The Company 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.
We report revenues in our financial results in two categories of services:
professional employer services (“PEO”) and staffing.
With our PEO clients, we enter into a co-employment arrangement in which we become the administrative employer while the client maintains physical care, custody and control of their workforce. Our PEO services are billed as a percentage of client payroll; the gross amount invoiced includes direct payroll costs plus an additional percentage amount to cover employer payroll-related taxes, workers' compensation coverage (if provided), other service related costs and a margin. However, actual costs can be higher or lower than anticipated. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Revenues for PEO services exclude direct payroll billings because we are not the primary obligor for those payments. We generate staffing services revenues primarily from short-term staffing, contract staffing, on-site management and direct placement services. For staffing services other than direct placement, invoiced amounts include direct payroll, an amount intended to cover employer payroll-related taxes, workers' compensation coverage, other service related costs and a margin. Staffing customers are invoiced weekly and typically have payment terms of 30 days. Direct placement services are billed at agreed fees at the time of a successful placement. Our business is concentrated in
California, and we expect to continue to derive a majority of our revenues from this market in the future. Revenues generated in our Californiaoperations accounted for 73% of our total revenues in 2022, 73% in 2021 and 75% in 2020. Consequently, any weakness in economic conditions, changes in the regulatory or insurance environment, or natural disasters or other major events in Californiacould have a material adverse effect on our financial results. Our cost of revenues for PEO services includes employer payroll-related taxes and workers' compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers' compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer's portion of Social Securityand Medicare taxes, federal and state unemployment taxes and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers' compensation costs consist primarily of the costs associated with our workers' compensation program, including premiums for the insured program, claims reserves for the self-insured program, claims administration fees, legal fees, medical cost containment ("MCC") expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, and costs associated with operating our two wholly owned insurance companies, AICE and Ecole. Selling, general and administrative expenses represent both branch office and corporate-level operating expenses. Branch operating expenses consist primarily of branch office staff payroll and personnel related costs, advertising, rent, office supplies, professional and legal fees and branch incentive compensation. Corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs, professional and legal fees, travel, occupancy costs, information systems costs, and executive and corporate staff incentive compensation. 23 -------------------------------------------------------------------------------- Depreciation and amortization represent depreciation of property and equipment, leasehold improvements, software and internally developed software costs. Property, equipment, software and internally developed software costs are depreciated using the straight-line method over their estimated useful lives, which range from 3 to 39 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life.
Critical Accounting Policies and Estimates
We have identified the following accounting estimate as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of this and other accounting policies, see "Note 1 - Summary of Operations and Significant Accounting Policies" to the consolidated financial statements in Item 8 of Part II of this report. The preparation of this Annual Report on Form 10-K requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. 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. Actual results may differ from these estimates.
Workers’ Compensation Reserves
We recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by establishing a reserve that represents our estimates of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred. When a claim involving a probable loss is reported, our independent third-party administrator for workers' compensation claims ("TPA") establishes a case reserve for the estimated amount of ultimate loss. The estimate reflects a judgment based on established case reserving practices and the experience and knowledge of the TPA regarding the nature and expected amount of the claim, as well as the estimated expenses of settling the claim, including legal and other fees and expenses of claims administration. The adequacy of such case reserves depends in part on the professional judgment of the TPA to evaluate the economic consequences of each claim properly and comprehensively. Our reserves include an additional component for potential future increases in the cost to finally resolve open injury claims and claims incurred in prior periods but not reported (together, "IBNR") based on actuarial estimates provided by the Company's independent actuary. IBNR reserves, unlike specific case reserves, do not apply to a specific claim but rather apply to the entire population of claims arising from a specific time period. IBNR primarily covers costs relating to:
Future claim payments in excess of case reserves on recorded open claims;
Additional claim payments on closed claims; and
Claims that have occurred but have not yet been reported to us.
The process of estimating 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, modifications in reserve estimation procedures, changes in individuals involved in the reserve estimation process, inflation, trends in the litigation and settlement of pending claims, and legislative changes. Our estimates are based on actuarial analyses and informed judgment, derived from individual experiences 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. 24 -------------------------------------------------------------------------------- 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. 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. We believe that the amounts recorded for our estimated liabilities for workers' compensation claims, which are based on informed judgment, analysis of data, actuarial estimates, and analysis of other trends associated with the Company's historical universe of claims data, are reasonable. Nevertheless, adjustments to such estimates will be required in future periods if the development of claim costs varies materially from our estimates, and such future adjustments may be material to our results of operations.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements and their potential effect on the Company's results of operations and financial condition, see "Note 1 - Summary of Operations and Significant Accounting Policies" to the consolidated financial statements in Item 8 of Part II of this report.
Statements in this Item or in Items 1, 1A, 3 and 9A of 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 beginning in 2023, 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. 25 -------------------------------------------------------------------------------- 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 this report. We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Results of Operations
The following table sets forth the percentages of total revenues represented by selected items in the Company's consolidated statements of operations for the years ended
December 31, 2022, 2021 and 2020, included in Item 8 of Part II of this report. Percentage of Total Net Revenues ($ in thousands) Years Ended December 31, 2022 2021 2020 Revenues: Professional employer services $ 937,36388.9 % $ 843,81588.3 % $ 777,43088.3 % Staffing services 116,963 11.1 111,351 11.7 $ 103,39411.7 Total revenues 1,054,326 100.0 955,166 100.0 880,824 100.0 Cost of revenues: Direct payroll costs 87,944 8.3 83,821 8.8 78,380 8.9 Payroll taxes and benefits 522,392 49.5 469,888 49.2 418,793 47.5 Workers' compensation 209,145 19.8 196,949 20.6 200,744 22.8 Total cost of revenues 819,481 77.7 750,658 78.6 697,917 79.2 Gross margin 234,845 22.3 204,508 21.4 182,907 20.8 Selling, general and administrative expenses 169,642 16.1 155,259 16.3 141,916 16.1 Depreciation and amortization 6,228 0.6 5,326 0.6 4,844 0.5 Income from operations 58,975 5.6 43,923 4.6 36,147 4.1 Other income, net 6,328 0.6 6,738 0.7 6,449 0.7 Income before income taxes 65,303 6.2 50,661 5.3 42,596 4.8 Provision for income taxes 18,035 1.7 12,582 1.3 8,831 1.0 Net income $ 47,2684.5 % $ 38,0794.0 % $ 33,7653.8 % 26
-------------------------------------------------------------------------------- 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 years ended
December 31, 2022, 2021 and 2020. Year Ended December 31, (in thousands) 2022 2021 2020
PEO and staffing wages 6,425,286 5,693,903 5,098,604
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 substantial reduction in safety incentive costs. Year Ended December 31, (in thousands) 2022 2021 2020 Workers' compensation $ 209,145 $ 196,949 $ 200,744Safety incentive costs 1,852 2,985 23,544
Non-GAAP gross workers’ compensation
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 Year Ended December 31, 2022 2021 2020 PEO and staffing wages 86.9 % 86.7 % 86.1 % Payroll taxes and benefits 7.0 % 7.2 % 7.1 % Non-GAAP gross workers' compensation 2.9 % 3.0 % 3.8 % Gross margin 3.2 % 3.1 % 3.1 % 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. Year Ended December 31, 2022 % Change 2021 % Change 2020 Average WSEs 122,001 8.0 % 112,928 4.3 % 108,249 Ending WSEs 122,306 5.3 % 116,154 6.3 % 109,292 27
Net income for 2022 was
$47.3 millioncompared to net income of $38.1 millionfor 2021. Diluted net income per share for 2022 was $6.54compared to diluted income per share of $5.00for 2021. Revenue for 2022 totaled $1,054.3 million, an increase of $99.2 millionor 10.4% over 2021, which reflects an increase in the Company's PEO service revenue of $93.5 millionor 11.1% and an increase in staffing services revenue of $5.6 millionor 5.0%.
The increase in PEO services revenues was primarily attributable to an increase
in average number of WSEs as well as an increase in average billing per WSE.
Gross margin for 2022 totaled
$234.8 millionor 22.3% of revenue compared to $204.5 millionor 21.4% of revenue for 2021. 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 2022 totaled $87.9 millionor 8.3% of revenue compared to $83.8 millionor 8.8% of revenue for 2021. 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 in 2022 as compared to 2021. Payroll taxes and benefits for 2022 totaled $522.4 millionor 49.5% of revenue compared to $469.9 millionor 49.2% of revenue for 2021. The increase in payroll taxes and benefits expense as a percentage of revenue was primarily due to the relative decrease in workers' compensation costs and an increase in federal payroll tax rates, partially offset by lower average state payroll tax rates in 2022. Workers' compensation expense for 2022 totaled $209.1 millionor 19.8% of revenue compared to $196.9 millionor 20.6% of revenue for 2021. The decrease in workers' compensation expense as a percentage of revenue was primarily due to favorable adjustments of $11.3 millionrelated to prior period claims in 2022, compared to favorable adjustments of $9.2 millionin 2021. Selling, general and administrative ("SG&A") expenses for 2022 totaled $169.6 millionor 16.1% of revenue compared to $155.3 millionor 16.3% of revenue for 2021. The increase of $14.3 millionin SG&A expense in 2022 was primarily attributable to increased employee related costs, as well as increased travel and marketing expenses due to more in-person meetings and events.
Other income, net for 2022 totaled
investment income in 2022.
Our effective income tax rate for 2022 was 27.6% compared to 24.8% for 2021. 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. See "Note 8 - Income Taxes" to the consolidated financial statements included in Item 8 of Part II of this report for additional information regarding income taxes. A discussion of our financial condition and results of operations for 2021 compared to 2020 can be found in Part II, Item 7. Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended
December 31, 2021, filed with the SECon March 7, 2022. 28
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 Securitytaxes 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
$107.4 million, which includes cash, cash equivalents, and restricted cash, increased $28.7 millionfor the twelve months ended December 31, 2022, compared to a decrease of $155.2 millionfor the comparable period of 2021. The increase in cash at December 31, 2022as compared to December 31, 2021was primarily due to proceeds from the sales and maturities of investments and restricted investments, net income, increased accrued payroll, payroll taxes and related benefits, and increased other accrued liabilities, partially offset by decreased workers' compensation claims liabilities, repurchase of common stock, and purchase of property, equipment and software. Net cash provided by operating activities in 2022 amounted to $27.8 million, compared to net cash used of $15.5 millionfor the comparable period of 2021. In 2022, net cash provided by operating activities was primarily due to net income of $47.3 million, increased accrued payroll, payroll taxes and related benefits of $24.9 millionand increased other accrued liabilities of $15.7 million, partially offset by decreased workers' compensation claims liabilities of $64.2 millionand increased trade accounts receivable of $8.1 million. Net cash provided by investing activities totaled $61.2 millionin 2022, compared to net cash used of $112.9 millionfor the comparable period of 2021. In 2022, net cash provided by investing activities consisted primarily of proceeds from sales and maturities of investments and restricted investments of $81.5 million, partially offset by purchase of property, equipment and software of $16.0 million, and purchase of restricted investments of $4.3 million. Net cash used in financing activities in 2022 was $60.2 millioncompared to net cash used of $26.9 millionfor the comparable period of 2021. In 2022, net cash used in financing activities primarily consisted of repurchases of common stock of $47.2 million, dividend payments of $8.5 millionand the payoff of the outstanding mortgage loan balance of $3.5 million. 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 $188.2 millionand $273.6 millionat December 31, 2022and December 31, 2021, respectively. The trust account balance is included as a component of the current and long-term restricted cash and investments in the Company's consolidated balance sheets.
See “Note 5 – Revolving Credit Facility and Long-Term Debt” to the consolidated
financial statements included in Item 8 of Part II of this report for
information regarding the Company’s credit agreement with
The Company's contractual obligations as of
December 31, 2022are summarized below: As of December 31, 2022 Payments Due by Period (in thousands) Less than 1 - 3 4 - 5 After Total 1 Year Years Years 5 Years Operating leases (1) $ 24,624 $ 7,870 $ 10,303 $ 5,221 $ 1,230Total contractual obligations $ 24,624 $ 7,870 $ 10,303 $ 5,221 $ 1,230(1) As of December 31, 2022, the Company has additional operating leases that have not yet commenced of $1.7 millionand remaining balances on short-term operating leases of $37,301. In January 2022, the Company paid off all of its long-term debt.
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