BBSI

Business Context and Reporting Period

Company: Barrett Business Services, Inc. (BBSI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: BBSI provides human resource management services, primarily Professional Employer Organization (PEO) and staffing services, to small and medium-sized businesses. The company operates through 44 branch offices across 10 states, with significant concentration in California and Oregon (67% of 2009 revenue). BBSI acts as a co-employer for PEO clients and provides temporary and contract staffing.

Key Financial Metrics

Note: PEO revenues are reported on a net basis (fees only), while staffing revenues are reported gross.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 15.7% to $236.5 million. Staffing services revenue dropped 24.9% ($38.4 million) due to reduced demand in a weak economy. PEO service fees declined 4.4% ($5.6 million) due to reduced hours at client sites, despite an increase in the number of PEO clients (1,600 in 2009 vs. 1,300 in 2008).
• Profitability Reversal: The company reported a net loss of $4.8 million in 2009, compared to net income of $6.3 million in 2008. This $11.1 million swing was primarily driven by a $11.8 million increase in workers' compensation expense.
• Workers' Compensation Adjustment: In Q2 2009, management engaged a new actuary and increased workers' compensation claims liabilities by $11.8 million due to economic erosion, healthcare cost uncertainty, and unexpected claim development. This caused the workers' compensation expense ratio to rise from 11.0% of revenue in 2008 to 17.4% in 2009.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased 8.7% to $33.5 million, largely due to lower profit sharing and variable costs.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects demand for staffing services to remain sensitive to uncertain economic conditions. Gross margins are expected to fluctuate based on the mix of staffing vs. PEO services and potential future adjustments to workers' compensation reserves.
• Unusual Items: The $11.8 million charge to workers' compensation reserves in 2009 was a significant non-recurring adjustment to estimates. In 2008, the company recorded a $3.5 million impairment charge on investments, which did not recur in 2009.
• Key Risks:
  • Workers' Compensation Reserves: Reserves are estimates; actual costs could exceed accruals, materially impacting earnings.
  • Self-Insurance Retention: The company maintains a $5.0 million per-occurrence retention for most states, exposing it to significant financial risk for large claims.
  • Insurance Carrier Viability: Excess coverage is held with AIG. While AIG's commercial subsidiary remains operational, the company monitors the carrier's financial stability.
  • Geographic Concentration: 67% of revenue is derived from California and Oregon, making the company vulnerable to regional economic downturns and regulatory changes.
  • Credit Risk: As a co-employer, BBSI assumes liability for payroll and taxes regardless of client payment, exposing it to client default risks.
• Liquidity: The company maintains a $10.0 million liquid asset covenant under its credit facility. As of Dec 31, 2009, liquid assets were sufficient, and the company was in compliance with all covenants.

Investor Verification Checklist

• Reserve Adequacy: Verify the methodology and assumptions used by the new actuary for the $11.8 million workers' compensation reserve increase.
• Client Concentration: Assess the financial health of major PEO clients in California and Oregon to gauge credit risk and potential revenue stability.
• Insurance Coverage: Confirm the status of the excess workers' compensation policy with AIG and the company's contingency plans for coverage replacement.
• Revenue Mix: Monitor the ratio of staffing to PEO revenue, as shifts toward staffing (gross reporting) can dilute reported gross margins.
• Stock Repurchases: Note that the company repurchased 313,000 shares in 2009 and has 1.8 million shares remaining under its authorized repurchase program.