reflecting overall economic conditions. The company is focusing on growth through existing office expansion and selective acquisitions.
• Internal Controls: The company disclosed that its disclosure controls and procedures were ineffective as of June 30, 2009, due to a material weakness in IT general controls (program changes and development) identified in 2006. Remedial actions, including a financial system upgrade, were completed in Q1 2009, but testing is ongoing.
• Credit Agreement: The company eliminated its line of credit and entered a Standby Letter of Credit Agreement. Covenants require maintaining liquid assets of at least $10.0 million and limiting net losses to $8.0 million for the fiscal year ending December 31, 2009.
• Stock Repurchases: The company repurchased 235,800 shares of common stock for $2.2 million during the six-month period.

Investor Verification Checklist

• Workers' Compensation Reserves: Verify the adequacy of the new $27.6 million liability estimate and the potential for future adjustments given the volatility in healthcare costs and claim severity.
• Covenant Compliance: Monitor the company's ability to limit its full-year 2009 net loss to under $8.0 million to remain in compliance with its credit agreement.
• Internal Control Remediation: Confirm the completion of testing for the new IT controls and the resolution of the material weakness in financial reporting.
• Revenue Mix: Assess the sustainability of the shift in revenue mix between staffing (lower margin, higher volatility) and PEO services (higher margin, more stable) as the economy recovers.
• Liquidity Position: Review the composition of marketable securities and the impact of potential further declines in investment yields on other income.