BARRETT BUSINESS SERVICES INC quarterly report, Q2 FY2022

Barrett Business Services, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Unaudited results; financial amounts below are in millions unless stated otherwise. BBSI provides PEO and staffing services, primarily to small and mid-sized businesses.

Financial results and liquidity

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Revenue	$262.2	$233.2	$508.6	$451.6
Gross margin	$66.9 (25.5%)	$57.5 (24.7%)	$107.2 (21.1%)	$88.3 (19.6%)
Operating income	$23.1 (8.8%)	$20.5 (8.8%)	$21.8 (4.3%)	$12.9 (2.9%)
Net income	$18.0	$17.1	$18.3	$12.5
Diluted EPS	$2.48	$2.24	$2.48	$1.64

Q2 revenue comprised $232.2 million in PEO service fees and $30.0 million in staffing services. For the first half, those amounts were $449.6 million and $58.9 million, respectively.
Operating cash flow was a use of $37.4 million in the first half, versus cash provided of $2.6 million in the comparable 2021 period. The principal working-capital pressures included a $111.2 million increase in receivables and a $37.9 million decline in workers’ compensation claims liabilities; higher accrued payroll and related benefits partly offset those uses.
Cash, cash equivalents and restricted cash totaled $44.1 million at June 30, including $34.1 million of cash and cash equivalents. The company also reported $77.3 million of investments and $240.0 million of restricted cash and investments. Restricted balances are not freely available for general operations.
No borrowings were outstanding on the $50 million revolving credit facility; $6.2 million of its $8 million letter-of-credit sublimit was in use. The company repaid its $3.5 million mortgage loan in January and reported compliance with credit-facility covenants.
Stockholders’ equity was $174.5 million, down from $208.5 million at year-end 2021. Six-month comprehensive loss was $4.7 million despite net income of $18.3 million, primarily reflecting $23.0 million of after-tax unrealized investment losses. The company repurchased $28.5 million of stock and paid $4.4 million in dividends during the first half.

Changes and management commentary

Q2 revenue increased 12.4% year over year; first-half revenue increased 12.6%. Management attributed PEO growth to more worksite employees and higher average billing per employee, and staffing growth primarily to business expansion following prior-year COVID-19 impacts. Average Q2 worksite employees rose 8.8% to 122,234.
Q2 net income increased 5.4%, while first-half net income increased 46.0%. First-half operating income rose substantially year over year, although reported operating margin was lower than Q2’s, consistent with the company’s stated seasonal fluctuation in quarterly results.
Workers’ compensation expense as a share of revenue declined year over year: to 17.7% from 19.5% in Q2 and to 18.6% from 20.3% for the first half. Management cited favorable claims development, including favorable prior-period adjustments of $6.5 million in Q2 and $9.4 million for the first half. SG&A increased, mainly from employee-related costs, travel and marketing.
Market-rate movements affected investment values: accumulated other comprehensive loss was $21.9 million at June 30, compared with income of $1.1 million at year-end 2021. Management estimated a 50-basis-point rate increase would reduce portfolio fair value by $7.0 million.

Outlook, risks and contingencies

The filing provides no quantified revenue or earnings guidance. Management notes that results can fluctuate with seasonality, statutory payroll-tax wage caps, workers’ compensation claims, client demand and competition. Third-quarter activity may benefit from customers in agriculture, food processing and forest products; holiday-shortened schedules may weigh on fourth-quarter revenue.
The insured workers’ compensation program renewed for July 2022–June 2023. BBSI may participate in favorable claims savings up to $22.5 million; the renewed arrangement does not permit additional premium charges for adverse claims development. The company retains risk under self-insured programs and certain older claims. Workers’ compensation reserves were $241.5 million; management cautions that ultimate losses may differ materially from estimates.
The IRS has proposed disallowing certain wage-based tax credits for multiple years. The filing lists estimated potential tax, penalties or additional tax amounts for affected years, but records no reserve because management believes its position is more likely than not sustainable and intends to defend it.
Litigation includes a California wage-and-hour matter with a settlement subject to customary court approval and a separate fatal-accident case in which BBSI disputes joint-employer responsibility. Management states it cannot estimate potential liability in the latter case. Estimated liabilities of $2.6 million for the discussed settlement and other cases were included in other accrued liabilities.
In August 2022, after the reporting period, BBSI announced plans to offer certain fully insured medical and other health benefits to qualifying worksite employees beginning in 2023. The filing identifies implementation, regulatory, technology and data-security risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2.

Important facts for investors to verify

Whether receivables growth and negative operating cash flow reverse as payroll and customer collections cycle through subsequent quarters.
Whether favorable workers’ compensation claims development persists and reserve estimates remain adequate.
The performance and liquidity impact of the investment portfolio, including further interest-rate-driven fair-value changes.
Developments in the IRS tax-credit disputes and the California litigation, including settlement approval and any change in estimated exposure.
Execution, costs and regulatory requirements for the planned 2023 health-benefits offering, and the effect of continued share repurchases and dividends on liquidity.