Barrett Business Services, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. BBSI provides professional employer organization (PEO) and staffing services to small and midsize businesses.
Financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $254.7 million | $246.4 million |
| Gross margin | $41.5 million; 16.3% of revenue | $40.4 million; 16.4% |
| Operating income (loss) | $(1.4) million | $(1.3) million |
| Net income | $0.8 million | $0.3 million |
| Diluted EPS | $0.12 | $0.04 |
| Cash used in operating activities | $26.5 million | $30.2 million |
Other income was $2.3 million, primarily from investment income, helping lift pretax income despite the operating loss. SG&A was $41.2 million, or 16.2% of revenue. The filing reports no material change in interest paid.
At March 31, cash and cash equivalents were $52.6 million, current investments $80.1 million, and restricted cash and investments $207.3 million across current and noncurrent assets. Total current assets were $449.5 million and current liabilities $338.4 million. The company had no revolver borrowings; its credit facility provides up to $50 million, with an $8 million letter-of-credit sublimit. BBSI reported compliance with its covenants. Workers’ compensation claims liabilities totaled $201.6 million.
Changes versus Q1 2022
- Revenue rose 3.4%: PEO revenue increased 6.8% to $232.3 million, while staffing revenue fell 22.8% to $22.4 million.
- Management attributed PEO growth to more worksite employees and higher average billing per employee. Average worksite employees increased 2.7% to 119,313. Staffing weakness reflected lower temporary-worker demand, inclement weather, and tight labor-market conditions.
- Gross margin dollars increased, but margin as a percentage of revenue edged down from 16.4% to 16.3%. Higher payroll tax and benefit costs, including $1.4 million in costs related to benefits newly offered to PEO clients, and less favorable prior-period workers’ compensation adjustments contributed to cost pressure.
- Net income increased from $0.3 million to $0.8 million. Operating loss was broadly unchanged; higher investment income was the main support to earnings.
- Cash used in operations improved by $3.7 million year over year. Cash, cash equivalents, and restricted cash declined $39.3 million during Q1, principally reflecting higher receivables, lower workers’ compensation liabilities, and share repurchases.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management expects quarterly results to remain variable; first-quarter results have historically been weak due to seasonality, payroll-tax wage limits, customer demand, and workers’ compensation claims experience.
- Workers’ compensation reserves depend on actuarial estimates and may change as claims develop. Q1 included a $1.1 million favorable adjustment for prior-period claims, versus $2.9 million in Q1 2022.
- The IRS is seeking to disallow certain wage-based tax credits for 2017–2020, with estimated additional taxes of $5.5 million and penalties of $1.7 million; similar disallowance for 2021 could add an estimated $0.2 million. BBSI disputes the IRS position and recorded no reserve.
- Litigation includes a California wage-and-hour class action in which a court found a triable joint-employer issue; management cannot estimate a potential loss range. The company reported $2.7 million of estimated liabilities for litigation matters. A separate California accident case was settled with BBSI removed from the suit; another settlement remains subject to customary court approval.
- A 50-basis-point increase in market interest rates would, per the filing, reduce investment-portfolio fair value by an estimated $5.8 million. The company also identifies risks involving client retention, labor-market conditions, healthcare regulation and data privacy, receivable collectability, and workers’ compensation claims.
- BBSI repurchased $8.0 million of common stock and paid $2.1 million in dividends during Q1. Management said disclosure controls were effective at quarter-end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether PEO growth can continue and whether staffing demand recovers, given the reported labor-market and weather effects.
- Workers’ compensation reserve development, insurance-program terms, and required collateral; trust-account balances were $178.8 million at March 31.
- Outcome and potential financial exposure of the IRS tax-credit dispute and pending litigation.
- Investment-portfolio valuation and interest-rate sensitivity, alongside the distinction between unrestricted and restricted liquidity.
- Costs, uptake, and compliance implications of the employee benefits offering launched for PEO clients in 2023.