Barrett Business Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
BBSI provides business management and human-resources outsourcing services to small and mid-sized businesses, principally through professional employer organization (PEO) services and staffing services. It operates in 68 U.S. markets and reported serving more than 7,770 companies. PEO services represented 92% of Q3 revenue; staffing represented 8%. BBSI began offering employee health and welfare benefits to PEO clients in 2023.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $273.3 | $273.8 | $792.6 | $782.4 |
| Gross margin | $68.3; 25.0% | $66.9; 24.4% | $176.9; 22.3% | $174.1; 22.3% |
| Operating income | $22.3 | $22.3 | $42.5 | $44.1 |
| Net income | $18.2 | $17.4 | $36.1 | $35.7 |
| Diluted EPS | $2.68 | $2.45 | $5.24 | $4.91 |
- Revenue mix and demand: Q3 PEO revenue rose 2.8% to $251.4 million, while staffing revenue fell 25.1% to $21.9 million. For the nine months, PEO revenue increased 4.9% to $728.0 million and staffing revenue declined 26.7% to $64.6 million.
- Margins and expenses: Q3 gross margin improved, while operating income was essentially unchanged. Nine-month operating income declined despite higher revenue. SG&A increased 2.7% in Q3 and 3.0% year to date, primarily due to employee-related costs. New PEO-client benefit costs were $3.4 million in Q3 and $6.6 million year to date.
- Other income and taxes: Investment income contributed to higher other income: $2.4 million in Q3 and $6.8 million year to date. Effective tax rates were 26.2% and 26.8%, respectively.
- Cash flow: Nine-month operating cash flow was $10.0 million, versus cash used of $3.1 million in 2022. Investing activities used $17.5 million; financing activities used $37.4 million, including $29.1 million of stock repurchases and $6.1 million of dividends. Capital spending was $8.1 million; operating cash flow less capital spending was approximately $1.9 million.
- Balance sheet and debt: At September 30, cash and cash equivalents were $41.6 million, current investments $87.7 million, and restricted cash and investments $207.5 million in total. Cash, cash equivalents and restricted cash reported in the cash-flow statement totaled $62.4 million, down $44.9 million from year-end 2022. Current assets were $427.5 million and current liabilities $341.1 million. Workers’ compensation claims liabilities totaled $177.8 million, down from $216.0 million at year-end. No borrowings were outstanding on the $50 million revolving credit facility; BBSI reported compliance with its covenants.
- Shareholder returns: The company repurchased $29.1 million of stock and paid $6.1 million in dividends during the first nine months. A new $75 million, two-year repurchase authorization began July 31, 2023; $10.9 million had been used by September 30.
Material changes versus the prior comparable period
- Q3 revenue was down 0.2%, reflecting PEO growth offset by weaker staffing demand. Management cited lower staffing demand and tight labor-market conditions.
- Average worksite employees increased 1.1% in Q3 and 1.8% year to date, slower than the respective 8.2% and 8.8% increases in 2022. Ending worksite employees were up 0.9% year over year.
- Q3 net income and diluted EPS increased year over year. For the first nine months, net income was modestly higher, but operating income declined.
- Investment income increased, while investment fair-value losses remained reflected in other comprehensive income. Nine-month comprehensive income was $34.0 million versus $3.9 million in 2022, largely because the prior-year period included substantially larger unrealized investment losses.
- Cash flow from operations improved year over year, but cash and restricted cash declined more sharply in 2023, reflecting working-capital changes, investment purchases, and shareholder distributions.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no quantitative revenue or earnings guidance. Management expects quarterly results to remain variable, citing seasonality, payroll-tax wage limits, workers’ compensation claims experience, demand, and competition. It notes that Q4 revenue may be affected by holiday-shortened customer schedules.
- Workers’ compensation: Claims reserves depend on actuarial estimates and are subject to uncertainty, including inflation, litigation, medical costs, and claims development. Q3 workers’ compensation expense benefited from $2.2 million of favorable prior-period liability and premium adjustments; the nine-month benefit was $9.5 million, compared with $12.8 million in 2022. About 16% of workers’ compensation exposure is through self-insured programs. Under the 2023–2024 insured policy, favorable claims development may allow BBSI to participate in savings up to $28.5 million; this is contingent, not forecast revenue.
- Tax dispute: The IRS is examining 2017–2021 returns and has indicated it intends to disallow certain wage-based credits for 2017–2020, potentially resulting in $7.4 million of additional taxes and $1.7 million of penalties. Similar disallowance for 2021 could add an estimated $0.6 million. BBSI disputes the position and has recorded no reserve for these notices, based on management’s assessment that its position is sustainable.
- Litigation: A California wage-and-hour class action involving alleged joint-employer status was revived on appeal. Management intends to defend the case but cannot estimate a potential loss range. Recorded estimated liabilities for this and other legal matters totaled $0.2 million.
- Market and operating risks: A 50-basis-point increase in market interest rates was estimated to reduce investment-portfolio fair value by $5.2 million. Other disclosed risks include client retention and growth, PEO employer status, healthcare-benefit compliance and costs, data privacy and security, receivable collectability, claims-reserve adequacy, and access to collateral or letters of credit.
- Management said disclosure controls and procedures were effective as of September 30, 2023, and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PEO growth can offset continued staffing weakness, and whether worksite-employee growth improves.
- How new client benefit costs, payroll taxes and SG&A affect margins as the service mix changes.
- Workers’ compensation reserve development, including the assumptions behind favorable prior-period adjustments and the contingent insurance-policy economics.
- The outcome and potential financial impact of the IRS credit dispute and California class action.
- Availability of unrestricted liquidity after distinguishing cash and current investments from insurance-related restricted funds, and the company’s future use of its credit facility, repurchase authorization and dividends.