What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-08 compared with 2024-11-07 · 50 added, 85 removed, 116 unchanged (54% of the section changed)

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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.

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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 benefit programs to our clients.

The employee benefit programs are offered through fully insured arrangements with third-party carriers and 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, among others.

In 2023, BBSI began offering additional employee benefit programs to our clients.

The benefit programs 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, among others.

These additional employee benefit programs are offered through fully insured arrangements with third-party carriers and are designed to provide strategic value to our clients through access to best-in-class plans and service.

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 nine months ended September 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 months ended March 31, 2025 and 2024 ($ in thousands):

Percentage of Total Net Revenues

Three Months Ended

Nine Months Ended

September 30,

Professional employer services

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Total cost of revenues

Selling, general and administrative

Selling, general and administrative expenses

Depreciation and amortization

Income from operations

Loss from operations

Other income, net

Income before income taxes

Provision for income taxes

Loss before income taxes

Benefit from income taxes

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 and nine months ended September 30, 2024 and 2023.

We therefore present for purposes of analysis gross billings and wage information for the three months ended March 31, 2025 and 2024.

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

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Percentage of Gross Billings

Three Months Ended

Nine Months Ended

September 30,

PEO and staffing wages

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Workers' compensation

The presentation of revenue on a net basis and the relative contributions of PEO and staffing 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 costs.

We refer to employees of our PEO clients as worksite employees (“WSEs”).

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Three Months Ended

September 30,

Year-over-year % Growth

Nine Months Ended

September 30,

Year-over-year % Growth

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 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.

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 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.

Three Months Ended March 31, 2025 and 2024

Net loss for the first quarter of 2025 amounted to $1.0 million compared to net loss of $0.1 million for the first quarter of 2024.

Diluted net loss per share for the first quarter of 2025 was $0.04 compared to diluted net loss per share of $0.01 for the first quarter of 2024.

Revenue for the first quarter of 2025 totaled $292.6 million, an increase of $26.8 million or 10.1% over the first quarter of 2024, which reflects an increase in the Company’s PEO services revenue of $28.7 million or 11.7% and a decrease in staffing services revenue of $2.0 million or 10.0%.

The increase in PEO services revenue was primarily attributable to a 7.6% increase in average number of WSEs as well as a 2.6% increase in average billing per WSE.

Gross margin for the first quarter of 2025 totaled $42.6 million or 14.6% of revenue compared to $39.6 million or 14.9% of revenue for the first quarter of 2024.

The decrease in gross margin as a percentage of revenues is primarily a result of the factors discussed within the separate components of gross margin below.

Direct payroll costs for the first quarter of 2025 totaled $13.3 million or 4.5% of revenue compared to $14.7 million or 5.5% of revenue for the first quarter of 2024.

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 2024.

Payroll taxes and benefits for the first quarter of 2025 totaled $187.0 million or 63.9% of revenue compared to $161.9 million or 60.9% of revenue for the first quarter of 2024.

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 2025 and PEO client benefit costs of $17.0 million in the first quarter of 2025 compared to $6.6 million in the first quarter of 2024, primarily due to expanded adoption of the Company’s additional employee benefit programs.

Workers’ compensation expense for the first quarter of 2025 totaled $49.6 million or 17.0% of revenue compared to $49.6 million or 18.7% of revenue for the first quarter of 2024.

The decrease in workers’ compensation expense as a percentage of revenue was primarily due to lower workers' compensation costs in the first quarter of 2025, including favorable prior year liability and premium adjustments of $3.8 million in the first quarter of 2025, compared to favorable prior year liability and premium adjustments of $3.0 million in the first quarter of 2024.

Selling, general and administrative (“SG&A”) expenses for the first quarter of 2025 totaled $44.8 million or 15.3% of revenue compared to $42.4 million or 16.0% of revenue for the first quarter of 2024.

increase of $2.4 million in SG&A expense was primarily attributable to increased employee-related costs compared to the first quarter of 2024.

Other income, net for the first quarter of 2025 totaled $2.6 million compared to other income, net of $3.3 million for the first quarter of 2024.

The decrease was primarily attributable to a decrease in investment income in the first quarter of 2025.

Our effective income tax rate for the first quarter of 2025 was 33.6% compared to 90.3% for the first quarter of 2024.

The decrease in our effective income tax rate was primarily attributable to reduced discrete tax benefits in the first quarter of 2025, primarily due to the reduction of an unrecognized tax benefit in the first quarter of 2024, with no comparable benefit recorded in the first quarter of 2025.

The impact of discrete items on our effective income tax rate is greater when our pre-tax income or loss is lower.

Additionally, 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

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Liquidity and Capital Resources

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’s cash balance of $43.0 million, which includes cash, cash equivalents, and restricted cash, decreased $39.6 million for the three months ended March 31, 2025, compared to an increase of $13.0 million for the comparable period of 2024.

The decrease in cash at March 31, 2025 as compared to December 31, 2024 was primarily due to the factors discussed below.

Net cash provided by operating activities for the three months ended March 31, 2025 amounted to $5.2 million, compared to cash provided of $9.0 million for the comparable period of 2024.

For the three months ended March 31, 2025, net cash provided by operating activities was primarily due to increased premium payable of $15.9 million, increased accrued payroll and related benefits of $15.7 million, and increased payroll taxes payable of $15.4 million, largely offset by increased trade accounts receivable of $26.8 million, increased prepaid expenses of $10.8 million, and decreased workers’ compensation claims liabilities of $7.2 million.

Net cash used in investing activities for the three months ended March 31, 2025 totaled $32.0 million, compared to cash provided of $14.1 million for the comparable period of 2024.

For the three months ended March 31, 2025, net cash used in investing activities consisted of purchases of investments and restricted investments of $39.2 million and purchases of property, equipment and software of $4.5 million, partially offset by proceeds from sales and maturities of investments and restricted investments of $11.7 million.

Net cash used in financing activities for the three months ended March 31, 2025 was $12.8 million, compared to cash used of $10.1 million for the comparable period of 2024.

For the three months ended March 31, 2025, net cash used in financing activities primarily consisted of repurchases of common stock of $9.2 million, repurchases of common stock on the vesting of restricted stock units and performance awards of $2.3 million, and dividend payments of $2.1 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 $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.

The balance in the trust account was $211.6 million and $197.1 million at March 31, 2025 and December 31, 2024, 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.

See “Note 4 – Revolving Credit Facility and Long-Term Debt” to the 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;

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

the competitiveness of our service offerings;

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expected levels of required surety deposits and letters of credit;

the outcome of tax audits;

the outcome of audits;

the effect of our formation and operation of two wholly owned licensed insurance subsidiaries;

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difficulties associated with integrating clients into our operations;

economic trends in our service areas;

economic trends in our service areas and the potential effects of changing governmental policies, including those related to immigration and tariffs;

natural disasters;

the potential for material deviations from expected future workers’ compensation claims experience;

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

PEO client benefit costs;

PEO client benefit costs, particularly with regard to health insurance benefits;

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

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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;

the effect of changing interest rates and 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, 2023, which was filed with the SEC on March 1, 2024.

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, 2024, which was filed with the SEC on February 28, 2025.

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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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 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.

Based on the Company’s overall interest exposure at March 31, 2025, a 50 basis point increase in market interest rates would have a $4.1 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 September 30, 2024, the Company had no outstanding borrowings on its line of credit.

At March 31, 2025, 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