Barrett Business Services(BBSI) - 2023 Q3 - Quarterly Report

Part I - Financial Information Item 1. Unaudited Interim Condensed Consolidated Financial Statements Unaudited Q3 2023 financials report $690.0 million in assets, flat revenue, $18.2 million net income, and improved operating cash flow Condensed Consolidated Balance Sheets Total assets reached $690.0 million as of September 30, 2023, with stable liabilities and equity growing to $180.4 million Condensed Consolidated Balance Sheet Summary (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $41,579 | $91,423 | | Trade accounts receivable, net | $205,217 | $163,838 | | Total current assets | $427,461 | $454,362 | | Total assets | $690,008 | $686,938 | | Liabilities & Equity | | | | Total current liabilities | $341,109 | $334,731 | | Total liabilities | $509,562 | $509,096 | | Total stockholders' equity | $180,446 | $177,842 | | Total liabilities and stockholders' equity | $690,008 | $686,938 | Condensed Consolidated Statements of Operations Q3 2023 revenues were flat at $273.3 million due to PEO growth offsetting staffing decline, with net income rising to $18.2 million Q3 2023 vs Q3 2022 Statement of Operations (in thousands, except per share amounts) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | PEO Services Revenue | $251,423 | $244,567 | | Staffing Services Revenue | $21,905 | $29,255 | | Total Revenues | $273,328 | $273,822 | | Gross Margin | $68,329 | $66,901 | | Income from Operations | $22,302 | $22,346 | | Net Income | $18,219 | $17,438 | | Diluted EPS | $2.68 | $2.45 | Nine Months Ended Sep 30, 2023 vs 2022 Statement of Operations (in thousands, except per share amounts) | Metric | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | PEO Services Revenue | $727,986 | $694,174 | | Staffing Services Revenue | $64,639 | $88,202 | | Total Revenues | $792,625 | $782,376 | | Gross Margin | $176,919 | $174,139 | | Income from Operations | $42,452 | $44,116 | | Net Income | $36,054 | $35,740 | | Diluted EPS | $5.24 | $4.91 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity grew to $180.4 million, primarily from $36.1 million net income, offset by $29.1 million in repurchases and $6.1 million in dividends - Key activities impacting stockholders' equity during the first nine months of 2023 included: - Net income of $36.1 million[28] - Company repurchases of common stock totaling $29.1 million (sum of $7,582k, $9,500k, $10,280k from retained earnings and related capital adjustments)[28] - Cash dividends paid of $6.1 million (sum of $2,067k, $2,013k, $2,025k)[28] Condensed Consolidated Statements of Cash Flows Net cash from operations improved to $10.0 million, while investing used $17.5 million and financing used $37.4 million, resulting in a $44.9 million cash decrease Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $9,999 | $(3,059) | | Net cash (used in) provided by investing activities | $(17,547) | $42,472 | | Net cash used in financing activities | $(37,394) | $(50,024) | | Net decrease in cash, cash equivalents and restricted cash | $(44,942) | $(10,611) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, a $302.8 million investment portfolio, $177.8 million workers' compensation liabilities, an IRS audit, and a joint-employer class-action lawsuit - The company's investment portfolio, measured at fair value, totaled $302.8 million as of September 30, 2023[59][63] - The majority of these investments are classified as Level 2 in the fair value hierarchy, consisting primarily of corporate bonds, U.S. treasuries, and mortgage-backed securities[59][63] - The company has significantly reduced its retained risk for workers' compensation claims through loss portfolio transfer agreements and new insurance arrangements[70][71] - For claims incurred from July 1, 2021, onward under its primary insured program, third-party insurers have assumed all risk of loss[70][71] - The IRS is examining federal tax returns for 2017-2021 and intends to disallow certain wage-based tax credits, which could result in an estimated $7.4 million in additional taxes and $1.7 million in penalties for 2017-2020[79] - The company disagrees with the determination and has not recorded a reserve[79] - The company is a defendant in a wage and hour class-action lawsuit where a key issue is whether BBSI was a joint-employer[80][82] - The company intends to vigorously defend the claim, but the potential range of loss is currently inestimable[80][82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights a strategic shift to higher-margin PEO services, maintaining gross margin despite flat revenue, with solid liquidity supporting repurchases and dividends Results of Operations Q3 2023 revenues were flat at $273.3 million due to PEO growth offsetting staffing decline, with gross margin increasing to 25.0% and net income rising to $18.2 million Key Performance Metrics | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Gross Billings (in thousands) | $1,963,462 | $1,908,818 | 2.9% | | Average WSEs | 127,232 | 125,813 | 1.1% | - The increase in PEO services revenue was driven by growth in WSEs from new clients and higher average billing per WSE[99] - The decrease in staffing revenue was due to lower demand and tight labor market conditions[99] - Payroll taxes and benefits expense increased as a percentage of revenue, primarily due to $3.4 million in costs related to new employee benefit offerings for PEO clients that began in 2023[99] Liquidity and Capital Resources Total cash decreased by $44.9 million to $62.4 million, primarily due to $29.1 million in repurchases and $6.1 million in dividends, despite $10.0 million in operating cash flow - Net cash from operations for the first nine months of 2023 was $10.0 million, compared to a use of $3.1 million in the same period of 2022[105] - Net cash used in financing activities was $37.4 million, primarily consisting of $29.1 million for common stock repurchases and $6.1 million for dividend payments[105] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk primarily involves interest rate changes impacting the investment portfolio; a 50 basis point rate increase would decrease fair value by $5.2 million - A 50 basis point increase in market interest rates would have a $5.2 million downward effect on the fair value of the Company's investment portfolio[109] Item 4. Controls and Procedures CEO and CFO concluded disclosure controls were effective as of September 30, 2023, with no material changes to internal controls - The Company's CEO and CFO concluded that the disclosure controls and procedures were effective as of September 30, 2023[110] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control[111] Part II - Other Information Item 1. Legal Proceedings Legal proceedings primarily involve a wage and hour class action lawsuit concerning the company's joint-employer status - The company is involved in a significant wage and hour class action lawsuit where the key issue is its status as a joint-employer[80][82][114] - The company is defending the claim, but the potential loss is not currently estimable[80][82][114] Item 1A. Risk Factors Key risks include potential determination as a non-legal employer in co-employment, and new risks from healthcare reforms and data privacy regulations like HIPAA - A significant risk is the potential determination that BBSI is not the "administrative employer," which could make clients jointly liable for employment taxes and discourage them from using BBSI's services[116] - The introduction of employee health benefits in 2023 exposes the company to new risks related to healthcare reform (e.g., the Affordable Care Act) and compliance with data privacy laws like HIPAA for handling protected health information (PHI)[117][118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2023, the company repurchased 115,400 shares; a new $75.0 million stock repurchase program was authorized, with $64.1 million remaining Stock Repurchases for Q3 2023 | Month | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July | - | - | | August | 48,500 | $95.66 | | September | 66,900 | $93.83 | | Total | 115,400 | N/A | - On July 31, 2023, the Board of Directors authorized a new stock repurchase program for up to $75.0 million of common stock over a two-year period[121] Item 6. Exhibits Exhibits include required CEO and CFO certifications and Inline XBRL data files - The filing includes required CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 1350, along with Inline XBRL data files[123]