Barrett Business Services, Inc. — Q3 2022 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. BBSI provides professional employer organization (PEO) and staffing services to small and midsized businesses. PEO revenue is reported net of direct payroll costs, so revenue is not comparable to gross billings.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $273.8m | $247.0m | $782.4m | $698.6m |
| Gross margin | $66.9m; 24.4% | $60.2m; 24.3% | $174.1m; 22.3% | $148.6m; 21.3% |
| Operating income | $22.3m | $17.7m | $44.1m | $30.7m |
| Net income | $17.4m | $14.9m | $35.7m | $27.5m |
| Diluted EPS | $2.45 | $1.96 | $4.91 | $3.59 |
- Q3 revenue increased 10.9%; PEO revenue grew 12.2% and staffing revenue 1.0%. For nine months, revenue increased 12.0%, with PEO up 11.9% and staffing up 12.6%.
- Management attributed PEO growth primarily to higher average worksite employee counts and average billing per employee. Average WSEs rose 8.2% in Q3 and 8.8% for the nine-month period.
- Operating margin improved to 8.1% in Q3 from 7.1%; for nine months it rose to 5.7% from 4.4%. Net margin was 6.3% and 4.6%, respectively, versus 6.0% and 3.9% in 2021.
- Investment income was $1.6m in Q3 and $4.8m for nine months, lower than the respective prior-year periods. Effective tax rates increased to 27.1% in Q3 and 26.9% for nine months, from 23.4% and 23.3%.
Cash flow, liquidity and capital
- Cash, cash equivalents and restricted cash totaled $68.0m at September 30, 2022, down $10.6m since year-end 2021. Balance-sheet cash and equivalents were $59.0m; investments were $73.2m, and restricted cash and investments totaled $224.4m. Some funds are restricted, primarily for insurance and workers’ compensation obligations.
- Nine-month operating cash flow was negative $3.1m, versus negative $60.3m in 2021. Key uses included a $52.9m decrease in workers’ compensation claims liabilities and a $38.8m increase in receivables.
- Investing activities provided $42.5m; financing activities used $50.0m, including $39.1m for share repurchases, $6.6m of dividends, and repayment of the $3.5m mortgage. The company had no revolver borrowings and was compliant with credit covenants at quarter-end.
- The $50.0m revolving facility includes an $8.0m letter-of-credit sublimit. Total liabilities were $525.6m, including $227.3m of workers’ compensation claims liabilities; stockholders’ equity was $171.4m.
Changes, outlook and risks
- Gross margin improved year over year, supported over the first nine months by $10.7m of favorable prior-period workers’ compensation reserve development (versus $7.5m in 2021). Q3 workers’ compensation expense increased with payroll volume; SG&A also rose, mainly from employee costs, travel and marketing.
- Investment market losses were significant: nine-month unrealized investment losses, net of tax, were $31.9m, reducing comprehensive income to $3.9m despite $35.7m net income. Accumulated other comprehensive loss was $30.8m. Management estimated that a 50-basis-point rate increase would reduce investment portfolio fair value by $6.3m.
- No specific earnings or revenue guidance is provided. Management described seasonal and quarterly variability, including payroll tax wage limits, customer activity patterns, labor-market conditions and workers’ compensation claims development. The company planned to offer certain fully insured medical and other health and welfare benefits to qualifying WSEs beginning in 2023 and disclosed execution, regulatory, technology and security risks from new services.
- Workers’ compensation reserves depend on actuarial estimates and may differ materially from ultimate costs. The insured program covers about 82% of exposure; the renewed July 2022–June 2023 policy allows participation in favorable results up to $22.5m and, unlike the prior policy, provides for no additional premium if claims develop adversely. The company retains risk in self-insured programs and for certain older claims.
- Tax authorities are examining federal returns. The IRS has proposed disallowing wage-based credits; estimated additional taxes and penalties disclosed for identified and potentially similar credits total several million dollars, excluding unassessed interest and penalties. The company disputes the positions and has recorded no reserve.
- Litigation includes a California wage-and-hour matter with a settlement subject to court approval and a separate fatal accident case where BBSI disputes joint-employer liability; management cannot estimate potential liability in the latter. Recorded estimated liabilities for the settlement and other cases were $2.4m.
- The company repurchased 513,629 shares for $39.1m through September 30 under a $75m, two-year authorization; $35.9m remained available. Quarterly dividends were $0.30 per share.
Investor verification priorities
- Assess whether WSE growth and average billing can sustain revenue gains, and review gross billings and wage trends alongside net-reported revenue.
- Examine operating cash conversion, receivables growth, and the effects of workers’ compensation payments and restricted collateral on available liquidity.
- Review investment portfolio duration, unrealized losses, credit quality and sensitivity to interest rates.
- Track workers’ compensation reserve development, policy economics, collateral requirements and the outcome of tax audits and litigation.
- Monitor the launch, costs and regulatory controls for the planned 2023 health-benefits offering, and the pace of share repurchases relative to cash generation.