Barrett Business Services, Inc.

BBSI to support our BBSI benefits offering, added a learning management system, and added numerous integrations with third parties. We've also been investing in our technology to better support the employee lifecycle experience, which is from when an employee is hired to when the employee retires and everywhere in between. We previously launched BBSI applicant tracking system, which addresses the front end of the employee lifecycle and allows for job postings, interviews, and and seamless onboarding into our payroll and timekeeping systems. In January, we launched the employee file cabinet, which provides a secure, centralized, and fully integrated digital repository. This allows our clients and their employees to confidently manage sensitive employee data and allows for manuscript or individualized curated forms with e-signature capability, which improves compliance and efficiency. In April, we officially launched our performance management module. This module's intuitive design will allow organizations to better align employee objectives with company expectations while tracking performance with consistency and clarity. It empowers employers to formalize performance expectations and document performance conversations through standardized review cycles, ongoing feedback, and development planning. our beta clients were very complimentary of the overall offering as well as the ease of use of our system. We think that ultimately these products will result in increased sales and better client retention, and we are excited to offer these products to existing clients as well as new prospects. Next, I'd like to shift to our view of the remainder of the year. As we look to the remainder of the year, our outlook remains unchanged. We expect our clients to continue growing at a rate below historical norms. However, we expect that rate of impact from low client hiring to moderate in the second half of the year. We believe BBSI is well suited to navigate macroeconomic and geopolitical uncertainties. In challenging times, small businesses are better off in a PEO relationship and can benefit from our scale and our expertise. We have consistently achieved strong, controllable growth by focusing on the needs of our clients and by adding new clients, a focus that we will maintain. We have more products to sell and more folks selling. Consistent execution, differentiated service model, and strong relationships position us to continue driving sustainable growth through 2026 and beyond. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I'm pleased to report that we finished the quarter with results in line with our plan and are reaffirming our outlook for the remainder of the year. Gross billings increased 3.5% to $2.16 billion in Q126 versus $2.09 billion in Q125. PEO gross billings increased 3.7% in the quarter to $2.15 billion, while staffing revenues declined 21% to $14 million in the quarter. Our PEO worksite employees grew by 2% in the quarter, which, as Gary noted, was driven by strong, controllable growth tempered by year-over-year client workforce reductions. Average billing per WSE per day increased 1.7% in the quarter, which was driven by increasing wages partially offset by lower overtime and hours worked. Looking at year-over-year PEO gross billings growth by region for Q1, Southern California grew by 2%, Northern California declined by 2%, Mountain grew by 6%, East Coast grew by 17%, Pacific Northwest grew by 1%, and our asset light markets grew by 85%. A few comments on our regional performance. Southern and Northern California are two largest markets, Both experienced slower growth in the quarter, primarily due to year-over-year client workforce reductions. New client ads in both regions were in line with expectations. However, Northern California also had slightly elevated runoff in the quarter and was more impacted by the negative client hiring trends. The East Coast continued to stand out, delivering its 20th consecutive quarter of double-digit growth, supported by strong, controllable growth and positive client hiring. the Pacific Northwest region returned to growth as solid net client ads more than offset softer client hiring activity. Turning to margin and profitability, our workers' compensation program continues to perform well, resulting in favorable adjustments for prior year claims. In Q126, we recognized favorable prior year liability and premium adjustments of $1.1 million compared to favorable adjustments of $3.8 million in the first quarter of 2025. We've previously discussed the market inflection in workers' compensation pricing and the positive momentum that followed the California Insurance Commissioner's approval of an average 8.7% premium rate increase in 2025. In the first quarter of 2026, we were able to increase our pricing each month and have now established a five-month trend of increased pricing. Reinforcing this broader market trend, the WCIRB has recommended an additional 10% increase in California advisory rates for 2026. As a reminder, the previous period of declining workers' compensation pricing has resulted in margin compression in recent years. And while we expect cost trends to continue to increase as well, we expect the improved pricing environment to stabilize margins, and support margin expansion over time. We continue to prioritize thoughtful risk management, and to that end, our workers' compensation claims are primarily fully insured, and our health insurance product is looking at our payroll tax costs. Payroll taxes are typically highest in Q1 as taxable wage caps reset, which results in lower margins in the first quarter of the year and a typical net operating loss. Payroll tax rates were in line with expectations for the quarter. You will also see that we have separated benefits costs into a discrete financial statement line item, representing the direct costs of our client benefits offering. As a fully insured product, these costs primarily represent the pass-through premiums for our client health plans and are directly correlated to the related client billings included in PEO revenue. We expect benefits volumes to continue growing with first quarter benefits costs up 56% year over year, broadly consistent with BBSI benefits billings growth. Overall, our gross margin rate was in line with our expectations and reflected stronger pricing trends and increased benefit sales with some headwind from lower staffing revenues. Moving to our operating costs and overall profitability, In Q1, SG&A increased approximately 6% due primarily to the timing of certain employee-related expenses. We continue to expect full-year SG&A trends lower than gross billings growth and more in line with prior-year SG&A growth. Moving to investment income, our investment portfolios earned $2 million in the first quarter, down approximately $600,000 from the prior year due to interest rates, and lower average investment balances as we continue to use excess cash in our stock buyback program. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA. Looking at our net results for the quarter, as a reminder, on March 31st, we announced the company had recorded a one-time tax charge related to credit from tax years 2017 through 2022 which were disallowed by the IRS and their related tax court decision. The amount of this charge was $11.6 million, or 46 cents per share. We continue to evaluate our available legal options, including our right to appeal. As a result of this charge, our GAAP net loss per diluted share was 59 cents for the quarter. Excluding the one-time charge, our adjusted net loss per diluted share was 13 cents compared to a net loss of 4 cents per diluted share in the year-ago quarter. Turning to our balance sheet, we're in a strong position with $92 million of unrestricted cash investments at March 31st and no debt. We continued our consistent approach to capital allocation, making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan. Under our $100 million August 2025 repurchase program, BBSI repurchased $20 million of shares in the first quarter at an average price of $28.68 per share, with $55 million remaining available under the program at quarter end. The company also paid $2 million in dividends in the quarter and reaffirmed its dividend for the following quarter. This brings total capital returned to shareholders in the last six months to over $40 million. Now turning to our outlook for the full year. Our Q1 operating results aligned with our expectations, reflecting continued strong execution of our fundamentals across the company. Accordingly, we are reiterating our full year outlook. We expect gross buildings growth between 3% and 5% for the year, WSE growth between 2% and 4% for the year, gross margin as a percentage of gross billings between 2.7% and 2.85%, and an effective annual tax rate normalized for the one-time tax charge between 26% and 27%. I will now turn the call back to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. And if you're using a speakerphone, please lift the handset before pressing any keys. And we have our first question from Chris Moore with CJS Securities.