UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2017

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From           to          

Commission File Number 0-21886

 

BARRETT BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

52-0812977

(State or other jurisdiction of
Incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

8100 NE Parkway Drive, Suite 200

 

 

Vancouver, Washington

 

98662

(Address of principal executive offices)

 

(Zip Code)

 

(360) 828-0700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§                   232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer (Do not check if a smaller reporting company)

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes       No  

As of November 1, 2017, 7,300,361 shares of the registrant’s common stock ($0.01 par value) were outstanding.

 

 


 

BARRETT BUSINESS SERVICES, INC.

INDEX TO FORM 10-Q

 

Part I - Financial Information

 

 

 

 

 

 

Page

Item 1.

 

Unaudited Interim Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - September 30, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity - Nine Months Ended September 30, 2017 and 2016

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2017 and 2016

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

28

 

 

 

 

 

Item 1A.

 

Risk Factors

 

28

 

 

 

 

 

Item 6.

 

Exhibits

 

28

 

 

 

 

 

Signature

 

29

 

 

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1.

Unaudited Interim Condensed Consolidated Financial Statements

Barrett Business Services, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In Thousands, Except Par Value)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,570

 

 

$

50,768

 

Trade accounts receivable, net

 

 

156,368

 

 

 

126,484

 

Prepaid expenses and other

 

 

6,605

 

 

 

3,899

 

Investments

 

 

796

 

 

 

5,675

 

Restricted cash and investments

 

 

90,681

 

 

 

48,557

 

Total current assets

 

 

290,020

 

 

 

235,383

 

Investments

 

 

1,191

 

 

 

642

 

Property, equipment and software, net

 

 

26,296

 

 

 

26,673

 

Restricted cash and investments

 

 

281,286

 

 

 

252,707

 

Goodwill

 

 

47,820

 

 

 

47,820

 

Other assets

 

 

3,376

 

 

 

9,293

 

Deferred income taxes

 

 

9,241

 

 

 

9,370

 

 

 

$

659,230

 

 

$

581,888

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

221

 

 

$

221

 

Accounts payable

 

 

4,033

 

 

 

4,944

 

Accrued payroll, payroll taxes and related benefits

 

 

182,267

 

 

 

153,110

 

Income taxes payable

 

 

6,781

 

 

 

3,041

 

Other accrued liabilities

 

 

7,407

 

 

 

7,674

 

Workers' compensation claims liabilities

 

 

89,601

 

 

 

81,339

 

Safety incentives liability

 

 

27,559

 

 

 

24,835

 

Total current liabilities

 

 

317,869

 

 

 

275,164

 

Long-term workers' compensation claims liabilities

 

 

255,084

 

 

 

231,198

 

Long-term debt

 

 

4,226

 

 

 

4,392

 

Customer deposits and other long-term liabilities

 

 

1,389

 

 

 

1,441

 

Total liabilities

 

 

578,568

 

 

 

512,195

 

Commitments and contingencies (Notes 4 and 6)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 20,500 shares authorized, 7,300

   and 7,244 shares issued and outstanding

 

 

73

 

 

 

72

 

Additional paid-in capital

 

 

11,183

 

 

 

9,638

 

Accumulated other comprehensive income (loss)

 

 

185

 

 

 

(3

)

Retained earnings

 

 

69,221

 

 

 

59,986

 

Total stockholders' equity

 

 

80,662

 

 

 

69,693

 

 

 

$

659,230

 

 

$

581,888

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In Thousands, Except Per Share Amounts)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Professional employer service fees

$

197,388

 

$

177,229

 

$

557,315

 

$

497,682

 

Staffing services

 

42,747

 

 

47,874

 

 

118,391

 

 

121,806

 

Total revenues

 

240,135

 

 

225,103

 

 

675,706

 

 

619,488

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Direct payroll costs

 

31,986

 

 

37,017

 

 

89,182

 

 

92,667

 

Payroll taxes and benefits

 

94,922

 

 

82,888

 

 

304,268

 

 

269,533

 

Workers' compensation

 

58,310

 

 

55,639

 

 

172,675

 

 

155,089

 

Total cost of revenues

 

185,218

 

 

175,544

 

 

566,125

 

 

517,289

 

Gross margin

 

54,917

 

 

49,559

 

 

109,581

 

 

102,199

 

Selling, general and administrative expenses

 

33,925

 

 

30,440

 

 

88,595

 

 

80,834

 

Depreciation and amortization

 

1,062

 

 

823

 

 

2,989

 

 

2,341

 

Income from operations

 

19,930

 

 

18,296

 

 

17,997

 

 

19,024

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

1,534

 

 

194

 

 

3,084

 

 

702

 

Interest expense

 

(52

)

 

(196

)

 

(197

)

 

(704

)

Loss on litigation

 

 

 

(3,305

)

 

 

 

(3,305

)

Other, net

 

32

 

 

27

 

 

28

 

 

26

 

Other income (expense), net

 

1,514

 

 

(3,280

)

 

2,915

 

 

(3,281

)

Income before income taxes

 

21,444

 

 

15,016

 

 

20,912

 

 

15,743

 

Provision for income taxes

 

6,659

 

 

4,783

 

 

6,228

 

 

4,991

 

Net income

$

14,785

 

$

10,233

 

$

14,684

 

$

10,752

 

Basic income per common share

$

2.03

 

$

1.41

 

$

2.02

 

$

1.49

 

Weighted average number of basic common shares outstanding

 

7,296

 

 

7,243

 

 

7,266

 

 

7,220

 

Diluted income per common share

$

1.96

 

$

1.38

 

$

1.95

 

$

1.46

 

Weighted average number of diluted common shares outstanding

 

7,527

 

 

7,405

 

 

7,539

 

 

7,350

 

Cash dividends per common share

$

0.25

 

$

0.22

 

$

0.75

 

$

0.66

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Net income

 

$

14,785

 

 

$

10,233

 

Unrealized gains on investments, net of tax of $51 and $2 in 2017 and 2016,

   respectively

 

 

75

 

 

 

4

 

Comprehensive income

 

$

14,860

 

 

$

10,237

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Net income

 

$

14,684

 

 

$

10,752

 

Unrealized gains on investments, net of tax of $128 and $35 in 2017 and 2016,

   respectively

 

 

188

 

 

 

58

 

Comprehensive income

 

$

14,872

 

 

$

10,810

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Loss)

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Total

 

Balance, December 31, 2015

 

7,203

 

 

$

72

 

 

$

6,964

 

 

$

(31

)

 

$

47,546

 

 

$

54,551

 

Common stock issued on exercise of options

   and vesting of restricted stock units

 

52

 

 

 

 

 

 

72

 

 

 

 

 

 

 

 

 

72

 

Common stock repurchased on vesting of

   restricted stock units

 

(11

)

 

 

 

 

 

(433

)

 

 

 

 

 

 

 

 

(433

)

Share-based compensation expense

 

 

 

 

 

 

 

1,881

 

 

 

 

 

 

 

 

 

1,881

 

Excess tax benefits from share-based

   compensation

 

 

 

 

 

 

 

265

 

 

 

 

 

 

 

 

 

265

 

Cash dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,766

)

 

 

(4,766

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,752

 

 

 

10,752

 

Balance, September 30, 2016

 

7,244

 

 

$

72

 

 

$

8,749

 

 

$

27

 

 

$

53,532

 

 

$

62,380

 

Balance, December 31, 2016

 

7,244

 

 

$

72

 

 

$

9,638

 

 

$

(3

)

 

$

59,986

 

 

$

69,693

 

Common stock issued on exercise of options

   and vesting of restricted stock units

 

85

 

 

 

1

 

 

 

147

 

 

 

 

 

 

 

 

 

148

 

Common stock repurchased on vesting of

   restricted stock units

 

(29

)

 

 

 

 

 

(1,666

)

 

 

 

 

 

 

 

 

(1,666

)

Share-based compensation expense

 

 

 

 

 

 

 

3,064

 

 

 

 

 

 

 

 

 

3,064

 

Cash dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,449

)

 

 

(5,449

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

188

 

 

 

 

 

 

188

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

14,684

 

 

 

14,684

 

Balance, September 30, 2017

 

7,300

 

 

$

73

 

 

$

11,183

 

 

$

185

 

 

$

69,221

 

 

$

80,662

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

14,684

 

 

$

10,752

 

Reconciliations of net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,989

 

 

 

2,341

 

Losses (gains) recognized on investments

 

 

(76

)

 

 

3

 

Losses recognized on sale of property

 

 

 

 

 

31

 

Share-based compensation

 

 

3,064

 

 

 

1,881

 

Excess tax benefit from share-based compensation

 

 

 

 

 

(265

)

Changes in certain operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(29,884

)

 

 

(49,545

)

Income taxes receivable

 

 

 

 

 

1,038

 

Prepaid expenses and other

 

 

(2,706

)

 

 

(464

)

Accounts payable

 

 

(911

)

 

 

1,303

 

Accrued payroll, payroll taxes and related benefits

 

 

29,157

 

 

 

39,719

 

Other accrued liabilities

 

 

(267

)

 

 

4,585

 

Income taxes payable

 

 

3,740

 

 

 

5,062

 

Workers' compensation claims liabilities

 

 

38,163

 

 

 

36,256

 

Safety incentives liability

 

 

2,724

 

 

 

3,744

 

Customer deposits, long-term liabilities and other assets, net

 

 

(150

)

 

 

851

 

Net cash provided by operating activities

 

 

60,527

 

 

 

57,292

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,612

)

 

 

(5,311

)

Proceeds from sale of property

 

 

 

 

 

1,478

 

Purchase of investments

 

 

(3,559

)

 

 

(274

)

Proceeds from sales and maturities of investments

 

 

7,889

 

 

 

4,504

 

Purchase of restricted cash and investments

 

 

(947,207

)

 

 

(127,207

)

Proceeds from sales and maturities of restricted cash and investments

 

 

876,897

 

 

 

91,113

 

Net cash used in investing activities

 

 

(68,592

)

 

 

(35,697

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from credit-line borrowings

 

 

24,899

 

 

 

14,868

 

Payments on credit-line borrowings

 

 

(24,899

)

 

 

(14,868

)

Payments on long-term debt

 

 

(166

)

 

 

(15,165

)

Common stock repurchased on vesting of restricted stock units

 

 

(1,666

)

 

 

(433

)

Dividends paid

 

 

(5,449

)

 

 

(4,766

)

Proceeds from exercise of stock options and vesting of restricted stock units

 

 

148

 

 

 

72

 

Excess tax benefits from share-based compensation

 

 

 

 

 

265

 

Net cash used in financing activities

 

 

(7,133

)

 

 

(20,027

)

Net increase (decrease) in cash and cash equivalents

 

 

(15,198

)

 

 

1,568

 

Cash and cash equivalents, beginning of period

 

 

50,768

 

 

 

25,218

 

Cash and cash equivalents, end of period

 

$

35,570

 

 

$

26,786

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


 

Barrett Business Services, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 - Basis of Presentation of Interim Period Statements

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The accompanying condensed financial statements are prepared on a consolidated basis. All intercompany account balances and transactions have been eliminated in consolidation. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.  Actual results may differ from such estimates and assumptions. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K at pages F1 – F29.  The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Revenue recognition

We recognize professional employer (“PEO”) service and staffing service revenue as services are rendered by our workforce.  PEO services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Our client services agreements have a minimum term of one year, are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party.  In addition, our client services agreements provide for immediate termination upon any default of the client regardless of when notice is given.  

We report PEO revenues on a net basis because we are not the primary obligor for certain of the services provided to our clients on behalf of their employees pursuant to our client services agreements. Specifically, we present revenue net of the amounts received or billed for direct payroll expenses such as salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. Safety incentive costs are also netted against PEO service revenue in our condensed consolidated statements of operations. Safety incentives represent cash incentives paid to certain client companies for maintaining safe-work practices and minimizing workplace injuries. The safety incentive is based on a percentage of annual payroll and is paid annually to clients who meet predetermined workers’ compensation claims cost objectives.

Cost of revenues

Our cost of revenues for PEO services includes employer payroll-related taxes and workers’ compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers’ compensation costs consist primarily of the costs associated with our workers’ compensation program, including claims reserves, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, the fronted insurance program, and costs associated with operating our two wholly owned insurance companies, Associated Insurance Company for Excess (AICE) and Ecole Insurance Company (Ecole).

8


 

Cash and cash equivalents

We consider non-restricted short-term investments, which are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three months, to be cash equivalents for purposes of the condensed consolidated statements of cash flows and condensed consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration.

Investments

The Company classifies investments as trading or available-for-sale. We had no trading securities at September 30, 2017 and December 31, 2016. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity.  Management considers available evidence in evaluating potential impairment of investments, including the duration and extent to which fair value is less than cost. Realized gains and losses on sales of investments are included in other income (expense) as other, net in our condensed consolidated statements of operations. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the condensed consolidated statements of operations.  

Restricted cash and investments

The Company holds restricted cash and investments primarily for the future payment of workers’ compensation claims. Restricted investments have been categorized as available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Management considers available evidence in evaluating potential impairment of restricted investments, including the duration and extent to which fair value is less than cost. Realized gains and losses on sales of restricted investments are included in other income (expense) as other, net in our condensed consolidated statements of operations. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the condensed consolidated statements of operations.

Allowance for doubtful accounts

The Company had an allowance for doubtful accounts of $265,000 and $78,000 at September 30, 2017 and December 31, 2016, respectively.  We make estimates of the collectability of our accounts receivable for services provided to our customers.  Management analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts.  If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

Workers’ compensation claims liabilities

Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by our internal claims adjusters and our third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, “IBNR”). At September 30, 2017 and December 31, 2016, workers’ compensation claims liabilities included case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, and unallocated loss adjustment expenses, including future administrative fees to be paid to third-party service providers. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.

9


 

The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, changes in individuals involved in the reserve estimation process, inflation, trends in the litigation and settlement of pending claims, and legislative changes.

Our estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves.

The Company’s independent actuary provides management with an estimate of the current and long-term portions of our total workers’ compensation claims, which is an important factor in our process for estimating workers’ compensation claims liabilities. The current portion represents the independent actuary’s best estimate of payments the Company will make related to workers’ compensation claims over the ensuing twelve months.

A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.

Safety incentives liability

Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe-work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third party administrator. The Company provided $27.6 million and $24.8 million at September 30, 2017 and December 31, 2016, respectively, as an estimate of the liability for unpaid safety incentives.

Customer deposits

We require deposits from certain PEO customers to cover a portion of our accounts receivable due from such customers in the event of default of payment.

Comprehensive income (loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders.

Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive income (loss) comprises unrealized holding gains and losses on our available-for-sale investments.

10


 

Statements of cash flows

Interest paid during the nine months ended September 30, 2017 and 2016 did not materially differ from interest expense. Income taxes paid during the nine months ended September 30, 2017 totaled $2.5 million. Income tax refunds received during the nine months ended September 30, 2016 totaled $1.1 million.

Basic and diluted earnings per share

Basic earnings per share are computed based on the weighted average number of common shares outstanding for each year using the treasury method. Diluted earnings per share reflect the potential effects of the exercise of outstanding stock options and the issuance of stock associated with outstanding restricted stock units. Basic and diluted shares outstanding are summarized as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Weighted average number of basic shares outstanding

 

 

7,296

 

 

 

7,243

 

 

 

7,266

 

 

 

7,220

 

Effect of dilutive securities

 

 

231

 

 

 

162

 

 

 

273

 

 

 

130

 

Weighted average number of diluted shares outstanding

 

 

7,527

 

 

 

7,405

 

 

 

7,539

 

 

 

7,350

 

Reclassifications

Due to the adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the Company’s financial condition, operating results, cash flows or stockholders’ equity.

Accounting estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Estimates are used for fair value measurement of investments, allowance for doubtful accounts, deferred income taxes, carrying values for goodwill and property and equipment, accrued workers’ compensation liabilities and safety incentive liabilities.  Actual results may or may not differ from such estimates.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The core principle of the update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The update also requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date.” The update defers the effective date of ASU 2014-09 by one year, requiring public business entities to apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.

11


 

In March, April and May 2016, the FASB issued the following ASUs: ASU No. 2016-08, Principal versus Agent Considerations - Reporting Revenue Gross versus Net;” ASU No. 2016-10, Identifying Performance Obligations and Licensing; and ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments in these updates do not change the core principles of the guidance in ASU 2014-09. The effective date and transition requirements for these updates are the same as the effective date and transition requirements in ASU 2015-14. We plan to adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective method, which recognizes the cumulative effect of application as an opening adjustment to retained earnings on that date. The Company is currently evaluating the impact of ASU 2014-09 and all related ASUs on its consolidated financial statements and footnote disclosures. While our analysis is on-going, we do not anticipate any material changes to our consolidated financial statements as a result of adopting the standard.  

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” The amendments in this update simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent on the condensed consolidated balance sheets. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard in the first interim period for the year ending December 31, 2017. The adoption of this standard resulted in a current to noncurrent adjustment to the Company’s current deferred tax asset balance of $25.2 million at December 31, 2016.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The core principle is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases. Under the new guidance, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the standard and the impact on its condensed consolidated financial statements and footnote disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation.” The amendments in this update simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this standard in the first interim period for the year ending December 31, 2017. In the first interim period for the year ending December 31, 2017, an immaterial amount of excess tax benefit was recognized in income tax benefit on the condensed consolidated statement of operations and was classified along with other income tax cash flows as an operating activity on the statement of cash flows. On a prospective basis, when applying the treasury stock method for computing diluted earnings-per-share, the assumed proceeds will not include any windfall tax benefits.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows: Restricted Cash.” The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company’s balance of restricted cash, which is within restricted cash and investments under current and non-current assets on the condensed consolidated balance sheets, was $70.4 million for the period ended September 30, 2017.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment.” The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in this update are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently

12


 

evaluating the standard but does not expect it to have a material impact on its condensed consolidated financial statements or footnote disclosures.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt.” The amendments in this update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. As of September 30, 2017, the amendments in this update would not have a material impact on the Company. However, the Company will continue to evaluate the standard to determine any potential impact.

Note 2 - Fair Value Measurement

The following table summarizes the Company’s investments at September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

Gains

 

 

Recorded

 

 

 

 

 

 

Gains

 

 

Recorded

 

 

 

Cost

 

 

(Losses)

 

 

Basis

 

 

Cost

 

 

(Losses)

 

 

Basis

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

54

 

 

$

 

 

$

54

 

 

$

1,943

 

 

$

 

 

$

1,943

 

U.S. Treasuries

 

 

50

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

Total cash equivalents

 

 

104

 

 

 

 

 

 

104

 

 

 

1,943

 

 

 

 

 

 

1,943

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Bonds

 

 

565

 

 

 

 

 

 

565

 

 

 

225

 

 

 

(1

)

 

 

224

 

U.S. Government Agency Securities

 

 

161

 

 

 

 

 

 

161

 

 

 

 

 

 

 

 

 

 

Municipal Bonds

 

 

70

 

 

 

 

 

 

70

 

 

 

713

 

 

 

1

 

 

 

714

 

Certificates of Deposit

 

 

 

 

 

 

 

 

 

 

 

4,737

 

 

 

 

 

 

4,737

 

Total current investments

 

 

796

 

 

 

 

 

 

796

 

 

 

5,675

 

 

 

 

 

 

5,675

 

Long term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Backed Securities

 

 

654

 

 

 

 

 

 

654

 

 

 

 

 

 

 

 

 

 

Corporate Bonds

 

 

330

 

 

 

 

 

 

330

 

 

 

567

 

 

 

(1

)

 

 

566

 

U.S. Treasuries

 

 

203

 

 

 

(1

)

 

 

202

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency Securities

 

 

5

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

Municipal Bonds

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

76

 

Total long term investments

 

 

1,192

 

 

 

(1

)

 

 

1,191

 

 

 

643

 

 

 

(1

)

 

 

642

 

Restricted cash and investments (1):