Barrett Business Services, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing was signed March 8, 2021. BBSI provides professional employer organization (PEO) services and staffing to small and mid-sized businesses; about 75% of 2020 revenue came from California.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $880.8 million | $942.3 million |
| PEO service fees | $777.4 million | $819.9 million |
| Staffing revenue | $103.4 million | $122.4 million |
| Gross margin | $182.9 million; 20.8% of revenue | $208.3 million; 22.1% of revenue |
| Operating income | $36.1 million | $50.5 million |
| Net income | $33.8 million | $48.3 million |
| Diluted EPS | $4.39 | $6.27 |
| Operating cash flow | $(27.9) million | $77.1 million |
Fourth quarter: Revenue was $233.2 million and net income was $7.2 million (diluted EPS $0.93), compared with revenue of $245.2 million and net income of $11.7 million (diluted EPS $1.51) in Q4 2019. BBSI reported a first-quarter 2020 net loss of $3.4 million.
Liquidity and debt at year-end: Cash and cash equivalents were $68.7 million; current investments were $101.2 million. Current assets were $407.9 million and current liabilities $290.6 million, leaving working capital of $117.2 million. The cash-flow statement’s combined cash, cash equivalents and restricted cash balance was $233.8 million; substantial restricted cash and investments support workers’ compensation obligations. Total debt was about $3.7 million, consisting of mortgage debt; there were no revolver borrowings. The company reported compliance with credit covenants.
Changes and drivers
- Revenue declined 6.5% year over year: PEO fees fell 5.2% and staffing revenue fell 15.6%. Management attributed the declines primarily to COVID-19 effects on clients and operations.
- Average PEO worksite employees fell 5.3% to 108,249; gross billings to continuing PEO customers increased 0.3%.
- Gross margin fell by $25.3 million, with margin as a share of revenue declining to 20.8%. Management cited more competitive pricing and a smaller favorable prior-claims reserve adjustment in 2020 ($6.4 million versus $13.4 million in 2019).
- SG&A decreased to $141.9 million, primarily reflecting lower employee-related costs and $12.1 million less profit-sharing and incentive compensation. Investment income declined $4.5 million as interest rates fell.
- Operating cash flow shifted from positive $77.1 million to negative $27.9 million, largely reflecting lower workers’ compensation claims liabilities and accrued payroll. Financing cash use included $9.1 million of dividends and $8.1 million of share repurchases.
Outlook, risks and unusual items
- Management expected COVID-19 disruption—including business closures, reduced hours and hiring freezes—to continue affecting customer growth and revenue in future quarters. It gave no specific numerical earnings or revenue guidance and said expected operating funds, liquid assets and available revolver capacity should cover working capital for the next 12 months.
- A June 2020 loss portfolio transfer removed specified 2014–2017 workers’ compensation claim obligations, reducing liabilities and related trust balances by $115.7 million. The company’s year-end workers’ compensation claims liability was $357.7 million; estimates are judgmental and were identified as a critical audit matter.
- Workers’ compensation exposure remains significant: BBSI generally retains the first $3.0 million per occurrence for claims incurred from July 1, 2020 onward, with different limits in certain states. Chubb fronted-program coverage was scheduled through June 30, 2021, with committed coverage through June 30, 2022.
- Major risks include pandemic-related client payroll reductions and nonpayment, concentration in California, workers’ compensation claim severity and reserve estimates, collateral requirements, cyber and technology risks, and competition. California represented about 75% of revenue.
- The IRS proposed disallowing certain wage-based credits, with estimated additional tax of about $2.3 million for 2012–2015; BBSI disputes the position and recorded no reserve. A California wage-and-hour case was pending before the state Supreme Court; management could not estimate a potential loss range for litigation.
- The company repurchased 144,470 shares for $8.1 million during 2020 and paid $1.20 per share in annual dividends. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor facts to verify
- Whether PEO client payroll, worksite employee counts and staffing demand recover from the pandemic-related declines.
- Workers’ compensation reserve development, the assumptions behind the $357.7 million liability, and collateral and insurance renewal requirements.
- The status and potential financial effect of the IRS tax-credit dispute and California wage litigation.
- Available liquidity after accounting for restricted funds, credit-facility terms and the cash-flow impact of claims and payroll-liability changes.
- Whether California concentration and competitive pricing continue to pressure revenue growth and margins.