Business context and reporting period
Barrett Business Services, Inc. (BBSI) filed this unaudited Form 10-Q for the three months ended March 31, 2022. BBSI provides professional employer organization (PEO), staffing, and related workforce-management services primarily to small and mid-sized businesses. PEO revenue is reported net of direct payroll costs.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $246.4 million | $218.4 million |
| Gross margin | $40.4 million; 16.4% of revenue | $30.9 million; 14.1% |
| Operating income (loss) | $(1.3) million; (0.5%) | $(7.5) million; (3.5%) |
| Net income (loss) | $0.3 million; $0.04 diluted EPS | $(4.6) million; $(0.60) diluted EPS |
| Operating cash flow | $(30.2) million | $(7.9) million |
- Revenue grew 12.8% year over year: PEO service fees rose 12.2% and staffing revenue rose 17.5%. Gross billings increased to $1.707 billion from $1.472 billion.
- Average worksite employees increased 9.3% to 116,197; ending worksite employees increased 8.8% to 117,924.
- Cash, cash equivalents and restricted cash totaled $54.8 million at quarter-end, down from $78.6 million at December 31, 2021. Cash and cash equivalents alone were $46.1 million. Current assets were $516.4 million and current liabilities $391.9 million.
- Investments were $81.3 million, with restricted cash and investments totaling $267.4 million. The filing reports a $14.4 million after-tax unrealized investment loss in other comprehensive income, contributing to comprehensive loss of $14.1 million.
- Workers’ compensation claims liabilities were $262.6 million, down from $279.4 million at year-end. The company recorded a $2.9 million favorable prior-period claims adjustment.
- No revolving-credit borrowings were outstanding; the $50 million facility had $6.2 million of its letter-of-credit sublimit in use. BBSI paid off its $3.5 million mortgage in January and reported compliance with its credit covenants.
- Financing cash outflows included $8.6 million of common-stock repurchases and $2.2 million of dividends. The company authorized a new repurchase program of up to $75 million over two years.
Material changes versus the prior comparable period
- BBSI returned to modest net income from a prior-year loss, while revenue and gross margin increased. Gross margin improved as a percentage of revenue, reflecting lower payroll-tax and workers’ compensation costs relative to revenue.
- Staffing revenue benefited from business reopening after COVID-19 impacts in the prior-year period; PEO growth reflected higher average billing per worksite employee and more worksite employees.
- Operating cash use increased, primarily due to a $100.6 million increase in receivables and a $16.9 million decrease in workers’ compensation liabilities, partly offset by an $85.9 million increase in accrued payroll and related liabilities.
- Investment-market declines drove a significant unrealized loss and reduced accumulated other comprehensive income from $1.1 million to a loss of $13.3 million.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management notes that quarterly results have historically fluctuated, including low income or losses in the first quarter, and identifies seasonality, payroll-tax wage limits, workers’ compensation claims, demand and competition as factors.
- Key risks include uncertainty in workers’ compensation reserve estimates and claims development; labor-market tightness and inflation; client retention and receivable collection; investment-market and interest-rate changes; and the availability of capital, borrowing capacity and collateral required for workers’ compensation programs.
- A 50-basis-point increase in market interest rates was estimated to reduce the fair value of the investment portfolio by $7.5 million. Management also warns of potential effects from COVID-19-related requirements, healthcare costs, cybersecurity, and economic conditions.
- The IRS is challenging certain wage-based tax credits. Management disputes the proposed disallowances and has recorded no reserve; stated estimated tax exposures are $2.3 million for 2012–2015, $1.7 million for 2017, $1.7 million for 2018 and $1.6 million for 2019.
- A settlement was reached in the Kaanaana wage-and-hour case, subject to customary court approval. BBSI recorded estimated liabilities of $2.6 million for that settlement and other legal matters.
- Management said disclosure controls were effective as of March 31, 2022, and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and improved gross margin continue, particularly given labor-market conditions and the mix of PEO and staffing services.
- How operating cash flow and receivables evolve after the substantial first-quarter working-capital outflow.
- Future workers’ compensation claims development, reserve adequacy, and any premium adjustments under the insured program.
- The effect of interest-rate and market movements on the investment portfolio and accumulated other comprehensive loss.
- Developments in the IRS tax-credit examinations and the Kaanaana settlement, including any changes to recorded liabilities.
- Use of the new share-repurchase authorization and ongoing dividend and capital requirements.