Barrett Business Services, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Amounts are in U.S. dollars; financial statement amounts are generally reported in millions unless noted. This is an annual filing, not a stand-alone fourth-quarter report.
Business context
BBSI provides professional employer organization (PEO) services and staffing to small and midsized businesses. PEO services represented 88.3% of 2021 revenue; staffing represented 11.7%. The company reported one operating and reportable segment. California generated approximately 73% of revenue. Average PEO worksite employees increased 4.3% to 112,928.
Key financial results
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $955.2 million | $880.8 million | +8.4% |
| Gross margin | $204.5 million; 21.4% of revenue | $182.9 million; 20.8% | Margin +0.6 percentage points |
| Income from operations | $43.9 million; 4.6% of revenue | $36.1 million; 4.1% | +21.5% |
| Net income | $38.1 million | $33.8 million | +12.8% |
| Diluted earnings per share | $5.00 | $4.39 | +13.9% |
| Operating cash flow | $(15.5) million | $(27.9) million | Cash use declined |
PEO fees rose 8.5%, primarily on higher average billing per worksite employee and increased average worksite headcount. Staffing revenue rose 7.7%, reflecting business reopening compared with the prior-year pandemic period. Payroll taxes and benefits increased to 49.2% of revenue from 47.5%, while workers’ compensation expense declined to 20.6% from 22.8%. Management attributed the workers’ compensation improvement to favorable claims development, including a $9.2 million favorable prior-period claims adjustment, versus $6.4 million in 2020. SG&A increased 9.4% to $155.3 million, driven in part by technology spending and higher employee-related and incentive costs.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $69.4 million; cash, cash equivalents and restricted cash totaled $78.6 million. Operating cash use was $15.5 million, investing cash use was $112.9 million, and financing cash use was $26.9 million. Investing activity included $308.6 million of purchases and $202.6 million of sales and maturities of investments and restricted investments. Restricted cash and investments are substantially tied to workers’ compensation collateral and are not necessarily available for general use. The company reported $273.6 million in workers’ compensation trust accounts.
The company had no revolver borrowings at December 31, 2021 and was in compliance with its covenants. Year-end mortgage debt was approximately $3.5 million and was repaid on January 31, 2022. A March 2022 amended facility increased the revolving line from $33 million to $50 million, retained an $8 million letter-of-credit sublimit and extended the term to July 1, 2024. The company paid $9.1 million in dividends and repurchased $17.3 million of shares during 2021. In February 2022, the board authorized a new share repurchase program of up to $75 million over two years.
Management stated that expected operating funds, current liquid assets and revolver availability should be sufficient for working-capital needs for the next 12 months.
Changes, outlook and notable items
- Revenue and earnings recovered from the 2020 decline: 2020 revenue had fallen 6.5%, while 2021 revenue increased 8.4%. Net income remained below 2019’s $48.3 million.
- A July 2021 workers’ compensation arrangement shifted all risk of loss for claims incurred after June 30, 2021 to third-party insurers. The arrangement runs through June 2022, with renewal committed through June 2023, and includes possible premium adjustments: up to $20 million in favorable-claims savings participation or up to $7.5 million in additional premium per 12-month policy period.
- A June 2021 loss portfolio transfer reduced workers’ compensation liabilities by $53.1 million. Total workers’ compensation claims liabilities were $279.4 million at year-end, down from $357.7 million. The auditor identified these reserves as a critical audit matter because estimation requires substantial actuarial judgment.
- Management cited continuing COVID-19-related uncertainty, labor shortages and possible effects on client payrolls, staffing demand and workers’ compensation claims. The filing provides no numerical revenue or earnings guidance.
- The IRS is challenging certain wage-based tax credits. The company disclosed estimated potential additional taxes of $2.3 million for tax years 2012–2015 and $1.7 million for 2017; similar disallowances for 2018 and 2019 could add $1.7 million and $1.6 million, respectively. The company disputes the positions and recorded no reserve for these matters.
- A California wage-and-hour case involving prevailing-wage and meal-break claims reached a settlement in December 2021, subject to customary court approval. The company recorded $2.6 million of estimated liabilities for this and other ordinary-course litigation.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Development of workers’ compensation claims and adequacy of the $279.4 million reserve, including the assumptions underlying favorable prior-period adjustments.
- Renewal and economics of the insured workers’ compensation program beyond June 2023, and the company’s continuing collateral requirements.
- California’s 73% revenue concentration and exposure to regional economic, regulatory or catastrophic events.
- Availability of liquidity after distinguishing unrestricted funds from restricted insurance collateral, and investment portfolio sensitivity to market movements. The filing estimates a 50-basis-point rate increase could reduce portfolio fair value by $8.2 million.
- Outcome and financial impact of the IRS tax-credit disputes and the California litigation settlement.
- Execution of the new $50 million credit facility covenants and the $75 million share repurchase authorization.