Barrett Business Services, Inc. (NASDAQ:BBSI) Q3 2022 Earnings Conference Call November 2, 2022 5:00 PM ET Company Participants Gary Kramer - President & CEO Anthony Harris - CFO Conference Call Participants Christopher Moore - CJS Jeff Martin - Roth Capital Partners Vincent Colicchio - Barrington Research Operator Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's Financial Results for the Third Quarter Ended September 30, 2022. Joining us today are BBSI' ...

Financial Data and Key Metrics Changes - The company reported a 14% increase in gross billings year-over-year, reaching $1.8 billion for the PEO business, while staffing revenues increased by 21% to $30 million [16][8] - Average worksite employees (WSEs) increased by 9% compared to the prior year, with average billing per WSE rising by 5% [16][8] - The company raised its full-year outlook, now expecting gross billings to increase between 11% and 13%, up from 10% to 12% previously [23] Business Line Data and Key Metrics Changes - The PEO business saw a 14% growth in gross billings, driven by stronger-than-expected growth from net new clients and higher average billing per WSE [16][8] - Staffing operations experienced a 21% increase year-over-year, with improvements in fill ratios despite challenges in the tight labor market [8][16] - The company added approximately 3,200 worksite employees year-over-year from net new clients, indicating strong client retention and growth [7][8] Market Data and Key Metrics Changes - PEO gross billings growth by region showed significant increases: Mountain States grew 34%, East Coast grew 22%, and Southern California grew 11% [17] - The company operates in 13 states and 68 markets, maintaining consistent operations across these regions [9] Company Strategy and Development Direction - The company is focusing on a three-pronged strategy to enhance client relationships and expand its referral partner network [5][6] - A new health benefits offering is being launched, which is expected to diversify the client profile and expand the total addressable market [12][10] - The company is actively looking for acquisition opportunities but remains cautious about deals that do not make sense [48] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's growth trajectory, citing strong performance in worksite employee growth and client retention [14][15] - Despite challenges such as tight labor markets and inflation, the company does not see signs of an economic slowdown affecting its operations [13][14] - The management is optimistic about the future, particularly with the new benefits offering expected to accelerate growth [15][24] Other Important Information - The company renewed its workers' compensation facility with better pricing and terms, reflecting improved underwriting and loss experience [10][19] - The company repurchased 270,000 shares at an average price of $73.88 per share, continuing its $75 million share repurchase program [22] Q&A Session Summary Question: Can you explain the mechanics of the health care benefits offering? - The company plans to start selling the health care benefits outside of California, with a seamless enrollment process leading to a master plan effective January 1, 2023 [27][28] Question: Is the health care offering exclusive to one insurance company? - The company has partnered with one health insurance company for the primary offering and another for ancillary benefits [30] Question: What is the pipeline for new sales prospects and referral partners? - The company is seeing increased lead activity and stronger business coming in compared to pre-pandemic levels [39] Question: What are the growth expectations for worksite employees in the second half of the year? - The company has tempered expectations for the second half, anticipating a more moderate pace of hiring due to the tight labor market [41] Question: What should Q3 revenue look like compared to Q2? - Q3 billings are expected to show strong year-over-year growth similar to Q2, with consistent trends observed [44] Question: Will the company be opportunistic in acquisitions if the market changes? - The company is actively looking for acquisition opportunities but will only pursue deals that make sense [48]

Financial Performance - Total revenues for the three months ended June 30, 2022, were $262,179 thousand, an increase from $233,203 thousand in the same period of 2021, representing a growth of 12.5%[21] - Net income for the three months ended June 30, 2022, was $18,014 thousand, compared to $17,090 thousand for the same period in 2021, reflecting an increase of 5.4%[22] - Basic income per common share for the three months ended June 30, 2022, was $2.52, up from $2.26 in the same period of 2021, indicating a growth of 11.5%[22] - Gross margin for the three months ended June 30, 2022, was $66,885 thousand, compared to $57,473 thousand for the same period in 2021, reflecting an increase of 16.5%[22] - Selling, general and administrative expenses for the three months ended June 30, 2022, were $42,272 thousand, up from $35,662 thousand in the same period of 2021, representing an increase of 18.3%[22] - Net income for June 2022 was $18,302,000, compared to $12,536,000 in June 2021, representing a year-over-year increase of approximately 46%[35] - Total revenues for the first six months of 2022 were $508.6 million, a 12.6% increase from $451.7 million in the first six months of 2021[106] Assets and Liabilities - Total current assets as of June 30, 2022, were $510,534 thousand, an increase from $406,719 thousand as of December 31, 2021, representing a growth of 25.5%[19] - Total liabilities as of June 30, 2022, were $581,776 thousand, compared to $538,422 thousand as of December 31, 2021, indicating an increase of 8.0%[19] - The company’s cash and cash equivalents as of June 30, 2022, were $34,098 thousand, a decrease from $69,405 thousand as of December 31, 2021, reflecting a decline of 50.9%[19] - Total cash, cash equivalents, and restricted cash as of June 30, 2022, amounted to $44.138 million, a decrease from $78.629 million at December 31, 2021[53] - The allowance for doubtful accounts was $539,000 as of June 30, 2022, up from $460,000 at December 31, 2021, reflecting a growing concern over collectability[46] Cash Flow and Investments - Cash flows from operating activities showed a net cash used of $37,416,000 in June 2022, contrasting with a net cash provided of $2,621,000 in June 2021[35] - The company reported a net decrease in cash and cash equivalents of $34,491,000 in June 2022, compared to a significant decrease of $219,674,000 in June 2021[35] - Total investments as of June 30, 2022, were valued at $367.135 million, with unrealized losses of $30.269 million[60] - The company’s cash equivalents included $29.587 million in money market funds as of June 30, 2022[60] - The total amount of asset-backed securities was $18.75 billion as of June 30, 2022, compared to $29.60 billion at the end of 2021, representing a decrease of about 37%[66] Stock and Shareholder Activity - The company repurchased common stock totaling $28,492,000 in June 2022, compared to $6,578,000 in June 2021, indicating an increase in stock buyback activity[35] - The Company repurchased a total of 269,581 shares during the quarter ended June 30, 2022, at an average price of $74.15 per share[123] - As of June 30, 2022, the Company had repurchased 384,449 shares at an aggregate purchase price of $28.5 million under its stock repurchase program[123] - The Board of Directors authorized a repurchase of up to $75.0 million of the Company's common stock over a two-year period beginning February 28, 2022[123] Operational Metrics - Average worksite employees (WSEs) increased by 8.8% to 122,234 in Q2 2022 compared to 112,363 in Q2 2021[101] - Professional employer service fees accounted for 88.6% of total revenues in Q2 2022, while staffing services represented 11.4%[92] - Payroll taxes and benefits represented 48.2% of total revenues in Q2 2022, slightly up from 47.9% in Q2 2021[92] - Workers' compensation costs for the three months ended June 30, 2022, were $46,483 thousand, a 2.1% increase from $45,513 thousand in Q2 2021[97] Tax and Regulatory Matters - The effective income tax rate for Q2 2022 was 26.9%, up from 23.6% in Q2 2021, primarily due to state taxes and federal and state tax credits[105] - The Company is subject to income tax examinations by the IRS for multiple years, with potential additional tax due estimated at approximately $2.3 million for certain years[81] Future Outlook and Risks - The company expects fluctuations in quarterly operating results due to factors such as seasonality, demand for services, and claims experience for workers' compensation[107] - The Company plans to introduce fully insured medical and other health and welfare benefits to qualifying worksite employees starting in 2023, which may introduce additional risks and uncertainties[121] - The Company is aware of the potential for additional legislative and regulatory requirements associated with new service offerings, which could impact profitability and competitiveness[121] - There have been no material changes in the risk factors since the last Annual Report filed on March 7, 2022[120]

Financial Data and Key Metrics Changes - The company reported a gross billings increase of 16% year-over-year, reaching $1.68 billion for the PEO business, while staffing revenues increased by 18% to $28.9 million [13][7] - Average worksite employees (WSEs) rose by 9% compared to the prior year, with average billing per WSE increasing by 6% due to higher wages [13][14] - The company generated positive net income in Q1 for the first time in over 10 years, typically showing a loss in Q1 due to payroll tax timing [16] Business Line Data and Key Metrics Changes - The PEO business saw a 16% increase in gross billings, driven by stronger client growth and hiring [13][14] - The staffing business experienced an 18% year-over-year growth, with improvements in applicant placement and fill ratios despite a tight labor market [7][8] - The company added approximately 3,500 worksite employees year-over-year from net new clients, marking the best quarter in over five years [6][29] Market Data and Key Metrics Changes - PEO gross billings growth varied by region, with the Mountain States growing by 38%, East Coast by 25%, and Southern California by 13% [14] - The company operates in 13 states and 68 markets, maintaining consistent market presence compared to the previous quarter [9] Company Strategy and Development Direction - The company is focused on a three-pronged strategy to enhance sales leads, including deepening relationships with existing partners and utilizing technology for new client acquisition [4][5] - An asset-light model is being employed to enter new markets, allowing for efficient client servicing and sales through digital initiatives [9][39] - The company plans to continue investing in technology and growth initiatives while maintaining a disciplined approach to acquisitions [12][25] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's trajectory, citing strong client retention and growth in prospects [11][50] - Despite macroeconomic challenges such as inflation and labor market tightness, the company does not see immediate signs of a slowdown in its data [10][50] - The company raised its full-year guidance for gross billings growth to 10%-12%, up from 7%-9%, reflecting confidence in continued performance [19] Other Important Information - The company has a new $75 million stock repurchase plan and has already purchased 241,000 shares at an average price of $74.80 [18] - The unrestricted cash investments decreased to $127 million from $166 million at year-end, primarily due to payroll tax payments and stock repurchases [17] Q&A Session Summary Question: Can you talk about the distribution of revenue and earnings in the final three quarters of 2022? - Management expects sequential growth each quarter, with Q4 potentially impacted by one less business day [22][23] Question: Will the company be more cautious on acquisitions given economic risks? - Management indicated that pricing has improved for sellers, and they remain active in the acquisition market while being prudent [24][25] Question: What was the year-over-year same customer WSE growth in the quarter? - The company added approximately 3,400 worksite employees from net new customers and about 6,500 from customer hiring year-over-year [29] Question: Can you comment on the asset-light model and its progress? - Management reported positive outcomes from the asset-light model, with markets performing at or better than expectations [39] Question: Is the average WSE growth guidance of 4% to 6% conservative? - Management acknowledged some conservatism in the guidance, considering the tight labor market and hiring trends [42][44]

Client Base and Employee Support - In 2021, the company supported over 7,600 PEO clients with an average of 112,928 worksite employees (WSEs), compared to 7,500 clients and 108,249 WSEs in 2020, reflecting a growth in client base and employee support [26]. - As of December 31, 2021, the company had a total of 121,660 employees, including 116,154 under PEO client service agreements [42]. - The small and mid-sized business segment remains a key focus for the company, as it is large, underserved, and generally more dependent on external resources [30]. Revenue and Financial Performance - Total revenues for 2021 were $955,166 thousand, an increase from $880,824 thousand in 2020, representing a growth of 8.5% [125]. - Revenues increased by 8.4% in 2021 but decreased by 6.5% in 2020, indicating volatility in revenue growth [64]. - Net income for 2021 was $38,079 thousand, compared to $33,765 thousand in 2020, reflecting an increase of 12.9% [125]. - Professional employer service fees accounted for 88.3% of total revenues in 2021, remaining consistent with 2020 [125]. - Gross billings for 2021 reached $6,569,986 thousand, up from $5,924,539 thousand in 2020, indicating a growth of 10.9% [128]. Operational Model and Technology - The company operates a decentralized delivery model with 50 branch locations across 47 states and the District of Columbia, enhancing local decision-making and client service [20]. - The company’s client-facing technology platform, myBBSI, provides tools for payroll processing, time and attendance management, and human resource information, enhancing operational efficiency for clients [33]. - The company’s operations are affected by the need to constantly improve technology to meet client expectations, with potential risks associated with technological upgrades [59]. Risk Management and Compliance - The company emphasizes risk mitigation and workplace safety, tying the employment of area managers and risk management consultants to their effectiveness in managing client safety compliance [36]. - The company is subject to various federal and state laws and regulations, which impose compliance costs but have not had a material adverse effect on its business to date [45]. - The company faces risks related to compliance with complex and evolving laws and regulations, which could adversely affect profitability and competitiveness [90]. Workers' Compensation and Claims Management - Approximately 82% of the company's workers' compensation exposure is covered through an insured program, which allows for premium adjustments based on overall portfolio performance, with potential savings of up to $20 million [38]. - The company’s self-insured programs cover approximately 18% of its workers' compensation exposure, with specific retention limits based on state regulations [40]. - The company has a comprehensive claims management program aimed at reducing workers' compensation costs through managed-care systems and early settlements [41]. Economic and Market Conditions - California operations accounted for approximately 73% of total revenues in 2021, making the company highly dependent on the economic and regulatory conditions in California [65]. - Economic downturns may lead to reduced revenues as small- and mid-sized clients could cut costs or cease operations, impacting the company's ability to attract new clients [67]. - The company is vulnerable to economic fluctuations, which can affect demand for staffing services and the availability of qualified employees [68]. Shareholder and Investment Activities - The company has repurchased a total of 91,104 shares during the quarter ended December 31, 2021, with an aggregate purchase price of $25.3 million as of that date [107]. - The company has authorized a new repurchase program of up to $75 million of its common stock over a two-year period starting February 28, 2022 [107]. - The investment portfolio is subject to market and credit risks, which could adversely impact the company's financial condition or results of operations [85]. Financial Position and Assets - The company's total current assets decreased slightly to $406.719 million in 2021 from $407.875 million in 2020 [157]. - Total liabilities decreased to $538.422 million in 2021 from $576.715 million in 2020, indicating a reduction of approximately 6.6% [157]. - The company's retained earnings increased to $178.323 million in 2021, up from $165.710 million in 2020, marking a growth of 7.7% [157]. Employee Relations and Community Engagement - The company’s employee relations with management employees are reported to be good, emphasizing the importance of attracting and retaining talent [42]. - The company has implemented a program providing paid volunteer time to encourage management employees' participation in community service projects [42].

Financial Data and Key Metrics Changes - In Q4 2021, gross billings increased by 13% year-over-year to $1.8 billion, while full-year gross billings rose by 11% to $6.6 billion [8][16][17] - Diluted EPS for the year increased by 14% to $5 per share compared to $4.39 in the prior year [16] - Net income for Q4 was $10.6 million, up from $7.2 million in Q4 2020 [17] Business Line Data and Key Metrics Changes - The staffing business saw a 14% increase in revenues compared to the prior year quarter [9][17] - Average worksite employees (WSEs) increased by 7% year-over-year, reaching the highest year-end total in BBSI's history [8][9] - Average billing per WSE increased by 5%, driven primarily by higher wages [17] Market Data and Key Metrics Changes - PEO gross billings growth by region in Q4 compared to the prior year was as follows: Mountain States grew 38%, East Coast grew 19%, Pacific Northwest grew 15%, Northern California grew 13%, and Southern California grew 6% [17][18] - Southern California's slower growth was attributed to lower same customer sales growth, but there were positive trends noted [18] Company Strategy and Development Direction - The company is focused on expanding its asset-light model, investing in technology, and enhancing its digital initiatives to attract larger clients [7][10][50] - Plans to enter approximately 10 new markets in 2022, leveraging trained talent and digital campaigns to support growth [11][50] - The company aims to maintain a strong client retention rate and continue investing in employee compensation and benefits [7][12] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about 2022, citing strong momentum from 2021 and improved client retention [14][27] - The company expects gross billings to increase between 7% and 9% for 2022, with average WSE growth projected at 3% to 4% [26] - Management noted that execution risk is the only potential hindrance to progress, emphasizing confidence in their operational strategies [15] Other Important Information - The company returned $26 million to shareholders in 2021 through dividends and stock repurchases, with a new $75 million stock repurchase program approved [25][24] - BBSI is now completely debt-free after paying off its corporate headquarters mortgage [23] Q&A Session Summary Question: How does investment income for 2022 compare with 2021? - Management indicated that while capital requirements are decreasing, rising short-term interest rates are expected to offset the decrease in restricted investments [30] Question: Can you discuss worksite employee growth drivers? - Management highlighted that the addition of 1,300 net new worksite employees was primarily due to new client additions and strong hiring within existing clients [36][37] Question: What is the outlook for average client size? - Management noted that they are now adding larger clients compared to those lost, indicating a positive shift in client acquisition strategy [41] Question: What are the plans for new market investments? - The company plans to invest in 10 new markets in 2022, leveraging trained talent and digital campaigns to support growth [50] Question: How does the pipeline of leads and prospects look now? - Management reported a 50% increase in prospects compared to the prior year, contributing to strong WSE growth [56]

Financial Data and Key Metrics Changes - The company reported a 12% increase in gross billings year-over-year, reaching $1.66 billion, and a 5% sequential increase from Q2 [17] - Average worksite employees (WSEs) increased by 8% year-over-year, exceeding expectations, with higher average billing per WSE up 3% [17][18] - Workers' compensation liabilities decreased by nearly $19 million due to the transition to a fully insured program [20] Business Line Data and Key Metrics Changes - Staffing revenues increased by 2% year-over-year to $29 million, although growth was constrained by labor market tightness [17][7] - The staffing business faced challenges in filling orders, but improvements in applicant numbers were noted post-government stimulus expiration [7] Market Data and Key Metrics Changes - PEO gross billings growth varied by region: Mountain States grew 35%, East Coast 16%, Pacific Northwest 14%, Northern California 13%, and Southern California 6% [18] - Client retention rates are stronger than pre-pandemic levels, indicating improved client relationships and service value [11] Company Strategy and Development Direction - The company is focusing on expanding its branch footprint, with new branches opened in Nashville and Pittsburgh, while consolidating others for efficiency [9][10] - A new strategy targeting asset-light markets is being implemented, leveraging remote operations and digital initiatives [14] - The company is enhancing its technology platform, myBBSI, to offer additional products and services, aiming to increase client engagement and retention [15][51] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic recovery and its impact on business performance, leading to an increased full-year outlook for gross billings and WSE growth [6][23] - The management team is actively preparing clients for potential vaccine mandates, emphasizing the importance of their support during challenging times [43] Other Important Information - The company remains debt-free, with $116 million in unrestricted cash and investments, and has returned capital to shareholders through dividends and stock repurchases [22] - The company is committed to maintaining competitive pricing while ensuring strong client retention [57] Q&A Session Summary Question: Impact of the Chubb agreement on workers' compensation claims - Management confirmed that the current agreement with Chubb covers claims from 2019-2021, with only self-insured claims remaining on the balance sheet [26][27] Question: Future LPTs and claims aging - Management indicated plans to evaluate future LPTs based on economic sense and pricing [30] Question: Investment income and decline rate - Investment balances are expected to decline gradually as claims are paid, with a rule of thumb of 25% of remaining claims paid annually [32] Question: SG&A run rate and future expectations - Q3's SG&A was higher due to variable compensation linked to exceeding revenue targets, and it is expected to decrease in Q4 [36] Question: Pricing pressures from wage increases - Management noted no significant pushback on pricing, maintaining flat renewal rates despite competitive market conditions [56] Question: Performance of new branches - New branches in Pittsburgh and Nashville are still in early stages, and management is optimistic about their future performance [62]

[Part I - Financial Information](index=3&type=section&id=Part%20I%20-%20Financial%20Information) [Unaudited Interim Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Unaudited%20Interim%20Condensed%20Consolidated%20Financial%20Statements) This section presents the unaudited interim financial statements for Barrett Business Services, Inc. as of September 30, 2021, and for the three and nine-month periods then ended, including balance sheets, statements of operations, comprehensive income, stockholders' equity, cash flows, and accompanying notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2021, total assets increased to **$809.0 million** from **$775.0 million** at year-end 2020, driven by higher trade accounts receivable, while total liabilities rose to **$601.3 million** from **$576.7 million** due to increased accrued payroll and benefits, and total stockholders' equity grew to **$207.6 million** from **$198.2 million** Condensed Consolidated Balance Sheet Highlights (In Thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $12,860 | $68,688 | | Trade accounts receivable, net | $240,293 | $118,506 | | Total current assets | $463,285 | $407,875 | | Total assets | $808,967 | $774,950 | | **Liabilities & Equity** | | | | Accrued payroll, payroll taxes and related benefits | $249,713 | $149,989 | | Workers' compensation claims liabilities (Current & Long-term) | $296,999 | $357,746 | | Total liabilities | $601,334 | $576,715 | | Total stockholders' equity | $207,633 | $198,235 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For Q3 2021, total revenues increased to **$247.0 million** from **$227.5 million** in Q3 2020, but net income decreased to **$14.9 million** from **$18.5 million**, while nine-month revenues grew to **$698.6 million** from **$647.6 million** with net income slightly increasing to **$27.5 million** from **$26.6 million** Q3 Financial Performance (In Thousands, Except Per Share) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Total Revenues | $246,950 | $227,513 | | Gross Margin | $60,235 | $59,234 | | Income from Operations | $17,723 | $22,306 | | Net Income | $14,929 | $18,511 | | Diluted EPS | $1.96 | $2.40 | Nine-Month Financial Performance (In Thousands, Except Per Share) | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Total Revenues | $698,598 | $647,648 | | Gross Margin | $148,573 | $131,928 | | Income from Operations | $30,667 | $27,459 | | Net Income | $27,465 | $26,614 | | Diluted EPS | $3.59 | $3.46 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2021, net cash used in operating activities was **$60.3 million**, net cash used in investing activities was **$133.3 million**, and net cash used in financing activities increased to **$18.0 million**, resulting in a total decrease in cash, cash equivalents, and restricted cash of **$211.6 million** Cash Flow Summary (Nine Months Ended Sep 30, In Thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(60,304) | $(78,861) | | Net cash (used in) provided by investing activities | $(133,308) | $2,178 | | Net cash used in financing activities | $(18,007) | $(8,380) | | **Net decrease in cash, cash equivalents and restricted cash** | **$(211,619)** | **$(85,063)** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes detail key accounting policies and events, including PEO revenue reporting, significant workers' compensation liabilities, Loss Portfolio Transfer agreements, a **$33.0 million** revolving credit facility, ongoing IRS tax examinations, and the Kaanaana class action lawsuit - PEO revenues are reported net of direct payroll costs as the company is not the primary obligor for these payments. Staffing revenues are recognized as services are rendered[39](index=39&type=chunk) - On June 30, 2021, the company entered into a second Loss Portfolio Transfer (LPT 2) agreement, which reduced outstanding workers' compensation liabilities by **$53.1 million** for policies issued up to June 30, 2018[70](index=70&type=chunk) - The company is involved in the Kaanaana class action lawsuit, where a California Supreme Court ruling affirmed that certain work was subject to prevailing wage requirements. Potential liability is not currently estimable and not accrued, though an estimated **$4.0 million** is accrued for this and other legal matters[81](index=81&type=chunk) - The IRS is examining federal tax returns for 2011-2014 and 2017-2019. The company disagrees with a proposed disallowance of certain tax credits for 2011-2014 and has not recorded a reserve[80](index=80&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's performance, highlighting an **8.5%** revenue increase in Q3 2021 driven by PEO services growth, despite a Q3 net income decrease to **$14.9 million** from **$18.5 million** due to higher SG&A expenses, while nine-month revenues grew **7.9%** with a slight net income increase [Results of Operations](index=22&type=section&id=Results%20of%20Operations) Q3 2021 revenue grew **8.5%** to **$247.0 million**, driven by a **9.5%** increase in PEO service fees and an **8.0%** increase in average worksite employees (WSEs), but Q3 net income fell to **$14.9 million** from **$18.5 million** due to a **$5.6 million** rise in SG&A expenses, while nine-month revenue increased **7.9%** to **$698.6 million** and net income rose slightly to **$27.5 million** Worksite Employee (WSE) Growth | Period | Metric | 2021 | % Change | 2020 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | **Q3** | Average WSEs | 116,258 | 8.0% | 107,600 | -8.1% | | **9 Months** | Average WSEs | 111,640 | 3.6% | 107,809 | -5.2% | - The increase in SG&A expenses was primarily due to the reversal of cost reductions implemented in 2020 in response to the COVID-19 pandemic, as well as higher variable employee compensation in 2021[102](index=102&type=chunk) - The company uses non-GAAP measures like gross billings and non-GAAP gross workers' compensation expense to manage operations. Non-GAAP gross workers' compensation as a percentage of gross billings decreased from **3.4%** to **3.0%** for Q3 and from **3.8%** to **3.0%** for the nine-month period, year-over-year[93](index=93&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) The company's total cash, cash equivalents, and restricted cash decreased by **$211.6 million** in the first nine months of 2021, primarily due to **$133.3 million** used in investing activities and **$60.3 million** used in operating activities, with financing activities using **$18.0 million** largely for stock repurchases and dividends - Net cash used in operating activities was **$60.3 million**, primarily due to a **$121.8 million** increase in trade accounts receivable and a **$60.2 million** decrease in workers' compensation claims liabilities[107](index=107&type=chunk) - In April 2021, the company replaced a **$63.7 million** standby letter of credit with other collateral, releasing **$38.7 million** of collateral from the bank and transferring a total of **$63.7 million** to its trust accounts[77](index=77&type=chunk)[109](index=109&type=chunk) - The company maintains a credit agreement with financial covenants requiring EBITDA of at least **$30 million** on a rolling four-quarter basis and a ratio of cash/investments to workers' comp/safety incentive liabilities of at least **1.0:1.0**. The company was in compliance as of September 30, 2021[77](index=77&type=chunk)[109](index=109&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk exposure is to changes in interest rates, affecting its investment portfolio of corporate bonds, mortgage-backed securities, and U.S. treasuries, with a hypothetical **50 basis point** interest rate increase estimated to result in a **$7.0 million** negative effect on the portfolio's fair value - The company's investment portfolio at September 30, 2021, included **$170.6 million** in corporate bonds, **$91.8 million** in mortgage-backed securities, and **$67.9 million** in U.S. treasuries[114](index=114&type=chunk) - A hypothetical **50 basis point** increase in market interest rates would have a **$7.0 million** negative impact on the fair value of the investment portfolio. The effect on outstanding debt would be immaterial[114](index=114&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were **effective** as of September 30, 2021, with no material changes to internal control over financial reporting during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of September 30, 2021[115](index=115&type=chunk) - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[116](index=116&type=chunk) [Part II - Other Information](index=30&type=section&id=Part%20II%20-%20Other%20Information) [Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to **Note 6** of the financial statements for details on legal proceedings, primarily the Kaanaana v. Barrett Business Services, Inc. class action lawsuit concerning prevailing wage laws in California - For information regarding legal proceedings, the report directs readers to **Note 6** of the condensed consolidated financial statements[119](index=119&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company highlights that its business may be negatively affected by disease outbreaks, specifically the ongoing COVID-19 pandemic, posing **significant risk** through impacts on PEO fees, client liquidity, compliance with evolving legislation, increased workers' compensation claims exposure, and **heightened security risks** from remote work - The COVID-19 pandemic poses a **significant risk**, as government restrictions and economic disruptions affecting the company's small- and mid-sized client base could materially harm business operations and revenue[121](index=121&type=chunk) - Evolving laws and regulations related to the pandemic, such as payroll tax credits and changes to workers' compensation standards, create compliance risks and could increase claims exposure[121](index=121&type=chunk) - Increased remote work exposes the company to **heightened security risks**, including cyber-attacks, and the continuation of the pandemic could lead to an economic downturn, impacting receivables and investment values[123](index=123&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2021, the company repurchased **55,547** shares of common stock under a **$50.0 million** plan authorized in August 2019, with approximately **$31.2 million** remaining available for future repurchases as of September 30, 2021 Stock Repurchases for Q3 2021 | Month | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July | 7,687 | $71.54 | | August | — | — | | September | 47,860 | $76.19 | | **Total** | **55,547** | | - The repurchases are part of a **$50.0 million** stock repurchase plan authorized in August 2019. As of September 30, 2021, **$31.2 million** remained available under the plan[125](index=125&type=chunk) [Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q report, including CEO and CFO certifications required by the Sarbanes-Oxley Act and various Inline XBRL documents for financial data tagging - Filed exhibits include CEO and CFO certifications pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350[127](index=127&type=chunk)[128](index=128&type=chunk) - The filing includes Inline XBRL documents for financial data tagging, as required by the SEC[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk)