Barrett Business Services, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. BBSI provides professional employer organization (PEO) and staffing services, primarily to small and midsized businesses. Financial amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $218.4 | $219.1; down 0.3% |
| PEO service fees | $193.8 | $193.6; up 0.1% |
| Staffing revenue | $24.6 | $25.5; down 3.5% |
| Gross margin | $30.9; 14.2% of revenue | $26.1; 11.9% |
| Operating loss | $(7.5) | $(7.1) |
| Net loss / diluted loss per share | $(4.6) / $(0.60) | $(3.4) / $(0.45) |
| Operating cash flow | $(7.9) | $1.0 provided |
Gross margin improved mainly as workers’ compensation expense fell to $46.3 million from $54.5 million, reflecting lower loss accrual rates and a $1.2 million favorable prior-period claims adjustment. Selling, general and administrative expense rose to $37.1 million from $32.1 million, partly due to higher IT costs and lower prior-year stock and incentive compensation. Investment income declined to $1.8 million from $3.0 million, which management attributed primarily to lower interest rates.
Gross billings increased 2.3% to $1.472 billion, and PEO and staffing wages rose to $1.271 billion from $1.233 billion. Average worksite employees fell 6.1% to 106,300; ending worksite employees fell 4.3% to 108,423. Management attributed pressure on staffing revenue and worksite employee counts to COVID-19, partly offset by higher average billing per PEO worksite employee.
At March 31, cash and cash equivalents were $28.5 million, investments were $114.1 million, and restricted cash and investments totaled $360.2 million. Cash, cash equivalents and restricted cash reported in the cash-flow statement were $96.5 million, down $137.3 million from year-end. The decline largely reflected purchases of investments and restricted investments, as well as higher receivables; it should not be read as equivalent to unrestricted cash burn. Current assets were $472.1 million and current liabilities were $369.8 million. Total debt was approximately $3.7 million; there were no revolver borrowings, and $6.2 million of the $8.0 million letter-of-credit sublimit was in use. BBSI reported compliance with its credit covenants.
Material changes and unusual items
- Revenue was nearly flat year over year, while net loss increased to $4.6 million from $3.4 million.
- Unrealized investment losses, net of tax, were $5.3 million, contributing to comprehensive loss of $9.8 million; accumulated other comprehensive income declined to $2.3 million from $7.6 million at year-end.
- Operating cash flow was affected by an $88.9 million increase in trade receivables, partly offset by an $83.9 million increase in accrued payroll, payroll taxes and benefits.
- Workers’ compensation liabilities were $362.7 million at quarter-end. The reserve estimate is actuarial and subject to uncertainty; actual claim costs may differ materially.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management said COVID-19, related restrictions and economic disruption could continue to constrain client hiring, hours worked, new-client additions and collections. It also cited possible effects on workers’ compensation claims, unemployment taxes, receivables and investment values. Management expects seasonal and other quarterly fluctuations, including typically weaker first-quarter results.
In April 2021, after quarter-end, BBSI and Chubb agreed to replace and cancel a $63.7 million Chubb letter of credit. The bank released $38.7 million of supporting collateral, which BBSI transferred, together with an additional $25.0 million, to Chubb trust accounts.
In the Kaanaana wage-and-hour case, the California Supreme Court affirmed a ruling that certain staffing work constituted public work subject to prevailing-wage requirements. The case was expected to return to the trial court for possible damages and other remedies. Potential liability from the prevailing-wage determination was not considered estimable and was not accrued; BBSI said it believes it may recover increased costs from the client district. The company had accrued $3.1 million for estimated liabilities relating to this and other litigation.
The IRS is challenging certain wage-based tax credits for 2011–2014, with an estimated additional tax of approximately $2.3 million for 2012–2015, including effects on carryover attributes. BBSI disputes the position and recorded no reserve, citing management’s assessment that its position is more likely than not sustainable. Additional risks include workers’ compensation reserve uncertainty, investment interest-rate exposure, client credit risk and covenant compliance.
Key facts for investors to verify
- Whether worksite employee trends, staffing demand and client activity recover as pandemic-related disruption changes.
- Receivables collection and operating cash generation, while distinguishing unrestricted cash from collateral and restricted investments.
- Future workers’ compensation claims development and the adequacy of the $362.7 million reserve.
- Developments and potential exposure in the Kaanaana litigation and the IRS tax-credit dispute.
- Effects of investment-market movements: BBSI estimated a 50-basis-point rate increase would affect investment portfolio fair value by $7.6 million.
- Credit facility and insurance collateral requirements, including the post-quarter Chubb collateral arrangement and ongoing covenant compliance.