Barrett Business Services(BBSI) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION (Unaudited) This section presents BBSI's unaudited interim condensed consolidated financial statements and notes for the periods ended June 30, 2023 Item 1. Unaudited Interim Condensed Consolidated Financial Statements This section presents BBSI's unaudited interim condensed consolidated financial statements and notes for periods ending June 30, 2023 Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show a slight decrease in total assets and liabilities from December 31, 2022, to June 30, 2023, with stable stockholders' equity Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Total assets | $671,904 | $686,938 | | Total liabilities | $493,935 | $509,096 | | Total stockholders' equity | $177,969 | $177,842 | Condensed Consolidated Statements of Operations Total revenues slightly increased for Q2 and six months ended June 30, 2023, driven by PEO services, while staffing declined, leading to a minor net income decrease Condensed Consolidated Statements of Operations (in thousands) Three Months Ended June 30: | Metric (in thousands) | 2023 | 2022 | Change ($) | Change (%) | | :-------------------- | :-------- | :-------- | :--------- | :--------- | | Total revenues | $264,630 | $262,179 | $2,451 | 0.9% | | PEO services revenue | $244,256 | $232,174 | $12,082 | 5.2% | | Staffing services revenue | $20,374 | $30,005 | $(9,631) | -32.1% | | Gross margin | $67,046 | $66,885 | $161 | 0.2% | | Net income | $17,016 | $18,014 | $(998) | -5.5% | | Basic EPS | $2.52 | $2.52 | $0.00 | 0.0% | | Diluted EPS | $2.47 | $2.48 | $(0.01) | -0.4% | Six Months Ended June 30: | Metric (in thousands) | 2023 | 2022 | Change ($) | Change (%) | | :-------------------- | :-------- | :-------- | :--------- | :--------- | | Total revenues | $519,297 | $508,554 | $10,743 | 2.1% | | PEO services revenue | $476,563 | $449,607 | $26,956 | 6.0% | | Staffing services revenue | $42,734 | $58,947 | $(16,213) | -27.5% | | Gross margin | $108,590 | $107,238 | $1,352 | 1.3% | | Net income | $17,835 | $18,302 | $(467) | -2.6% | | Basic EPS | $2.62 | $2.51 | $0.11 | 4.4% | | Diluted EPS | $2.57 | $2.48 | $0.09 | 3.6% | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for the three and six months ended June 30, 2023, significantly improved compared to the prior year, primarily due to a reduction in unrealized losses on investments Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) Three Months Ended June 30: | Metric (in thousands) | 2023 | 2022 | | :-------------------- | :-------- | :-------- | | Net income | $17,016 | $18,014 | | Unrealized losses on investments, net of tax | $(2,028) | $(8,624) | | Comprehensive income | $14,988 | $9,390 | Six Months Ended June 30: | Metric (in thousands) | 2023 | 2022 | | :-------------------- | :-------- | :-------- | | Net income | $17,835 | $18,302 | | Unrealized gains (losses) on investments, net of tax | $1,624 | $(22,982) | | Comprehensive income (loss) | $19,459 | $(4,680) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity at June 30, 2023, increased slightly from December 31, 2022, influenced by net income and share-based compensation, offset by repurchases and dividends Changes in Stockholders' Equity (Six Months Ended June 30, 2023, in thousands) | Item | Impact on Equity (in thousands) | | :---------------------------------------- | :--------------- | | Balance, December 31, 2022 | $177,842 | | Common stock issued | $2 | | Common stock repurchased | $(10,145) | | Share-based compensation expense | $1,963 | | Cash dividends on common stock | $(2,013) | | Unrealized loss on investments, net of tax | $(2,028) | | Net income | $17,016 | | Balance, June 30, 2023 | $177,969 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, the company experienced a net decrease in cash, cash equivalents, and restricted cash, primarily due to operating and financing activities Cash Flows (Six Months Ended June 30, in thousands) | Activity | 2023 (in thousands) | 2022 (in thousands) | | :------------------------ | :---------- | :---------- | | Net cash used in operating activities | $(23,197) | $(37,416) | | Net cash (used in) provided by investing activities | $(6,363) | $39,383 | | Net cash used in financing activities | $(23,223) | $(36,458) | | Net decrease in cash, cash equivalents and restricted cash | $(52,783) | $(34,491) | | Cash, cash equivalents and restricted cash, end of period | $54,595 | $44,138 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, financial instrument valuations, workers' compensation liabilities, debt, income tax, and legal matters, providing crucial context Note 1 - Basis of Presentation of Interim Period Statements This note outlines the basis for preparing interim financial statements, detailing key accounting policies for revenue, costs, cash, investments, workers' compensation, and EPS - PEO revenues are reported net of direct payroll costs, as the Company is not the primary obligor for wage payments to client employees. Staffing revenues are recognized as services are rendered[34] - Workers' compensation claims liabilities are management's best estimate, utilizing actuarial expertise and projection techniques, and are reviewed at least quarterly[42] Cash, Cash Equivalents and Restricted Cash (in thousands) | Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------- | :------------ | :---------------- | | Cash and cash equivalents | $48,347 | $91,423 | | Restricted cash | $6,248 | $15,955 | | Total | $54,595 | $107,378 | Weighted Average Common Shares Outstanding (in thousands) | Period | Basic (2023, in thousands) | Basic (2022, in thousands) | Diluted (2023, in thousands) | Diluted (2022, in thousands) | | :----- | :----------- | :----------- | :------------- | :------------- | | Three Months Ended June 30 | 6,751 | 7,162 | 6,875 | 7,257 | | Six Months Ended June 30 | 6,809 | 7,284 | 6,931 | 7,365 | Note 2 - Fair Value Measurement The company's available-for-sale investments are measured at fair value, with unrealized gains/losses in OCI, primarily consisting of corporate bonds, U.S. treasuries, and mortgage-backed securities Total Investments at Fair Value (in thousands) | Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------- | :------------ | :---------------- | | Current Investments | $84,658 | $68,325 | | Restricted Cash and Investments | $185,966 | $199,326 | | Total Investments | $282,288 | $307,947 | Contractual Maturities of Available-for-Sale Securities (June 30, 2023, in thousands) | Maturity Period | Corporate Bonds (in thousands) | U.S. Treasuries (in thousands) | U.S. Gov. Agency Securities (in thousands) | Asset Backed Securities (in thousands) | Money Market Funds (in thousands) | Emerging Markets (in thousands) | Total (in thousands) | | :-------------- | :-------------- | :-------------- | :-------------------------- | :---------------------- | :----------------- | :--------------- | :---- | | Less than 1 Year | $3,049 | $3,775 | $1,539 | - | $11,692 | $1,981 | $22,036 | | Between 1 to 5 Years | $63,667 | $27,007 | $24,269 | $792 | - | - | $115,735 | | Between 5 to 10 Years | $38,847 | $29,665 | $3,535 | $11,921 | - | - | $83,968 | | After 10 Years | $175 | - | - | $1,269 | - | - | $1,444 | | Total | $105,738 | $60,447 | $29,343 | $13,982 | $11,692 | $1,981 | $223,183 | Note 3 – Workers' Compensation Claims Workers' compensation claims liabilities decreased, with most exposure covered by an insured program, and the company retaining risk for claims incurred prior to July 1, 2021, and for self-insured programs Workers' Compensation Claims Liabilities (in thousands) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----- | :------------ | :---------------- | | Ending balance | $191,822 | $216,000 | | IBNR | $90,053 | $124,320 | | Ratio of IBNR to liabilities | 47% | 51% | - Approximately 84% of the Company's workers' compensation exposure is covered through an insured program, with third-party insurers assuming all risk for claims incurred from July 1, 2021, onwards[64] - The Company retains risk for claims incurred under the insured program prior to July 1, 2021, up to $3.0 million or $5.0 million per occurrence, and for all claims under its self-insured programs up to $1.0 million to $3.0 million per occurrence depending on the state[64][68] - The trust account balance for collateral under the insured program was $163.4 million at June 30, 2023, down from $188.2 million at December 31, 2022[66] Note 4 - Revolving Credit Facility and Long-Term Debt The company's $50.0 million revolving credit facility was amended on July 31, 2023, extending its term to July 1, 2026, and modifying sublimits and covenants - Revolving credit line of $50.0 million, extended to July 1, 2026, with a sublimit for standby letters of credit increased from $8.0 million to $25.0 million[71] - Financial covenants were modified, including a decrease in the minimum tangible net worth requirement from $100 million to $50 million[71] - The Company had no outstanding borrowings on its revolving credit line at June 30, 2023, and was in compliance with all covenants[71] Note 5 – Income Taxes The company evaluates deferred tax assets quarterly and was in a cumulative income position; the IRS is examining federal tax returns for 2017-2021, proposing disallowance of certain wage-based tax credits - The Company was in a cumulative income position for the 12 quarters ended June 30, 2023, supporting the realizability of deferred tax assets[74] - IRS examination for 2017-2021 proposes disallowing wage-based tax credits, potentially resulting in $7.4 million in additional taxes and $1.7 million in penalties for 2017-2020, plus $0.6 million for 2021. The Company disputes this[74] - Total gross unrecognized tax benefits of $0.6 million (excluding interest and penalties) as of June 30, 2023, are not expected to materially change in the next 12 months[74] Note 6 – Litigation The company faces ongoing class action wage and hour lawsuits in California, with one case settled and another reversed on appeal regarding joint-employer status, which BBSI will defend - The 'Kaanaana v. Barrett Business Services, Inc.' class action lawsuit regarding prevailing wage and meal break violations has been settled and is final[75][77] - In the 'Merry Maids franchisee' class action, the Ninth Circuit Court of Appeals reversed summary judgment for BBSI, finding a triable issue of fact on joint-employer status. BBSI intends to vigorously defend this claim[77] - Management has recorded estimated liabilities totaling $2.0 million in other accrued liabilities for ongoing legal proceedings and claims[77] Note 7 – Subsequent Events The only significant subsequent event is the July 31, 2023, amendment of the revolving credit facility with Wells Fargo Bank, N.A., extending its term and modifying covenants - On July 31, 2023, the Company amended its credit agreement with Wells Fargo Bank, N.A., extending the revolving credit line to July 1, 2026, and increasing the sublimit for standby letters of credit to $25.0 million[78][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, business model, and operational results for the periods ended June 30, 2023 and 2022 General BBSI provides business management solutions for small and mid-sized companies, integrating management consulting with human resource outsourcing, including workers' compensation and employee benefits - BBSI provides business management solutions for small and mid-sized companies, leveraging a management platform that integrates management consulting and human resource outsourcing[81] - The company operates a decentralized delivery model with local business teams in 68 markets, offering strategic leadership and expert consultation[81] - BBSI offers workers' compensation coverage and began offering employee benefits (medical, dental, vision, etc.) to PEO clients in 2023[85] Results of Operations For Q2 and the first six months of 2023, net income slightly decreased despite modest revenue growth from PEO services, offsetting a significant decline in staffing services Revenue Mix and Growth Three Months Ended June 30: | Metric | 2023 (%) | 2022 (%) | Change (2023 vs 2022) | | :----- | :------- | :------- | :-------------------- | | PEO services revenue | 92.3% | 88.6% | +5.2% | | Staffing services revenue | 7.7% | 11.4% | -32.1% | | Total revenues | 100.0% | 100.0% | +0.9% | Six Months Ended June 30: | Metric | 2023 (%) | 2022 (%) | Change (2023 vs 2022) | | :----- | :------- | :------- | :-------------------- | | PEO services revenue | 91.8% | 88.4% | +6.0% | | Staffing services revenue | 8.2% | 11.6% | -27.5% | | Total revenues | 100.0% | 100.0% | +2.1% | Key Financial Ratios as Percentage of Gross Billings Three Months Ended June 30: | Metric | 2023 | 2022 | | :----- | :---- | :---- | | PEO and staffing wages | 86.9% | 86.9% | | Payroll taxes and benefits | 7.0% | 6.9% | | Workers' compensation | 2.6% | 2.5% | | Gross margin | 3.5% | 3.7% | Six Months Ended June 30: | Metric | 2023 | 2022 | | :----- | :---- | :---- | | PEO and staffing wages | 86.9% | 86.9% | | Payroll taxes and benefits | 7.5% | 7.4% | | Workers' compensation | 2.7% | 2.7% | | Gross margin | 2.9% | 3.0% | Worksite Employees (WSEs) Growth Three Months Ended June 30: | Metric | 2023 | % Change | 2022 | % Change | | :----- | :-------- | :------- | :-------- | :------- | | Average WSEs | 124,186 | 1.6% | 122,234 | 8.8% | | Ending WSEs | 127,336 | 2.8% | 123,853 | 8.4% | Six Months Ended June 30: | Metric | 2023 | % Change | 2022 | % Change | | :----- | :-------- | :------- | :-------- | :------- | | Average WSEs | 121,749 | 2.1% | 119,216 | 9.1% | | Ending WSEs | 127,336 | 2.8% | 123,853 | 8.4% | Fluctuations in Quarterly Operating Results The company anticipates significant quarterly fluctuations in operating results due to seasonality, payroll tax wage limits, workers' compensation claims, service demand, and competition - Quarterly operating results are expected to fluctuate due to seasonality, wage limits on statutory payroll taxes, workers' compensation claims experience, demand for services, and competition[98] - Payroll taxes generally decline throughout the calendar year as statutory wage bases are exceeded. Revenue may be higher in Q3 due to agriculture, food processing, and forest products industries, and lower in Q4 due to holiday schedules[98] Liquidity and Capital Resources The company's cash balance decreased by $52.8 million for the six months ended June 30, 2023, primarily due to increased receivables, decreased workers' compensation liabilities, and stock repurchases Cash Balance and Changes (in thousands) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----- | :------------ | :---------------- | | Cash, cash equivalents, and restricted cash | $54,595 | $107,378 | | Net decrease (six months) | $(52,783) | $(34,491) | - Net cash used in operating activities was $23.2 million for the six months ended June 30, 2023, primarily due to increased trade accounts receivable ($34.2 million) and decreased workers' compensation claims liabilities ($24.9 million)[100] - Net cash used in financing activities was $23.2 million, mainly from $18.2 million in common stock repurchases and $4.1 million in dividend payments[100] Forward-Looking Information This section highlights forward-looking statements covering economic conditions, service competitiveness, client retention, gross margin, labor market, workers' compensation reserves, tax assets, and litigation - Forward-looking statements include discussions on economic conditions, competitiveness, client retention, revenue growth, gross margin, labor market, workers' compensation reserves, deferred tax assets, insurance subsidiaries, and litigation costs[102] - Key risk factors include the ability to retain and attract clients, effects of governmental orders, integration difficulties, economic trends, workers' compensation claims experience, regulatory changes, security breaches, collectability of receivables, tax rate changes, inflation, healthcare reforms, capital market conditions, and availability of financing[102] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate changes, affecting its investment portfolio, with a hypothetical 50 basis point increase resulting in a $5.5 million downward effect on fair value - The Company's market risk primarily relates to interest rate changes affecting its investment portfolio[104] - A 50 basis point increase in market interest rates would result in a $5.5 million downward effect on the fair value of the investment portfolio at June 30, 2023[104] - The investment portfolio at June 30, 2023, included $105.7 million in corporate bonds, $60.4 million in U.S. treasuries, and $51.1 million in mortgage-backed securities[104] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023[105] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[106] - Management acknowledges that control systems provide only reasonable, not absolute, assurance due to inherent limitations like resource constraints, human error, collusion, or management override[107] PART II – OTHER INFORMATION This section provides additional information including legal proceedings, updated risk factors, details on equity security sales and use of proceeds, other disclosures, and a list of exhibits Item 1. Legal Proceedings This section refers to Note 6 of the condensed consolidated financial statements for detailed information on the company's legal proceedings - Information regarding legal proceedings is detailed in Note 6 to the condensed consolidated financial statements[109] Item 1A. Risk Factors This section updates risk factors, highlighting new risks related to the company's 'employer' status, healthcare reform compliance, and data security regulations from offering health benefits - New risk factors include potential liabilities if the company is determined not to be an 'employer' under certain laws, which could deter clients and affect its ability to offer health benefits[111] - Risks associated with healthcare reforms, specifically the Patient Protection and Affordable Care Act, include potential penalties for non-compliance with employer mandates and increased costs or limitations on offering health benefits[112] - Failure to comply with data security regulations (e.g., HIPAA, HITECH Act) related to protected health information (PHI) from offering health benefits could adversely affect the business and reputation[113] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 123,361 shares of common stock during Q2 2023, and a new $75.0 million stock repurchase program was authorized on July 31, 2023, replacing the previous program Stock Repurchases (Quarter Ended June 30, 2023) | Month | Total Shares Repurchased | Average Price Paid Per Share | | :---- | :----------------------- | :--------------------------- | | April | 5,000 | $82.77 | | May | 90,461 | $81.41 | | June | 27,900 | $84.80 | | Total | 123,361 | | - As of June 30, 2023, the company had repurchased 819,851 shares for $65.3 million under the February 2022 program[116] - On July 31, 2023, a new $75.0 million stock repurchase program was authorized for a two-year period, replacing the prior program[116] Item 5. Other Information This item reiterates the amendment to the revolving credit agreement with Wells Fargo Bank, N.A., on July 31, 2023, which extended the credit line and modified certain terms and covenants - The revolving credit agreement with Wells Fargo Bank, N.A., was amended on July 31, 2023, extending the $50.0 million credit line to July 1, 2026, and increasing the standby letter of credit sublimit to $25.0 million[117] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, the first amendment to the credit agreement, and XBRL-related documents - Exhibits include CEO and CFO certifications (31.1, 31.2), certification pursuant to 18 U.S.C. Section 1350 (32*), and the First Amendment to the Third Amended and Restated Credit Agreement (4.1)[119] Signatures The report is duly signed on behalf of Barrett Business Services, Inc. by Anthony J. Harris, Executive Vice President and Chief Financial Officer, and Treasurer, on August 2, 2023 - The report was signed by Anthony J. Harris, Executive Vice President and Chief Financial Officer, and Treasurer, on August 2, 2023[121]