May 4, 2023 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2023

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 0-21886

BARRETT BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)


Maryland		52-0812977
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification No.)

8100 NE Parkway Drive, Suite 200
Vancouver, Washington		98662
(Address of principal executive offices)		(Zip Code)

(360) 828-0700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 Per Share

BBSI

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer 

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 19, 2023, 6,806,397 shares of the registrant’s common stock ($0.01 par value) were outstanding.

BARRETT BUSINESS SERVICES, INC.

INDEX TO FORM 10-Q

Part I - Financial Information (Unaudited)

Page

Item 1.

Unaudited Interim Condensed Consolidated Financial Statements

3

Condensed Consolidated Balance Sheets - March 31, 2023 and December 31, 2022

3

Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2023 and 2022

4

Condensed Consolidated Statements of Comprehensive Income (Loss) - Three Months Ended March 31, 2023 and 2022

5

Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2023 

6

Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2022

7

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2023 and 2022

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

Part II - Other Information

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6.

Exhibits

29

Signature  

29

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Interim Condensed Consolidated Financial Statements

Barrett Business Services, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In Thousands, Except Par Value)


	March 31,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	52,635		$	91,423
Investments		80,088			68,325
Trade accounts receivable, net		188,013			163,838
Prepaid expenses and other		20,605			19,787
Restricted cash and investments		108,165			110,989
Total current assets		449,506			454,362
Property, equipment and software, net		47,272			45,954
Operating lease right-of-use assets		19,273			19,804
Restricted cash and investments		99,117			104,277
Goodwill		47,820			47,820
Other assets		3,358			3,281
Deferred income taxes		10,044			11,440
Total assets	$	676,390		$	686,938
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,384		$	8,264
Accrued payroll, payroll taxes and related benefits		235,922			222,331
Income taxes payable		722			610
Current operating lease liabilities		7,029			6,957
Other accrued liabilities		29,314			31,603
Workers' compensation claims liabilities		58,233			62,917
Safety incentives liability		1,784			2,049
Total current liabilities		338,388			334,731
Long-term workers' compensation claims liabilities		143,408			153,070
Long-term operating lease liabilities		13,559			14,225
Customer deposits and other long-term liabilities		7,557			7,070
Total liabilities		502,912			509,096
Commitments and contingencies (Notes 4 and 6)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 6,800 and 6,871 shares issued and outstanding		68			69
Additional paid-in capital		33,559			32,744
Accumulated other comprehensive expense		(23,942	)		(27,594	)
Retained earnings		163,793			172,623
Total stockholders' equity		173,478			177,842
Total liabilities and stockholders' equity	$	676,390		$	686,938

The accompanying notes are an integral part of these condensed consolidated financial statements.

Barrett Business Services, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In Thousands, Except Per Share Amounts)


	Three Months Ended
	March 31,
	2023			2022
Revenues:
Professional employer services	$	232,307		$	217,433
Staffing services		22,360			28,942
Total revenues		254,667			246,375
Cost of revenues:
Direct payroll costs		16,871			21,921
Payroll taxes and benefits		144,582			135,865
Workers' compensation		51,670			48,236
Total cost of revenues		213,123			206,022
Gross margin		41,544			40,353
Selling, general and administrative expenses		41,226			40,165
Depreciation and amortization		1,677			1,508
Loss from operations		(1,359	)		(1,320	)
Other income (expense):
Investment income, net		2,315			1,638
Interest expense		(38	)		(34	)
Other, net		36			32
Other income, net		2,313			1,636
Income before income taxes		954			316
Provision for income taxes		135			28
Net income	$	819		$	288
Basic income per common share	$	0.12		$	0.04
Weighted average number of basic common shares outstanding		6,866			7,406
Diluted income per common share	$	0.12		$	0.04
Weighted average number of diluted common shares outstanding		6,985			7,474

The accompanying notes are an integral part of these condensed consolidated financial statements.

Barrett Business Services, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In Thousands)


	Three Months Ended
	March 31,
	2023		2022
Net income	$	819	$	288
Unrealized income (losses) on investments, net of tax of $1,397 and ($5,487) in 2023 and 2022, respectively		3,652		(14,358	)
Comprehensive income (loss)	$	4,471	$	(14,070	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Barrett Business Services, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2023

(Unaudited)

(In Thousands)


										Accumulated
										Other
							Additional			Comprehensive
	Common Stock						Paid-in			(Loss)			Retained
	Shares			Amount			Capital			Income			Earnings			Total
Balance, December 31, 2022		6,871		$	69		$	32,744		$	(27,594	)	$	172,623		$	177,842
Common stock issued on exercise of options, purchase of ESPP shares and vesting of restricted stock units and performance awards		31			-			339			-			-			339
Common stock repurchased on vesting of restricted stock units and performance awards		(11	)		-			(1,005	)		-			-			(1,005	)
Share-based compensation expense		-			-			1,928			-			-			1,928
Company repurchases of common stock		(91	)		(1	)		(447	)		-			(7,582	)		(8,030	)
Cash dividends on common stock ($0.30 per share)		-			-			-			-			(2,067	)		(2,067	)
Unrealized income on investments, net of tax		-			-			-			3,652			-			3,652
Net income		-			-			-			-			819			819
Balance, March 31, 2023		6,800		$	68		$	33,559		$	(23,942	)	$	163,793		$	173,478

The accompanying notes are an integral part of these condensed consolidated financial statements.

Barrett Business Services, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2022

(Unaudited)

(In Thousands)


										Accumulated
										Other
							Additional			Comprehensive
	Common Stock						Paid-in			Income			Retained
	Shares			Amount			Capital			(Loss)			Earnings			Total
Balance, December 31, 2021		7,415		$	74		$	29,054		$	1,079		$	178,323		$	208,530
Common stock issued on exercise of options, purchase of ESPP shares and vesting of restricted stock units and performance awards		18			-			411			-			-			411
Common stock repurchased on vesting of restricted stock units and performance awards		(4	)		-			(185	)		-			-			(185	)
Share-based compensation expense		-			-			1,830			-			-			1,830
Company repurchases of common stock		(115	)		(1	)		(484	)		-			(8,090	)		(8,575	)
Cash dividends on common stock ($0.30 per share)		-			-			-			-			(2,229	)		(2,229	)
Unrealized loss on investments, net of tax		-			-			-			(14,358	)		-			(14,358	)
Net income		-			-			-			-			288			288
Balance, March 31, 2022		7,314		$	73		$	30,626		$	(13,279	)	$	168,292		$	185,712

The accompanying notes are an integral part of these condensed consolidated financial statements.

Barrett Business Services, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)


	Three Months Ended
	March 31,
	2023			2022
Cash flows from operating activities:
Net income	$	819		$	288
Reconciliations of net income to net cash used in operating activities:
Depreciation and amortization		1,677			1,508
Non-cash lease expense		1,756			1,798
Investment amortization and losses recognized		237			336
Deferred Income taxes		-			25
Share-based compensation		1,928			1,830
Changes in certain operating assets and liabilities:
Trade accounts receivable		(24,175	)		(100,589	)
Income taxes		112			223
Prepaid expenses and other		(818	)		(1,633	)
Accounts payable		(2,880	)		(153	)
Accrued payroll, payroll taxes and related benefits		13,944			85,897
Other accrued liabilities		(2,372	)		50
Workers' compensation claims liabilities		(14,412	)		(16,894	)
Safety incentives liability		(265	)		(1,038	)
Operating lease liabilities		(1,819	)		(1,725	)
Other assets and liabilities, net		(247	)		(132	)
Net cash used in operating activities		(26,515	)		(30,209	)
Cash flows from investing activities:
Purchase of property, equipment and software		(2,995	)		(6,754	)
Proceeds from sales and maturities of investments		233			10,796
Purchase of restricted investments		(1,725	)		(2,272	)
Proceeds from sales and maturities of restricted investments		2,446			18,735
Net cash (used in) provided by investing activities		(2,041	)		20,505
Cash flows from financing activities:
Payments on long-term debt		-			(3,510	)
Repurchases of common stock		(8,030	)		(8,575	)
Common stock repurchased on vesting of stock awards		(1,005	)		(185	)
Dividends paid		(2,067	)		(2,229	)
Proceeds from exercise of stock options		339			411
Net cash used in financing activities		(10,763	)		(14,088	)
Net decrease in cash, cash equivalents and restricted cash		(39,319	)		(23,792	)
Cash, cash equivalents and restricted cash, beginning of period		107,378			78,629
Cash, cash equivalents and restricted cash, end of period	$	68,059		$	54,837

The accompanying notes are an integral part of these condensed consolidated financial statements.

Barrett Business Services, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation of Interim Period Statements

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The accompanying condensed financial statements are prepared on a consolidated basis. All intercompany account balances and transactions have been eliminated in consolidation. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from such estimates and assumptions. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2022 Annual Report on Form 10-K at pages 31 - 58. The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Revenue recognition

Professional employer (“PEO”) services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Staffing revenues relate primarily to short-term staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related revenue is recognized, as services are rendered by our workforce.

Our PEO client service agreements have a minimum term of one year, are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party. In addition, our client service agreements provide for immediate termination upon any payment default of the client regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Staffing customers are generally invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days. The amount of earned but unbilled revenue is classified as a receivable on the condensed consolidated balance sheets.

We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. We also present revenue net of safety incentives, because these incentives represent consideration payable to customers.

Cost of revenues

Our cost of revenues for PEO services includes employer payroll-related taxes, workers’ compensation costs and employee benefits costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, and workers’ compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and employee benefit costs, which primarily comprises health insurance premiums paid to third-party insurers and direct support payroll. Workers’ compensation costs consist primarily of premiums paid to third-party insurers, claims reserves, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, as well as costs associated with operating our two wholly owned insurance companies, Associated Insurance Company for Excess (“AICE”) and Ecole Insurance Company (“Ecole”).

Cash and cash equivalents

We consider non-restricted short-term investments that are highly liquid, readily convertible into cash, with maturities at acquisition of less than three months to be cash equivalents for purposes of the condensed consolidated statements of cash flows and condensed consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration.

Investments

The Company classifies investments as available-for-sale. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Investments are recorded as current on the condensed consolidated balance sheets as the invested funds are available for current operations. Management considers available evidence in evaluating potential impairment of investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of investments are included in investment income in our condensed consolidated statements of operations.

Restricted cash and investments

The Company holds restricted cash and investments primarily for the future payment of insurance premiums and workers’ compensation claims. These investments are categorized as available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Restricted cash and investments are classified as current and noncurrent on the condensed consolidated balance sheets based on the nature of the restriction. Management considers available evidence in evaluating potential impairment of restricted investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of restricted investments are included in investment income in our condensed consolidated statements of operations.

Restricted cash and investments also includes investments held as part of the Company’s deferred compensation plan. These investments are classified as trading securities and are recorded at fair value with unrealized gains and losses reported as a component of income (loss) from operations.

Allowance for doubtful accounts

The Company had an allowance for doubtful accounts of $885,000 and $893,000 at March 31, 2023 and December 31, 2022, respectively. We make estimates of the collectability of our accounts receivable for services provided to our customers based on future expected credit losses. Management analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

Workers’ compensation claims liabilities

Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by our third-party administrator for workers’ compensation claims, coupled with an actuarial estimate of future loss development with respect to reported claims and incurred but not reported claims (together, “IBNR”). Workers’ compensation claims liabilities include case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, unallocated loss adjustment expenses and estimated future recoveries. The estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond one year is included in long-term liabilities on our condensed consolidated balance sheets. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.

The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes.

Our estimates are based on actuarial analysis and informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves.

A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.

Safety incentives

We accrue for and present expected safety incentives as a reduction of revenue. Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe-work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third-party administrator. In July 2020, the Company began limiting its safety incentive offering in certain markets. The Company provided $1.8 million and $2.0 million at March 31, 2023 and December 31, 2022, respectively, as an estimate of the liability for unpaid safety incentives.

Customer deposits

We require deposits from certain PEO customers to cover a portion of our accounts receivable due from such customers in the event of default of payment.

Comprehensive income (loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders.

Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principles (“GAAP”) are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive income (loss) comprises unrealized holding gains and losses on our available-for-sale investments.

Statements of cash flows

Interest paid during the three months ended March 31, 2023 and 2022 did not materially differ from interest expense. Income taxes paid by the Company during the three months ended March 31, 2023 and 2022 totaled $0.01 million and $0.04 million, respectively.

Bank deposits and other cash equivalents that are restricted for use are classified as restricted cash. The table below reconciles the cash, cash equivalents and restricted cash balances from our condensed consolidated balance sheets to the amounts reported on the condensed consolidated statements of cash flows (in thousands):

March 31,

December 31,

March 31,

December 31,

2023