Business Context and Reporting Period
Company: Barrett Business Services, Inc. (BBSI)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2010
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 as a co-employer for PEO clients and offers on-demand and contract staffing.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues (GAAP) | $58.3 million | $51.1 million |
| Gross Margin | $5.4 million (9.2%) | $3.7 million (7.2%) |
| Net Loss | $(1.7) million | $(3.2) million |
| Diluted Loss Per Share | $(0.16) | $(0.30) |
| Cash and Cash Equivalents | $28.1 million | $45.1 million (End of Q1 2009) |
| Net Cash from Operating Activities | $0.8 million | $0.7 million |
| Workers' Compensation Claims Liability | $28.6 million | $27.8 million (Dec 31, 2009) |
Note: GAAP revenues exclude the gross payroll of PEO clients. On a gross basis, total revenues were $262.6 million for Q1 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total GAAP revenues increased 14.1% year-over-year, driven by a 15.4% increase in PEO service fees and a 12.6% increase in staffing services revenue.
- Profitability Improvement: Net loss narrowed by $1.5 million compared to Q1 2009. Gross margin dollars increased by $1.7 million, aided by a reduction in payroll taxes and benefits as a percentage of revenue (from 44.3% to 42.3%) due to changes in California unemployment wage reporting.
- Workers' Compensation: Expense increased to $7.8 million (13.4% of revenue) from $6.7 million (13.1% of revenue) due to a higher number of injury claims incurred in the quarter.
- Liquidity: Cash and cash equivalents decreased by $8.6 million from the prior year-end, primarily due to $5.1 million in purchases of marketable securities and $2.9 million in net purchases of restricted securities to capitalize a new insurance subsidiary.
Outlook, Risks, and Unusual Items
- New Insurance Subsidiary: Effective January 5, 2010, the company formed "Ecole Insurance Company," a fully licensed Arizona insurance company to provide workers' compensation coverage for Arizona employees. Capitalization cost was approximately $6.1 million.
- Management Commentary: Management expects demand for staffing services to continue reflecting overall economic conditions. Growth in PEO revenues was attributed to new customers exceeding lost business.
- Risks and Contingencies:
- Workers' Compensation Reserves: The company is self-insured in several states. Reserves are estimates subject to volatility based on claim frequency and severity. A significant increase in reserves occurred in Q2 2009 ($11.8 million) following a new actuarial review.
- Insurance Carrier Viability: The company maintains excess coverage with AIG. While AIG's commercial subsidiary remains a fully accepted carrier, the company monitors the financial capacity of insurers due to AIG's exposure to subprime mortgage securities.
- Seasonality: Results fluctuate due to seasonality in staffing and specific PEO client industries (agriculture, construction).
- Capital Resources: The company is in compliance with all credit agreement covenants, including maintaining liquid assets of at least $10.0 million.
Investor Verification Checklist
- Workers' Compensation Reserve Adequacy: Verify the stability of the $28.6 million liability estimate and monitor for adverse loss development in future quarters.
- Revenue Mix Impact: Confirm how the shift between high-margin PEO services and lower-margin staffing services affects gross margin percentages.
- Cash Flow Sustainability: Assess the impact of significant cash outflows for marketable securities and insurance capitalization on future liquidity.
- Insurance Carrier Exposure: Monitor the financial health of AIG and the company's ability to recover insured claims.
- Stock Repurchases: Note the repurchase of 5,065 shares in March 2010 under the existing plan, with 1.8 million shares remaining available.