What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-06 compared with 2026-05-07 · 76 added, 45 removed, 138 unchanged (47% of the section changed)

36 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 months ended March 31, 2026 and 2025 ($ 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 six months ended June 30, 2026 and 2025 ($ in thousands):

Percentage of Total Net Revenues

Three Months Ended

Six Months Ended

Professional employer services

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Depreciation and amortization

Loss from operations

Income from operations

Other income, net

Loss before income taxes

Provision for (benefit from) income taxes

Income before income taxes

Provision for income taxes

Net income (loss)

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.

This charge was recorded within provision for 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

The reconciliation of net loss and diluted loss per share to non-GAAP net income and non-GAAP diluted income per share for the six months ended June 30, 2026 is shown in the table below (in thousands, except per share amounts):

Six Months Ended

Net (Loss) Income

Diluted (Loss) Income Per Share

GAAP net loss

Non-recurring tax adjustment

Non-GAAP net loss

Non-GAAP net income

Weighted average number of

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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 months ended March 31, 2026 and 2025.

We therefore present for purposes of analysis gross billings and wage information for the three and six months ended June 30, 2026 and 2025.

Three Months Ended

Six Months Ended

(in thousands)

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Percentage of Gross Billings

Three Months Ended

Six Months Ended

PEO and staffing wages

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Three Months Ended

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%.

Year-over-year

Six Months Ended

Year-over-year

Three Months Ended June 30, 2026 and 2025

Net income for the second quarter of 2026 amounted to $12.9 million compared to net income of $18.5 million for the second quarter of 2025.

Diluted net income per share for the second quarter of 2026 was $0.52 compared to diluted net income per share of $0.70 for the second quarter of 2025.

Revenue for the second quarter of 2026 totaled $319.3 million, an increase of $11.6 million or 3.8% over the second quarter of 2025, which reflects an increase in the Company’s PEO services revenue of $14.8 million or 5.1% and a decrease in staffing services revenue of $3.2 million or 18.2%.

The increase in PEO services revenue was primarily attributable to a 0.5% increase in the average number of WSEs as well as a 2.2% increase in average billing per WSE per day.

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.

Gross margin for the second quarter of 2026 totaled $64.9 million or 20.3% of revenue compared to $73.3 million or 23.8% of revenue for the second 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 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.

Direct payroll costs for the second quarter of 2026 totaled $10.6 million or 3.3% of revenue compared to $13.2 million or 4.3% of revenue for the second 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 second quarter of 2025.

Payroll taxes for the second quarter of 2026 totaled $158.2 million or 49.5% of revenue compared to $155.0 million or 50.4% of revenue for the second quarter of 2025.

The decrease in payroll taxes as a percentage of revenues in the second 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 second quarter of 2026 totaled $28.9 million or 9.1% of revenue compared to $18.3 million or 5.9% of revenue for the second quarter of 2025.

The increase in benefit costs as a percentage of revenues 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 second quarter of 2026 totaled $56.7 million or 17.8% of revenue compared to $48.0 million or 15.6% of revenue for the second quarter of 2025.

The increase in workers’ compensation expense as a percentage of revenues was primarily attributable to higher workers’ compensation costs in the second quarter of 2026, which included favorable prior year liability and premium adjustments of $2.0 million, compared to favorable prior year liability and premium adjustments of $8.8 million in the second quarter of 2025.

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2026 totaled $47.2 million or 14.8% of revenue compared to $48.2 million or 15.7% of revenue for the second quarter of 2025.

The decrease of $1.0 million in SG&A expense was primarily attributable to decreased employee-related costs compared to the second quarter of 2025.

Other income, net for the second quarter of 2026 totaled $1.9 million compared to other income, net of $2.3 million for the second quarter of 2025.

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

Our effective income tax rate for the second quarter of 2026 was 25.7% compared to 27.1% for the second quarter of 2025.

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, 2026 and 2025

Net loss for the first six months of 2026 amounted to $1.9 million compared to net income of $17.4 million for the first six months of 2025.

Diluted net loss per share for the first six months of 2026 was $0.08 compared to diluted net income per share of $0.66 for the first six months of 2025.

Revenue for the first six months of 2026 totaled $626.3 million, an increase of $26.1 million or 4.3% over the first six months of 2025, which reflects an increase in the Company's PEO services revenue of $32.9 million or 5.8% and a decrease in staffing services revenue of $6.8 million or 19.4%.

The increase in PEO services revenue was primarily attributable to a 1.2% increase in the average number of WSEs as well as a 2.0% increase in average billing per WSE per day.

Gross margin for the first six months of 2026 totaled $108.0 million or 17.2% of revenue compared to $115.9 million or 19.3% of revenue for the first six months 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 six months of 2026 totaled $21.1 million or 3.4% of revenue compared to $26.5 million or 4.4% of revenue for the first six months 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 six months of 2025.

Payroll taxes for the first six months of 2026 totaled $332.3 million or 53.1% of revenue compared to $324.4 million or 54.0% of revenue for the first six months of 2025.

The decrease in payroll taxes as a percentage of revenues for the first six months 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 six months of 2026 totaled $56.4 million or 9.0% of revenue compared to $35.9 million or 6.0% of revenue for the second quarter of 2025.

The increase in benefit costs as a percentage of revenues 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 six months of 2026 totaled $108.5 million or 17.3% of revenue compared to $97.6 million or 16.3% of revenue for the first six months of 2025.

The increase in workers' compensation expense as a percentage of revenues was primarily due to higher workers' compensation costs in the first six months of 2026, which included favorable prior year liability and premium adjustments of $3.1 million in the first six months of 2026 compared to favorable prior year liability and premium adjustments of $12.6 million in the first six months of 2025.

SG&A expense for the first six months of 2026 totaled $94.7 million or 15.1% of revenue compared to $93.0 million or 15.5% of revenue for the first six months of 2025.

The increase of $1.7 million in SG&A expense was primarily attributable to increased employee-related benefit and information technology costs compared to the first six months of 2025.

Other income, net for the first six months of 2026 totaled $4.0 million compared to other income, net of $4.9 million for the first six months of 2025.

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

Provision for income taxes for the first six months of 2026 was $14.8 million compared to provision for income taxes of $6.4 million for the first six months of 2025.

The increase was primarily due to additional tax expense and interest recorded during the first quarter of 2026 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.

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Liquidity and Capital Resources

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’s cash balance of $30.9 million, which includes cash, cash equivalents, and restricted cash, decreased $95.5 million for the six months ended June 30, 2026, compared to a decrease of $45.4 million for the comparable period of 2025.

The decrease in cash at June 30, 2026 as compared to December 31, 2025 was primarily due to the factors discussed below.

Net cash used in operating activities for the six months ended June 30, 2026 amounted to $78.0 million, compared to cash used of $48.6 million for the comparable period of 2025.

For the six months ended June 30, 2026, net cash used in operating activities was primarily due to increased trade accounts receivable of $52.9 million, decreased premium payable of $42.7 million, decreased payroll taxes payable of $14.0 million, decreased other accrued liabilities of $9.5 million and decreased workers’ compensation claims liabilities of $9.1 million, partially offset by increased accrued payroll and related benefits of $34.6 million and increased income taxes payable of $13.5 million.

Net cash provided by investing activities for the six months ended June 30, 2026 totaled $22.7 million, compared to cash provided of $26.1 million for the comparable period of 2025.

For the six months ended June 30, 2026, net cash provided by investing activities consisted of proceeds from sales and maturities of investments and restricted investments of $35.8 million, partially offset by purchases of property, equipment and software of $11.2 million.

Net cash used in financing activities for the six months ended June 30, 2026 was $40.2 million, compared to cash used of $22.9 million for the comparable period of 2025.

For the six months ended June 30, 2026, net cash used in financing activities primarily consisted of repurchases of common stock of $35.5 million and dividend payments of $3.9 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 $189.5 million and $175.3 million at March 31, 2026 and December 31, 2025, respectively.

The balance in the trust account was $135.0 million and $175.3 million at June 30, 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.

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expected levels of required surety deposits and letters of credit;

the outcome of audits;

the outcome of audits and other determinations by the IRS;

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

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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;

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 wars in Ukraine and Iran, other 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 impact of the One Big Beautiful Bill Act and other recently enacted legislation on our business;

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.

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, 2025, which was filed with the SEC on February 26, 2026.

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 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.

Based on the Company’s overall interest exposure at June 30, 2026, a 50 basis point increase in market interest rates would have a $2.7 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 March 31, 2026, the Company had no outstanding borrowings on its line of credit.

At June 30, 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