Barrett Business Services, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. BBSI provides professional employer organization (PEO), staffing, and related business-management services, primarily to small and midsized businesses. PEO revenue is reported net of client employee direct payroll costs.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $264.6M | $262.2M | $519.3M | $508.6M |
| Gross margin | $67.0M (25.3%) | $66.9M (25.5%) | $108.6M (20.8%) | $107.2M (21.1%) |
| Operating income | $21.5M | $23.1M | $20.2M | $21.8M |
| Net income | $17.0M | $18.0M | $17.8M | $18.3M |
| Diluted EPS | $2.47 | $2.48 | $2.57 | $2.48 |
- Q2 PEO revenue rose 5.2% to $244.3M, while staffing revenue fell 32.1% to $20.4M. For the first half, PEO revenue increased 6.0% to $476.6M and staffing revenue decreased 27.5% to $42.7M.
- Q2 average worksite employees increased 1.6% year over year to 124,186; ending worksite employees rose 2.8% to 127,336. Gross billings increased 4.5% in Q2 to $1.912B.
- Q2 net income decreased 5.5% year over year. Management attributed PEO growth to more worksite employees and higher average billing per employee; weaker staffing demand and tight labor conditions weighed on staffing revenue.
- Payroll taxes and benefits increased as a share of revenue, partly reflecting higher average payroll tax rates and new PEO client benefit costs ($1.8M in Q2; $3.2M for the half). Workers’ compensation expense as a share of revenue also rose; favorable prior-year liability and premium adjustments were smaller than in 2022.
Cash, liquidity, and capital
- At June 30, cash and cash equivalents were $48.3M; total cash, cash equivalents, and restricted cash were $54.6M. Current investments were $84.7M, and restricted cash and investments totaled $192.4M across current and noncurrent classifications.
- Six-month operating cash flow was negative $23.2M, versus negative $37.4M a year earlier. The 2023 use of cash chiefly reflected a $34.2M increase in receivables and a $24.9M reduction in workers’ compensation liabilities, partly offset by net income and higher accrued payroll liabilities.
- Investing cash flow was negative $6.4M; financing cash flow was negative $23.2M. Financing uses included $18.2M of share repurchases and $4.1M of dividends.
- No borrowings were outstanding under the $50M revolving credit line at June 30, and the company reported covenant compliance. On July 31, the facility maturity was extended to July 1, 2026, the standby-letter-of-credit sublimit increased from $8M to $25M, and certain covenants and restrictions were modified.
- Workers’ compensation claims liabilities were $191.8M, down from $216.0M at year-end. The company held $163.4M in its insurance trust account. These claims reserves are estimates subject to actuarial judgment and actual payments may differ.
Changes, outlook, and risks
- Management provided no quantified earnings or revenue guidance. It expects quarterly results to remain variable, citing seasonality, statutory payroll-tax wage limits, customer demand, competition, and workers’ compensation claims experience. The company has historically had weaker first-quarter results; customer activity may support third-quarter revenue, while holiday schedules can reduce fourth-quarter revenue.
- Investment income increased to $2.1M in Q2 and $4.5M for the first half. First-half comprehensive income was $19.5M versus a $4.7M comprehensive loss in 2022, reflecting a $1.6M unrealized investment gain versus a $23.0M unrealized loss in the prior-year period. Accumulated other comprehensive loss remained $26.0M at June 30.
- The portfolio’s reported fair value was $282.3M, with $35.9M of gross unrealized losses. Management estimated a 50-basis-point rate increase would reduce portfolio fair value by $5.5M.
- The IRS is challenging certain wage-based tax credits for 2017–2020, with estimated additional tax of $7.4M and penalties of $1.7M; similar disallowance for 2021 could add $0.6M. BBSI disputes the position and recorded no reserve for these amounts. Separately, gross unrecognized tax benefits were $0.6M.
- A California wage-and-hour case remains pending after an appellate ruling found a triable issue regarding joint-employer status; management cannot estimate a potential loss. The company recorded $2.0M of estimated liabilities for litigation matters overall. A separate class action settlement has received court approval and is final.
- Newly highlighted risks include the company’s employer status in co-employment arrangements and compliance, cost, and data-security obligations associated with beginning to offer health benefits to PEO clients in 2023. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PEO growth and worksite-employee gains can offset continued weakness in staffing demand.
- Receivables collection trends and the reasons for operating cash outflow, including the timing of payroll and workers’ compensation payments.
- Workers’ compensation reserve development, insurer policy performance, collateral requirements, and any changes in actuarial estimates.
- Outcome and potential financial exposure of the IRS tax-credit examination and the pending California litigation.
- Investment portfolio valuation and interest-rate sensitivity, and the terms and covenant capacity of the amended credit facility.
- Repurchase activity: BBSI bought back 123,361 shares in Q2; on July 31, the board authorized a new $75M, two-year repurchase program replacing the prior program.