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General
Company Background.Barrett Business Services, Inc. ("BBSI," the "Company," "our" or "we"), is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively. We believe this platform, delivered through a decentralized organizational structure, differentiates BBSI from our competitors. BBSI was incorporated inMaryland in 1965.
Business strategy. Our strategy is to align local operational teams with the mission of small and medium business owners, thereby creating value for their business. To do this, BBSI:
• partners with business owners to leverage their investment in human resources
capital through a highly focused and results-oriented approach;
• brings predictability to every client organization thanks to a three-tier system
management platform; and
• allows business owners to focus on their core business by reducing
organizational complexity and maximization of productivity.
Business Organization . We operate a decentralized delivery model using operationally-focused business teams, typically located within 50 miles of our client companies. These teams are led by senior level business generalists and include senior level professionals with expertise in human resources, organizational development, risk mitigation and workplace safety and various types of administration, including payroll. These teams are responsible for growth of their operations, and for providing strategic leadership, guidance and expert consultation to our client companies. The decentralized structure fosters autonomous decision-making in which business teams deliver plans that closely align with the objectives of each business owner client. This structure also provides a means of incubating talent to support increased growth and capacity. We support clients with employees located in 43 states and theDistrict of Columbia through a network of 53 branch locations inCalifornia ,Oregon ,Arizona ,Colorado ,Pennsylvania ,Washington ,Idaho ,Maryland ,Nevada ,Utah ,Delaware ,North Carolina ,New Mexico ,Tennessee , andVirginia . We also have several smaller recruiting locations in our general market areas, which are under the direction of a branch office. Services Overview. BBSI's core purpose is to advocate for business owners, particularly in the small and mid-sized business segment. Our evolution from an entrepreneurially run company to a professionally managed organization has helped to form our view that all businesses experience inflection points at key stages of growth. The insights gained through our own growth, along with the trends we see in working with more than 7,500 companies each day, define our approach to guiding business owners through the challenges associated with being an employer. BBSI's business teams align with each business owner client through a structured three-tiered progression. In doing so, business teams focus on the objectives of each business owner and deliver planning, guidance and resources in support of those objectives.
Level 1: Tactical alignment
The first stage focuses on the mutual setting of expectations and is essential
to a successful client relationship. It begins with a process of assessment and
discovery in which the business owner's business objectives, attitudes, and
culture are aligned with BBSI's processes, controls and culture. This stage
includes an implementation process, which addresses the administrative
components of employment.
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Level 2: Dynamic relationship
The second stage of the relationship emphasizes organizational development as a means of achieving each client’s business goals. The emphasis is on improving processes, developing best practices, training supervisors and developing leadership.
Level 3: Strategic advice
With an emphasis on advocacy on behalf of the business owner, the third stage of the relationship is more strategic and forward-looking with a goal of cultivating an environment in which all efforts are directed by the mission and long-term objectives of the business owner. In addition to serving as a resource and guide, BBSI has the ability to provide workers' compensation coverage as a means of meeting statutory requirements and protecting our clients from employment-related injury claims. Through our third-party administrators, we provide claims management services for our clients. We work to manage and reduce job injury claims, identify fraudulent claims and structure optimal work programs, including modified duty.
Results of operations
The spread of COVID-19 and resulting restrictions and labor shortages acrossthe United States are having, and will continue to have, a negative impact on the operating results of the Company. As our clients respond to the effects of efforts to address the consequences of the pandemic, including the measures taken at various levels of government to contain the virus's spread, we expect that our ability to add new customers, as well as to grow revenues from existing customers, will be adversely affected due to economic slowdown, business closures, labor shortages and reductions in hours worked. The following table sets forth the percentages of total revenues represented by selected items in the Company's condensed consolidated statements of operations for the three and nine months endedSeptember 30, 2021 and 2020 ($ in thousands):
Percentage of total net income
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenues:
Professional employer service fees $ 217,972 88.3 % $ 199,082 87.5 % $ 620,287 88.8 % $ 573,162 88.5 %
Staffing services 28,978 11.7 28,431 12.5 78,311 11.2 74,486 11.5
Total revenues 246,950 100.0 227,513 100.0 698,598 100.0 647,648 100.0
Cost of revenues:
Direct payroll costs 21,870 8.9
21,452 9.4 58 818 8.4 56 325 8.7 Social charges and benefits
115,012 46.6 100,142 44.0 349,514 50.0 313,275 48.4 Workers' compensation 49,833 20.2 46,685 20.5 141,693 20.3 146,120 22.6 Total cost of revenues 186,715 75.7 168,279 73.9 550,025 78.7 515,720 79.6 Gross margin 60,235 24.3
59,234 26.1 148,573 21.3 131,928 20.4 Sales, general and administrative
expenses 41,170 16.7
35,587 15.6 113,939 16.3 100,957 15.6 Depreciation
1,342 0.5 1,341 0.6 3,967 0.6 3,512 0.5 Income from operations 17,723 7.1 22,306 9.9 30,667 4.4 27,459 4.2 Other income, net 1,779 0.7 1,294 0.6 5,122 0.7 5,693 0.9 Income before income taxes 19,502 7.9 23,600 10.4 35,789 5.1 33,152 5.1 Provision for income taxes 4,573 1.9 5,089 2.2 8,324 1.2 6,538 1.0 Net income$ 14,929 6.0 %$ 18,511 8.1 %$ 27,465 3.9 %$ 26,614 4.1 % 22
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We report professional employer ("PEO") services revenues net of direct payroll
costs because we are not the primary obligor for wage payments to our clients'
employees. However, management believes that gross billings and wages are useful
in understanding the volume of our business activity and serve as an important
performance metric in managing our operations, including the preparation of
internal operating forecasts and establishing executive compensation performance
goals. We therefore present for purposes of analysis gross billings and wage
information for the three and nine months ended September 30, 2021 and 2020.
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Gross billings $ 1,689,313 $ 1,511,908 $ 4,762,193 $ 4,321,018
PEO and staffing wages $ 1,462,982 $ 1,300,352 $ 4,119,235 $ 3,710,788
Because safety incentives represent consideration payable to PEO customers,
safety incentive costs are netted against PEO revenue in our consolidated
statements of operations. We therefore present below for purposes of analysis
non-GAAP gross workers' compensation expense, which represents workers'
compensation costs including safety incentive costs. We believe this non-GAAP
measure is useful in evaluating the total costs of our workers' compensation
program. In July 2020 , the Company began limiting its safety incentive offering
in certain markets, resulting in a reduction to safety incentive costs.
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Workers' compensation $ 49,833 $ 46,685 $ 141,693 $ 146,120
Safety incentive costs 687 5,369
2,163 19,150 Gross indemnities not in accordance with GAAP
In monitoring and evaluating the performance of our operations, management also
reviews the following ratios, which represent selected amounts as a percentage
of gross billings. Management believes these ratios are useful in understanding
the efficiency and profitability of our service offerings.
(Unaudited) (Unaudited)
Percentage of Gross Billings Percentage of Gross Billings
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
PEO and staffing wages 86.6% 86.0% 86.5% 85.9%
Payroll taxes and benefits 6.8% 6.6% 7.3% 7.3%
Non-GAAP gross workers'
compensation 3.0% 3.4% 3.0% 3.8%
Gross margin 3.6% 3.9% 3.1% 3.1%
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The presentation of revenue on a net basis and the relative contributions of
staffing and PEO services revenue can create volatility in our gross margin as a
percentage of revenue. A relative increase in PEO services revenue will result
in a higher gross margin as a percentage of revenue. Improvement in gross margin
percentage occurs because incremental client services revenue dollars are
reported as revenue net of all related direct payroll and safety incentive
costs.
We refer to employees of our PEO clients as worksite employees ("WSEs").
Management reviews average and ending WSE growth to monitor and evaluate the
performance of our operations. Average WSEs are calculated by dividing the
number of unique individuals paid in each month by the number of months in the
period. Ending WSEs represents the number of unique individuals paid in the last
month of the period.
(Unaudited)
Three Months Ended
September 30,
2021 % Change 2020 % Change
Average WSEs 116,258 8.0% 107,600 -8.1%
Ending WSEs 115,949 7.7% 107,612 -7.6%
(Unaudited)
Nine Months Ended
September 30,
2021 % Change 2020 % Change
Average WSEs 111,640 3.6% 107,809 -5.2%
Ending WSEs 115,949 7.7% 107,612 -7.6%
Three months ended
Net income for the third quarter of 2021 amounted to$14.9 million compared to net income of$18.5 million for the third quarter of 2020. Diluted income per share for the third quarter of 2021 was$1.96 compared to diluted income per share of$2.40 for the third quarter of 2020. Revenue for the third quarter of 2021 totaled$247.0 million , an increase of$19.4 million or 8.5% over the third quarter of 2020, which reflects an increase in the Company's PEO service fee revenue of$18.9 million or 9.5% and an increase in staffing services revenue of$0.5 million or 1.9%. Our growth in PEO service revenues was primarily attributable to an increase in average billing per WSE as well as an increase in the average number of WSEs. The increase in staffing services revenue was due primarily to the reopening of business after the impacts of COVID-19 during the prior year period. Gross margin for the third quarter of 2021 totaled$60.2 million or 24.3% of revenue compared to$59.2 million or 26.1% of revenue for the third quarter of 2020. The decrease in gross margin as a percentage of revenues is a result of the factors discussed within the separate components of gross margin below. Direct payroll costs for the third quarter of 2021 totaled$21.9 million or 8.9% of revenue compared to$21.5 million or 9.4% of revenue for the third quarter of 2020. The decrease in direct payroll costs percentage was primarily due to the increase in PEO services and decrease in staffing services within the mix of our customer base compared to the third quarter of 2020. Payroll taxes and benefits for the third quarter of 2021 totaled$115.0 million or 46.6% of revenue compared to$100.1 million or 44.0% of revenue for the third quarter of 2020. The increase in payroll taxes and benefits as a percentage of revenues is due primarily to an increase in newly hired WSEs, which increased the amount of payroll subject to payroll taxes in the third quarter of 2021 as compared to the third quarter of 2020. Workers' compensation expense for the third quarter of 2021 totaled$49.8 million or 20.2% of revenue compared to$46.7 million or 20.5% for the third quarter of 2020. The decrease in workers' compensation expense as a percentage of revenue is primarily related to favorable claims development as compared to the third quarter of 2020. 24
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Selling, general and administrative ("SG&A") expenses for the third quarter of
2021 totaled $41.2 million or 16.7% of revenue compared to $35.6 million or
15.6% of revenue for the third quarter of 2020. The increase of $5.6 million in
SG&A expense was primarily attributable to lower employee related expenses in
the prior year due to reductions implemented in response to the COVID-19
pandemic that have since been reversed as well as increased variable employee
compensation and incentive pay in the current year related to stronger than
expected financial results.
Other income, net for the third quarter of 2021 was $1.8 million , compared to
other income, net of $1.3 million for the third quarter of 2020. The increase
was primarily attributable to an increase in investment income in the third
quarter of 2021.
Our effective income tax rate for the third quarter of 2021 was 23.4%, compared
to 21.6% for the third quarter of 2020. Our income tax rate typically differs
from the federal statutory tax rate of 21% primarily due to state taxes and
federal and state tax credits.
Nine months ended
Net income for the first nine months of 2021 amounted to$27.5 million compared to net income of$26.6 million for the first nine months of 2020. Diluted income per share for the first nine months of 2021 was$3.59 compared to diluted income per share of$3.46 for the first nine months of 2020. Revenues for the first nine months of 2021 totaled$698.6 million , an increase of$51.0 million or 7.9% over the first nine months of 2020, which reflects an increase in the Company's PEO service fee revenue of$47.1 million or 8.2% and an increase in staffing services revenue of$3.8 million or 5.1%. The increase in PEO service revenues was primarily attributable to an increase in average billing per WSE as well as an increase in the average number of WSEs. The increase in staffing services revenue was due primarily to the reopening of business after the impacts of COVID-19 during the prior year period. Gross margin for the first nine months of 2021 totaled$148.6 million or 21.3% of revenue compared to$131.9 million or 20.4% of revenue for the first nine months of 2020. The increase in gross margin as a percentage of revenues is primarily a result of the factors discussed within the separate components of gross margin below. Direct payroll costs for the first nine months of 2021 totaled$58.8 million or 8.4% of revenue compared to$56.3 million or 8.7% of revenue for the first nine months of 2020. The decrease in direct payroll costs percentage was primarily due to the increase in PEO services and decrease in staffing services within the mix of our customer base in the first nine months of 2021 as compared to the first nine months of 2020. Payroll taxes and benefits for the first nine months of 2021 totaled$349.5 million or 50.0% of revenue compared to$313.3 million or 48.4% of revenue for the first nine months of 2020. The increase in payroll taxes and benefits as a percentage of revenues is primarily due to an increase in newly hired WSEs, which increased the amount of payroll subject to payroll taxes in the first nine months of 2021 as compared to the first nine months of 2020. Workers' compensation expense for the first nine months of 2021 totaled$141.7 million or 20.3% of revenue compared to$146.1 million or 22.6% of revenue for the first nine months of 2020. The decrease in workers' compensation expense as a percentage of revenue was primarily due to favorable claims development as well as a favorable adjustment of$7.5 million related to prior period claims during the first nine months of 2021, compared to a favorable adjustment of$5.2 million in the first nine months of 2020. SG&A expenses for the first nine months of 2021 totaled$113.9 million or 16.3% of revenue compared to$101.0 million or 15.6% of revenue for the first nine months of 2020. The increase of$12.9 million in SG&A expense was primarily attributable to an increase in IT expense related to the launch of the myBBSI portal in 2020 and increased employee related expenses due to prior year reductions during the COVID-19 pandemic that have since been reversed and increased variable employee compensation and incentive pay in the current year related to stronger than expected financial results. Other income, net for the first nine months of 2021 was$5.1 million as compared to other income, net of$5.7 million for the first nine months of 2020. The decrease was primarily attributable to a decrease in investment income in the first nine months of 2021 because of lower interest rates. 25 --------------------------------------------------------------------------------
Our effective tax rate for the first nine months of 2021 was 23.3%, compared to 19.7% for the first nine months of 2020. Our income tax rate generally differs from the federal statutory tax rate by 21%, mainly due to state taxes and federal taxes and state tax credits.
Fluctuations in quarterly operating results
We have historically experienced significant fluctuations in our quarterly operating results, including losses in the first quarter of each year, and expect such fluctuations to continue in the future. Our operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers' compensation, demand for our services, and competition. Payroll taxes, as a component of cost of revenues, generally decline throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes andSocial Security taxes are exceeded on a per employee basis. Our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers' businesses in the agriculture, food processing and forest products-related industries. In addition, revenues in the fourth quarter may be reduced by many customers' practice of operating on holiday-shortened schedules. Workers' compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. In addition, positive or adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company's estimated workers' compensation expense.
Liquidity and capital resources
The Company's cash balance of$22.2 million , which includes cash, cash equivalents, and restricted cash, decreased$211.6 million for the nine months endedSeptember 30, 2021 , compared to a decrease of$85.1 million for the comparable period of 2020. The decrease in cash atSeptember 30, 2021 as compared toDecember 31, 2020 was primarily due to purchases of investments and restricted investments, increased trade accounts receivable and decreased workers' compensation claims liabilities, which was due primarily to the loss portfolio transfer agreement, partially offset by proceeds from sales and maturities of investments and restricted investments and increased accrued payroll, payroll taxes and related benefits. Net cash used by operating activities for the nine months endedSeptember 30, 2021 was$60.3 million , compared to net cash used of$78.9 million for the comparable period of 2020. For the nine months endedSeptember 30, 2021 , cash used by operating activities was primarily due to increased trade accounts receivable of$121.8 million , decreased workers' compensation claims liabilities of$60.2 million and decreased safety incentive liabilities of$13.5 million , partially offset by increased accrued payroll, payroll taxes and related benefits of$100.8 million and net income of$27.5 million . Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$133.3 million , compared to net cash provided of$2.2 million for the comparable period of 2020. For the nine months endedSeptember 30, 2021 , cash used in investing activities consisted primarily of purchases of investments and restricted investments of$310.6 million and purchases of property, equipment and software of$5.0 million , partially offset by proceeds from sales and maturities of investments and restricted investments of$182.3 million . Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$18.0 million , compared to net cash used of$8.4 million for the comparable period of 2020. For the nine months endedSeptember 30, 2021 , cash was primarily used for repurchases of common stock of$10.8 million and dividend payments of$6.8 million , partially offset by proceeds from exercises of stock options of$1.2 million . The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in trust accounts (the "trust accounts"). The balance in the trust accounts was$293.1 million and$290.7 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The trust account balances are included as a component of the current and long-term restricted cash and investments in the Company's condensed consolidated balance sheets. 26
-------------------------------------------------------------------------------- OnJune 30, 2021 , the Company entered into a loss portfolio transfer agreement to remove all remaining outstanding workers' compensation claims obligations for client policies issued under its insured program up toJune 30, 2018 . This transaction reduced the Company's outstanding workers' compensation liabilities by$53.1 million . The payment terms of the LPT required$5.0 million to be paid prior toJune 30, 2021 , with the remaining amount paid inJuly 2021 . The Company maintains an agreement (the "Agreement") with the Bank for a revolving credit line of$33.0 million and a sublimit for standby letters of credit of$8.0 million . AtSeptember 30, 2021 ,$6.2 million of the sublimit for standby letters of credit was used. Advances under the revolving credit line bear interest, as selected by the Company, of (a) the daily floating rate of one-month LIBOR plus 1.75% or (b) the fixed rate of LIBOR plus 1.75%. The Agreement also provides for an unused commitment fee of 0.375% per year on the average daily unused amount of the revolving credit line, as well as a fee of 1.75% of the face amount of each letter of credit reserved under the line of credit. The Company had no outstanding borrowings on its revolving credit line atSeptember 30, 2021 andDecember 31, 2020 . The credit facility is collateralized by the Company's accounts receivable and other rights to receive payment. The Agreement also provided a$63.7 million standby letter of credit (the "Letter of Credit"). InApril 2021 , the Company and the insurance carrier reached an agreement to replace the Letter of Credit with other collateral assets and cancel the Letter of Credit in its entirety. As part of the transaction, the Bank released the$38.7 million of collateral held in support of the Letter of Credit, and the Company transferred the$38.7 million along with an additional$25.0 million to the trust accounts to satisfy the collateral requirements of the insured program.
The Agreement requires compliance with certain financial commitments as follows:
• EBITDA[profitbeforetaxplusinterestfromdebtors(netof[netincomebeforetaxesplusinterestexpense(netof[bénéficenetavantimpôtsplusintérêtsdébiteurs(netde[netincomebeforetaxesplusinterestexpense(netof
capitalized interest expense), amortization and amortization expense
expense] on a rolling four-quarter basis must be not less than$30 million at the end of each fiscal quarter; and • the ratio of restricted and unrestricted cash and investments to workers' compensation and safety incentive liabilities must be at least 1.0:1.0, measured quarterly.
The Agreement imposes certain additional restrictions unless the Bank has given its prior written consent as follows:
• it is forbidden to contract additional debts, other than the purchase
financing for the acquisition of assets, provided that the sum of
all purchase financing does not exceed$1,000,000 at any time; • the Company may not terminate or cancel any of the AICE policies; and
• if an event of default arises, including on a pro forma basis, no
dividends or distributions would be allowed to be paid and redemptions
and repurchases of the Company's stock would be permitted only up to$15 million in any rolling 12-month period. The Agreement also contains customary events of default and specified cross-defaults under the Company's workers' compensation insurance arrangements. If an event of default under the Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Agreement to be immediately due and payable. AtSeptember 30, 2021 , the Company was in compliance with all covenants. The Company maintains a mortgage loan with the Bank with a balance of approximately$3.6 million and$3.7 million atSeptember 30, 2021 andDecember 31, 2020 , respectively, secured by the Company's corporate office building inVancouver, Washington . This loan requires payment of monthly installments of$18,375 , bearing interest at the one-month LIBOR plus 2.0%, with the unpaid principal balance dueJuly 1, 2022 . LIBOR likely will no longer be in general use as a reference rate by financial institutions byDecember 31, 2021 .
Inflation
Inflation has generally not been a significant factor in the operations of the Company during the periods described above. The Company has taken into account the impact of escalating medical and other costs when establishing reserves for future workers’ compensation claims payments.
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Forward-looking information
Statements in this report include forward-looking statements which are not historical in nature and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, discussion of economic conditions in our market areas and their effect on revenue levels, the effects of the COVID-19 pandemic on our business operations, the competitiveness of our service offerings, our ability to attract and retain clients and to achieve revenue growth, the effect of changes in our mix of services on gross margin, the effect of tight labor market conditions, the adequacy of our workers' compensation reserves, the effect of changes in estimates of our future claims liabilities on our workers' compensation reserves, including the effect of changes in our reserving practices and claims management process on our actuarial estimates, expected levels of required surety deposits and letters of credit, our ability to generate sufficient taxable income in the future to utilize our deferred tax assets, the effect of our formation and operation of two wholly owned licensed insurance subsidiaries, the risks of operation and cost of our insured program, the financial viability of our excess insurance carriers, the effectiveness of our management information systems, our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements, litigation costs, the effect of changes in the interest rate environment on the value of our investment securities and long-term debt, the adequacy of our allowance for doubtful accounts, and the potential for and effect of acquisitions. All of our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include our ability to retain current clients and attract new clients, the effects of governmental orders imposing business closures and shelter-in-place and social distancing requirements, difficulties associated with integrating clients into our operations, economic trends in our service areas, the potential for material deviations from expected future workers' compensation claims experience, changes in the workers' compensation regulatory environment in our primary markets, security breaches or failures in the Company's information technology systems, collectability of accounts receivable, changes in effective payroll tax rates and federal and state income tax rates, the carrying values of deferred income tax assets and goodwill (which may be affected by our future operating results), the impact of and potential changes to the Patient Protection and Affordable Care Act, escalating medical costs, and other health care legislative initiatives on our business, the effect of conditions in the global capital markets on our investment portfolio, and the availability of capital, borrowing capacity on our revolving credit facility, or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insured employer for workers' compensation coverage or our insured program. Additional risk factors affecting our business are discussed in Item 1A of Part II of this report and Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onMarch 8, 2021 . We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 28
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