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Barrett Business Services Inc (NASDAQ:BBSI)
Q1 2020 Earnings Call
May 6, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone and thank you for participating in today's conference call to discuss BBSI's Financial Results for the First Quarter ended March 31, 2020.

Joining us today are BBSIs President and CEO, Mr. Gary Kramer; the company's CFO, Mr. Anthony Harris; and COO, Mr. Gerald Blotz. Following the remarks, we'll open the call for your questions.

Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding the forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented, that does not reflect historical fact are subject to a number of risks and uncertainties actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and the company's quarterly and annual report filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

I would like to remind everyone, this call will be available for replay through June 6, 2020, starting at 3:00 PM ET this afternoon. Webcast will replay -- a webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at www.mybbsi.com.

Now, I'd like to turn the the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Gary Kramer -- Chief Executive Officer

Thank you, Jerry. Hello, everyone, and thank you for taking the time to be on the call. The events that unfolded over the past two months have been historic and unprecedented, and our hearts go out to all those affected by the global crisis.

On behalf of all BBSI employees, we would like to extend our deep gratitude to the heroes in healthcare and the first responders. We would also like to express our appreciation for the thoughtful actions taken by our leaders in government for keeping us safe, but also for the actions they have taken to support small businesses. Many of these actions will be discussed during our call today. Our business teams are operational and working effectively, with the vast majority working remotely, and BBSI continues to be open for business. I want to acknowledge and thank everyone in the BBSI family, many of whom are listening to this call, for their exceptional response to the crisis. We continue to provide outstanding and uninterrupted service to our clients and distribution partners.

Our product has never been more relevant and our teams have been behaving selflessly, while advocating for the small business owner. These events were unexpected and transpired very quickly, the business owner and some of our distribution partners often don't have the necessary resources to digest all of these rapid changes and facts in order to make informed and wise business decisions. It is in times like this that BBSI can make a difference in the lives of our clients and their employees.

As an organization, we dissected and decipher all of the various legislations from essential versus non-essential, to FFCRA, to the CARES Act and work tirelessly with our clients to assist them in determining which option would be best for their organization. And then we developed reports or made introductions to assist them with applying for these various grants, loans and subsidies.

We assisted clients on modifying their business toward essential services in order to remain open and to provide the required materials, products and services to keep America functioning. We continue to assist our clients with restructuring their workforce, whether through best practices of working remotely or a strategy for layoffs and furloughs. If layoffs occur and we work to redirect those displaced employees to other BBSI clients that are growing as a result of the pandemic and need to hire. Simply put, our value proposition has never been more relevant. Having your personal team at BBSI when you are in a time of need is a powerful ally to have in your corner.

Before I move into the quarter. I would like to speak to the financial strength of BBSI. Over the past couple of years, we have taken many steps and actions in order to solidify our balance sheet. We previously discussed, building a financial mode around the company and then utilizing the excess capital to invest in the business, increase the dividend and then opportunistically repurchase shares. We started to buyback stock during the first quarter, but we quickly suspended the repurchase program once the economy started to shelter in place. At quarter end, our true available cash and securities on hand was $94 million and we have an additional $50 million credit facility behind us.

We have stressed our portfolio under multiple economic scenarios and we do not foresee any reasonable scenario where our capital and liquidity would be insufficient. We are good stewards of our capital and we will ensure that BBSI is here for the long term to support our clients, distribution channels, employees and investors.

I'm going to divide my remaining remarks into three sections. In the first section, I will discuss the first quarter's operations, then I will comment on what we are seeing in early April and the steps we have taken to manage through COVID-19 and third and most importantly, what we are doing to set up for growing and capitalizing when the economy returns to normalcy. Then Anthony Harris, our new CFO will deliver his prepared remarks regarding the quarter, as well as a financial review of BBSI in a post- COVID-19 world. Finally, we will open the line for questions.

For the first quarter, we started strong and were on plan for January and February, but we began to see a slowdown in revenue and new business transacting in March due to COVID-19. We finished the quarter with gross billings growth of 5.8%. To put this in perspective, through February our gross billings were up 8% year to date over prior year and then March was up 1.5% resulting in the 5.8% growth in gross billings.

Regarding our client count, we added 403 new PEO clients, we experienced attrition of 181 clients, 13 due to accounts receivable, 15 for lack of peer progression, 7 due to risk profile, 15 businesses sold, 47 businesses closed, 7 businesses closed due to COVID, 77 left due to pricing competition or companies that have moved away from the outsource model. This represents a build in the quarter of 222 net new clients. Our first quarter earnings were in line with our expectations when considering the COVID effect in March and we had good momentum that Anthony will discuss shortly, but this is ancient history and not reflective of the current economy.

Turning to today's environment, the COVID-19 pandemic and consequent economic crisis will, of course, impact our clients and as such, will impact BDSI. First, I would like to better explain BBSIs client base and how we think the pandemic will affect them and their industries. As you know, our client portfolio is skewed heavily to the blue and gray collar industries. We do not have clients in the most distressed industries, such as airlines and cruises. Of our portfolio of clients, some may feel disruption in their specific industry or may be impacted by shelter in place inefficiencies in their geography. 18% of our clients as a percentage of billings would be minimally affected by COVID and we are seeing gross billing slow from flat to down 7% in April.

This would include, waste management, janitorial, maintenance and landscaping. 65% of our clients as a percentage of billings would be moderately affected by COVID and we are seeing gross billings decrease 7% to 15% in April. This would include contractors, construction, transportation, logistics and manufacturing. 17% of our clients as a percentage of billings would be severely affected by COVID and we are seeing gross billings decrease from 15% to 50% in April. This would include restaurants and hospitality, retail and wholesale sales and professional services.

Attempting to forecast in this environment by industry, by client, and by geography is a fool's errand and is unknowable. What we can say is that, some clients will prosper, some clients will be slightly affected and some clients will be deeply affected. Overall, our aggregated clients businesses will be reduced, some will have to close temporarily, some will have to close permanently and when they reopen, it is impossible to know what the diminished capacity will be or how quickly they will ramp.

From a macroeconomic perspective, our staffing business will slow the quickest and the deepest. When businesses need to make cuts, one of the first places they go to is the temporary workforce and we are experiencing the swift deceleration in staffing revenue. As you know, we are a PEO that has a small staffing operation. Our PEO business is much larger and holds up much better during booms and bus in the economic cycle. Anthony will provide more information regarding the April interim financials in his remarks.

Next, I'm going to discuss the various steps we have taken to manage through COVID-19. Knowing that our revenue was going to decelerate coupled with the fact that no one can confidently predict how the economy will come back to life, we had to make some difficult decisions regarding our operations and SG&A reductions. The first thing we did was to curtail any discretionary spending regarding marketing and travel, as well as deferring the opening of new branches.

The next decisions we made were more difficult and involved consolidating branches and engaging in layoffs and furloughs. Regarding our branch consolidations, we combined Gastonia in the Charlotte, Ogden Ogden in the Salt Lake City and Vancouver Washington in the Portland. We are also establishing a new concept that we are calling a satellite location. These are locations that are profitable and focus on staffing, but will typically be managed by a leader in a different PEO branch. Hermiston is now satellite of Yakima, the Oregon Coast, consisting of Newport, Coos Bay in Tillamook are now satellites of Portland. Rosenberg is now a satellite of Eugene. These moves were made with the intention of continuing to grow revenue, while servicing our clients, but doing so in a more cost-efficient manner. We also decreased the staffing operations to support the decrease in revenue. Through these various moves, we have reduced our workforce by 8% as it relates to layoffs, and 9% as it relates to furloughs. We have also eliminated any temporary employees and reduced hours for some employees were the work cannot be supported by the revenue.

As of today, we have extended the furlough through June 1. At the end of April, we will have 57 branches and the stratification is as follows. We have 18 mature branches with run rates in excess of $100 million. This is a measure, we used to indicate a branches ability to increase leverage. We have 20 emerging branches running between $30 and $100 million. We have 19 branches we consider developing with run rates of up to $30 million. We also have five satellite operations that focus on staffing and are typically managed by another branch.

Next, I'm going to discuss the various steps we are taking now to ensure that we will emerge stronger and capitalize in a post COVID-19 world. As we previously discussed, we have been investing in our new client-facing technology. I'm pleased to say that the team has overcome many challenges as it relates to COVID-19 and we are still on track for the release in the second quarter. MyBBSI will launch in June and all new clients will be on our new system. We will then convert our existing client base throughout the remainder of the year. We are extremely excited about this technology as it is going to make our clients' lives and our lives better. Based on our proven track record of adding and retaining business with an average IT platform, our new updated technology platform will be an absolute accelerant to growth. Increasing our ability to be competitive in the market and to go after new business we couldn't reach before. We can see the finish line and the teams are sprinting to cross it.

Regarding the accelerant to growth, we announced that Michael Saverien has joined the team as the Executive Director of Sales and Distribution. As a company, we have a heightened focus and attention on sales in the sales process, we have formed a dedicated Marketing and Communications team reporting to Michael, whose first objective will be to develop and execute a successful campaign for the launch of MyBBSI. We have created and conducted formal sales trainings for 250 of our market-facing employees, so they will be comfortable with the new system and are properly equipped to sell ahead of the launch. We have an extensive mapping by distribution partner, and we'll have a coordinated approach to ensure that our messaging is consistent and on point.

We have multiple marketing strategies to ensure we are attacking distribution partners and clients with precision. We've also applied for our PEO license in every state and we expect to be fully licensed in the next four months. We are currently only licensed in 20 states, which sometimes inhibits us from doing business with certain clients. This change will be an important catalyst to growth as we will be able to go wherever our clients go. And more importantly, we will be able to land new clients that may have been historically too large for us.

When we go to market we are offering the best of BBSI. We have various products in assets consisting of strategic consulting, human resources, information technology, insurance, risk management, financial stability and staffing. When we meet with the potential client they may join BBSI because they have a certain pain point today, but they will stay because we deliver our whole suite of products flawlessly. People have been and continue to be our product, which has never been more relevant to the business owner than it is today. Packaging their knowledge and expertise with our new technology platform and the ability to transact nationally, strategically positions us to go after larger, more tech savvy clients and increases our total available market. To say that we are poised for incredible future growth and are eager to accelerate our sales effort post COVID-19 is an understatement.

Now I'm going to turn the call over to Anthony for his prepared remarks.

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Thanks. I'll begin with an overview of our first quarter results and then talk about our current capital position. Finally, I'll provide more commentary on how COVID-19 is currently impacting our business.

Net loss for the quarter was $3.4 million, compared to $2.3 million in Q1 '19. Please recall, that we historically incur a loss in the first quarter due to higher payroll taxes at the beginning of each year. Gross billings of $1.44 billion, grew 5.8% over the same period. PEO gross billings increased 6.1% to $1.41 billion. Within this figure, January and February were up 8%, while March billings grew only 1.5%, which was approximately $55 million less than planned due to COVID-19 impacts in the second half of the month.

Staffing revenues declined consistent with our expectations to $25.5 million in Q1, compared to $27.7 million in the prior year quarter. Net revenues of $219.1 million were up slightly from Q1 '19 as the growth in PEO revenue was mostly offset by the decline in staffing revenue. Workers' compensation expense as a percent of gross billings was 4.3% this quarter, which is within our expected range of 4.2% to 4.4%. The quarterly independent actuarial valuation resulted in a reduction of prior year estimated liability of $800,000.

Our workers' compensation claims frequency continues to trend favorably. In the quarter we saw trailing 12 month relative frequency of claims as a percentage of payroll, decreased 18% compared to the first quarter of 2019. SG&A in the quarter was $32.1 million or 2.2% of gross billings, compared to $33.2 million or 2.4% in the prior year quarter. SG&A includes a $1.1 million benefit due to stock compensation reversals, which was partially offset by accelerations of $400,000 due to pay-outs related to layoffs that took place in Q1. Most of the proactive expense management that Gary discussed is not reflected in our Q1 results, but will be in Q2. Our investment portfolios earned $3 million in the first quarter, compared to $3.1 million in the prior year.

I now want to discuss more about our capital and liquidity position, particularly in light of our current macroeconomic conditions. I'm pleased to report that we remain in a strong cash position with a strong balance sheet and substantial liquidity. Our unrestricted cash investments were $93.6 million and we continue to be debt free at quarter end, except for the $4 million mortgage on our corporate headquarters. We have also reached an agreement in principle with Wells Fargo to increase our line of credit from $33 million to $50 million until July 2021, which will provide even more liquidity and financial flexibility, should we need it.

Our restricted cash investments were $466.7 million at quarter end, for total cash investments on our balance sheet of $560 million. Of this amount, 50% is held in cash. Our average duration is 1.4 years, down from 1.6 at year-end. Our portfolios remain conservatively invested with the average quality of investment being AA and no investment being greater than 4% of our portfolio.

At year-end, our unrealized gain on investments was $3.9 million, which decreased in the quarter down to $100,000 due to market volatility and widening credit spreads at that time. However, since March 31, we have seen these credit spreads tighten and our unrealized gain as of April 30 was approximately $5 million.

With most companies impacted by COVID-19 in some way, we are proactively monitoring the credit quality of our investments and we have not recorded any credit losses on our portfolio to date. Our average book yield has decreased to 1.5% from 2.3% at year-end, which is primarily the result of short-term treasury yields declining in the quarter. We do expect average book yield to remain lower than planned for the year as we remain in a low interest rate environment.

We continue to focus on being good stewards of our capital, we are managing cash flows by proactively reducing expenses, adjusting staffing levels, slowing capital project spending and temporarily deferring three branch openings that were scheduled for 2020. As Gary mentioned, we have temporarily suspended our stock buyback program after acquiring 59,000 shares in Q1 at an average price of $50 per share.

I do want to emphasize that we remain committed to returning value to our shareholders through our dividend, which as we announced yesterday, the Board declared at $0.30 per share for the quarter. We also continue to invest in our company through the ongoing rollout and marketing of MyBBSI and other high leverage activities during this time.

Due to the heightened uncertainty created by COVID-19, including the viruses duration and length of various stay home orders, we are withdrawing our full year outlook. But we do want to provide additional insight into the impacts of COVID-19 on our business since the end of the first quarter. Gary made reference to how we expect COVID-19 to impact various industries within our client base. In aggregate, we have seen weekly gross billings for PEO services decline 16% in April 2020 compared to April 2019. This decrease is primarily the result of a decline in headcount and hours worked.

Our weekly PEO gross billings volume has remained generally steady at these levels over the last four weeks. Note that these figures represent billings processed in April and therefore may include revenue that was accrued in March. Looking at regional numbers for that same period, California billings were down 18%, Northwest was down 15%, East Coast was down 4% and the Mountain States region showed billing growth of 3%. To reiterate, we remain open for business and continue to actively sell.

However, we expect headwinds to new client adds in the second quarter related to the current economic conditions and government restrictions in place. And we have seen this trend in April. As a partial offset, we expect discretionary client run off to slow due to the valuable services we are providing during this time. Our weekly billing volume for staffing is down 35% in April, compared to the year-ago period. Again, this may include revenues accrued in March, but is meant as a metric to understand the latest impact of COVID-19.

One area of focus for our staffing business is logistics support for retail distribution. As retail sales have slowed dramatically, these distribution centers have followed suit. We have scaled down our staffing employee based to reflect this decline. And while staffing revenue typically drops rapidly in a period of downturn, we also expect it to rebound quickly as the economy improves.

Total combined gross billings for PEO and Staffing were down 16% in April compared to the prior year. We are closely monitoring the collection of receivables and have not seen an increase in client billing defaults or bad debts. We have implemented additional processes to ensure that we minimize receivables risk during this time.

There have been several government programs introduced to assist small and medium-size businesses, including the FFCRA and the CARES Act. The FFCRA implements a paid leave requirement for small businesses, funded dollar for dollar by payroll tax credits. While the CARES Act established the paycheck protection program or PPP, employee retention tax credits and employer payroll tax deferral. These programs are designed to incentivize employers to continue paying their employees even while an employee might be out sick or the company's operations are suspended.

For example, the PPP provides a low interest loan to small businesses that could be forgiven up 100% if the proceeds are used for payroll and other essential causes. When the CARES Act was passed we immediately began to educate our clients on its various programs and assisted our clients in applying for PPP loans. As a result of these efforts we estimate that over 70% of our clients have applied for a PPP loan. This is significant as it will help our most impacted clients stay afloat during this time, and will also benefit BBSI as clients maintain their payroll. We have not experienced much of this benefit in our April numbers due to the timing of the loans and the payroll cycles, but we do anticipate a slight pickup in May.

Moving to workers' compensation, we believe our workers' compensation program is well insulated from the potential effects of COVID-19. Less than 2% of our worksite employees are in the healthcare sector or are considered first responders as generally defined, and we see this as a low-risk area for BBSI. As mentioned earlier, our claims frequency in the quarter was down and this trend continued into April as claims frequency decreased faster than the decline in payroll. As of today, we have not opened a single COVID-19 claim.

More broadly, we also consider the impact on the frequency of claims as economic conditions deteriorate. We expect this typical correlation to be significantly reduced in the current environment. Due to the extensive economic stimulus that has been offered. For example, with the additional $600 per week for unemployment benefits as authorized by the CARES Act, more than 95% of our covered worksite employees would now receive more money from unemployment than from workers' compensation indemnity payments.

In closing, while we cannot predict the severity or duration of the economic impacts of COVID-19, based on what we are seeing through April, we can provide the following assumptions for our expected annual results. We expect April to be the low point for our billings and we expect revenue to improve as shelter in place orders are lifted and as we see the positive effects of the PPP. We expect our workers' compensation costs to remain in the previously communicated range of 4.2% to 4.4% of gross billings.

We expect SG&A to decline from the prior year between 6% and 10% based on the actions we've taken so far, as well as our internal projections for when we expect the workforce to more fully resume. We expect investment income will be approximately $4 million lower than our original plan for the year due to lower yields in our conservative investment strategy.

Finally, based on our modeling, even in those pessimistic scenarios we are still profitable for the year. We do not know the final impact of billing growth for the year. We do know the strategies that we have implemented have put us in a strong position. And nothing we are seeing in April changes that. Gary?

Gary Kramer -- Chief Executive Officer

Thanks, Anthony. In conclusion, BBSI's financials are solid, and we are confident that we will weather this pandemic and emerge with momentum. The business owner is resilient and the entrepreneurial spirit is alive and well. We are focusing on supporting the business owner in their time of need now and are also keeping our eye toward the future for long-term growth. I'm confident that as the country starts to resume some normalcy, BBSI will be ready with an excellent product and in position to capitalize.

And with that, I'm going to turn it over to questions. Jerry?

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] The first question is from Chris Moore, CJS Securities. Please go ahead, sir.

Chris Moore -- CJS Securities -- Analyst

All right. Thanks guys. Hey, good morning.

Gary Kramer -- Chief Executive Officer

Good morning, Chris.

Chris Moore -- CJS Securities -- Analyst

[Indecipherable] Talk about segmenting the client base to kind of media, moderate exposed. Is there any relationship [Technical Issues] kind of the size of clients. Just trying to understand, like, for example, severely do you have bigger clients there [Technical Issues].

Gary Kramer -- Chief Executive Officer

Hey, Chris. I'll answer what I think you asked. If you don't mind, can you hang up and try to dial back in, because you were breaking in and out, so I'm going to answer what I think you asked, which was, when I gave, call it, the breakdown of our clients, which would be minimally, moderately or more severely affected. So the basic idea is we gave a -- to give you an idea of our -- the industries we're in and how we think those industries are going to be affected. So we gave the percentages, and so 18% would be minimally affected and these are all going to be. Our clients are all typically going to be around that 25%, in average, it's going be around that 25% worksite employee average. The average of the client size isn't really going to change, whether it's large or small clients, but 18% of our clients would be minimally affected, 65% of our clients will be moderately affected. And that's going to be the decrease from from 7% to 15%, and 17% would be severely effective and they're going be down 15% to 50%. But for me, when I think about this, the important thing is, for those that are moderately effective these are going to bounce back quicker. When you're looking at the states and how they're doing, their resumption to normalcy. So these are going to be your contractors your construction you're trucking and logistics, these are ones that are going to bounce back quicker than, say, retail, restaurants and hospitals.

So the -- when I think of when the economy is going to be back and function in May, call it 85% of our workforce will be close to normal strength. And then the remaining, call it 17% to 15% will start to come in, but it will come in slower.

Chris Moore -- CJS Securities -- Analyst

That's helpful. Are you hearing me any better or I can dial in and try again.

Gary Kramer -- Chief Executive Officer

I can hear you.

Chris Moore -- CJS Securities -- Analyst

Okay. Yeah, just in terms of nobody knows where you're going to have amount in revenue for fiscal '20, but if you're looking at fiscal '21. I'm just trying to see fiscal '20 from the base, is it -- is it likely that no, you will get better same-store growth or new client growth in '21, how you look at that?

Gary Kramer -- Chief Executive Officer

So that's a really good question. But a hard one to answer with any kind of precision other than the gut here. So to me, I'll make the assumption that the economy is going to get back to normal. We're not going to have to go into shelter-in-place again come Q4 right, we're going to figure this out, and we're going to be able to work and effective -- effectively have an operating economy. So when I think of how we're going to grow. I think we're going to more than likely see an increase in our same customer sales, as we're coming off of lows, that's where we're going to get the majority of our pop coming out. And then under our discipline, we're going to continue to add clients.

We think we're going to be able to add more clients at the back half of the year, because of the sales, I'll say, the sales process we're working through as having a better technology, having a better product, having -- being able to do our product nationally. So I think our sales are going to pick up more Q3, Q4, which will carry us into 2020. So I think it's going to be a little bit of a mix of both, but we're going to see in my mind, we're going to see an upward direction on both our existing clients and the clients we’re going to add.

Chris Moore -- CJS Securities -- Analyst

Got it. I'll jump back in line. Thanks, guys.

Operator

The next question is from Jeff Martin, ROTH Capital Partners. Please go ahead, sir.

Jeff Martin -- ROTH Capital Partners -- Analyst

Thanks, good morning. Gary and Anthony hope, you're doing well. Yeah, I wanted to get a sense of your client base in terms of how they fare in various phases of reopening, most states are taking it on a multi-phase approach. And if you could kind of give your thoughts on how that affects in different areas of your client base.

Gary Kramer -- Chief Executive Officer

Yeah. So we gave the, call it three tranches, the first tranche is operating effectively now. The second tranche, even though these were deemed primarily essential like i.e., construction, residential construction, depending upon the jurisdiction you are in, and it wasn't the state jurisdiction. It was called the county, you're in -- the county put further restrictions on say construction in the San Francisco area. Well, that has been lifted. And those folks are back, now back to work. So we feel that that middle tranche is going to -- we're going to feel an uptick quickly in that middle tranche. Is it going to go back to where it was, what would be at some sort of diminished capacity, we're going to have to wait and see, but we do think we're going to get some quicker growth out of that tranche.

And then the third tranche is when we think about restaurants and hospitality, right -- restaurants, they are open now, but they're nowhere near the size and scale they were, they're somewhere out of the back of the restaurant instead of the front. Hospitality, we've seen some shutdown, we saw three shutdowns of our clients so far that were COVID-related on the hotelier side. Retail and wholesale sales were not big in that space, mainly the space that we're in there.

It's typically the Grab and Go, your franchise type business that we're in. And then the last is professional services and that one -- that one is going to be a little more of a tricky one because in there, we have say some dentists and professionals and they went to zero, right. The dental profession went to zero. And when they when they get back to them, optometrists, when they get back to some sort of normalcy. I don't have that answer yet. I know it's going to be in the last wave, but I don't know when that last wave is going to be.

Jeff Martin -- ROTH Capital Partners -- Analyst

Okay. And then I wanted to dive into a little bit more about the emerging sales strategy and be doing quite a bit of things differently and expanded like getting your PEO licensing in every state, but could you kind of give us a high level what are kind of the top three initiatives with the launch of myBBSI in terms of your sales strategy.

Gary Kramer -- Chief Executive Officer

Yeah, I'll say, we have a very organized and surgical approach to how we're going to go to market. First and foremost, we're going to have a state-of-the-art technology that we're going to be proud of, that we think is going to hopefully sell itself, but we know we got to sell it in that market. Right. So we're very proud of the technology we're building. We're very proud that what it's going to bring to market and how it's going to open doors. So this technology in general is going to help us with larger clients, it's going to help us with tech savvy clients and it's going to help us reach clients that we couldn't reach before.

So we feel like it's going to open up our total available market. Now, when we are going to market, we know this is a little bit of a channel -- a challenging sales environment, where we're trying to sell in the Zoom and Skype and GoToMeeting world, but we're getting better at it. And just like the whole world is and I think we got a good craft, that we can -- that we're able to develop and bring to market, even in the second quarter. So when we think of clients that left us and we know where they left, that they brought payroll in-house, if they left because of technology. We know who they are and we're going to go knock on their doors.

Our distribution partners have all been mapped to somebody within our organization and somebody within our organization is going to go out and -- and do the pitch to that distribution partners, so that they are comfortable with our technology, so that they can go and make a recommendation to their clients. So we're, I'll say, we have a very good strategy that we're operating on a one-to-one basis. And then when we think of our one to many. We're going to be a little different than we historically have when we're looking at different marketing and we're looking at videos and Internet presence and things of that nature where we can try to get our one to many.

And then when we think about being a PEO in every state that is really going to help us. Right. It's going to help us with larger clients, right, because if you're a buyer of the PEO, you want contract certainty, you want ease of business, you want to have a PEO that can go everywhere you are or that will go where you are planning to go and we will be able to do that. So we feel like we're going to be able to have a strategy where we're going to go at larger clients and be able to service their business everywhere they go. So we’re -- we've been doing the training, we're getting real good at it. And we're really excited about it.

Jeff Martin -- ROTH Capital Partners -- Analyst

Okay. And thank you for all the level of detail. And with regards to the April impact, but I was curious, you gave it on a gross billings basis, do you have what hours worked and headcount changes were for April?

Gary Kramer -- Chief Executive Officer

Yeah, so it's primarily headcount and hours worked. So headcount was down about 13%, and hours worked was primarily the difference. Pay rates, we're seeing basically flat, a little bit up that, there's little bit of shift in the average pay rate as you're seeing the type of employee that was laid off or furloughed versus kept, shift a little bit, basically flat.

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

And then there was a slight uptick in sick time as people use their sick time before they went out on layoff or the furloughed. So you had a little bit of a tailwind there. But all in, it's in general our clients got smaller and they cut their over time. They cut their hours, they cut their workforce. But we're starting to see in last week's payroll cycle, we're starting to see some growth. So we feel comfortable that we -- I don't want to, I don't want to ever call a bottom, but it feels like we're at the bottom and we're starting to see some upward trajectory. And we think we're going to see more trajectory as the states open up, resume business normalcy. We get a little bit of a tailwind for the PPP loan. So we feel like kind of the worst is behind us and we're going to, we're going to grow -- we're going to grow out of here for Q2.

When we think of Q2 in general, we think I know, I know we didn't give guide and it's -- the challenge is, is this a V, is it a W, is it a U shaped recovery and our crystal ball can’t determine that. But when we do our modeling and we are looking at the rest of the year, we think almost in every scenario we will be profitable for the year. We think realistically we’ll have good profit. And then when we think of second quarter, second quarter in general is going to be profitable for us as well.

Jeff Martin -- ROTH Capital Partners -- Analyst

Very helpful and encouraging. Thanks guys.

Operator

The next question is from Josh Vogel with Sidoti & Company. Please go ahead sir.

Josh Vogel -- Sidoti & Company -- Analyst

Thanks. Good morning Gary and Anthony hope you people are doing well. And I also want to get all the level of detail and insights it’s very helpful. Gary you mentioned when you were talking about client attrition in Q1 that you had seven that you were closed due to COVID. I was curious if you had a number for April?

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Yes, so this -- I want to say that this is a little subjective, but not too subjective. So we had seven that closed for COVID and that was primarily in the hotelier space, smaller hotel, motel kind of business in Q1. We've had 10 clients -- as of as of last week we had 10 more clients closed because of COVID.

Josh Vogel -- Sidoti & Company -- Analyst

Okay, great. Also I saw the news that California became the first state to borrow from the federal government to make unemployment payments. And Anthony I know you talked a little bit about benefits affecting 95% of work site employees making more money today than if they were working. But I was just wondering, is there anything we can deduce from the news out in California? And could you give a potential read on what's going on in your client portfolio in that state?

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Well, with respect to unemployment, I guess I will say it wasn't a surprise to us that California hit that threshold. We are anticipating that several states would in California probably would be one of the first to hit that. Certainly the stimulus 3B unemployment program has been a great help to individual employees, although we're also seeing clients generally speaking want to work and the ones that have had to shut down or layoff are because of the shelter-in-place orders. So we do still anticipate that coming back as quickly as that ramps up.

So the extended unemployment benefits continued through July 31 with the CARES Act. The addition of $600 from the federal stimulus, which at this point, we're anticipating will get us through all the shelter-in-place orders.

Gary Kramer -- Chief Executive Officer

Yes, the important thing there is the federal $600, that's obviously from the fed and not in the state. And if you think specific to California they went into the borrowing position in 2008, 2009 during the great recession. And it took them about nine years to pay it off and they paid it off at year end 2018. So if you think they were in a deficit position until year end of ‘18, then in ‘19, they started to build it up. And then when you had record unemployment in 2020, they didn't have enough in the reserve and that's why they got to go to the fed to tap it.

So that's kind of, I don't want to -- some states have better, I'll say, fiscal responsibility and will be later into the pool for the federal subsidy. But California, we knew was going to be one of the first ones because of the way they, they managed through ‘08, ‘09.

Josh Vogel -- Sidoti & Company -- Analyst

Okay, great. Relative to the prior, I guess, four to six quarters we saw, I guess, one of the smaller favorable worker's comp adjustments. I know it's kind of done on a rolling basis, but are we near the end of seeing these types of adjustments? Or maybe can you give also just some color when you take these adjustments how long ago are these claims, how long ago did they actually occur? It is usually few years or is it a fluid situation.

Gary Kramer -- Chief Executive Officer

Yes, so you typically, when you think of setting your loss reserve for the year, you will typically allow us some time to age and develop because when it ages and develop, you get better certainty on what your estimated ultimate will be on that year.

So, when we're making actions now for our prior accident year adjustments, it’s going to be typically in this market, it's going to be for the 17-year and prior and a little bit of weight to the 18, but not a lot. We won't touch the 19-year for a little bit of time to give that some more age. The one thing that I do just want to talk about is COVID and worker's comp, because we brought it up in our prepared remarks.

And typically if you think of when you catch the flu, the flu is not your typical workers' comp claim. And the reason it is, is because you can generally get it out in the general public. So disease is not typically covered under workers' compensation. And we feel that our portfolio is pretty well isolated to having any workers' comp exposure for COVID.

What we have seen is certain states pass recommend legislation for what they are calling presumption. And the presumption is if you are a first line, if your fire, if you are police, if you are a nurse, if you are a doctor, the states are saying you are required to work and you know that you're going to have it in your work and if you can track COVID, then you're just going to be a presumption that you contracted it at work and you can file a workers' comp claim.

So we feel for our portfolio, we don't do municipalities, we don't do firemen, we don't do police. We do have some healthcare exposure, but we don't do hospitals. So the healthcare exposure we have is going to be your, physicians, which are not a big concern to us because they are doing everything via TeleMed now, which then leads us to a smaller percentage, which is going to be some home health and some nursing care.

So when we say that less than 2% of our portfolio is in that first responder in healthcare, once you whittle it down, it gets to less than 1% of our exposure would be in what the states would deem as the first responder or the health care space. So we feel like we are very isolated from this being a worker's comp COVID event for BBSI.

Josh Vogel -- Sidoti & Company -- Analyst

That's really helpful. Thank you. And one last one, understanding in this environment, cash preservation is so important, but once we get emerged from this and we're in a new normal, you have been carrying quite the balance sheet in the last couple of years. What are some plans, what are you going to do with this cash? Is there potential for a higher dividend, a special dividend or how should investors think about it?

Gary Kramer -- Chief Executive Officer

Yes, I'm looking forward to thinking about that honestly. So I think right now, kind of like we said in the remarks, I mean we're approaching this like most companies that have an abundance of caution, right? So for 2020, we're really looking at that capital preservation first and foremost and obviously focused on what we can do to manage through this help our clients maintain margin, trim, cash flow and cost where we can. The cash decrease we saw from year end Q1 was all expected and that’s part of our cyclical pattern of our cash flows. And we have modeled it out through the rest of the year.

As part of that abundance of caution, we have paused our stock buyback. Based off our models and the cash we have. We still feel like we have a lot of headroom to be very committed to the dividend and we've stated that. I will say, as we see how COVID passes and the economy opens up and recovers and we see that cash build in the second half of the year, I look forward to having that conversation again.

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Yeah Josh, and the only other thing I would say is, there's going to be a lot of companies that are out there in our industry that are going to – that didn't have our balance sheet, that didn't have our financial strengths that are going to be more troubled. And I will say when we think of go forward, we will entertain the idea of being more acquisitive than we have been in the past.

Josh Vogel -- Sidoti & Company -- Analyst

Okay. Well thank you for taking my questions guys.

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Thanks, Josh.

Operator

The next question is from Vincent Colicchio, Barrington Research. Please go ahead sir.

Vincent Colicchio -- Barrington Research -- Analyst

Yes, Gary, what portion of revenue is associated with the branch consolidation you mentioned? And should we be concerned that the process may be disruptive to clients?

Gary Kramer -- Chief Executive Officer

Yes, so the intent here is that the consolidations will not affect revenue and will not affect service. So really when we think of the consolidations, what we're doing is we're eliminating some of the cost structure that goes with that. And then when we think of our satellite branches that are now going to report into PEO branches, the intent there was to remove some management layers. So what we’re doing is consolidating businesses, servicing our clients, maintaining or accelerating revenue and really just trying to be mindful of the cost side of the equation.

Vincent Colicchio -- Barrington Research -- Analyst

Got it. And then you've added the services that you're providing to clients, the advisory work you're doing and then such. What have you done to make sure you don't damage client satisfaction from guys without being stretched in terms of kind of the normal stuff, they do?

Gary Kramer -- Chief Executive Officer

So if you think of our products right now, our teams are gold in the market, right. These business owners that are trying to deal with this on their own -- if you’re not with BBSI and you're doing this on your own, this is going to be a real challenging market to do it. We have the teams and the infrastructure that we can through our -- our expertise of digesting these different laws, digesting these different legislations, helping you with understanding it, helping you with your payroll reports, designing it so that you can then file your payroll reports.

If you don't have a banker, we know a banker, we'll introduce you to a banker, we'll get you to the front of the line. Right. So we are -- we've done a ton of work in this -- in this environment. And honestly, I think our retention is going to be better than we expected and it's going to be better than we expected because the value we're giving right now is going to our clients. So I'm not worried about that so much. I think what we'll see is, it's going to be a little more challenging to move business, just because people are kind of hunkered down and they're not thinking of a bigger world yet, they're just trying to get through their, managing through their cash flow, the liquidity and go through their plans.

And we're going to see a little bit of slowdown in client adds, in the second quarter, which we think will pick up in Q3, as the economy opens up and we have a product that we can bring as far as our technology. So I think long term this is going to be good -- unfortunately, it'll be good news for BBSI, because I think we're going to get a lot more client referrals. I think we're going to, we've helped a lot. We helped a lot of our distribution partners. Our distribution partners are primarily running small businesses themselves.

We’ve help them with their business. We've helped them apply for loans. Right. If we help them in their time in need, then hopefully there, they're going to have some tit for tat and refer us more business. So where we truly think that we are going to emerge from the stronger than we answered and we're very optimistic about the future.

Vincent Colicchio -- Barrington Research -- Analyst

And what is your -- what is your approach to pricing been in this environment?

Gary Kramer -- Chief Executive Officer

When we went through our May, April was kind of already bounded on the books in the month of April, when COVID hit, when we thought of May. Our idea for May was look we -- we know that you are in trouble, business owner. We want to make this easy whatever the terms and conditions that were, we're going to give that to you again. So renew par expiring, we called it.

When we got into June, June is when we're going to start to look, look at the industry, look at the space and look at potentially starting to raise a little price, ultimately, we think prices are going to have to go up to support the business and we're trying to be a long-term partner for our clients, we're trying not to gouge our clients, but ultimately I think prices have to go up to reflect the effort that we got to do in order to support the business for COVID.

Vincent Colicchio -- Barrington Research -- Analyst–

Okay. Thanks for answering my questions.

Operator

We have a question from Bill Dezellem, Tieton Capital Management. Please go ahead, sir.

Bill Dezellem -- Tieton Capital Management -- Analyst

Thank you. I have a group of questions. The first one is a follow-up to an earlier question or maybe an earlier answer relative to acquisitions, would you talk us through your thought process and/or the strategy that when the time comes that you're more seriously entertaining acquisitions, how you will proceed?

Gary Kramer -- Chief Executive Officer

Yeah. The basic idea is we would, our strategy would stay the same as far as trying to open branches in markets that we’re not in. So I wouldn't look to do a consolidation in, say California, because we have a big footprint in California, but if we had somebody that came across that had business in places we were looking to go, in the three that we had planned for the year was New Mexico, Tennessee and Texas. If somebody came, if I have to present itself in geographies like that is how we would think about going through the acquisitive process.

Bill Dezellem -- Tieton Capital Management -- Analyst

Great, thank you. And then I actually have two clarifying questions on what you had said earlier in your remarks. Would you please repeat the cost of the layoffs that you did and the impact that that had. I believe you said on the March quarter. But if it's in Q2 split it out for us, please.

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

So if you're talking about the cost that is like the accelerated payments in severance. For Q1, there was about $400,000 that was included in that, for Q2, we'll see about $400,000 again related to accelerated charges for severance, but we'll also have in Q2, an additional $1.2 million, you'll see come through for the executive change, separation agreements that were previously filed.

Gary Kramer -- Chief Executive Officer

Yes. We -- when we think about the furloughs, the layoffs are a permanent -- the layoffs are a permanent savings and the layoffs.

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Yeah, the savings and I can jump in on those, the savings, layoffs are about $140,000 a week, that's the layoffs savings. And that's going to be for the rest of the year. And then when we think about the furloughs, the furloughs, are going to save us, probably in that same ballpark. We -- trust me, I don't want to furlough, I want the economy to resume, I want to bring our employees back, but we think that we're going to be furloughed through the end of May, had to make a decision about when we start to bring folks back in June based upon how the economy starts to resume some normalcy. So the furloughs, we don't anticipate that it will be a year long savings, we think it'll be a Q -- call it a Q2 and potentially into Q3 depending on how the economy opens.

Bill Dezellem -- Tieton Capital Management -- Analyst

All right. And for reminder, you said this in your opening remarks, what percentage of the workforce of your workforce did you lay off and what percentage were furloughed?

Gary Kramer -- Chief Executive Officer

Sure. So for the furloughs unfortunately, I got 20 pages on this script, Bill. So, give me a second to find that one.

Bill Dezellem -- Tieton Capital Management -- Analyst

No, it's just fine, I thought you're looking. I think you just said this, but just for -- for clarity, the layoffs. Those are permanent, not just this year but forever and that's just pure cost reduction. And the furloughs, those are, as you said temporary you'll need to figure out when you bring them back that, did we hear that and understand that correctly?

Gary Kramer -- Chief Executive Officer

Yeah. The layoffs were 8%. The furloughs, were 9% and then we eliminated if we had any temporary employees we eliminated the temporary employees and then some of our folks are hourly and we reduced some hours if the work wasn't there. And when we think of furloughs, it mainly affected one of our -- one of our -- part of our business teams, which is the risk folks and the thought process there as we knew that the -- we knew that new business was going to slow down. So we weren't going to have as much underwriting to do. And then we knew that as far as the work doing in the field was going to slow down because as we sheltered in place, and nobody was working then we weren't going to have any work to do going to their site, so we anticipate that that will pick back up when the economy resumes and especially because, look, I mean -- here is the value of when these businesses open back up, they don't know how to open back up in a COVID world, right. They don't know how -- they don't know what normal is and we got to help them with all the regulations and compliance as far as the social distancing and the masks and thermometers and how to do everything that you need to do in order to operate in this world and those folks are going to be key to helping those clients get back to normalcy.

Bill Dezellem -- Tieton Capital Management -- Analyst

Great, thank you. And then one additional question and I will go back in queue. Not only did we have the COVID, but we also had you becoming CEO, Gary. So the layoffs, how -- what's the -- the split between cost reductions that were related to your rethinking the business and what percent of those layoffs were really instigated by the, by the virus and led you to rethink the business as a result of that?

Gary Kramer -- Chief Executive Officer

So, good question. I don't have the answer, other than we had a 100-day plan and that plan lasted four days. And then we had to adapt quickly and make decisions for what we think is the best strategy for the long-term success of BBSI.

So the honeymoon did not last long at all, Bill. And we made the best decisions we could based upon the facts we had in order to make sure that we weathered the storm, but more importantly, we're spending our time and attention on how do we emerge from this and how do we capitalize market share based upon the product we have and all the work we've done.

Bill Dezellem -- Tieton Capital Management -- Analyst

Great. Thank you both for taking the questions.

Gary Kramer -- Chief Executive Officer

Thanks, Bill.

Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Mr. Kramer for closing remarks. Please go ahead, Mr. Kramer.

Gary Kramer -- Chief Executive Officer

Thank you, Jerry. Thank you everybody for taking the time. Thank you everybody for being interested in BBSI. We are truly doing great things in the market with our clients and we are optimistic that when this economy turns, we will turn quicker than t and get back to growth. So thank you all for everything. And please make sure you stay safe.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Gary Kramer -- Chief Executive Officer

Anthony Harris -- Vice President-Finance, Secretary and Treasurer

Chris Moore -- CJS Securities -- Analyst

Jeff Martin -- ROTH Capital Partners -- Analyst

Josh Vogel -- Sidoti & Company -- Analyst

Vincent Colicchio -- Barrington Research -- Analyst

Bill Dezellem -- Tieton Capital Management -- Analyst

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