Barrett Business Services(BBSI) - 2021 Q3 - Quarterly Report

Part I - Financial Information Unaudited Interim Condensed Consolidated Financial Statements This section presents the unaudited interim financial statements for Barrett Business Services, Inc. as of September 30, 2021, and for the three and nine-month periods then ended, including balance sheets, statements of operations, comprehensive income, stockholders' equity, cash flows, and accompanying notes Condensed Consolidated Balance Sheets As of September 30, 2021, total assets increased to $809.0 million from $775.0 million at year-end 2020, driven by higher trade accounts receivable, while total liabilities rose to $601.3 million from $576.7 million due to increased accrued payroll and benefits, and total stockholders' equity grew to $207.6 million from $198.2 million Condensed Consolidated Balance Sheet Highlights (In Thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $12,860 | $68,688 | | Trade accounts receivable, net | $240,293 | $118,506 | | Total current assets | $463,285 | $407,875 | | Total assets | $808,967 | $774,950 | | Liabilities & Equity | | | | Accrued payroll, payroll taxes and related benefits | $249,713 | $149,989 | | Workers' compensation claims liabilities (Current & Long-term) | $296,999 | $357,746 | | Total liabilities | $601,334 | $576,715 | | Total stockholders' equity | $207,633 | $198,235 | Condensed Consolidated Statements of Operations For Q3 2021, total revenues increased to $247.0 million from $227.5 million in Q3 2020, but net income decreased to $14.9 million from $18.5 million, while nine-month revenues grew to $698.6 million from $647.6 million with net income slightly increasing to $27.5 million from $26.6 million Q3 Financial Performance (In Thousands, Except Per Share) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Total Revenues | $246,950 | $227,513 | | Gross Margin | $60,235 | $59,234 | | Income from Operations | $17,723 | $22,306 | | Net Income | $14,929 | $18,511 | | Diluted EPS | $1.96 | $2.40 | Nine-Month Financial Performance (In Thousands, Except Per Share) | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Total Revenues | $698,598 | $647,648 | | Gross Margin | $148,573 | $131,928 | | Income from Operations | $30,667 | $27,459 | | Net Income | $27,465 | $26,614 | | Diluted EPS | $3.59 | $3.46 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash used in operating activities was $60.3 million, net cash used in investing activities was $133.3 million, and net cash used in financing activities increased to $18.0 million, resulting in a total decrease in cash, cash equivalents, and restricted cash of $211.6 million Cash Flow Summary (Nine Months Ended Sep 30, In Thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(60,304) | $(78,861) | | Net cash (used in) provided by investing activities | $(133,308) | $2,178 | | Net cash used in financing activities | $(18,007) | $(8,380) | | Net decrease in cash, cash equivalents and restricted cash | $(211,619) | $(85,063) | Notes to Condensed Consolidated Financial Statements The notes detail key accounting policies and events, including PEO revenue reporting, significant workers' compensation liabilities, Loss Portfolio Transfer agreements, a $33.0 million revolving credit facility, ongoing IRS tax examinations, and the Kaanaana class action lawsuit - PEO revenues are reported net of direct payroll costs as the company is not the primary obligor for these payments. Staffing revenues are recognized as services are rendered[39] - On June 30, 2021, the company entered into a second Loss Portfolio Transfer (LPT 2) agreement, which reduced outstanding workers' compensation liabilities by $53.1 million for policies issued up to June 30, 2018[70] - The company is involved in the Kaanaana class action lawsuit, where a California Supreme Court ruling affirmed that certain work was subject to prevailing wage requirements. Potential liability is not currently estimable and not accrued, though an estimated $4.0 million is accrued for this and other legal matters[81] - The IRS is examining federal tax returns for 2011-2014 and 2017-2019. The company disagrees with a proposed disallowance of certain tax credits for 2011-2014 and has not recorded a reserve[80] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting an 8.5% revenue increase in Q3 2021 driven by PEO services growth, despite a Q3 net income decrease to $14.9 million from $18.5 million due to higher SG&A expenses, while nine-month revenues grew 7.9% with a slight net income increase Results of Operations Q3 2021 revenue grew 8.5% to $247.0 million, driven by a 9.5% increase in PEO service fees and an 8.0% increase in average worksite employees (WSEs), but Q3 net income fell to $14.9 million from $18.5 million due to a $5.6 million rise in SG&A expenses, while nine-month revenue increased 7.9% to $698.6 million and net income rose slightly to $27.5 million Worksite Employee (WSE) Growth | Period | Metric | 2021 | % Change | 2020 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Q3 | Average WSEs | 116,258 | 8.0% | 107,600 | -8.1% | | 9 Months | Average WSEs | 111,640 | 3.6% | 107,809 | -5.2% | - The increase in SG&A expenses was primarily due to the reversal of cost reductions implemented in 2020 in response to the COVID-19 pandemic, as well as higher variable employee compensation in 2021[102] - The company uses non-GAAP measures like gross billings and non-GAAP gross workers' compensation expense to manage operations. Non-GAAP gross workers' compensation as a percentage of gross billings decreased from 3.4% to 3.0% for Q3 and from 3.8% to 3.0% for the nine-month period, year-over-year[93][95][96] Liquidity and Capital Resources The company's total cash, cash equivalents, and restricted cash decreased by $211.6 million in the first nine months of 2021, primarily due to $133.3 million used in investing activities and $60.3 million used in operating activities, with financing activities using $18.0 million largely for stock repurchases and dividends - Net cash used in operating activities was $60.3 million, primarily due to a $121.8 million increase in trade accounts receivable and a $60.2 million decrease in workers' compensation claims liabilities[107] - In April 2021, the company replaced a $63.7 million standby letter of credit with other collateral, releasing $38.7 million of collateral from the bank and transferring a total of $63.7 million to its trust accounts[77][109] - The company maintains a credit agreement with financial covenants requiring EBITDA of at least $30 million on a rolling four-quarter basis and a ratio of cash/investments to workers' comp/safety incentive liabilities of at least 1.0:1.0. The company was in compliance as of September 30, 2021[77][109] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to changes in interest rates, affecting its investment portfolio of corporate bonds, mortgage-backed securities, and U.S. treasuries, with a hypothetical 50 basis point interest rate increase estimated to result in a $7.0 million negative effect on the portfolio's fair value - The company's investment portfolio at September 30, 2021, included $170.6 million in corporate bonds, $91.8 million in mortgage-backed securities, and $67.9 million in U.S. treasuries[114] - A hypothetical 50 basis point increase in market interest rates would have a $7.0 million negative impact on the fair value of the investment portfolio. The effect on outstanding debt would be immaterial[114] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[115] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[116] Part II - Other Information Legal Proceedings This section refers to Note 6 of the financial statements for details on legal proceedings, primarily the Kaanaana v. Barrett Business Services, Inc. class action lawsuit concerning prevailing wage laws in California - For information regarding legal proceedings, the report directs readers to Note 6 of the condensed consolidated financial statements[119] Risk Factors The company highlights that its business may be negatively affected by disease outbreaks, specifically the ongoing COVID-19 pandemic, posing significant risk through impacts on PEO fees, client liquidity, compliance with evolving legislation, increased workers' compensation claims exposure, and heightened security risks from remote work - The COVID-19 pandemic poses a significant risk, as government restrictions and economic disruptions affecting the company's small- and mid-sized client base could materially harm business operations and revenue[121] - Evolving laws and regulations related to the pandemic, such as payroll tax credits and changes to workers' compensation standards, create compliance risks and could increase claims exposure[121] - Increased remote work exposes the company to heightened security risks, including cyber-attacks, and the continuation of the pandemic could lead to an economic downturn, impacting receivables and investment values[123] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company repurchased 55,547 shares of common stock under a $50.0 million plan authorized in August 2019, with approximately $31.2 million remaining available for future repurchases as of September 30, 2021 Stock Repurchases for Q3 2021 | Month | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July | 7,687 | $71.54 | | August | — | — | | September | 47,860 | $76.19 | | Total | 55,547 | | - The repurchases are part of a $50.0 million stock repurchase plan authorized in August 2019. As of September 30, 2021, $31.2 million remained available under the plan[125] Exhibits This section lists the exhibits filed with the Form 10-Q report, including CEO and CFO certifications required by the Sarbanes-Oxley Act and various Inline XBRL documents for financial data tagging - Filed exhibits include CEO and CFO certifications pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350[127][128] - The filing includes Inline XBRL documents for financial data tagging, as required by the SEC[129][130][131]