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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-01 · 82 added, 56 removed, 119 unchanged (54% of the section changed)

37 unchanged sentences

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 and six months ended June 30, 2024 and 2023 ($ in thousands):

The following table sets forth the percentages of total revenues represented by selected items in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023 ($ in thousands):

Percentage of Total Net Revenues

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Professional employer services

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However, management believes that gross billings and wages are useful in understanding the volume of our business activity and serve as an important performance metric in managing our operations, including the preparation of internal operating forecasts and establishing executive compensation performance goals.

We therefore present for purposes of analysis gross billings and wage information for the three and six months ended June 30, 2024 and 2023.

We therefore present for purposes of analysis gross billings and wage information for the three and nine months ended September 30, 2024 and 2023.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

PEO and staffing wages

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Three Months Ended

September 30,

Year-over-year % Growth

Six Months Ended

Nine Months Ended

September 30,

Year-over-year % Growth

Three Months Ended June 30, 2024 and 2023

Net income for the second quarter of 2024 amounted to $16.7 million compared to net income of $17.0 million for the second quarter of 2023.

Diluted net income per share for the second quarter of 2024 was $0.62 compared to diluted net income per share of $0.62 for the second quarter of 2023.

Revenue for the second quarter of 2024 totaled $279.7 million, an increase of $15.1 million or 5.7% over the second quarter of 2023, which reflects an increase in the Company’s PEO services revenue of $15.6 million or 6.4% and a decrease in staffing services revenue of $0.6 million or 3.0%.

The increase in PEO services revenue was primarily attributable to an increase in average number of WSEs and an increase in average billing per WSE, as well as an increase in PEO benefits revenue.

Gross margin for the second quarter of 2024 totaled $67.9 million or 24.2% of revenue compared to $67.0 million or 25.3% of revenue for the second quarter of 2023.

Three Months Ended September 30, 2024 and 2023

Net income for the third quarter of 2024 amounted to $19.6 million compared to net income of $18.2 million for the third quarter of 2023.

Diluted net income per share for the third quarter of 2024 was $0.74 compared to diluted net income per share of $0.67 for the third quarter of 2023.

Revenue for the third quarter of 2024 totaled $294.3 million, an increase of $21.0 million or 7.7% over the third quarter of 2023, which reflects an increase in the Company’s PEO services revenue of $21.4 million or 8.5% and a decrease in staffing services revenue of $0.4 million or 1.9%.

The increase in PEO services revenue was primarily attributable to a 4.8% increase in average WSEs, a 2.9% increase in the average billing per WSE, as well as an increase in PEO client benefits revenue.

Gross margin for the third quarter of 2024 totaled $74.4 million or 25.3% of revenue compared to $68.3 million or 25.0% of revenue for the third quarter of 2023.

The separate components of gross margin are discussed below.

Direct payroll costs for the second quarter of 2024 totaled $14.7 million or 5.3% of revenue compared to $15.1 million or 5.7% of revenue for the second quarter of 2023.

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 second quarter of 2023.

Payroll taxes and benefits for the second quarter of 2024 totaled $148.8 million or 53.2% of revenue compared to $134.1 million or 50.7% of revenue for the second quarter of 2023.

The increase in payroll taxes and benefits expense as a percentage of revenue was primarily due to higher average payroll tax rates in the second quarter of 2024 and PEO client benefit costs of $7.1 million in the second quarter of 2024 compared to $1.8 million in the second quarter of 2023.

Workers’ compensation expense for the second quarter of 2024 totaled $48.3 million or 17.3% of revenue compared to $48.4 million or 18.3% of revenue for the second quarter of 2023.

The decrease in workers’ compensation expense as a percentage of revenue was primarily due to favorable prior year liability and premium adjustments of $8.9 million in the second quarter of 2024, compared to favorable prior year liability and premium adjustments of $6.3 million in the second quarter of 2023.

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2024 totaled $45.6 million or 16.3% of revenue compared to $43.8 million or 16.6% of revenue for the second quarter of 2023.

The decrease as a percentage of revenue was primarily the result of decreased employee-related costs as a percentage of revenue.

Other income, net for the second quarter of 2024 totaled $3.1 million compared to other income, net of $2.1 million for the second quarter of 2023.

The increase was primarily attributable to an increase in investment income in the second quarter of 2024.

Our effective income tax rate for the second quarter of 2024 was 28.8% compared to 28.1% for the second quarter of 2023.

Direct payroll costs for the third quarter of 2024 totaled $16.2 million or 5.5% of revenue compared to $16.3 million or 6.0% of revenue for the third quarter of 2023.

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 third quarter of 2023.

Payroll taxes and benefits for the third quarter of 2024 totaled $154.1 million or 52.4% of revenue compared to $135.7 million or 49.6% of revenue for the third quarter of 2023.

The increase in payroll taxes and benefits expense as a percentage of revenue was primarily due to higher average payroll tax rates in the third quarter of 2024 and PEO client benefit costs of $9.0 million in the third quarter of 2024 compared to $3.4 million in the third quarter of 2023.

Workers’ compensation expense for the third quarter of 2024 totaled $49.5 million or 16.8% of revenue compared to $53.0 million or 19.4% of revenue for the third quarter of 2023.

The decrease in workers’ compensation expense as a percentage of revenue was primarily due to favorable claims development as compared to the third quarter of 2023, as well as favorable prior year liability and premium adjustments of $4.3 million in the third quarter of 2024, compared to favorable prior year liability and premium adjustments of $2.2 million in the third quarter of 2023.

Selling, general and administrative (“SG&A”) expenses for the third quarter of 2024 totaled $49.1 million or 16.7% of revenue compared to $44.2 million or 16.2% of revenue for the third quarter of 2023.

The increase of $4.9 million in SG&A expense was primarily attributable to increased employee-related costs, including increased variable employee compensation and incentive pay related to stronger financial results compared to the third quarter of 2023.

Other income, net for the third quarter of 2024 totaled $2.3 million compared to other income, net of $2.4 million for the third quarter of 2023.

The decrease was primarily attributable to a decrease in investment income in the third quarter of 2024.

Our effective income tax rate for the third quarter of 2024 was 23.6% compared to 26.2% for the third quarter of 2023.

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.

Six Months Ended June 30, 2024 and 2023

Net income for the first six months of 2024 amounted to $16.6 million compared to net income of $17.8 million for the first six months of 2023.

Diluted net income per share for the first six months of 2024 was $0.62 compared to diluted net income per share of $0.64 for the first six months of 2023.

Revenue for the first six months of 2024 totaled $545.4 million, an increase of $26.1 million or 5.0% over the first six months of 2023, which reflects an increase in the Company's PEO services revenue of $29.5 million or 6.2% and a decrease in staffing services revenue of $3.4 million or 7.9%.

The increase in PEO services revenue was primarily attributable to an increase in the average number of WSEs and an increase in average billing per WSE, as well as an increase in PEO benefits revenue.

Gross margin for the first six months of 2024 totaled $107.5 million or 19.7% of revenue compared to $108.6 million or 20.8% of revenue for the first six months of 2023.

Nine Months Ended September 30, 2024 and 2023

Net income for the first nine months of 2024 amounted to $36.2 million compared to net income of $36.1 million for the first nine months of 2023.

Diluted net income per share for the first nine months of 2024 was $1.35 compared to diluted net income per share of $1.31 for the first nine months of 2023.

Revenue for the first nine months of 2024 totaled $839.7 million, an increase of $47.1 million or 5.9% over the first nine months of 2023, which reflects an increase in the Company’s PEO services revenue of $50.9 million or 7.0% and a decrease in staffing services revenue of $3.8 million or 5.9%.

The increase in PEO services revenue was primarily attributable to a 3.9% increase in average WSEs, a 3.4% increase in the average billing per WSE, as well as an increase in PEO client benefits revenue.

Gross margin for the first nine months of 2024 totaled $181.9 million or 21.6% of revenue compared to $176.9 million or 22.3% of revenue for the first nine months of 2023.

The separate components of gross margin are discussed below.

Direct payroll costs for the first six months of 2024 totaled $29.4 million or 5.4% of revenue compared to $32.0 million or 6.2% of revenue for the first six months of 2023.

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 six months of 2023.

Payroll taxes and benefits for the first six months of 2024 totaled $310.7 million or 57.0% of revenue compared to $278.7 million or 53.7% of revenue for the first six months of 2023.

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 six months of 2024 and PEO client benefit costs of $13.7 million in the first six months of 2024 compared to $3.2 million in the first six months of 2023.

Workers' compensation expense for the first six months of 2024 totaled $97.9 million or 17.9% of revenue compared to $100.0 million or 19.3% of revenue for the first six months of 2023.

The decrease in workers' compensation expense as a percentage of revenue was primarily due to favorable prior year liability and premium adjustments of $11.8 million in the first six months of 2024 compared to favorable prior year liability and premium adjustments of $7.4 million in the first six months of 2023.

SG&A expense for the first six months of 2024 totaled $88.0 million or 16.1% of revenue compared to $85.0 million or 16.4% of revenue for the first six months of 2023.

The decrease as a percentage of revenue was primarily the result of decreased employee-related costs as a percentage of revenue.

Other income, net for the first six months of 2024 totaled $6.3 million compared to other income, net of $4.5 million for the first six months of 2023.

The increase was primarily attributable to an increase in investment income in the first six months of 2024.

Our effective income tax rate for the first six months of 2024 was 24.9% compared to 27.5% for the first six months of 2023.

Direct payroll costs for the first nine months of 2024 totaled $45.6 million or 5.4% of revenue compared to $48.3 million or 6.1% of revenue for the first nine months of 2023.

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 nine months of 2023.

Payroll taxes and benefits for the first nine months of 2024 totaled $464.8 million or 55.4% of revenue compared to $414.4 million or 52.3% of revenue for the first nine months of 2023.

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 nine months of 2024 and PEO client benefit costs of $22.6 million in the first nine months of 2024 compared to $6.6 million in the first nine months of 2023.

Workers’ compensation expense for the first nine months of 2024 totaled $147.4 million or 17.6% of revenue compared to $153.0 million or 19.3% of revenue for the first nine months of 2023.

The decrease in workers’ compensation expense as a percentage of revenue was primarily due to favorable prior year liability and premium adjustments of $16.1 million in the first nine months of 2024 compared to favorable prior year liability and premium adjustments of $9.5 million in the first nine months of 2023, as well as favorable claims development as compared to the first nine months of 2023.

SG&A expense for the first nine months of 2024 totaled $137.1 million or 16.3% of revenue compared to $129.2 million or 16.3% of revenue for the first nine months of 2023.

The increase of $7.9 million in SG&A expense was primarily attributable to increased employee-related costs.

Other income, net for the first nine months of 2024 totaled $8.6 million compared to other income, net of $6.8 million for the first nine months of 2023.

The increase was primarily attributable to an increase in investment income in the first nine months of 2024.

Our effective income tax rate for the first nine months of 2024 was 24.2% compared to 26.8% for the first nine months of 2023.

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.

We historically have 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.

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Liquidity and Capital Resources

The Company’s cash balance of $70.0 million, which includes cash, cash equivalents, and restricted cash, decreased $4.8 million for the six months ended June 30, 2024, compared to a decrease of $52.8 million for the comparable period of 2023.

The decrease in cash at June 30, 2024 as compared to December 31, 2023 was primarily due to increased trade accounts receivable, decreased premium payable, decreased workers’ compensation claims liabilities, repurchases of common stock, and purchases of property, equipment and software, partially offset by proceeds from sales and maturities of restricted and unrestricted cash and investments, increased accrued payroll, payroll taxes and related benefits, and net income.

Net cash used in operating activities for the six months ended June 30, 2024 amounted to $42.4 million, compared to cash used of $23.2 million for the comparable period of 2023.

For the six months ended June 30, 2024, net cash used in operating activities was primarily due to increased trade accounts receivable of $40.2 million, decreased premium payable of $29.8 million, and decreased workers’ compensation claims liabilities of $18.3 million, partially offset by increased accrued payroll, payroll taxes and related benefits of $16.8 million, and net income of $16.6 million.

Net cash provided by investing activities for the six months ended June 30, 2024 totaled $57.0 million, compared to cash used of $6.4 million for the comparable period of 2023.

For the six months ended June 30, 2024, net cash provided by investing activities consisted of proceeds from sales and maturities of investments and restricted investments of $72.4 million, partially offset by purchases of property, equipment and software of $7.7 million and purchases of restricted investments of $7.7 million.

Net cash used in financing activities for the six months ended June 30, 2024 was $19.5 million, compared to cash used of $23.2 million for the comparable period of 2023.

For the six months ended June 30, 2024, net cash used in financing activities primarily consisted of repurchases of common stock of $14.1 million and dividend payments of $3.9 million.

The Company’s cash balance of $28.7 million, which includes cash, cash equivalents, and restricted cash, decreased $46.1 million for the nine months ended September 30, 2024, compared to a decrease of $44.9 million for the comparable period of 2023.

The decrease in cash at September 30, 2024 as compared to December 31, 2023 was primarily due to increased trade accounts receivable, purchases of investments and restricted investments, decreased workers’ compensation claims liabilities, repurchases of common stock, decreased premium payable, purchases of property, equipment and software, and dividend payments, partially offset by proceeds from sales and maturities of investments and restricted investments, net income, and increased accrued payroll, payroll taxes and related benefits.

Net cash used in operating activities for the nine months ended September 30, 2024 amounted to $43.3 million, compared to cash provided of $10.0 million for the comparable period of 2023.

For the nine months ended September 30, 2024, net cash used in operating activities was primarily due to increased trade accounts receivable of $82.3 million, decreased workers’ compensation claims liabilities of $30.7 million, and decreased premium payable of $15.7 million, partially offset by net income of $36.2 million, and increased accrued payroll, payroll taxes and related benefits of $35.0 million.

Net cash provided by investing activities for the nine months ended September 30, 2024 totaled $29.0 million, compared to cash used of $17.5 million for the comparable period of 2023.

For the nine months ended September 30, 2024, net cash provided by investing activities consisted of proceeds from sales and maturities of investments and restricted investments of $75.5 million, partially offset by purchases of investments and restricted investments of $35.4 million, and purchases of property, equipment and software of $11.0 million.

Net cash used in financing activities for the nine months ended September 30, 2024 was $31.9 million, compared to cash used of $37.4 million for the comparable period of 2023.

For the nine months ended September 30, 2024, net cash used in financing activities primarily consisted of repurchases of common stock of $22.1 million and dividend payments of $6.0 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 $181.3 million and $210.9 million at June 30, 2024 and December 31, 2023, 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.

The balance in the trust account was $189.3 million and $210.9 million at September 30, 2024 and December 31, 2023, respectively.

The trust account balance is included as a component of the current and long-term restricted cash and investments in the Company’s unaudited condensed consolidated balance sheets.

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.

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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, 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 outcome of tax audits, 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 expected credit losses, 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.

These forward-looking statements include, among others, discussion of economic conditions in our market areas and their effect on revenue levels;

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;

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;

the outcome of tax audits;

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 expected credit losses;

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 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:

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changes in the workers’ compensation regulatory environment in our primary markets;

PEO client benefits costs;

PEO client benefit costs;

security breaches or failures in the Company’s information technology systems;

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We attempt to limit our investment portfolio’s exposure to market risk through low investment turnover and diversification.

Based on the Company’s overall interest exposure at June 30, 2024, a 50 basis point increase in market interest rates would have a $4.6 million downward effect on the fair value of the Company’s investment portfolio.

Based on the Company’s overall interest exposure at September 30, 2024, a 50-basis-point increase in market interest rates would have a $4.6 million downward effect on the fair value of the Company’s investment portfolio.

Outstanding borrowings on the Company’s line of credit bear interest at a variable market rate, which makes the cost of borrowing on the line of credit susceptible to changing interest rates.

At June 30, 2024, the Company had no outstanding borrowings on its line of credit.

At September 30, 2024, the Company had no outstanding borrowings on its line of credit.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis