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 June 30, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 Per Share

BBSI

The NASDAQ Stock Market LLC

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 August 1, 2019, 7,469,780 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 (Unaudited)

 

 

 

 

 

 

Page

Item 1.

 

Unaudited Interim Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - June 30, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity - Six Months Ended June 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 5.

 

Other Information

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

Signature

 

33

 

 

 

 

 

 

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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,693

 

 

$

35,371

 

Trade accounts receivable, net

 

 

163,228

 

 

 

151,597

 

Prepaid expenses and other

 

 

15,720

 

 

 

13,880

 

Investments

 

 

77,271

 

 

 

416

 

Restricted cash and investments

 

 

108,275

 

 

 

120,409

 

Total current assets

 

 

388,187

 

 

 

321,673

 

Investments

 

 

 

 

 

1,687

 

Property, equipment and software, net

 

 

27,999

 

 

 

24,812

 

Operating lease right-of-use assets

 

 

25,005

 

 

 

 

Restricted cash and investments

 

 

335,966

 

 

 

348,165

 

Goodwill

 

 

47,820

 

 

 

47,820

 

Other assets

 

 

3,329

 

 

 

3,474

 

Deferred income taxes

 

 

5,897

 

 

 

8,458

 

 

 

$

834,203

 

 

$

756,089

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

221

 

 

$

221

 

Accounts payable

 

 

4,824

 

 

 

4,336

 

Accrued payroll, payroll taxes and related benefits

 

 

181,966

 

 

 

158,683

 

Income taxes payable

 

 

2,670

 

 

 

4,403

 

Current operating lease liabilities

 

 

6,381

 

 

 

 

Other accrued liabilities

 

 

15,908

 

 

 

20,566

 

Workers' compensation claims liabilities

 

 

108,289

 

 

 

109,319

 

Safety incentives liability

 

 

27,316

 

 

 

29,210

 

Total current liabilities

 

 

347,575

 

 

 

326,738

 

Long-term workers' compensation claims liabilities

 

 

322,447

 

 

 

304,078

 

Long-term debt

 

 

3,840

 

 

 

3,951

 

Long-term operating lease liabilities

 

 

19,101

 

 

 

 

Customer deposits and other long-term liabilities

 

 

3,773

 

 

 

2,285

 

Total liabilities

 

 

696,736

 

 

 

637,052

 

Commitments and contingencies (Notes 4, 5 and 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 20,500 shares authorized, 7,414

   and 7,395 shares issued and outstanding

 

 

74

 

 

 

74

 

Additional paid-in capital

 

 

19,265

 

 

 

15,437

 

Accumulated other comprehensive income (loss)

 

 

1,632

 

 

 

(5,068

)

Retained earnings

 

 

116,496

 

 

 

108,594

 

Total stockholders' equity

 

 

137,467

 

 

 

119,037

 

 

 

$

834,203

 

 

$

756,089

 

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional employer service fees

 

$

203,157

 

 

$

197,277

 

 

$

393,684

 

 

$

386,239

 

Staffing services

 

 

27,825

 

 

 

34,326

 

 

 

55,513

 

 

 

69,340

 

Total revenues

 

 

230,982

 

 

 

231,603

 

 

 

449,197

 

 

 

455,579

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct payroll costs

 

 

20,992

 

 

 

26,020

 

 

 

41,834

 

 

 

52,423

 

Payroll taxes and benefits

 

 

101,697

 

 

 

98,249

 

 

 

216,494

 

 

 

222,437

 

Workers' compensation

 

 

53,174

 

 

 

58,854

 

 

 

107,403

 

 

 

115,976

 

Total cost of revenues

 

 

175,863

 

 

 

183,123

 

 

 

365,731

 

 

 

390,836

 

Gross margin

 

 

55,119

 

 

 

48,480

 

 

 

83,466

 

 

 

64,743

 

Selling, general and administrative expenses

 

 

39,005

 

 

 

35,614

 

 

 

72,165

 

 

 

65,043

 

Depreciation and amortization

 

 

970

 

 

 

1,274

 

 

 

1,939

 

 

 

2,278

 

Income (loss) from operations

 

 

15,144

 

 

 

11,592

 

 

 

9,362

 

 

 

(2,578

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

3,332

 

 

 

2,201

 

 

 

6,404

 

 

 

4,220

 

Interest expense

 

 

(481

)

 

 

(68

)

 

 

(958

)

 

 

(110

)

Other, net

 

 

 

 

 

(12

)

 

 

12

 

 

 

4

 

Other income, net

 

 

2,851

 

 

 

2,121

 

 

 

5,458

 

 

 

4,114

 

Income before income taxes

 

 

17,995

 

 

 

13,713

 

 

 

14,820

 

 

 

1,536

 

Provision for (benefit from) income taxes

 

 

4,088

 

 

 

2,473

 

 

 

3,213

 

 

 

(581

)

Net income

 

$

13,907

 

 

$

11,240

 

 

$

11,607

 

 

$

2,117

 

Basic income per common share

 

$

1.88

 

 

$

1.54

 

 

$

1.57

 

 

$

0.29

 

Weighted average number of basic common shares

     outstanding

 

 

7,410

 

 

 

7,310

 

 

 

7,408

 

 

 

7,307

 

Diluted income per common share

 

$

1.81

 

 

$

1.46

 

 

$

1.51

 

 

$

0.28

 

Weighted average number of diluted common

     shares outstanding

 

 

7,692

 

 

 

7,675

 

 

 

7,674

 

 

 

7,658

 

 

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

 

 

4


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Net income

 

$

13,907

 

 

$

11,240

 

Unrealized gains (losses) on investments, net of tax of $1,164 and ($373) in 2019

   and 2018, respectively

 

 

3,043

 

 

 

(975

)

Comprehensive income

 

$

16,950

 

 

$

10,265

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Net income

 

$

11,607

 

 

$

2,117

 

Unrealized gains (losses) on investments, net of tax of $2,561 and ($1,928) in 2019 and

   2018, respectively

 

 

6,700

 

 

 

(4,939

)

Comprehensive income (loss)

 

$

18,307

 

 

$

(2,822

)

 

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

 

 

5


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2019 and 2018

(Unaudited)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Loss)

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Total

 

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

 

7

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Common stock repurchased on vesting of

   restricted stock units

 

(1

)

 

 

 

 

 

(76

)

 

 

 

 

 

 

 

 

(76

)

Share-based compensation expense

 

 

 

 

 

 

 

1,542

 

 

 

 

 

 

 

 

 

1,542

 

Cash dividends on common stock ($0.25 per

   share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,826

)

 

 

(1,826

)

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

(3,964

)

 

 

 

 

 

(3,964

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,123

)

 

 

(9,123

)

Balance, March 31, 2018

 

7,307

 

 

$

73

 

 

$

13,830

 

 

$

(5,394

)

 

$

66,931

 

 

$

75,440

 

Common stock issued on exercise of options

   and vesting of restricted stock units

 

5

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

48

 

Common stock repurchased on vesting of

   restricted stock units

 

(1

)

 

 

 

 

 

(92

)

 

 

 

 

 

 

 

 

(92

)

Share-based compensation expense

 

 

 

 

 

 

 

1,041

 

 

 

 

 

 

 

 

 

1,041

 

Cash dividends on common stock ($0.25 per

   share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,827

)

 

 

(1,827

)

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

(975

)

 

 

 

 

 

(975

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

11,240

 

 

 

11,240

 

Balance, June 30, 2018

 

7,311

 

 

$

73

 

 

$

14,827

 

 

$

(6,369

)

 

$

76,344

 

 

$

84,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

7,395

 

 

$

74

 

 

$

15,437

 

 

$

(5,068

)

 

$

108,594

 

 

$

119,037

 

Common stock issued on exercise of options

   and vesting of restricted stock units and

   performance awards

 

17

 

 

 

 

 

 

122

 

 

 

 

 

 

 

 

 

122

 

Common stock repurchased on vesting of

   restricted stock units and performance

   awards

 

(2

)

 

 

 

 

 

(178

)

 

 

 

 

 

 

 

 

(178

)

Share-based compensation expense

 

 

 

 

 

 

 

1,387

 

 

 

 

 

 

 

 

 

1,387

 

Cash dividends on common stock ($0.25 per

   share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,852

)

 

 

(1,852

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

3,657

 

 

 

 

 

 

3,657

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,300

)

 

 

(2,300

)

Balance, March 31, 2019

 

7,410

 

 

$

74

 

 

$

16,768

 

 

$

(1,411

)

 

$

104,442

 

 

$

119,873

 

Common stock issued on exercise of options

   and vesting of restricted stock units

 

4

 

 

 

 

 

 

56

 

 

 

 

 

 

 

 

 

56

 

Common stock repurchased on vesting of

   restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

2,441

 

 

 

 

 

 

 

 

 

2,441

 

Cash dividends on common stock ($0.25 per

   share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,853

)

 

 

(1,853

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

3,043

 

 

 

 

 

 

3,043

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

13,907

 

 

 

13,907

 

Balance, June 30, 2019

 

7,414

 

 

$

74

 

 

$

19,265

 

 

$

1,632

 

 

$

116,496

 

 

$

137,467

 

 

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

11,607

 

 

$

2,117

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,939

 

 

 

2,278

 

Non-cash lease expense

 

 

3,509

 

 

 

 

Losses recognized on investments

 

 

26

 

 

 

38

 

Share-based compensation

 

 

3,828

 

 

 

2,583

 

Changes in certain operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(11,631

)

 

 

(15,896

)

Income taxes receivable

 

 

 

 

 

(643

)

Prepaid expenses and other

 

 

(1,840

)

 

 

(4,100

)

Accounts payable

 

 

488

 

 

 

(1,215

)

Accrued payroll, payroll taxes and related benefits

 

 

24,740

 

 

 

4,533

 

Other accrued liabilities

 

 

(4,658

)

 

 

(80

)

Income taxes payable

 

 

(1,733

)

 

 

 

Workers' compensation claims liabilities

 

 

17,470

 

 

 

27,341

 

Safety incentives liability

 

 

(1,894

)

 

 

(468

)

Operating lease liabilities

 

 

(3,032

)

 

 

 

Other assets and liabilities, net

 

 

46

 

 

 

(27

)

Net cash provided by operating activities

 

 

38,865

 

 

 

16,461

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(5,127

)

 

 

(3,517

)

Purchase of investments

 

 

(117

)

 

 

(1,401

)

Proceeds from sales and maturities of investments

 

 

15,262

 

 

 

1,369

 

Purchase of restricted investments

 

 

(3,245

)

 

 

(103,388

)

Proceeds from sales and maturities of restricted investments

 

 

34,765

 

 

 

32,749

 

Net cash provided by (used in) investing activities

 

 

41,538

 

 

 

(74,188

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from credit-line borrowings

 

 

18,843

 

 

 

8,500

 

Payments on credit-line borrowings

 

 

(18,843

)

 

 

(8,500

)

Payments on long-term debt

 

 

(111

)

 

 

(110

)

Common stock repurchased on vesting of restricted stock units

 

 

(178

)

 

 

(168

)

Dividends paid

 

 

(3,705

)

 

 

(3,653

)

Proceeds from exercise of stock options

 

 

178

 

 

 

101

 

Net cash used in financing activities

 

 

(3,816

)

 

 

(3,830

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

76,587

 

 

 

(61,557

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

140,702

 

 

 

120,205

 

Cash, cash equivalents and restricted cash, end of period

 

$

217,289

 

 

$

58,648

 

 

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 2018 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. We also present revenue net of customer incentives, including safety incentives, because those incentives represent consideration payable to customers.

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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”).

Cash and cash equivalents

We consider non-restricted short-term investments that 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 available-for-sale. 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 on the condensed consolidated balance sheets as the invested funds are available for current operations. 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. These investments are 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.

Restricted cash and investments also includes investments held as part of the Company’s deferred compensation plan. These investments are classified as trading securities and are recorded at fair value with unrealized gains and losses reported as a component of other income (expense), net.

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Allowance for doubtful accounts

The Company had an allowance for doubtful accounts of $586,000 and $533,000 at June 30, 2019 and December 31, 2018, 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.

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.

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Customer incentives

We accrue for and present expected customer incentives as a reduction of revenue. 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 $27.3 million and $29.2 million at June 30, 2019 and December 31, 2018, respectively, as an estimate of the liability for unpaid safety incentives. Also, a one-time customer incentive of $9.8 million was declared in December 2018, and is included in other accrued liabilities on the consolidated balance sheets. At June 30, 2019 the remaining balance of this incentive was $7.2 million.

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.

Statements of cash flows

Interest paid during the six months ended June 30, 2019 did not materially differ from interest expense. Interest paid during the six months ended June 30, 2018 totaled $1.8 million, primarily related to prepaid fees for the Company’s letter of credit. Income taxes paid during the six months ended June 30, 2019 totaled $5.0 million. Income taxes paid during the six months ended June 30, 2018 totaled $0.1 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):

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

23,693

 

 

$

35,371

 

 

$

33,786

 

 

$

59,835

 

Restricted cash, included in restricted cash and investments

 

 

193,596

 

 

 

105,331

 

 

 

24,862

 

 

 

60,370

 

Total cash, cash equivalents and restricted cash shown in

   the statement of cash flows

 

$

217,289

 

 

$

140,702

 

 

$

58,648

 

 

$

120,205

 

 

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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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Weighted average number of basic shares outstanding

 

 

7,410

 

 

 

7,310

 

 

 

7,408

 

 

 

7,307

 

Effect of dilutive securities

 

 

282

 

 

 

365

 

 

 

266

 

 

 

351

 

Weighted average number of diluted shares outstanding

 

 

7,692

 

 

 

7,675

 

 

 

7,674

 

 

 

7,658

 

 

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 customer incentive liabilities.  Actual results may or may not differ from such estimates.

Recent accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“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 amendments in this update were adopted using the optional transition method, effective January 1, 2019. The lease commitments appear on our consolidated balance sheets as operating lease right-of-use assets and current and long-term operating lease liabilities. Such amounts are based on the present value of such commitments using our incremental borrowing rate. We have utilized the transition package of practical expedients permitted within the new standard, which allows us to carry forward the historical lease classification. See “Note 5 – Leases” for additional information.

 

 

 

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Note 2 - Fair Value Measurement

The following table summarizes the Company’s investments at June 30, 2019 and December 31, 2018 measured at fair value on a recurring basis (in thousands):

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

Gains

 

 

Recorded

 

 

 

 

 

 

Gains

 

 

Recorded

 

 

 

Cost

 

 

(Losses)

 

 

Basis