Business context and reporting period
Barrett Business Services, Inc. (BBSI) provides professional employer organization (PEO), staffing, and related workforce-management services, primarily to small and mid-sized businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; results are compared with the corresponding 2020 periods. PEO revenue is reported net of direct payroll costs.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $233.2 million | $201.0 million | $451.6 million | $420.1 million |
| Gross margin | $57.5 million; 24.7% | $46.6 million; 23.2% | $88.3 million; 19.6% | $72.7 million; 17.3% |
| Operating income | $20.5 million; 8.8% of revenue | $12.2 million; 6.1% | $12.9 million; 2.9% | $5.2 million; 1.2% |
| Net income | $17.1 million | $11.5 million | $12.5 million | $8.1 million |
| Diluted EPS | $2.24 | $1.51 | $1.64 | $1.06 |
For Q2, revenue increased 16.0% year over year, with PEO fees up 15.5% and staffing revenue up 20.3%. For the first half, revenue increased 7.5%. Management attributed growth principally to higher average billing per worksite employee (WSE) and higher average WSE counts, as well as staffing demand recovering from the prior-year pandemic impact. Average WSEs rose 9.5% in Q2 and 1.3% for the six-month period versus 2020.
Operating cash flow was $2.6 million for the first half, compared with cash used of $114.4 million in 2020. Investing activities used $211.5 million, mainly reflecting purchases of investments and restricted investments; financing activities used $10.8 million, including $6.6 million of share repurchases and $4.5 million of dividends. Cash, cash equivalents and restricted cash totaled $14.2 million at June 30, down $219.7 million from year-end. Unrestricted cash and cash equivalents alone were $2.5 million; substantial cash and investments are restricted, primarily for workers’ compensation obligations.
Total assets were $866.1 million and total liabilities $666.7 million at June 30. The company had approximately $3.6 million of mortgage debt and no revolver borrowings. Its revolving credit line is $33.0 million; $6.2 million of the $8.0 million letter-of-credit sublimit was used. BBSI reported compliance with its financial covenants. The current ratio was approximately 1.14, but restricted assets mean this measure should not be read as unrestricted liquidity.
Material changes versus the prior comparable period
- Q2 net income rose about 49%; first-half net income rose about 55%. First-half results include a Q1 net loss of $4.6 million, followed by Q2 net income of $17.1 million.
- Gross margin improved in both periods. Workers’ compensation expense as a share of revenue declined, supported by favorable prior-period claims development: $5.5 million in Q2 and $6.7 million for the first half, versus $1.4 million and $2.2 million, respectively, in 2020.
- Payroll taxes and benefits as a percentage of revenue increased, which management attributed primarily to the timing of payroll-tax wage caps. SG&A rose to $35.7 million in Q2 and $72.8 million for the first half, driven mainly by IT and employee-related costs.
- Workers’ compensation claims liabilities fell to $315.7 million from $357.7 million at year-end. A June 30 loss portfolio transfer reduced liabilities by $53.1 million; the remaining payment was due in July and included in other accrued liabilities.
- First-half investment income declined to $3.7 million from $4.8 million. Unrealized investment losses reduced first-half comprehensive income by $3.1 million.
Outlook, risks, contingencies and unusual items
The filing provides no quantitative earnings or revenue guidance. Management said COVID-19-related economic disruption, business closures and labor shortages could continue to impede client growth and payroll-based PEO revenue. It also highlighted seasonality, payroll-tax wage limits, labor-market conditions, workers’ compensation claims experience, customer collections, investment-market changes and cybersecurity as risks. Management expects quarterly results to fluctuate and has historically experienced first-quarter losses.
Effective July 1, 2021, third-party insurers assumed all risk for claims incurred after June 30 under the insured program, under an arrangement through June 30, 2022 with a renewal commitment through June 30, 2023. Premium adjustments can provide BBSI with up to $20.0 million of favorable-claims participation or require up to $7.5 million of additional premium for a 12-month policy period. BBSI retains exposure under self-insured programs and for certain claims incurred before July 1.
A California wage-and-hour case, Kaanaana, was remanded for further proceedings after a state Supreme Court ruling that the work at issue constituted public work subject to prevailing-wage requirements. Potential liability from that determination was not considered estimable and was not accrued; the company believes it may recover increased costs from the customer. Recorded estimated liabilities for this and other legal matters totaled $3.8 million. Separately, the IRS proposed disallowing wage-based tax credits, with estimated additional tax of approximately $2.3 million; BBSI disputes the determination and recorded no reserve. The IRS also notified BBSI of an audit of its 2017–2019 federal returns.
Interest-rate risk is material to the investment portfolio: management estimated a 50-basis-point rate increase would affect portfolio fair value by $10.8 million. The mortgage loan’s LIBOR-based rate and the anticipated phaseout of LIBOR are also noted. Disclosure controls were assessed as effective at June 30, 2021; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether revenue and WSE growth persist, and how much reflects improved client payroll activity versus rate or billing changes.
- Whether favorable workers’ compensation reserve development continues and whether the $315.7 million claims reserve proves adequate; actuarial estimates are inherently uncertain.
- The cash and collateral effects of the June loss portfolio transfer, the July payment, and the new insured-program terms, including possible premium adjustments.
- How much reported liquidity is actually available for general use given the large restricted cash and investment balances and low unrestricted cash balance.
- The eventual financial exposure from the Kaanaana litigation and IRS tax-credit dispute, neither of which had a fully recorded potential liability.
- Whether investment fair-value changes, COVID-19 impacts, labor shortages and customer payment risks materially affect future results or covenant headroom.