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 ofIncorporation or organization)
(IRS EmployerIdentification 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.
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
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
Part II - Other Information
Legal Proceedings
28
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
29
Item 6.
Exhibits
Signature
2
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
99,117
104,277
Goodwill
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
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Three Months Ended
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
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
Weighted average number of diluted common shares outstanding
6,985
7,474
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
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
Condensed Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2023
Accumulated
Other
Additional
Comprehensive
Common Stock
Paid-in
(Loss)
Retained
Shares
Amount
Capital
Income
Earnings
Total
Balance, December 31, 2022
6,871
Common stock issued on exercise of options, purchase of ESPP shares and vesting of restricted stock units and performance awards
31
-
339
Common stock repurchased on vesting of restricted stock units and performance awards
(11
(1,005
Share-based compensation expense
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
Unrealized income on investments, net of tax
Balance, March 31, 2023
6,800
Three Months Ended March 31, 2022
Balance, December 31, 2021
7,415
74
29,054
1,079
178,323
208,530
18
411
(4
(185
1,830
(115
(484
(8,090
(8,575
(2,229
Unrealized loss on investments, net of tax
Balance, March 31, 2022
7,314
73
30,626
(13,279
168,292
185,712
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Reconciliations of net income to net cash used in operating activities:
Non-cash lease expense
1,756
1,798
Investment amortization and losses recognized
237
336
Deferred Income taxes
25
Share-based compensation
Changes in certain operating assets and liabilities:
Trade accounts receivable
(24,175
(100,589
Income taxes
112
223
(818
(1,633
(2,880
(153
13,944
85,897
(2,372
50
(14,412
(16,894
(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
(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
Common stock repurchased on vesting of stock awards
Dividends paid
Proceeds from exercise of stock options
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
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”).
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.
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.
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.
10
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.
11
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) 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):
2021
46,074
69,405
Restricted cash, included in restricted cash and investments
15,424
15,955
8,763
9,224
Total cash, cash equivalents and restricted cash shown in the statements of cash flows
12
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 issuance of shares in connection with the exercise of outstanding stock options, vesting of outstanding restricted stock units and performance share units, and the Company’s employee stock purchase plan. Basic and diluted shares outstanding are summarized as follows (in thousands):
Weighted average number of basic shares outstanding
Effect of dilutive securities
119
Weighted average number of diluted shares outstanding
Accounting estimates
The preparation of our condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions. These affect the reported amounts of assets and liabilities, the 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.
13
Note 2 - Fair Value Measurement
The following table summarizes the Company’s investments at March 31, 2023 and December 31, 2022 measured at fair value on a recurring basis (in thousands):
March 31, 2023
December 31, 2022
Gross
Unrealized
Recorded
Cost
Losses
Basis
Current:
Cash equivalents:
Money market funds
26,823
40,296
Total cash equivalents
Investments:
Corporate bonds
38,447
(4,644
33,803
38,489
(5,181
33,308
Asset backed securities
13,696
(581
13,115
13,709
(737
12,972
Mortgage backed securities
15,903
(2,972
12,931
16,135
(3,139
12,996
U.S. treasuries
12,439
(1,310
11,129
U.S. government agency securities
7,366
(240
7,126
7,369
(302
7,067
Emerging markets
2,034
(50
1,984
2,044
(62
1,982
Total current investments
89,885
(9,797
77,746
(9,421
Restricted cash and investments (1):
81,833
(9,834
71,999
81,993
(11,296
70,697
56,950
(6,441
50,509
66,479
(9,222
57,257
44,878
(5,394
39,484
46,138
(6,045
40,093
26,450
(1,625
24,825
26,479
(2,156
24,323
Mutual funds
7,509
6,301
150
646
Total restricted cash and investments
217,770
(23,294
194,476
228,045
(28,719
199,326
Total investments
334,478
(33,091
301,387
346,087
(38,140
307,947
(1) Included in restricted cash and investments within the condensed consolidated balance sheets is restricted cash of $12.8 million and $15.9 million as of March 31, 2023 and December 31, 2022, respectively, which is excluded from the table above. Restricted cash and investments are classified as current and noncurrent on the balance sheet based on the nature of the restriction.
14
The following table summarizes the Company’s investments at March 31, 2023 and December 31, 2022 measured at fair value on a recurring basis by fair value hierarchy level (in thousands):
Level 1
Level 2
Level 3
Other (1)
Restricted cash and investments:
266,905
26,973
260,704
40,942
(1) Investments in money market funds measured at fair value using the net asset value per share practical expedient are not subject to hierarchy level classification disclosure. The Company invests in money market funds that seek to maintain a stable net asset value. These investments include commingled funds that comprise high-quality short-term securities representing liquid debt and monetary instruments where the redemption value is likely to be the fair value. Redemption is permitted daily without written notice.
15
The following table summarizes the contractual maturities of the Company’s available-for-sale securities at March 31, 2023 and December 31, 2022. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. The table also includes money market funds, which are classified as cash and cash equivalents on the Company’s consolidated balance sheets.
(In thousands)
Less than1 Year
Between 1 to5 Years
Between 5 to10 Years
After 10 Years
2,536
53,788
49,300
178
105,802
3,532
16,627
41,479
61,638
3,986
24,436
3,529
31,951
11,821
1,294
39,011
94,851
106,129
1,472
241,463
50,439
52,920
104,005
440
3,405
53,412
40,539
3,943
24,025
3,422
31,390
2,113
10,859
12,981
45,568
79,860
111,867
248,154
The average contractual maturity of mortgage backed securities, which are excluded from the table above, was 23 years as of March 31, 2023 and December 31, 2022.
Note 3 – Workers’ Compensation Claims
The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):
Beginning balance
215,987
279,407
Add: claims expense accrual
Current period
4,362
4,284
Prior periods
(1,114
(2,919
3,248
1,365
Less: claim payments related to
180
225
17,480
18,034
17,660
18,259
Change in claims incurred in excess of retention limits
66
133
Ending balance
201,641
262,646
Incurred but not reported (IBNR)
103,804
138,604
Ratio of IBNR to workers' compensation claims liabilities
51
%
53
Insured program
The Company provides workers’ compensation coverage for client employees primarily through arrangements with fully licensed, third-party insurers (the “insured program”). Under this program, carriers issue policies or afford coverage to the Company’s clients under a program maintained by the Company. Approximately 83% of the Company’s workers’ compensation exposure is covered through the insured program.
16
The Company entered into a new arrangement for its insured program effective July 1, 2021 whereby third-party insurers assumed all risk of loss for claims incurred from July 1, 2021 to June 30, 2022 (the “2021-2022 Policy”). The 2021-2022 Policy allows for premium adjustments depending on overall policy performance. If claims develop favorably, BBSI can participate in the savings up to $20.0 million for the twelve-month policy period. If claims develop adversely, additional premium may be charged up to $7.5 million for the twelve-month policy period.
Effective July 1, 2022, the Company renewed the arrangement for its insured program, which now continues through June 30, 2023 (the “2022-2023 Policy”). Under the renewed arrangement, the Company can participate in savings up to $22.5 million for the twelve-month policy period. For the 2022-2023 Policy, no additional premium may be charged if claims develop adversely. The 2022-2023 Policy includes a renewal commitment through June 30, 2024.
For claims incurred under the insured program prior to July 1, 2021, the Company retains risk of loss up to the first $3.0 million per occurrence on policies issued after June 30, 2020 and $5.0 million per occurrence on policies issued before that date.
On June 29, 2020, the Company entered into a loss portfolio transfer agreement (“LPT 1”) to remove all outstanding workers’ compensation claims obligations for claims incurred under its insured program between February 1, 2014 and December 31, 2017. This transaction reduced the Company’s outstanding workers’ compensation liabilities and trust account balances by $115.7 million.
On June 30, 2021, the Company entered into a loss portfolio transfer agreement (“LPT 2”) to remove all remaining outstanding workers’ compensation claims obligations for client policies issued under its insured program up to June 30, 2018. This transaction reduced the Company’s outstanding workers’ compensation liabilities by $53.1 million.
The following is a summary of the risk retained by the Company under its insured program after considering the effects of the loss portfolio transfers and current insurance arrangements:
Year
Claims risk retained
2014
No
2015
2016
2017
2018 (1)
2019 (1)
Yes
2020
2021 - Through June 30
2021 - July 1 and after
(1) LPT 2 excluded approximately 10% of claims from 2018 and included an approximately offsetting amount of claims from 2019.
The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in a trust account (the “trust account”). The balance in the trust account was $178.8 million and $188.2 million at March 31, 2023 and December 31, 2022, respectively. The trust account balance is included as a component of the current and long-term restricted cash and investments in the Company’s condensed consolidated balance sheets.
17
Self-insured programs
The Company is a self-insured employer with respect to workers' compensation coverage for all employees, including employees of PEO clients that elect to participate in our workers’ compensation program, working in Colorado, Maryland and Oregon. In the state of Washington, state law allows only the Company's staffing services and internal management employees to be covered under the Company's self-insured workers' compensation program. The Company also operates a wholly owned, fully licensed insurance company, Ecole, which provides workers’ compensation coverage to client employees working in Arizona and Utah. Approximately 17% of the Company’s workers’ compensation exposure is covered through self-insurance or Ecole (the “self-insured programs”).
For all claims incurred under the Company’s self-insured programs, the Company retains risk of loss up to the first $3.0 million per occurrence, except in Maryland and Colorado, where the Company’s retention per occurrence is $1.0 million and $2.0 million, respectively. For claims incurred under the Company’s self-insured programs prior to July 1, 2020, the Company retains risk of loss up to the first $5.0 million per occurrence, except in Maryland and Colorado, where the retention per occurrence is $1.0 million and $2.0 million, respectively.
The states of California, Maryland, Oregon, Washington, Colorado and Delaware required the Company to maintain collateral totaling $53.9 million and $54.5 million at March 31, 2023 and December 31, 2022, respectively, to cover potential workers’ compensation claims losses related to the Company’s current and former status as a self-insured employer. At March 31, 2023, the Company provided surety bonds totaling $53.9 million, including a California requirement of $22.3 million.
Claims liabilities
The Company provided a total of $201.6 million and $216.0 million at March 31, 2023 and December 31, 2022, respectively, as an estimated future liability for unsettled workers' compensation claims liabilities. Of this amount, $3.0 million at March 31, 2023 and December 31, 2022, represent case reserves incurred in excess of the Company’s retention. The accrual for costs incurred in excess of retention limits is offset by a receivable from insurance carriers of $3.0 million and $3.0 million at March 31, 2023 and December 31, 2022, respectively, included in other assets in the condensed consolidated balance sheets.
Note 4 - Revolving Credit Facility and Long-Term Debt
The Company maintains an agreement (the “Agreement”) with Wells Fargo Bank, N.A. (the ”Bank”) for a revolving credit line of $50.0 million and a sublimit for standby letters of credit of $8.0 million. Advances under the revolving credit line bear interest, as selected by the Company, of (a) the daily Simple Secured Overnight Financing Rate (“SOFR”) plus 1.75% or (b) one-month Term SOFR plus 1.75%. The Agreement also provides for an unused commitment fee of 0.30% 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 at March 31, 2023 and December 31, 2022. The credit facility is collateralized by the Company’s accounts receivable and other rights to receive payment.
The Agreement requires the satisfaction of certain financial covenants as follows:
The Agreement imposes certain additional restrictions unless the Bank provides its prior written consent as follows:
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. At March 31, 2023, the Company was in compliance with all covenants.
Note 5 – Income Taxes
Under ASC 740, “Income Taxes,” management evaluates the realizability of the deferred tax assets on a quarterly basis under a “more likely than not” standard. As part of this evaluation, management reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. One component of this analysis is to determine whether the Company was in a cumulative loss position for the most recent 12 quarters. The Company was in a cumulative income position for the 12 quarters ended March 31, 2023.
The Company’s realization of a portion of net deferred tax assets is based in part on our estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals.
The Company is subject to income taxes in U.S. federal and multiple state and local tax jurisdictions. The Internal Revenue Service (the "IRS") is examining the Company’s federal tax returns for the years ended December 31, 2017 through 2021. In November 2022, BBSI received notice that the IRS intends to disallow certain wage-based tax credits claimed for the years 2017 through 2020, which could result in estimated total additional taxes of $5.5 million and penalties of $1.7 million. Tax year 2021 remains under audit; disallowance of similar wage-based credits would result in additional estimated tax due of $0.2 million. The Company disagrees with the IRS determination to disallow certain wage-based credits taken by the Company and believes that the Company has the technical merits to defend its position. Based on management’s more-likely-than-not assessment that the position is sustainable, no reserve for the aforementioned IRS notices of disallowance of wage-based tax credits or underpayment penalties has been recorded in the financial statements.
In the major jurisdictions where it operates, the Company is generally no longer subject to income tax examinations by tax authorities for tax years before 2016. As of March 31, 2023 and December 31, 2022, total gross unrecognized tax benefits, excluding interest and penalties, of $0.6 million would affect the Company's effective tax rate if recognized in future periods. The Company does not anticipate any material changes to the reserve in the next 12 months.
A portion of the consolidated income the Company generates is not subject to state income tax. Depending on the percentage of this income as compared to total consolidated income, the Company's state effective tax rate could fluctuate from expectations.
At March 31, 2023, the Company had no state operating loss carryforwards. At March 31, 2023, the Company did not have a federal general business tax credit carryforward or an alternative minimum tax credit carryforward.
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Note 6 – Litigation
On November 21, 2012, David Kaanaana (“Kaanaana”), a former staffing employee, filed a class action wage and hour lawsuit against BBSI in the California Superior Court on behalf of himself and certain other employees who worked at County Sanitation District No. 2 of Los Angeles County (“the District”). The trial court ruled in plaintiffs’ favor regarding certain alleged meal break violations but ruled in favor of BBSI with respect to the application of the California prevailing wage law to the District and other claims. These latter rulings were appealed by the plaintiffs to the California Court of Appeal. On November 30, 2018, the California Court of Appeal for the Second Appellate District returned its decision in Kaanaana v. Barrett Business Services, Inc., overruling the trial court's decision to dismiss the prevailing wage claim, ruling that the work in question at the District constituted “public works” under the applicable law, and also ruling that plaintiffs’ were entitled to additional remedies with regard to the meal break violations under California law. On January 9, 2019, BBSI filed a petition of review to the California Supreme Court.
On February 27, 2019, the California Supreme Court granted the petition to review the Court of Appeal’s decision with respect to the prevailing wage issue. A decision from the California Supreme Court was issued March 29, 2021 affirming the Court of Appeal decision and concluding that the recycling sorting work performed by the staffing employees in question was a “public work” and therefore would be subject to prevailing wage requirements. No damages were awarded in the appeals process. The case was remanded to Superior Court for any such determination with respect to both the prevailing wage issue and any additional remedies for the meal break violations. On December 7, 2021 the parties engaged in a mediation effort which resulted in a settlement agreement on December 22, 2021. The settlement is subject to customary court approval.
On January 17, 2018 and January 18, 2018, respectively, suits were filed in the California Superior Court for the County of Santa Cruz by Sandra Gill, Robert Seth Gill Jr. and Alyssa Gill, individually and on behalf of the estate of Robert S. Gill, Sr., and by Stephen and Torrey Whitmire, against Hildebrand and Sons Trucking, Daniel Harrington, BBSI, the State of California, Department of Transportation, the State of California, California Highway Patrol, and Statewide Traffic Safety and Signs seeking monetary damages arising out of personal injuries and a fatality suffered after Messrs. Gill and Whitmire were struck by a truck at a California highway mudslide removal operation. Hildebrand was a PEO client of BBSI and operated the truck involved in the accident. The actions allege that the injuries and death were the result of, among other things, the negligent actions of a Hildebrand employee, and the unsafe conditions at the mudslide removal operation. In February 2023, BBSI and the plaintiffs reached an agreement to settle, which removed BBSI from the suit.
On April 5, 2011, several individual plaintiffs filed a wage and hour class action in the California Superior Court, County of Fresno, naming as defendants their employer, a Merry Maids franchisee; BBSI, which was providing PEO services to the franchisee; and various parties related to the franchisor. Plaintiffs claimed, among other things, that BBSI and the franchisor were their joint employer with franchisee and therefore jointly responsible for the alleged wage and hour violations. The case was subsequently removed to the United States District Court for the Eastern District of California, and on January 18, 2019, the District Court certified a class of former non-exempt employees who resided in California and worked for the franchisee in certain positions during the period from April 6, 2007 through January 19, 2019. On November 30, 2020, the District Court granted BBSI’s motion for summary judgment to be removed from the case. Thereafter the plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit, and on June 2, 2022, the Court of Appeals reversed the order granting summary judgment to BBSI. The court held that there is a triable issue of fact concerning whether or not BBSI was a joint-employer under applicable California law. BBSI intends to vigorously defend the claim, including continuing to assert its defense on the ground that it was not a joint-employer of plaintiffs. Given the uncertainties surrounding this litigation, management is unable to estimate a potential range of loss.
In addition to the matters above, BBSI is subject to other legal proceedings and claims that arise in the ordinary course of our business. There are significant uncertainties surrounding litigation. For the matters discussed above, as well as other cases, management has recorded estimated liabilities totaling $2.7 million in other accrued liabilities in the condensed consolidated balance sheets.
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Note 7 – Subsequent Events
We have evaluated events and transactions occurring after the balance sheet date through our filing date and noted no events that are subject to recognition or disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 in Maryland in 1965.
Business Strategy Our strategy is to align local operations teams with the mission of small and mid-sized business owners, driving value to their business. To do so, BBSI:
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, recruiting, employee benefits, and various types of administration, including payroll. These teams are responsible for growth and profitability 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. We support clients with a local presence in 68 markets throughout the United States.
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 7,770 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.
Tier 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.
Tier 2: Dynamic Relationship
The second stage of the relationship emphasizes organizational development as a means of achieving each client’s business objectives. There is a focus on process improvement, development of best practices, supervisor training and leadership development.
Tier 3: Strategic Counsel
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 can 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. In 2023, BBSI began offering employee benefits to our clients. The employee benefit programs are designed to provide strategic value to our clients through access to best-in-class plans and service. Benefit plans available to clients include medical, dental and vision plans, flexible spending accounts and health savings accounts, life insurance and voluntary accident coverage, and critical illness and disability coverage.
Results of Operations
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 months ended March 31, 2023 and 2022 ($ in thousands):
Percentage of Total Net Revenues
91.2
88.3
8.8
11.7
100.0
6.6
8.9
56.8
55.1
Workers’ compensation
20.3
19.6
83.7
83.6
16.3
16.4
16.2
0.7
0.6
(0.6
(0.5
0.9
0.3
0.1
0.0
0.2
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We report PEO 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 months ended March 31, 2023 and 2022.
(in thousands)
Gross billings
1,789,218
1,707,175
PEO and staffing wages
1,551,352
1,482,201
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.
Percentage of Gross Billings
86.7%
86.8%
8.1%
8.0%
2.9%
2.8%
2.3%
2.4%
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. Generally, 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.
% Change
Average WSEs
119,313
2.7%
116,197
9.3%
Ending WSEs
121,363
117,924
8.8%
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Three Months Ended March 31, 2023 and 2022
Net income for the first quarter of 2023 amounted to $0.8 million compared to net income of $0.3 million for the first quarter of 2022. Diluted net income per share for the first quarter of 2023 was $0.12 compared to diluted net income per share of $0.04 for the first quarter of 2022.
Revenue for the first quarter of 2023 totaled $254.7 million, an increase of $8.3 million or 3.4% over the first quarter of 2022, which reflects an increase in the Company’s PEO service revenue of $14.9 million or 6.8% and a decrease in staffing services revenue of $6.6 million or 22.8%.
The increase in PEO services revenues was primarily attributable to an increase in the average number of WSEs as well as an increase in average billing per WSE. The decrease in staffing services revenue was due primarily to lower demand for temporary workers caused by inclement weather and continued tight labor market conditions.
Gross margin for the first quarter of 2023 totaled $41.5 million or 16.3% of revenue compared to $40.4 million or 16.4% of revenue for the first quarter of 2022. The separate components of gross margin are discussed below.
Direct payroll costs for the first quarter of 2023 totaled $16.9 million or 6.6% of revenue compared to $21.9 million or 8.9% of revenue for the first quarter of 2022. The decrease in direct payroll costs as a percentage of revenues was primarily due to a decrease in staffing services within the mix of our customer base compared to the first quarter of 2022.
Payroll taxes and benefits for the first quarter of 2023 totaled $144.6 million or 56.8% of revenue compared to $135.9 million or 55.1% of revenue for the first quarter of 2022. The increase in payroll taxes and benefits expense as a percentage of revenue was primarily due to higher average payroll tax rates in the first quarter of 2023 and PEO client benefit costs of $1.4 million related to the availability of employee benefits to our PEO clients beginning in 2023.
Workers’ compensation expense for the first quarter of 2023 totaled $51.7 million or 20.3% of revenue compared to $48.2 million or 19.6% of revenue for the first quarter of 2022. The increase in workers’ compensation expense as a percentage of revenue was primarily due to favorable adjustments of only $1.1 million related to prior period claims in the first quarter of 2023, compared to favorable adjustments of $2.9 million related to prior period claims in the first quarter of 2022.
Selling, general and administrative (“SG&A”) expenses for the first quarter of 2023 totaled $41.2 million or 16.2% of revenue compared to $40.2 million or 16.3% of revenue for the first quarter of 2022. The increase of $1.0 million in SG&A expense was primarily attributable to increased employee-related costs.
Other income, net for the first quarter of 2023 totaled $2.3 million compared to other income of $1.6 million for the first quarter of 2022. The increase was primarily attributable to an increase in investment income in the first quarter of 2023.
Our effective income tax rate for the first quarter of 2023 was 14.2% compared to 8.9% for the first quarter of 2022. Our income tax rate typically differs from the federal statutory tax rate of 21% primarily due to state taxes as well as federal and state tax credits.
Fluctuations in Quarterly Operating Results
We have historically experienced significant fluctuations in our quarterly operating results, including losses or minimal income 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 and Social 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
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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 $68.1 million, which includes cash, cash equivalents, and restricted cash, decreased $39.3 million for the three months ended March 31, 2023, compared to a decrease of $23.8 million for the comparable period of 2022. The decrease in cash at March 31, 2023 as compared to December 31, 2022 was primarily due to increased trade accounts receivable, decreased workers’ compensation claims liabilities and repurchases of common stock, partially offset by increased accrued payroll, payroll taxes and related benefits.
Net cash used in operating activities for the three months ended March 31, 2023 amounted to $26.5 million, compared to cash used of $30.2 million for the comparable period of 2022. For the three months ended March 31, 2023, net cash used in operating activities was primarily due to increased trade accounts receivable of $24.2 million and decreased workers’ compensation claims liabilities of $14.4 million, partially offset by increased accrued payroll, payroll taxes and related benefits of $13.9 million.
Net cash used in investing activities for the three months ended March 31, 2023 totaled $2.0 million, compared to cash provided of $20.5 million for the comparable period of 2022. For the three months ended March 31, 2023, net cash used in investing activities consisted primarily of purchase of property, equipment and software of $3.0 million and purchase of restricted investments of $1.7 million, partially offset by proceeds from sales and maturities of investments and restricted investments of $2.7 million.
Net cash used in financing activities for the three months ended March 31, 2023 was $10.8 million, compared to cash used of $14.1 million for the comparable period of 2022. For the three months ended March 31, 2023, net cash used in financing activities primarily consisted of repurchases of common stock of $8.0 million and dividend payments of $2.1 million.
See “Note 4 – Revolving Credit Facility and Long-Term Debt” to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for additional information regarding the Company’s credit agreement with Wells Fargo Bank, N.A.
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 lingering effects of the COVID-19 pandemic on our business operations, the competitiveness of our service offerings, the availability of certain fully insured medical and other health and welfare benefits to qualifying worksite employees, 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, the adequacy of our allowance for doubtful accounts, and the potential for and effect of acquisitions.
All 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; laws or regulations imposing requirements related to the COVID-19 pandemic; 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 effects of inflation on our operating expenses and those of our clients; 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 I of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 6, 2023. We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s exposure to market risk for changes in interest rates primarily relates to its investment portfolio and its outstanding borrowings on its line of credit. As of March 31, 2023, the Company’s investments consisted principally of approximately $105.8 million in corporate bonds, $61.6 million in U.S. treasuries, $52.4 million in mortgage backed securities, $32.0 million in U.S. government agency securities, $27.0 million in money market funds, $13.1 million in asset backed securities, $7.5 million in mutual funds and $2.0 million in emerging markets securities. Based on the Company’s overall interest exposure at March 31, 2023, a 50 basis point increase in market interest rates would have a $5.8 million downward effect on the fair value of the Company’s investment portfolio. At March 31, 2023, the Company had no outstanding borrowings on its line of credit.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our ICFR is a process designed by, or under the supervision of, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our condensed consolidated financial statements for external purposes in accordance with GAAP.
We maintain “disclosure controls and procedures” that are designed with the objective of providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on their evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Refer to “Note 6 - Litigation," to the condensed consolidated financial statements included in Part I, Item 1 of this report for information regarding legal proceedings in which we are involved.
Item 1A. Risk Factors
Other than the information below, there have been no material changes in the risk factors that were included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 6, 2023.
If we are determined not to be an “employer” under certain laws and regulations, our clients may stop using our services, and we may be subject to additional liabilities.
We are the administrative employer in our co-employment relationships under the various laws and regulations of the IRS and the U.S. Department of Labor. If we are determined not to be the administrative employer under such laws and regulations and are therefore unable to assume our clients’ obligations for employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes. Some clients or prospective clients may view such potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new relationship with us. Any determination that we are not the administrative employer for purposes of ERISA could also adversely affect our ability to offer health care benefits to our PEO clients by subjecting us to additional state and federal laws and regulations, and could materially adversely affect our business, financial condition, and results of operations.
Our business is subject to risks associated with healthcare reforms.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) subject us to potential penalties unless we offer our employees minimum essential healthcare coverage that is affordable. To comply with the employer mandate provision of the Acts, we offer health care coverage to all temporary and permanent employees eligible for coverage under the Acts other than employees of our PEO clients, which are responsible for providing required health care coverage to their employees. Designating employees as eligible is complex and is subject to challenge by employees and the Internal Revenue Service (“IRS”). While we believe we have properly identified eligible employees, a later determination that we failed to offer the required health coverage to eligible employees could result in penalties that may materially harm our business.
Additionally, we began offering employee health and welfare benefits to our PEO clients beginning in 2023. We cannot be certain that compliant insurance coverage will remain available to us on reasonable terms, and we could face additional risks arising from future changes to or repeal of the Acts or changed interpretations of our obligations under the Acts. If new healthcare legislation or future changes to the Acts were to increase the cost of providing health care benefits, or to limit our ability to offer health care benefits to our PEO clients, our business, operating results, and financial condition could be materially adversely affected.
Failure to comply with applicable data security regulations related to our health care offering could adversely affect our business.
As BBSI began offering health benefits to our PEO clients in 2023, we have access to protected health information (PHI) of our client employees. Compliance with federal regulations such as HIPAA and the HITECH Act is required for handling this PHI. HIPAA imposes limitations on the use and disclosure of PHI, and sets requirements for health data privacy, security, and breach notification. Non-compliance with HIPAA can lead to penalties and fines. Failure to appropriately comply with data security regulations could materially adversely impact our business, reputation, operating results, and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes information related to stock repurchases during the quarter ended March 31, 2023.
Month
Total Number of Shares Repurchased
Average PricePaid Per Share
Total Numberof SharesRepurchasedas Part ofPubliclyAnnounced Plan (1)
ApproximateDollar Value ofShares thatMay Yet BeRepurchasedUnder the Plan (1)
January
—
27,832,833
February
March
90,553
88.67
19,803,564
(1) On February 28, 2022, the Board of Directors authorized the repurchase of up to $75.0 million of the Company’s common stock over a two-year period beginning February 28, 2022. As of March 31, 2023, the Company had repurchased 696,490 shares at an aggregate purchase price of $55.2 million.
Item 6.Exhibits
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32*
Certification pursuant to 18 U.S.C. Section 1350.
101.INS
Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, has been formatted in Inline XBRL.
*Furnished, not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant
Date: May 3, 2023
By:
/s/ Anthony J. Harris
Anthony J. Harris
Executive Vice President and Chief Financial Officer and Treasurer