What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-07 compared with 2025-11-06 · 65 added, 80 removed, 118 unchanged (55% of the section changed)

15 unchanged sentences

The decentralized structure fosters autonomous decision-making in which business teams deliver plans that closely align with the objectives of each business owner client.

Services Overview BBSI’s core purpose is to advocate for business owners, particularly in the small and mid-sized business segment.

Services Overview BBSI’s core purpose is to advocate for business owners, particularly in the small and mid-sized business sector.

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.

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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 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.

BBSI also offers employee benefit programs to our clients.

The benefit programs available to our 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 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, 2025 and 2024 ($ 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, 2026 and 2025 ($ in thousands):

Percentage of Total Net Revenues

Three Months Ended

Nine Months Ended

September 30,

Professional employer services

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Direct payroll costs

Payroll taxes and benefits

Payroll taxes

Benefit costs

Workers’ compensation

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Depreciation and amortization

Income from operations

Loss from operations

Other income, net

Income before income taxes

Provision for income taxes

Loss before income taxes

Provision for (benefit from) income taxes

During the first quarter of 2026, the Company recorded tax-effected charges of $11.6 million related to the disallowance of certain wage-based tax credits claimed in prior years.

This charge was recorded within provision for (benefit from) income taxes on our condensed consolidated statements of operations.

We have excluded this charge from our non-GAAP measures as it relates to prior periods and is not indicative of our current or future operational performance.

See “Note 5 – Income Taxes” to the condensed consolidated financial statements included in Item 1 of Part I of this report for additional information.

The reconciliation of net loss and diluted loss per share to non-GAAP net loss and non-GAAP diluted loss per share for the three months ended March 31, 2026 is shown in the table below (in thousands, except per share amounts):

Three Months Ended

Diluted Loss Per Share

GAAP net loss

Non-recurring tax adjustment

Non-GAAP net loss

Weighted average number of

diluted common shares outstanding

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, 2025 and 2024.

We therefore present for purposes of analysis gross billings and wage information for the three months ended March 31, 2026 and 2025.

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

Payroll taxes and benefits

Payroll taxes

Benefit costs

Workers' compensation

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Three Months Ended

September 30,

Year-over-year

Nine Months Ended

September 30,

Year-over-year

Three Months Ended September 30, 2025 and 2024

Net income for the third quarter of 2025 amounted to $20.6 million compared to net income of $19.6 million for the third quarter of 2024.

Diluted net income per share for the third quarter of 2025 was $0.79 compared to diluted net income per share of $0.74 for the third quarter of 2024.

Revenue for the third quarter of 2025 totaled $318.9 million, an increase of $24.7 million or 8.4% over the third quarter of 2024, which reflects an increase in the Company’s PEO services revenue of $26.9 million or 9.9% and a decrease in staffing services revenue of $2.2 million or 10.3%.

The increase in PEO services revenue was primarily attributable to a 6.1% increase in the average number of WSEs as well as a 2.5% increase in average billing per WSE per day.

Gross margin for the third quarter of 2025 totaled $76.8 million or 24.0% of revenue compared to $74.4 million or 25.3% of revenue for the third 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 third quarter of 2025 totaled $14.6 million or 4.6% of revenue compared to $16.2 million or 5.5% of revenue for the third 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 third quarter of 2024.

Payroll taxes and benefits for the third quarter of 2025 totaled $176.3 million or 55.3% of revenue compared to $154.1 million or 52.4% of revenue for the third 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 third quarter of 2025 as well as expanded adoption of our PEO client benefit programs, resulting in client benefit costs of $19.6 million in the third quarter of 2025 compared to $9.0 million in the third quarter of 2024.

Workers’ compensation expense for the third quarter of 2025 totaled $51.3 million or 16.1% of revenue compared to $49.5 million or 16.8% of revenue for the third quarter of 2024.

The decrease in workers’ compensation expense as a percentage of revenue was primarily due to lower workers' compensation costs in the third quarter of 2025, which included favorable prior year liability and premium adjustments of $3.9 million, compared to favorable prior year liability and premium adjustments of $4.3 million in the third quarter of 2024.

Selling, general and administrative (“SG&A”) expenses for the third quarter of 2025 totaled $49.9 million or 15.6% of revenue compared to $49.1 million or 16.7% of revenue for the third quarter of 2024.

The increase of $0.8 million in SG&A expense was primarily attributable to increased employee-related costs compared to the third quarter of 2024.

Other income, net for the third quarter of 2025 totaled $2.0 million compared to other income, net of $2.3 million for the third quarter of 2024.

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

Our effective income tax rate for the third quarter of 2025 was 22.9% compared to 23.6% for the third quarter of 2024.

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, 2025 and 2024

Net income for the first nine months of 2025 amounted to $38.1 million compared to net income of $36.2 million for the first nine months of 2024.

Diluted net income per share for the first nine months of 2025 was $1.45 compared to diluted net income per share of $1.35 for the first nine months of 2024.

Revenue for the first nine months of 2025 totaled $919.2 million, an increase of $79.5 million or 9.5% over the first nine months of 2024, which reflects an increase in the Company's PEO services revenue of $85.9 million or 11.0% and a decrease in staffing services revenue of $6.5 million or 10.6%.

Year-over-year % Growth

Three Months Ended March 31, 2026 and 2025

Net loss for the first quarter of 2026 amounted to $14.8 million compared to net loss of $1.0 million for the first quarter of 2025.

Diluted net loss per share for the first quarter of 2026 was $0.59 compared to diluted net loss per share of $0.04 for the first quarter of 2025.

Revenue for the first quarter of 2026 totaled $307.0 million, an increase of $14.4 million or 4.9% over the first quarter of 2025, which reflects an increase in the Company’s PEO services revenue of $18.1 million or 6.6% and a decrease in staffing services revenue of $3.6 million or 20.6%.

The increase in PEO services revenue was primarily attributable to a 1.9% increase in the average number of WSEs as well as a 1.7% increase in average billing per WSE per day.

Gross margin for the first nine months of 2025 totaled $192.6 million or 20.9% of revenue compared to $181.9 million or 21.6% of revenue for the first nine months of 2024.

Gross margin for the first quarter of 2026 totaled $43.2 million or 14.1% of revenue compared to $42.6 million or 14.6% of revenue for the first quarter of 2025.

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 nine months of 2025 totaled $41.1 million or 4.5% of revenue compared to $45.6 million or 5.4% of revenue for the first nine months 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 nine months of 2024.

Payroll taxes and benefits for the first nine months of 2025 totaled $536.6 million or 58.4% of revenue compared to $464.8 million or 55.4% of revenue for the first nine months 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 nine months of 2025 as well as expanded adoption of our PEO client benefit programs, resulting in client benefit costs of $54.4 million in the first nine months of 2025 compared to $22.6 million in the first nine months of 2024.

Workers' compensation expense for the first nine months of 2025 totaled $148.9 million or 16.2% of revenue compared to $147.4 million or 17.6% of revenue for the first nine months of 2024.

The decrease in workers' compensation expense as a percentage of revenue was primarily due to lower workers' compensation costs in the first nine months of 2025, which included favorable prior year liability and premium adjustments of $16.5 million in the first nine months of 2025 compared to favorable prior year liability and premium adjustments of $16.1 million in the first nine months of 2024.

SG&A expense for the first nine months of 2025 totaled $142.9 million or 15.5% of revenue compared to $137.1 million or 16.3% of revenue for the first nine months of 2024.

The increase of $5.8 million in SG&A expense was primarily attributable to increased employee-related costs compared to the first nine months of 2025.

Other income, net for the first nine months of 2025 totaled $6.9 million compared to other income, net of $8.6 million for the first nine months of 2024.

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

Our effective income tax rate for the first nine months of 2025 was 24.7% compared to 24.2% for the first nine months of 2024.

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.

Direct payroll costs for the first quarter of 2026 totaled $10.5 million or 3.4% of revenue compared to $13.3 million or 4.5% of revenue for the first quarter of 2025.

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 2025.

Payroll taxes for the first quarter of 2026 totaled $174.1 million or 56.7% of revenue compared to $169.4 million or 57.9% of revenue for the first quarter of 2025.

The decrease in payroll taxes as a percentage of revenue in the first quarter of 2026 was primarily due to a higher mix of revenue attributable to PEO client benefits coverage, which is not subject to payroll taxes.

Benefit costs for the first quarter of 2026 totaled $27.4 million or 8.9% of revenue compared to $17.6 million or 6.0% of revenue for the first quarter of 2025.

The increase in benefit costs as a percentage of revenue was primarily due to expanded adoption of our PEO client benefit programs, as well as an increase in health insurance premium rates.

Workers’ compensation expense for the first quarter of 2026 totaled $51.8 million or 16.9% of revenue compared to $49.6 million or 17.0% of revenue for the first quarter of 2025.

The slight decrease in workers’ compensation expense as a percentage of revenue was primarily attributable to lower workers’ compensation costs in the first quarter of 2026, which included favorable prior year liability and premium adjustments of $1.1 million, compared to favorable prior year liability and premium adjustments of $3.8 million in the first quarter of 2025.

Selling, general and administrative (“SG&A”) expenses for the first quarter of 2026 totaled $47.5 million or 15.5% of revenue compared to $44.8 million or 15.3% of revenue for the first quarter of 2025.

The increase of $2.7 million in SG&A expense was primarily attributable to increased employee-related costs compared to the first quarter of 2025.

Other income, net for the first quarter of 2026 totaled $2.0 million compared to other income, net of $2.6 million for the first quarter of 2025.

The decrease was primarily attributable to a decrease in investment income in the first quarter of 2026.

Provision for income taxes for the first quarter of 2026 was $10.4 million compared to benefit from income taxes of $0.5 million for the first quarter of 2025.

The increase was primarily due to additional tax expense and interest recorded during the quarter related to the disallowance of certain wage-based tax credits claimed in prior years.

See “Note 5 – Income Taxes” to the condensed consolidated financial statements included in Item 1 of Part I of this report for additional information.

Fluctuations in Quarterly Operating Results

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Liquidity and Capital Resources

The Company’s cash balance of $66.0 million, which includes cash, cash equivalents, and restricted cash, decreased $16.5 million for the nine months ended September 30, 2025, compared to a decrease of $46.1 million for the comparable period of 2024.

The decrease in cash at September 30, 2025 as compared to December 31, 2024 was primarily due to the factors discussed below.

Net cash used in operating activities for the nine months ended September 30, 2025 amounted to $10.2 million, compared to cash used of $43.3 million for the comparable period of 2024.

For the nine months ended September 30, 2025, net cash used in operating activities was primarily due to increased trade accounts receivable of $66.1 million, decreased premium payable of $35.6 million, decreased workers’ compensation claims liabilities of $19.2 million, increased prepaid expenses of $7.1 million, and decreased payroll taxes payable of $6.5 million, partially offset by increased accrued payroll and related benefits of $63.0 million, net income of $38.1 million, share-based compensation of $7.8 million, and increased other accrued liabilities of $7.3 million.

Net cash provided by investing activities for the nine months ended September 30, 2025 totaled $27.4 million, compared to cash provided of $29.0 million for the comparable period of 2024.

For the nine months ended September 30, 2025, net cash provided by investing activities consisted of proceeds from sales and maturities of investments and restricted investments of $84.1 million, partially offset by purchases of investments and restricted investments of $43.4 million and purchases of property, equipment and software of $13.3 million.

Net cash used in financing activities for the nine months ended September 30, 2025 was $33.8 million, compared to cash used of $31.9 million for the comparable period of 2024.

For the nine months ended September 30, 2025, net cash used in financing activities primarily consisted of repurchases of common stock of $24.8 million and dividend payments of $6.2 million.

The Company’s cash balance of $84.6 million, which includes cash, cash equivalents, and restricted cash, decreased $41.8 million for the three months ended March 31, 2026, compared to a decrease of $39.6 million for the comparable period of 2025.

The decrease in cash at March 31, 2026 as compared to December 31, 2025 was primarily due to the factors discussed below.

Net cash used in operating activities for the three months ended March 31, 2026 amounted to $22.1 million, compared to cash provided of $5.2 million for the comparable period of 2025.

For the three months ended March 31, 2026, net cash used in operating activities was primarily due to increased trade accounts receivable of $45.0 million, net loss of $14.8 million, increased prepaid expenses of $10.8 million, decreased other accrued liabilities of $9.2 million and decreased workers’ compensation claims liabilities of $5.3 million, partially offset by increased accrued payroll and related benefits of $25.1 million, increased premium payable of $17.0 million, increased income taxes payable of $10.3 million and increased payroll taxes payable of $6.8 million.

Net cash provided by investing activities for the three months ended March 31, 2026 totaled $3.3 million, compared to cash used of $32.0 million for the comparable period of 2025.

For the three months ended March 31, 2026, net cash provided by investing activities consisted of proceeds from sales and maturities of investments and restricted investments of $10.4 million, partially offset by purchases of property, equipment and software of $5.7 million.

Net cash used in financing activities for the three months ended March 31, 2026 was $23.0 million, compared to cash used of $12.8 million for the comparable period of 2025.

For the three months ended March 31, 2026, net cash used in financing activities primarily consisted of repurchases of common stock of $20.3 million and dividend payments of $2.0 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 $159.9 million and $197.1 million at September 30, 2025 and December 31, 2024, respectively.

The balance in the trust account was $189.5 million and $175.3 million at March 31, 2026 and December 31, 2025, 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.

See “Note 4 – Revolving Credit Facility” 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

5 unchanged sentences

the effect of changes in our mix of services on gross margin;

labor market conditions;

labor market conditions, including the impact of AI and automation on workplace displacement;

the adequacy of our workers’ compensation reserves;

8 unchanged sentences

litigation costs;

the effect of changes in the interest rate environment on the value of our investment securities;

the effect of inflationary pressures or changes in the interest rate environment on the value of our investment securities;

the adequacy of our allowance for expected credit losses;

3 unchanged sentences

our ability to retain current clients and attract new clients;

technology disruption, including the displacement of employees through the adoption of AI and automation by our clients;

difficulties associated with integrating clients into our operations;

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

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

risks to our business and the business of our clients arising from current or future tariffs or other trade restrictions, supply chain issues, changes in labor force, or geopolitical instability, including the war in Ukraine, conflicts in the Middle East, and the potential for future conflicts or disruptions in other parts of the world;

natural disasters;

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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 changing interest rates and conditions in the global capital markets on our investment portfolio;

the effect of changing monetary policy, 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.

6 unchanged sentences

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, 2025, a 50 basis point increase in market interest rates would have a $3.6 million downward effect on the fair value of the Company’s investment portfolio.

Based on the Company’s overall interest exposure at March 31, 2026, a 50 basis point increase in market interest rates would have a $3.0 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, 2025, the Company had no outstanding borrowings on its line of credit.

At March 31, 2026, 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