# Barrett Business Services Inc: Form 10-Q for the period ended Sep 30, 2022

- Company: [Barrett Business Services Inc](/companies/bbsi.md) (CIK 902791)
- Form: 10-Q
- Filed: 2022-11-03
- Accepted by EDGAR: Nov 2, 2022, 18:26 ET
- Period: 2022-09-30
- Accession: 0000950170-22-021382
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/902791/000095017022021382/bbsi-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/902791/000095017022021382/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $273.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $782.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $206.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $608.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $66.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $174.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $43.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $125.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $22.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $44.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $35.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $102.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $6.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $13.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $17.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $35.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $2.45 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $4.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $2.48 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $4.96 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 7,127,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 7,286,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | −$3.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $11.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $6.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $39.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $59.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $460.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $697.0m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $341.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $525.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $171.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 25,254 characters.

### General

Company Background Barrett Business Services, Inc. (“BBSI,” the “Company,” “our” or “we”), is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively. We believe this platform, delivered through a decentralized organizational structure, differentiates BBSI from our competitors. BBSI was incorporated in Maryland in 1965.

Business Strategy Our strategy is to align local operations teams with the mission of small and mid-sized business owners, driving value to their business. To do so, BBSI:

- partners with business owners to leverage their investment in human capital through a high-touch, results-oriented approach;
- brings predictability to each client organization through a three-tiered management platform; and
- enables business owners to focus on their core business by reducing organizational complexity and maximizing productivity.

Business Organization We operate a decentralized delivery model using operationally-focused business teams, typically located within 50 miles of our client companies. These teams are led by senior level business generalists and include senior level professionals with expertise in human resources, organizational development, risk mitigation and workplace safety, and various types of administration, including payroll. These teams are responsible for growth and profitability of their operations, and for providing strategic leadership, guidance and expert consultation to our client companies. The decentralized structure fosters autonomous decision-making in which business teams deliver plans that closely align with the objectives of each business owner client. This structure also provides a means of incubating talent to support increased growth and capacity. We support clients with a local presence in 68 markets in Arizona, California, Colorado, Delaware, Idaho, Maryland, Nevada, North Carolina, Oregon, Pennsylvania, Tennessee, Utah, and Washington.

Services Overview BBSI’s core purpose is to advocate for business owners, particularly in the small and mid-sized business segment. 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. The insights gained through our own growth, along with the trends we see in working with more than 7,600 companies each day, define our approach to guiding business owners through the challenges associated with being an employer. BBSI’s business teams align with each business owner client through a structured three-tiered progression. In doing so, business teams focus on the objectives of each business owner and deliver planning, guidance and resources in support of those objectives.

#### Tier 1: Tactical Alignment

The first stage focuses on the mutual setting of expectations and is essential to a successful client relationship. It begins with a process of assessment and discovery in which the business owner’s business objectives, attitudes, and culture are aligned with BBSI’s processes, controls and culture. This stage includes an implementation process, which addresses the administrative components of employment.

#### Tier 2: Dynamic Relationship

The second stage of the relationship emphasizes organizational development as a means of achieving each client’s business objectives. There is a focus on process improvement, development of best practices, supervisor training and leadership development.

#### Tier 3: Strategic Counsel

With an emphasis on advocacy on behalf of the business owner, the third stage of the relationship is more strategic and forward-looking with a goal of cultivating an environment in which all efforts are directed by the mission and long-term objectives of the business owner.

In addition to serving as a resource and guide, BBSI has the ability to provide workers’ compensation coverage as a means of meeting statutory requirements and protecting our clients from employment-related injury claims. Through our third-party administrators, we provide claims management services for our clients. We work to manage and reduce job injury claims, identify fraudulent claims and structure optimal work programs, including modified duty.

### 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, 2022 and 2021 ($ in thousands):

| Revenues: | Percentage of Total Net Revenues Three Months Ended September 30, 2022 |  | 2021 |  | Nine Months Ended September 30, 2022 |  | 2021 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Professional employer services | $244,567 | 89.3% | $217,972 | 88.3% | $694,174 | 88.7% | $620,287 | 88.8% |
| Staffing services | 29,255 | 10.7 | 28,978 | 11.7 | 88,202 | 11.3 | 78,311 | 11.2 |
| Total revenues | 273,822 | 100.0 | 246,950 | 100.0 | 782,376 | 100.0 | 698,598 | 100.0 |
| Cost of revenues: |  |  |  |  |  |  |  |  |
| Direct payroll costs | 22,112 | 8.1 | 21,870 | 8.9 | 66,491 | 8.5 | 58,818 | 8.4 |
| Payroll taxes and benefits | 128,459 | 46.9 | 115,012 | 46.6 | 390,677 | 49.9 | 349,514 | 50.0 |
| Workers’ compensation | 56,350 | 20.6 | 49,833 | 20.2 | 151,069 | 19.3 | 141,693 | 20.3 |
| Total cost of revenues | 206,921 | 75.6 | 186,715 | 75.7 | 608,237 | 77.7 | 550,025 | 78.7 |
| Gross margin | 66,901 | 24.4 | 60,235 | 24.3 | 174,139 | 22.3 | 148,573 | 21.3 |
| Selling, general and administrative expenses | 43,001 | 15.7 | 41,170 | 16.7 | 125,438 | 16.0 | 113,939 | 16.3 |
| Depreciation and amortization | 1,554 | 0.6 | 1,342 | 0.5 | 4,585 | 0.6 | 3,967 | 0.6 |
| Income from operations | 22,346 | 8.1 | 17,723 | 7.1 | 44,116 | 5.7 | 30,667 | 4.4 |
| Other income, net | 1,568 | 0.6 | 1,779 | 0.7 | 4,758 | 0.6 | 5,122 | 0.7 |
| Income before income taxes | 23,914 | 8.7 | 19,502 | 7.9 | 48,874 | 6.3 | 35,789 | 5.1 |
| Provision for income taxes | 6,476 | 2.4 | 4,573 | 1.9 | 13,134 | 1.7 | 8,324 | 1.2 |
| Net income | $17,438 | 6.3% | $14,929 | 6.0% | $35,740 | 4.6% | $27,465 | 3.9% |

22

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, 2022 and 2021.

*(Unaudited)*

*(Unaudited)*

*(in thousands)*

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Gross billings | $1,908,818 | $1,689,313 | $5,445,217 | $4,762,193 |
| PEO and staffing wages | $1,656,580 | $1,462,982 | $4,727,772 | $4,119,235 |

Because safety incentives represent consideration payable to PEO customers, safety incentive costs are netted against PEO revenue in our consolidated statements of operations. We therefore present below for purposes of analysis non-GAAP gross workers’ compensation expense, which represents workers’ compensation costs including safety incentive costs. We believe this non-GAAP measure is useful in evaluating the total costs of our workers’ compensation program. In July 2020, the Company began limiting its safety incentive offering in certain markets, resulting in a substantial reduction in safety incentive costs.

*(Unaudited)*

*(Unaudited)*

*(in thousands)*

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Workers' compensation | $56,350 | $49,833 | $151,069 | $141,693 |
| Safety incentive costs | 527 | 687 | 1,554 | 2,163 |
| Non-GAAP gross workers' compensation | $56,877 | $50,520 | $152,623 | $143,856 |

In monitoring and evaluating the performance of our operations, management also reviews the following ratios, which represent selected amounts as a percentage of gross billings. Management believes these ratios are useful in understanding the efficiency and profitability of our service offerings.

*(Unaudited)*

*(Unaudited)*

|  | Percentage of Gross Billings Three Months Ended September 30, 2022 | 2021 | Percentage of Gross Billings Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| PEO and staffing wages | 86.8% | 86.6% | 86.8% | 86.5% |
| Payroll taxes and benefits | 6.7% | 6.8% | 7.2% | 7.3% |
| Non-GAAP gross workers' compensation | 3.0% | 3.0% | 2.8% | 3.0% |
| Gross margin | 3.5% | 3.6% | 3.2% | 3.1% |

The presentation of revenue on a net basis and the relative contributions of staffing and PEO services revenue can create volatility in our gross margin as a percentage of revenue. 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 and safety incentive costs.

We refer to employees of our PEO clients as worksite employees (“WSEs”). Management reviews average and ending WSE growth to monitor and evaluate the performance of our operations. Average WSEs are calculated by dividing the number of unique individuals paid in each month by the number of months in the period. Ending WSEs represents the number of unique individuals paid in the last month of the period.

*(Unaudited)*

|  | Three Months Ended September 30, 2022 | % Change | 2021 | % Change |
| --- | ---: | ---: | ---: | ---: |
| Average WSEs | 125,813 | 8.2% | 116,258 | 8.0% |
| Ending WSEs | 127,297 | 9.8% | 115,949 | 7.7% |

23

*(Unaudited)*

|  | Nine Months Ended September 30, 2022 | % Change | 2021 | % Change |
| --- | ---: | ---: | ---: | ---: |
| Average WSEs | 121,415 | 8.8% | 111,640 | 3.6% |
| Ending WSEs | 127,297 | 9.8% | 115,949 | 7.7% |

### Three Months Ended September 30, 2022 and 2021

Net income for the third quarter of 2022 amounted to $17.4 million compared to net income of $14.9 million for the third quarter of 2021. Diluted net income per share for the third quarter of 2022 was $2.45 compared to diluted net income per share of $1.96 for the third quarter of 2021.

Revenue for the third quarter of 2022 totaled $273.8 million, an increase of $26.9 million or 10.9% over the third quarter of 2021, which reflects an increase in the Company’s PEO service revenue of $26.6 million or 12.2% and an increase in staffing services revenue of $0.3 million or 1.0%.

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

Gross margin for the third quarter of 2022 totaled $66.9 million or 24.4% of revenue compared to $60.2 million or 24.3% of revenue for the third quarter of 2021. The increase 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 2022 totaled $22.1 million or 8.1% of revenue compared to $21.9 million or 8.9% of revenue for the third quarter of 2021. 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 2021.

Payroll taxes and benefits for the third quarter of 2022 totaled $128.5 million or 46.9% of revenue compared to $115.0 million or 46.6% of revenue for the third quarter of 2021. The increase in payroll taxes and benefits expense was primarily due to an increase in payroll volume, offset in part by lower average payroll tax rates in 2022.

Workers’ compensation expense for the third quarter of 2022 totaled $56.4 million or 20.6% of revenue compared to $49.8 million or 20.2% of revenue for the third quarter of 2021. The increase in workers’ compensation expense was primarily attributable to higher payroll volume.

Selling, general and administrative (“SG&A”) expenses for the third quarter of 2022 totaled $43.0 million or 15.7% of revenue compared to $41.2 million or 16.7% of revenue for the third quarter of 2021. The increase of $1.8 million in SG&A expense was primarily attributable to increased employee-related costs, as well as increased travel and marketing expenses due to more in-person meetings and events.

Other income, net for the third quarter of 2022 was $1.6 million compared to other income of $1.8 million for the third quarter of 2021. The decrease was primarily attributable to a decrease in investment income in the third quarter of 2022.

Our effective income tax rate for the third quarter of 2022 was 27.1% compared to 23.4% for the third quarter of 2021. 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, 2022 and 2021

Net income for the first nine months of 2022 amounted to $35.7 million compared to net income of $27.5 million for the first nine months of 2021. Diluted net income per share for the first nine months of 2022 was $4.91 compared to diluted net income per share of $3.59 for the first nine months of 2021.

Revenues for the first nine months of 2022 totaled $782.4 million, an increase of $83.8 million or 12.0% over the first nine months of 2021, which reflects an increase in the Company’s PEO service revenue of $73.9 million or 11.9% and an increase in staffing services revenue of $9.9 million or 12.6%.

The increase in PEO service revenues was primarily attributable to an increase in the average number of WSEs as well as an increase in average billing per WSE.

Gross margin for the first nine months of 2022 totaled $174.1 million or 22.3% of revenue compared to $148.6 million or 21.3% of revenue for the first nine months of 2021. The increase 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 2022 totaled $66.5 million or 8.5% of revenue compared to $58.8 million or 8.4% of revenue for the first nine months of 2021. The increase in direct payroll costs percentage was primarily due to an increase in staffing services within the mix of our customer base compared to the first nine months of 2021.

Payroll taxes and benefits for the first nine months of 2022 totaled $390.7 million or 49.9% of revenue compared to $349.5 million or 50.0% of revenue for the first nine months of 2021. The increase in payroll taxes and benefits expense was due primarily to higher payroll volume, offset in part by lower average payroll tax rates in 2022.

Workers’ compensation expense for the first nine months of 2022 totaled $151.1 million or 19.3% of revenue compared to $141.7 million or 20.3% of revenue for the first nine months of 2021. The decrease in workers’ compensation expense as a percentage of revenue was primarily due to favorable adjustments in the first nine months of 2022 of $10.7 million related to prior period claims, compared to favorable adjustments of $7.5 million in the first nine months of 2021.

SG&A expenses for the first nine months of 2022 totaled $125.4 million or 16.0% of revenue compared to $113.9 million or 16.3% of revenue for the first nine months of 2021. The increase of $11.5 million in SG&A expense was primarily attributable to increased employee-related costs, as well as increased travel and marketing expenses due to more in-person meetings and events.

Other income, net for the first nine months of 2022 was $4.8 million as compared to other income, net of $5.1 million for the first nine months of 2021. The decrease was primarily attributable to a decrease in investment income in the first nine months of 2022.

Our effective income tax rate for the first nine months of 2022 was 26.9% compared to 23.3% for the first nine months of 2021. Our income tax rate typically differs from the federal statutory tax rate of 21% primarily due to state taxes and federal and state tax credits.

### Fluctuations in Quarterly Operating Results

We have historically experienced significant fluctuations in our quarterly operating results, including losses or minimal income in the first quarter of each year, and expect such fluctuations to continue in the future. Our operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers’ compensation, demand for our services, and competition. Payroll taxes, as a component of cost of revenues, generally decline throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes and Social Security taxes are exceeded on a per employee basis. Our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers’ businesses in the agriculture, food processing and forest products-related industries. In addition, revenues in the fourth quarter may be reduced by many customers’ practice of operating on holiday-shortened schedules. Workers’ compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. In addition, positive or adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company’s estimated workers’ compensation expense.

### Liquidity and Capital Resources

The Company’s cash balance of $68.0 million, which includes cash, cash equivalents, and restricted cash, decreased $10.6 million for the nine months ended September 30, 2022, compared to a decrease of $211.6 million for the comparable period of 2021. The decrease in cash at September 30, 2022 as compared to December 31, 2021 was primarily due to decreased workers' compensation claims liabilities, the repurchase of common stock and increased trade accounts receivable, partially offset by the proceeds from the sales and maturities of investments and restricted investments, net income and increased accrued payroll, payroll taxes, and related benefits.

Net cash used by operating activities for the nine months ended September 30, 2022 was $3.1 million, compared to net cash used of $60.3 million for the comparable period of 2021. For the nine months ended September 30, 2022, net cash used by operating activities was primarily due to decreased workers’ compensation claims liabilities of $52.9 million and increased trade accounts receivable of $38.8 million, partially offset by net income of $35.7 million, increased accrued payroll, payroll taxes and related benefits of $33.1 million and increased other accrued liabilities of $11.7 million.

Net cash provided by investing activities for the nine months ended September 30, 2022 was $42.5 million, compared to net cash used of $133.3 million for the comparable period of 2021. For the nine months ended September 30, 2022, net cash provided by investing activities consisted primarily of proceeds from sales and maturities of investment and restricted investments of $57.6 million, partially offset by purchases of property, equipment and software of $11.5 million and the purchase of restricted investments of $3.6 million.

Net cash used in financing activities for the nine months ended September 30, 2022 was $50.0 million, compared to net cash used of $18.0 million for the comparable period of 2021. For the nine months ended September 30, 2022, cash used in financing activities primarily consisted of repurchases of common stock of $39.1 million, dividend payments of $6.6 million and the payoff of the outstanding mortgage loan balance of $3.5 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 $198.6 million and $273.6 million at September 30, 2022 and December 31, 2021, 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 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.

### 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, the lingering effects of the COVID-19 pandemic on our business operations, the competitiveness of our service offerings, our plans to make certain fully insured medical and other health and welfare benefits available to qualifying worksite employees beginning in 2023, our ability to attract and retain clients and to achieve revenue growth, the effect of changes in our mix of services on gross margin, the effect of tight labor market conditions, the adequacy of our workers’ compensation reserves, the effect of changes in estimates of our future claims liabilities on our workers’ compensation reserves, including the effect of changes in our reserving practices and claims management process on our actuarial estimates, expected levels of required surety deposits and letters of credit, our ability to generate sufficient taxable income in the future to utilize our deferred tax assets, the effect of our formation and operation of two wholly owned licensed insurance subsidiaries, the risks of operation and cost of our insured program, the financial viability of our excess insurance carriers, the effectiveness of our management information systems, our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements, litigation costs, the effect of changes in the interest rate environment on the value of our investment securities, the adequacy of our allowance for doubtful accounts, and the potential for and effect of acquisitions.

All of our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include our ability to retain current clients and attract new clients, the effects of governmental orders, laws or regulations imposing requirements related to the COVID-19 pandemic, difficulties associated with integrating clients into our operations, economic trends in our service areas, the potential for material deviations from expected future workers’ compensation claims experience, changes in the workers’ compensation regulatory environment in our primary markets, security breaches or failures in the Company’s information technology systems, collectability of accounts receivable, changes in effective payroll tax rates and federal and state income tax rates, the carrying values of deferred income tax assets and goodwill (which may be affected by our future operating results), the effects of inflation on our operating expenses and those of our clients, 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, 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, 2021, which was filed with the SEC on March 7, 2022. We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

## Market risk

As filed, 868 characters.

The Company’s exposure to market risk for changes in interest rates primarily relates to its investment portfolio and its outstanding borrowings on its line of credit. As of September 30, 2022, the Company’s investments consisted principally of $110.0 million in corporate bonds, $58.5 million in mortgage backed securities, $56.7 million in U.S. treasuries, $36.6 million in U.S. government agency securities, $30.3 million in money market funds, $18.4 million in asset backed securities, $6.1 million in mutual funds and $2.0 million in emerging markets securities. Based on the Company’s overall interest exposure at September 30, 2022, a 50 basis point increase in market interest rates would have a $6.3 million effect on the fair value of the Company’s investment portfolio. At September 30, 2022, the Company had no outstanding borrowings on its line of credit.

## Controls and procedures

As filed, 3,388 characters.

### Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our ICFR is a process designed by, or under the supervision of, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our condensed consolidated financial statements for external purposes in accordance with GAAP.

We maintain “disclosure controls and procedures” that are designed with the objective of providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on their evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2022.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Inherent Limitations

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

## Risk factors

As filed, 1,766 characters.

Other than the information below, there have been no material changes in the risk factors that were included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 7, 2022.

### New service offerings may subject us to additional risks.

In August 2022, BBSI announced its plans to make certain fully insured medical and other health and welfare benefits available to qualifying worksite employees beginning in 2023. This new service offering, as well as other potential future service offerings, may introduce additional risks and uncertainties to our business. Our efforts to implement new services may place substantial additional demands on our employees, as well as our information systems and technology platforms. We may also need to invest significant additional resources in our people, processes, controls and information security. Failure to successfully implement new service offerings, including the appropriate controls, policies and procedures, information systems, and data privacy and security, could have a material adverse effect on our business, reputation, results of operations and financial condition.

New service offerings, including health care benefits, may also introduce additional legislative and regulatory requirements with which we are not familiar, or from which we are currently exempt. Violation of such laws and regulations could subject us to fines, penalties, and damages, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be materially adversely affected.

Filed Nov 3, 2022.
Source: SEC EDGAR, the filing index for accession 0000950170-22-021382. Last ingested by Listed: Nov 4, 2026, 16:56 ET. No prices; not investment advice.