May 5, 2021 - 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, 2021

☐	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 21, 2021, 7,565,315 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

	Condensed Consolidated Balance Sheets - March 31, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2021 and 2020	4

	Condensed Consolidated Statements of Comprehensive Loss - Three Months Ended March 31, 2021 and 2020	5

	Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2021 and 2020	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

Part II - Other Information

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6.	Exhibits	29

Signature		30

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,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	28,545	$	68,688
Investments		114,142		101,244
Trade accounts receivable, net		207,430		118,506
Income taxes receivable		8,209		6,485
Prepaid expenses and other		14,613		15,961
Restricted cash and investments		99,183		96,991
Total current assets		472,122		407,875
Property, equipment and software, net		35,400		34,916
Operating lease right-of-use assets		23,475		23,025
Restricted cash and investments		261,020		258,153
Goodwill		47,820		47,820
Other assets		2,818		3,161
	$	842,655	$	774,950
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	221	$	221
Accounts payable		5,611		4,746
Accrued payroll, payroll taxes and related benefits		233,132		149,989
Current operating lease liabilities		8,006		7,539
Other accrued liabilities		8,292		7,275
Workers' compensation claims liabilities		103,290		102,040
Safety incentives liability		11,254		18,827
Total current liabilities		369,806		290,637
Long-term workers' compensation claims liabilities		259,373		255,706
Long-term debt		3,455		3,510
Deferred income taxes		2,511		4,518
Long-term operating lease liabilities		16,387		16,419
Customer deposits and other long-term liabilities		6,638		5,925
Total liabilities		658,170		576,715
Commitments and contingencies (Notes 4 and 6)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 7,554 and 7,566 shares issued and outstanding		76		76
Additional paid-in capital		26,483		24,885
Accumulated other comprehensive income		2,314		7,564
Retained earnings		155,612		165,710
Total stockholders' equity		184,485		198,235
	$	842,655	$	774,950

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,
	2021			2020
Revenues:
Professional employer service fees	$	193,819		$	193,592
Staffing services		24,626			25,512
Total revenues		218,445			219,104
Cost of revenues:
Direct payroll costs		18,450			19,077
Payroll taxes and benefits		122,783			119,462
Workers' compensation		46,347			54,514
Total cost of revenues		187,580			193,053
Gross margin		30,865			26,051
Selling, general and administrative expenses		37,107			32,115
Depreciation and amortization		1,297			1,000
Loss from operations		(7,539	)		(7,064	)
Other income (expense):
Investment income, net		1,769			2,967
Interest expense		(308	)		(235	)
Other, net		9			1
Other income, net		1,470			2,733
Loss before income taxes		(6,069	)		(4,331	)
Benefit from income taxes		(1,515	)		(924	)
Net loss	$	(4,554	)	$	(3,407	)
Basic loss per common share	$	(0.60	)	$	(0.45	)
Weighted average number of basic common shares outstanding		7,576			7,521
Diluted loss per common share	$	(0.60	)	$	(0.45	)
Weighted average number of diluted common shares outstanding		7,576			7,521

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

Barrett Business Services, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In Thousands)

	Three Months Ended
	March 31,
	2021			2020
Net loss	$	(4,554	)	$	(3,407	)
Unrealized losses on investments, net of tax of ($2,007) and ($1,046) in 2021 and 2020, respectively		(5,250	)		(2,735	)
Comprehensive loss	$	(9,804	)	$	(6,142	)

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, 2021 and 2020

(Unaudited)

(In Thousands)

									Accumulated
									Other
						Additional			Comprehensive
	Common Stock					Paid-in			Income			Retained
	Shares			Amount		Capital			(Loss)			Earnings			Total
Balance, December 31, 2020		7,566		$	76	$	24,885		$	7,564		$	165,710		$	198,235
Common stock issued on exercise of options, purchase of ESPP shares and vesting of restricted stock units and performance awards		38			—		815			—			—			815
Common stock repurchased on vesting of restricted stock units and performance awards		(1	)		—		(107	)		—			—			(107	)
Share-based compensation expense		—			—		1,060			—			—			1,060
Company repurchase of common stock		(49	)		—		(170	)		—			(3,266	)		(3,436	)
Cash dividends on common stock ($0.30 per share)		—			—		—			—			(2,278	)		(2,278	)
Unrealized loss on investments, net of tax		—			—		—			(5,250	)		—			(5,250	)
Net loss		—			—		—			—			(4,554	)		(4,554	)
Balance, March 31, 2021		7,554		$	76	$	26,483		$	2,314		$	155,612		$	184,485

										Accumulated
										Other
							Additional			Comprehensive
	Common Stock						Paid-in			Income			Retained
	Shares			Amount			Capital			(Loss)			Earnings			Total
Balance, December 31, 2019		7,514		$	75		$	20,227		$	2,819		$	148,678		$	171,799
Common stock issued on exercise of options, purchase of ESPP shares and vesting of restricted stock units and performance awards		56			1			903			—			—			904
Common stock repurchased on vesting of restricted stock units and performance awards		(6	)		—			(378	)		—			—			(378	)
Share-based compensation expense		—			—			342			—			—			342
Company repurchase of common stock		(59	)		(1	)		(169	)					(2,817	)		(2,987	)
Cash dividends on common stock ($0.30 per share)		—			—			—			—			(2,262	)		(2,262	)
Unrealized loss on investments, net of tax		—			—			—			(2,735	)		—			(2,735	)
Net loss		—			—			—			—			(3,407	)		(3,407	)
Balance, March 31, 2020		7,505		$	75		$	20,925		$	84		$	140,192		$	161,276

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,
	2021			2020
Cash flows from operating activities:
Net loss	$	(4,554	)	$	(3,407	)
Reconciliations of net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		1,297			1,000
Non-cash lease expense		1,872			1,724
Investment amortization and losses recognized		203			81
Deferred Income taxes		—			508
Share-based compensation		1,060			342
Changes in certain operating assets and liabilities:
Trade accounts receivable		(88,924	)		(2,229	)
Income taxes		(1,724	)		(1,102	)
Prepaid expenses and other		1,348			(1,592	)
Accounts payable		865			(1,660	)
Accrued payroll, payroll taxes and related benefits		83,926			6,406
Other accrued liabilities		964			(2,095	)
Workers' compensation claims liabilities		5,273			6,452
Safety incentives liability		(7,573	)		(1,620	)
Operating lease liabilities		(1,887	)		(1,672	)
Other assets and liabilities, net		(30	)		(95	)
Net cash (used in) provided by operating activities		(7,884	)		1,041
Cash flows from investing activities:
Purchase of property, equipment and software		(1,781	)		(3,439	)
Purchase of investments		(23,444	)		(23,722	)
Proceeds from sales and maturities of investments		9,381			21,758
Purchase of restricted investments		(132,788	)		(1,828	)
Proceeds from sales and maturities of restricted investments		24,286			14,449
Net cash (used in) provided by investing activities		(124,346	)		7,218
Cash flows from financing activities:
Payments on long-term debt		(55	)		(55	)
Repurchase of common stock		(3,436	)		(2,987	)
Common stock repurchased on vesting of stock awards		(107	)		(378	)
Dividends paid		(2,278	)		(2,262	)
Proceeds from exercise of stock options		815			904
Net cash used in financing activities		(5,061	)		(4,778	)
Net (decrease) increase in cash, cash equivalents and restricted cash		(137,291	)		3,481
Cash, cash equivalents and restricted cash, beginning of period		233,837			273,341
Cash, cash equivalents and restricted cash, end of period	$	96,546		$	276,822

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 2020 Annual Report on Form 10-K at pages 34 – 61. 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 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 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 and workers’ compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, 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 employee benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers’ compensation costs consist primarily of claims reserves, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, and the fronted insurance program, 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, and have 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 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 $1,092,000 and $757,000 at March 31, 2021 and December 31, 2020, 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 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. The Company provided $11.3 million and $18.8 million at March 31, 2021 and December 31, 2020, 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, 2021 and 2020 did not materially differ from interest expense. Income taxes paid during the three months ended March 31, 2021 totaled $0.2 million. No income taxes were paid during the three months ended March 31, 2020.

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,
	2021		2020		2020		2019
Cash and cash equivalents	$	28,545	$	68,688	$	14,272	$	44,570
Restricted cash, included in restricted cash and investments		68,001		165,149		262,550		228,771
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	96,546	$	233,837	$	276,822	$	273,341

Basic and diluted earnings per share

Basic earnings per share are computed based on the weighted average number of common shares outstanding for each year using the treasury method. Diluted earnings per share reflect the potential effects of the exercise of outstanding stock options, the issuance of stock associated with outstanding restricted stock units, performance share units and the Company’s employee stock purchase plan. Basic and diluted shares outstanding are summarized as follows (in thousands):

	Three Months Ended
	March 31,
	2021		2020
Weighted average number of basic shares outstanding		7,576		7,521
Effect of dilutive securities		—		—
Weighted average number of diluted shares outstanding		7,576		7,521

As a result of the net loss for the three months ended March 31, 2021 and 2020, 95,899 and 187,745 potential common shares have been excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

Accounting estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are used for fair value measurement of investments, allowance for doubtful accounts, deferred income taxes, carrying values for goodwill and property, equipment and software, accrued workers’ compensation liabilities and safety incentive liabilities. Actual results may or may not differ from such estimates.

Note 2 - Fair Value Measurement

The following table summarizes the Company’s investments at March 31, 2021 and December 31, 2020 measured at fair value on a recurring basis (in thousands):

March 31, 2021

December 31, 2020

Gross

Unrealized