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, 2018

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 every Interactive Data File required to be submitted 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 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

 

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, 2018, 7,381,099 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, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity - Nine Months Ended September 30, 2018 and 2017

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2018 and 2017

 

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

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

27

 

 

 

 

 

Signature

 

28

 

 

 

 

 

 

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,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,975

 

 

$

59,835

 

Trade accounts receivable, net

 

 

162,574

 

 

 

136,664

 

Income taxes receivable

 

 

 

 

 

1,686

 

Prepaid expenses and other

 

 

12,444

 

 

 

5,724

 

Investments

 

 

395

 

 

 

674

 

Restricted cash and investments

 

 

112,385

 

 

 

103,652

 

Total current assets

 

 

322,773

 

 

 

308,235

 

Investments

 

 

1,649

 

 

 

1,199

 

Property, equipment and software, net

 

 

26,731

 

 

 

24,909

 

Restricted cash and investments

 

 

333,062

 

 

 

291,273

 

Goodwill

 

 

47,820

 

 

 

47,820

 

Other assets

 

 

3,148

 

 

 

3,215

 

Deferred income taxes

 

 

8,158

 

 

 

5,834

 

 

 

$

743,341

 

 

$

682,485

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

221

 

 

$

221

 

Accounts payable

 

 

4,464

 

 

 

5,166

 

Accrued payroll, payroll taxes and related benefits

 

 

194,718

 

 

 

181,639

 

Income taxes payable

 

 

2,429

 

 

 

 

Other accrued liabilities

 

 

8,860

 

 

 

9,024

 

Workers' compensation claims liabilities

 

 

103,527

 

 

 

97,673

 

Safety incentives liability

 

 

28,600

 

 

 

28,532

 

Total current liabilities

 

 

342,819

 

 

 

322,255

 

Long-term workers' compensation claims liabilities

 

 

295,311

 

 

 

265,844

 

Long-term debt

 

 

4,006

 

 

 

4,171

 

Customer deposits and other long-term liabilities

 

 

1,276

 

 

 

1,381

 

Total liabilities

 

 

643,412

 

 

 

593,651

 

Commitments and contingencies (Notes 4 and 6)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 20,500 shares authorized, 7,381

   and 7,301 shares issued and outstanding

 

 

74

 

 

 

73

 

Additional paid-in capital

 

 

13,674

 

 

 

12,311

 

Accumulated other comprehensive loss

 

 

(7,406

)

 

 

(1,430

)

Retained earnings

 

 

93,587

 

 

 

77,880

 

Total stockholders' equity

 

 

99,929

 

 

 

88,834

 

 

 

$

743,341

 

 

$

682,485

 

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional employer service fees

 

$

206,320

 

 

$

197,388

 

 

$

592,559

 

 

$

557,315

 

Staffing services

 

 

40,967

 

 

 

42,747

 

 

 

110,307

 

 

 

118,391

 

Total revenues

 

 

247,287

 

 

 

240,135

 

 

 

702,866

 

 

 

675,706

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct payroll costs

 

 

30,842

 

 

 

31,986

 

 

 

83,265

 

 

 

89,182

 

Payroll taxes and benefits

 

 

100,348

 

 

 

94,922

 

 

 

322,784

 

 

 

304,268

 

Workers' compensation

 

 

56,412

 

 

 

58,310

 

 

 

172,388

 

 

 

172,675

 

Total cost of revenues

 

 

187,602

 

 

 

185,218

 

 

 

578,437

 

 

 

566,125

 

Gross margin

 

 

59,685

 

 

 

54,917

 

 

 

124,429

 

 

 

109,581

 

Selling, general and administrative expenses

 

 

36,670

 

 

 

33,925

 

 

 

101,713

 

 

 

88,595

 

Depreciation and amortization

 

 

949

 

 

 

1,062

 

 

 

3,228

 

 

 

2,989

 

Income from operations

 

 

22,066

 

 

 

19,930

 

 

 

19,488

 

 

 

17,997

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

2,235

 

 

 

1,534

 

 

 

6,455

 

 

 

3,084

 

Interest expense

 

 

(465

)

 

 

(52

)

 

 

(574

)

 

 

(197

)

Other, net

 

 

10

 

 

 

32

 

 

 

15

 

 

 

28

 

Other income, net

 

 

1,780

 

 

 

1,514

 

 

 

5,896

 

 

 

2,915

 

Income before income taxes

 

 

23,846

 

 

 

21,444

 

 

 

25,384

 

 

 

20,912

 

Provision for income taxes

 

 

4,759

 

 

 

6,659

 

 

 

4,178

 

 

 

6,228

 

Net income

 

$

19,087

 

 

$

14,785

 

 

$

21,206

 

 

$

14,684

 

Basic income per common share

 

$

2.59

 

 

$

2.03

 

 

$

2.89

 

 

$

2.02

 

Weighted average number of basic common shares

     outstanding

 

 

7,369

 

 

 

7,296

 

 

 

7,327

 

 

 

7,266

 

Diluted income per common share

 

$

2.50

 

 

$

1.96

 

 

$

2.77

 

 

$

1.95

 

Weighted average number of diluted common

     shares outstanding

 

 

7,643

 

 

 

7,527

 

 

 

7,652

 

 

 

7,539

 

Cash dividends per common share

 

$

0.25

 

 

$

0.25

 

 

$

0.75

 

 

$

0.75

 

 

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,

 

 

 

2018

 

 

2017

 

Net income

 

$

19,087

 

 

$

14,785

 

Unrealized gains (losses) on investments, net of tax of ($396) and $51 in 2018 and 2017,

   respectively

 

 

(1,037

)

 

 

75

 

Comprehensive income

 

$

18,050

 

 

$

14,860

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Net income

 

$

21,206

 

 

$

14,684

 

Unrealized gains (losses) on investments, net of tax of  ($2,325) and $128 in 2018 and

   2017, respectively

 

 

(5,976

)

 

 

188

 

Comprehensive income

 

$

15,230

 

 

$

14,872

 

 

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, 2018 and 2017

(Unaudited)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Loss)

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Total

 

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

 

Balance, December 31, 2017

 

7,301

 

 

$

73

 

 

$

12,311

 

 

$

(1,430

)

 

$

77,880

 

 

$

88,834

 

Common stock issued on exercise of options

   and vesting of restricted stock units

 

112

 

 

 

1

 

 

 

323

 

 

 

 

 

 

 

 

 

324

 

Common stock repurchased on vesting of

   restricted stock units

 

(32

)

 

 

 

 

 

(2,952

)

 

 

 

 

 

 

 

 

(2,952

)

Share-based compensation expense

 

 

 

 

 

 

 

3,992

 

 

 

 

 

 

 

 

 

3,992

 

Cash dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,499

)

 

 

(5,499

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

(5,976

)

 

 

 

 

 

(5,976

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

21,206

 

 

 

21,206

 

Balance, September 30, 2018

 

7,381

 

 

$

74

 

 

$

13,674

 

 

$

(7,406

)

 

$

93,587

 

 

$

99,929

 

 

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,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

21,206

 

 

$

14,684

 

Reconciliations of net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,228

 

 

 

2,989

 

Losses (gains) recognized on investments

 

 

36

 

 

 

(76

)

Share-based compensation

 

 

3,992

 

 

 

3,064

 

Changes in certain operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(25,910

)

 

 

(29,884

)

Income taxes receivable

 

 

1,686

 

 

 

 

Prepaid expenses and other

 

 

(6,720

)

 

 

(2,706

)

Accounts payable

 

 

(702

)

 

 

(911

)

Accrued payroll, payroll taxes and related benefits

 

 

13,079

 

 

 

29,157

 

Other accrued liabilities

 

 

(772

)

 

 

(267

)

Income taxes payable

 

 

2,429

 

 

 

3,740

 

Workers' compensation claims liabilities

 

 

35,391

 

 

 

38,163

 

Safety incentives liability

 

 

68

 

 

 

2,724

 

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

 

 

(109

)

 

 

(150

)

Net cash provided by operating activities

 

 

46,902

 

 

 

60,527

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,442

)

 

 

(2,612

)

Purchase of investments

 

 

(1,688

)

 

 

(3,559

)

Proceeds from sales and maturities of investments

 

 

1,481

 

 

 

7,889

 

Purchase of restricted investments

 

 

(103,861

)

 

 

(363,680

)

Proceeds from sales and maturities of restricted investments

 

 

54,819

 

 

 

53,039

 

Net cash used in investing activities

 

 

(53,691

)

 

 

(308,923

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from credit-line borrowings

 

 

8,500

 

 

 

24,899

 

Payments on credit-line borrowings

 

 

(8,500

)

 

 

(24,899

)

Payments on long-term debt

 

 

(165

)

 

 

(166

)

Common stock repurchased on vesting of restricted stock units

 

 

(2,952

)

 

 

(1,666

)

Dividends paid

 

 

(5,499

)

 

 

(5,449

)

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

 

 

324

 

 

 

148

 

Net cash used in financing activities

 

 

(8,292

)

 

 

(7,133

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(15,081

)

 

 

(255,529

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

120,205

 

 

 

341,330

 

Cash, cash equivalents and restricted cash, end of period

 

$

105,124

 

 

$

85,801

 

 

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 2017 Annual Report on Form 10-K at pages F1 – F27.  The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Revenue recognition

Professional employer (“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. Staffing revenues relate primarily to short-term staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related revenue is recognized, as services are rendered by our workforce.

Our PEO client service 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 service agreements provide for immediate termination upon any default of the client regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Staffing customers are invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days. The amount of earned but unbilled revenue is classified as a receivable on the condensed consolidated balance sheets.

We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. Safety incentives represent consideration payable to PEO customers, and therefore safety incentive costs are also netted against PEO revenue.

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 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, and the fronted insurance program, as well as 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, 2018 and December 31, 2017. 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. Investments are recorded as current and noncurrent on the condensed consolidated balance sheets based on maturity date. 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 investment income 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. Restricted cash and investments are classified as current and noncurrent on the condensed consolidated balance sheets based on the nature of the restriction. 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 investment income 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 $482,000 and $265,000 at September 30, 2018 and December 31, 2017, 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 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”). 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. The estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond one year is included in long-term liabilities on our condensed consolidated balance sheets. 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, 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.

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

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 our third party administrator. The Company provided $28.6 million and $28.5 million at September 30, 2018 and December 31, 2017, 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. generally accepted accounting principles (“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, 2018 totaled $1.8 million, and primarily related to prepaid fees for the Company’s letter of credit. Interest paid during the nine months ended September 30, 2017 did not materially differ from interest expense. Income taxes paid during the nine months ended September 30, 2018 totaled $0.1 million. Income taxes paid during the nine months ended September 30, 2017 totaled $2.5 million.

Bank deposits and other cash equivalents that are restricted for use are classified as restricted cash. The table below reconciles the cash, cash equivalents and restricted cash balances from our condensed consolidated balance sheets to the amounts reported on the condensed consolidated statements of cash flows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

34,975

 

 

$

59,835

 

Restricted cash, included in restricted cash and investments

 

 

70,149

 

 

 

60,370

 

Total cash, cash equivalents and restricted cash shown in the

   statement of cash flows

 

$

105,124

 

 

$

120,205

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted average number of basic shares outstanding

 

 

7,369

 

 

 

7,296

 

 

 

7,327

 

 

 

7,266

 

Effect of dilutive securities

 

 

274

 

 

 

231

 

 

 

325

 

 

 

273

 

Weighted average number of diluted shares outstanding

 

 

7,643

 

 

 

7,527

 

 

 

7,652

 

 

 

7,539

 

Reclassifications

Due to the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash,” 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.

11


 

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued 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. We have adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective method. We have determined that there are no material changes to our revenue recognition policies or to our consolidated financial statements as a result of adopting the standard.  

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, and interim periods within those years. The Company is currently evaluating the standard but expects it to have an impact on the Company’s assets and liabilities on the condensed consolidated balance sheets.

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. We have retrospectively adopted this standard effective January 1, 2018. The Company’s balance of restricted cash and restricted cash equivalents was $70.1 million, $60.4 million, $50.2 million and $290.6 million for the periods ended September 30, 2018, December 31, 2017, September 30, 2017 and December 31, 2016, respectively. The adoption of the guidance also requires us to reconcile our cash balance on the condensed consolidated statements of cash flows to the cash balance presented on the condensed consolidated balance sheets. See “Statements of cash flows” within “Note 1 - Basis of Presentation of Interim Period Statements” for these disclosures.

 

 

 

 

12


 

Note 2 - Fair Value Measurement

The following table summarizes the Company’s investments at September 30, 2018 and December 31, 2017 measured at fair value on a recurring basis (in thousands):

 

<

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

Gains

 

 

Recorded

 

 

 

 

 

 

Gains

 

 

Recorded

 

 

 

Cost

 

 

(Losses)

 

 

Basis

 

 

Cost

 

 

(Losses)

 

 

Basis

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

61

 

 

$

 

 

$

61

 

 

$

121

 

 

$

 

 

$

121

 

U.S. treasuries

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

100

 

Total cash equivalents

 

 

61

 

 

 

 

 

 

61

 

 

 

221

 

 

 

 

 

 

221

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

 

346

 

 

 

(1

)

 

 

345

 

 

 

199

 

 

 

 

 

 

199

 

Corporate bonds

 

 

45

 

 

 

 

 

 

45

 

 

 

400

 

 

 

 

 

 

400

 

U.S. government agency securities

 

 

5

 

 

 

 

 

 

5

 

 

 

65

 

 

 

 

 

 

65

 

Municipal bonds

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

Total current investments

 

 

396

 

 

 

(1

)

 

 

395

 

 

 

674

 

 

 

 

 

 

674

 

Long term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

 

745

 

 

 

(10

)

 

 

735

 

 

 

202

 

 

 

(2

)

 

 

200

 

Mortgage backed securities

 

 

501

 

 

 

(18

)

 

 

483

 

 

 

577

 

 

 

(5

)

 

 

572

 

Corporate bonds

 

 

383

 

 

 

(11

)

 

 

372

 

 

 

419

 

 

 

(2

)

 

 

417

 

U.S. government agency securities

 

 

50

 

 

 

(1

)

 

 

49