The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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.
8
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.
9
Allow
ance 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.
10
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
|
|
11
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.
12
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
|
|
|
Cost
|
|
|
(Losses)
|
|
|
Basis
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
224
|
|
|
$
|
—
|
|
|
$
|
224
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Total cash equivalents
|
|
|
224
|
|
|
|
—
|
|
|
|
224
|
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
48,822
|
|
|
|
(126
|
)
|
|
|
48,696
|
|
|
|
20
|
|
|
|
—
|
|
|
|
20
|
|
U.S. treasuries
|
|
|
19,002
|
|
|
|
(50
|
)
|
|
|
18,952
|
|
|
|
347
|
|
|
|
—
|
|
|
|
347
|
|
U.S. government agency securities
|
|
|
8,913
|
|
|
|
248
|
|
|
|
9,161
|
|
|
|
50
|
|
|
|
(1
|
)
|
|
|
49
|
|
Mortgage backed securities
|
|
|
447
|
|
|
|
(4
|
)
|
|
|
443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Asset backed securities
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total current investments
|
|
|
77,203
|
|
|
|
68
|
|
|
|
77,271
|
|
|
|
417
|
|
|
|
(1
|
)
|
|
|
416
|
|
Long term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
794
|
|
|
|
(3
|
)
|
|
|
791
|
|
Mortgage backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
484
|
|
|
|
(13
|
)
|
|
|
471
|
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
422
|
|
|
|
(7
|
)
|
|
|
415
|
|
Asset backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
Total long term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,710
|
|
|
|
(23
|
)
|
|
|
1,687
|
|
Restricted cash and investments
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
128,012
|
|
|
|
1,265
|
|
|
|
129,277
|
|
|
|
185,116
|
|
|
|
(3,739
|
)
|
|
|
181,377
|
|
Mortgage backed securities
|
|
|
71,839
|
|
|
|
192
|
|
|
|
72,031
|
|
|
|
89,426
|
|
|
|
(2,026
|
)
|
|
|
87,400
|
|
U.S. government agency securities
|
|
|
29,801
|
|
|
|
675
|
|
|
|
30,476
|
|
|
|
45,548
|
|
|
|
(908
|
)
|
|
|
44,640
|
|
U.S. treasuries
|
|
|
18,794
|
|
|
|
21
|
|
|
|
18,815
|
|
|
|
44,304
|
|
|
|
(283
|
)
|
|
|
44,021
|
|
Money market funds
|
|
|
16,614
|
|
|
|
—
|
|
|
|
16,614
|
|
|
|
419
|
|
|
|
—
|
|
|
|
419
|
|
Supranational bonds
|
|
|
4,767
|
|
|
|
34
|
|
|
|
4,801
|
|
|
|
4,765
|
|
|
|
(24
|
)
|
|
|
4,741
|
|
Mutual funds
|
|
|
2,550
|
|
|
|
—
|
|
|
|
2,550
|
|
|
|
1,093
|
|
|
|
—
|
|
|
|
1,093
|
|
Asset backed securities
|
|
|
126
|
|
|
|
1
|
|
|
|
127
|
|
|
|
75
|
|
|
|
(1
|
)
|
|
|
74
|
|
Municipal bonds
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
Total restricted cash and investments
|
|
|
272,553
|
|
|
|
2,188
|
|
|
|
274,741
|
|
|
|
370,796
|
|
|
|
(6,981
|
)
|
|
|
363,815
|
|
Total investments
|
|
$
|
349,980
|
|
|
$
|
2,256
|
|
|
$
|
352,236
|
|
|
$
|
372,953
|
|
|
$
|
(7,005
|
)
|
|
$
|
365,948
|
|
(1) Included in restricted cash and investments within the condensed consolidated balance sheet is restricted cash of $169.5 million and $104.5 million as of June 30, 2019 and December 31, 2018, respectively, which is excluded from the table above. Restricted cash and investments are classified as current and noncurrent on the balance sheet based on the nature of the restriction.
13
The following table summarizes the Company’s investments at
June 30, 2019
and
December 31, 2018
measured at fair value on a recurring basis b
y fair value hierarchy level (in thousands):
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Other
(1)
|
|
|
Basis
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Other
(1)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
224
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
224
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
48,696
|
|
|
|
—
|
|
|
|
48,696
|
|
|
|
—
|
|
|
|
435
|
|
|
|
—
|
|
|
|
435
|
|
|
|
—
|
|
U.S. treasuries
|
|
|
18,952
|
|
|
|
—
|
|
|
|
18,952
|
|
|
|
—
|
|
|
|
1,138
|
|
|
|
—
|
|
|
|
1,138
|
|
|
|
—
|
|
U.S. government
agency securities
|
|
|
9,161
|
|
|
|
—
|
|
|
|
9,161
|
|
|
|
—
|
|
|
|
49
|
|
|
|
—
|
|
|
|
49
|
|
|
|
—
|
|
Mortgage backed
securities
|
|
|
443
|
|
|
|
—
|
|
|
|
443
|
|
|
|
—
|
|
|
|
471
|
|
|
|
—
|
|
|
|
471
|
|
|
|
—
|
|
Asset backed
securities
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
Restricted cash and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
129,277
|
|
|
|
—
|
|
|
|
129,277
|
|
|
|
—
|
|
|
|
181,377
|
|
|
|
—
|
|
|
|
181,377
|
|
|
|
—
|
|
Mortgage backed
securities
|
|
|
72,031
|
|
|
|
—
|
|
|
|
72,031
|
|
|
|
—
|
|
|
|
87,400
|
|
|
|
—
|
|
|
|
87,400
|
|
|
|
—
|
|
U.S. government
agency securities
|
|
|
30,476
|
|
|
|
—
|
|
|
|
30,476
|
|
|
|
—
|
|
|
|
44,640
|
|
|
|
—
|
|
|
|
44,640
|
|
|
|
—
|
|
U.S. treasuries
|
|
|
18,815
|
|
|
|
—
|
|
|
|
18,815
|
|
|
|
—
|
|
|
|
44,021
|
|
|
|
—
|
|
|
|
44,021
|
|
|
|
—
|
|
Money market funds
|
|
|
16,614
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,614
|
|
|
|
419
|
|
|
|
—
|
|
|
|
—
|
|
|
|
419
|
|
Supranational bonds
|
|
|
4,801
|
|
|
|
—
|
|
|
|
4,801
|
|
|
|
—
|
|
|
|
4,741
|
|
|
|
—
|
|
|
|
4,741
|
|
|
|
—
|
|
Mutual funds
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,093
|
|
|
|
1,093
|
|
|
|
—
|
|
|
|
—
|
|
Asset backed
securities
|
|
|
127
|
|
|
|
—
|
|
|
|
127
|
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
Municipal bonds
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
Total investments
|
|
$
|
352,236
|
|
|
$
|
2,550
|
|
|
$
|
332,848
|
|
|
$
|
16,838
|
|
|
$
|
365,948
|
|
|
$
|
1,093
|
|
|
$
|
364,406
|
|
|
$
|
449
|
|
(1) Investments in money market funds measured at fair value using the net asset value per share practical expedient are not subject to hierarchy level classification disclosure. The Company invests in money market funds that seek to maintain a stable net asset value. These investments include commingled funds that comprise high-quality short-term securities representing liquid debt and monetary instruments where the redemption value is likely to be the fair value. Redemption is permitted daily without written notice.
14
The following table summarizes the contractual maturities of the Company’s available for sale securities at
June 30, 2019
. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
|
June 30, 2019
|
|
(In thousands)
|
Less than 1 Year
|
|
|
Between 1 to 5 Years
|
|
|
Between 5 to 10 Years
|
|
|
After 10 Years
|
|
|
Total
|
|
Corporate bonds
|
$
|
9,162
|
|
|
$
|
143,773
|
|
|
$
|
24,886
|
|
|
$
|
152
|
|
|
$
|
177,973
|
|
U.S. government agency securities
|
|
4,002
|
|
|
|
7,921
|
|
|
|
27,714
|
|
|
|
—
|
|
|
$
|
39,637
|
|
U.S. treasuries
|
|
21,155
|
|
|
|
16,612
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
37,767
|
|
Money market funds
|
|
16,838
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
16,838
|
|
Supranational bonds
|
|
—
|
|
|
|
4,801
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4,801
|
|
Asset backed securities
|
|
—
|
|
|
|
146
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
146
|
|
Municipal bonds
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
50
|
|
Total
|
$
|
51,207
|
|
|
$
|
173,253
|
|
|
$
|
52,600
|
|
|
$
|
152
|
|
|
$
|
277,212
|
|
The average contractual maturity of mortgage backed securities was 17 years as of June 30, 2019.
15
Note 3 – Wo
rkers’ Compensation Claims
The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers' compensation claims liabilities
|
|
$
|
422,872
|
|
|
$
|
378,874
|
|
|
$
|
413,397
|
|
|
$
|
363,517
|
|
Add: claims expense accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
41,145
|
|
|
|
39,967
|
|
|
|
81,530
|
|
|
|
79,019
|
|
Prior periods
|
|
|
(2,952
|
)
|
|
|
—
|
|
|
|
(4,652
|
)
|
|
|
(6
|
)
|
|
|
|
38,193
|
|
|
|
39,967
|
|
|
|
76,878
|
|
|
|
79,013
|
|
Less: claim payments related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
4,145
|
|
|
|
5,148
|
|
|
|
5,604
|
|
|
|
6,281
|
|
Prior periods
|
|
|
26,088
|
|
|
|
22,856
|
|
|
|
53,804
|
|
|
|
45,391
|
|
|
|
|
30,233
|
|
|
|
28,004
|
|
|
|
59,408
|
|
|
|
51,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Change in claims incurred in excess of retention limits
|
|
|
(96
|
)
|
|
|
(23
|
)
|
|
|
(131
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers' compensation claims liabilities
|
|
$
|
430,736
|
|
|
$
|
390,814
|
|
|
$
|
430,736
|
|
|
$
|
390,814
|
|
Incurred but not reported (IBNR)
|
|
$
|
273,114
|
|
|
$
|
231,702
|
|
|
$
|
273,114
|
|
|
$
|
231,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of IBNR to workers' compensation claims liabilities
|
|
|
63
|
%
|
|
|
59
|
%
|
|
|
63
|
%
|
|
|
59
|
%
|
The Company is a self-insured employer with respect to workers' compensation coverage for all of its employees (including employees co-employed through our client service agreements) working in Colorado, Maryland and Oregon. In the state of Washington, state law allows only the Company's staffing services and internal management employees to be covered under the Company's self-insured workers' compensation program.
The Company obtains policies from Chubb Limited (“Chubb”) for all clients in California, Delaware, Virginia, Pennsylvania, North Carolina, New Jersey, West Virginia, Idaho, Nevada and the District of Columbia. The arrangement with Chubb, known as a fronted program, provides BBSI a licensed, admitted insurance carrier to issue policies on behalf of BBSI. The risk of loss up to the first $5.0 million per occurrence is retained by BBSI through various agreements. Chubb assumes credit risk should BBSI be unable to satisfy its indemnification obligations.
The Company’s wholly owned, fully licensed captive insurance company incorporated in Arizona, AICE, provides reinsurance coverage up to $5.0 million per occurrence, except in Maryland and Colorado, where our retention per occurrence is $1.0 million and $2.0 million, respectively. The Company maintains excess workers’ compensation insurance coverage with Chubb between $5.0 million and statutory limits per occurrence, except in Maryland, where coverage with Chubb is between $1.0 million and statutory limits per occurrence, and in Colorado, where the coverage with Chubb is between $2.0 million and statutory limits per occurrence.
The Company also operates a wholly owned, fully licensed insurance company, Ecole, which provides workers’ compensation coverage to the Company’s employees working in Arizona and Utah. The Company maintains additional reinsurance coverage for Ecole with Chubb, for losses above $5.0 million per occurrence.
The Company restructured its fronted program with Chubb effective July 1, 2018. The new agreement maintains retention levels of $5.0 million per occurrence but now requires that collateral be advanced at the inception of the policy term. To partially satisfy these additional collateral requirements, the Company provided a surety bond of $30.0 million and a letter of credit of $63.7 million from its principal bank, Wells Fargo Bank, National Association (the “Bank”).
16
As part of its fronted workers’ compensation insurance program with Chubb, the Company makes monthly payments into trust account
s
(the
“
Chubb trust account
s
”) to be used for the payment of future claims. The balance in th
e Chubb trust account
s
was
$
407.7
million
and $
451.0
million at
June 30, 2019
and
December 31, 2018
, respectively. The Chubb trust account
s’
balances are included as a component of the current and long-term restricted cash and
investments
on
the Company’s
condensed consolidated balance sheets.
The states of California, Maryland, Oregon, Washington, Colorado and Delaware required us to maintain specified investment balances or other financial instruments totaling $73.2
million and $85.2 million at June 30, 2019 and December 31, 2018, respectively, to cover potential workers’ compensation claims losses related to the Company’s current and former status as a self-insured employer. At June 30, 2019, the Company provided surety bonds and standby letters of credit totaling $73.2 million, including a California requirement of $55.6 million.
The Company provided a total of $430.7 million and $413.4 million at June 30, 2019 and December 31, 2018, respectively, as an estimated future liability for unsettled workers' compensation claims liabilities. Of this amount, $3.2 million at June 30, 2019 and December 31, 2018, represent case reserves incurred in excess of the Company’s retention. The accrual for costs incurred in excess of retention limits is offset by a receivable from excess insurance carriers of $3.2 million at June 30, 2019 and December 31, 2018, included in other assets on the condensed consolidated balance sheets.
Note 4 - Revolving Credit Facility and Long-Term Debt
On August 6, 2019, the Company entered into an amended credit agreement (the “Agreement”) with the Bank, which supersedes the previous agreement. The Agreement increased the revolving credit line from $28.0 million to $33.0 million and increased the sublimit for standby letters of credit from $7.5 million to $8.0 million. At June 30, 2019, $5.9 million of the sublimit for standby letters of credit was used. The Agreement expires on July 1, 2022. There were no changes to the previous credit agreement in place during the second quarter of 2019.
Advances under the revolving credit line bear interest, as selected by the Company, of (a) the daily floating rate of one month LIBOR plus 1.75% or (b)
the fixed rate of LIBOR plus 1.75%.
The Agreement also provides for an unused commitment fee of 0.375% per year on the average daily unused amount of the revolving credit line, as well as a fee of 1.75% of the face amount of each letter of credit reserved under the line of credit. The Company had no outstanding borrowings on its revolving credit line at June 30, 2019 and December 31, 2018. The credit facility is collateralized by the Company’s accounts receivable and other rights to receive payment.
The Agreement also provides for a $63.7 million standby letter of credit (the “Chubb Letter of Credit”). The Chubb Letter of Credit has an expiration date of July 1, 2020, subject to automatic renewal in specified circumstances.
In connection with the Chubb Letter of Credit, the Bank has been granted a security interest of first priority in certain blocked securities accounts (collectively, the “Collateral Accounts”). The Company has agreed to deposit in the Collateral Accounts 50% of the Company’s consolidated net income (after tax and less cash dividends) for each quarter plus, to the extent necessary, an additional amount by May 15 each year so that the deposits in the Collateral Accounts for the prior year total at least $16 million.
The initial fee paid under the Chubb Letter of Credit in June 2018 was equal to 2.5% of the face amount thereof. Upon annual renewal, the fees payable to the Bank quarterly in advance include (a) a fee at the annual rate of 2.5%, calculated based on the difference between the face amount of the Chubb Letter of Credit and 95% of the aggregate value of the Collateral Accounts as of the end of the previous quarter, (b) a fee at the annual rate of 1.0% calculated based on the balance of the face amount, and (c) other fees upon the payment or negotiation of each drawing under the Chubb Letter of Credit.
17
The Agreement requires the satisfaction of certain financial covenants as follows:
|
•
|
EBITDA [net income before taxes plus interest expense (net of capitalized interest expense), depreciation expense, and amortization expense] on a rolling four-quarter basis of not less than $30 million at the end of each fiscal quarter; and
|
|
•
|
ratio of restricted and unrestricted cash and investments to workers’ compensation and safety incentive liabilities of at least 1.0:1.0, measured quarterly.
|
The Agreement includes certain additional restrictions as follows:
|
•
|
incurring additional indebtedness is prohibited without the prior approval of the Bank, other than purchase financing (including capital leases) for the acquisition of assets, provided that the aggregate of all purchase financing does not exceed $1,000,000 at any time; and
|
|
•
|
the Company may not terminate or cancel any of the AICE policies without the Bank’s prior written consent.
|
The Agreement also contains customary events of default and specified cross-defaults under the Company’s workers’ compensation insurance arrangements. If an event of default under the Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Agreement to be immediately due and payable. At June 30, 2019, the Company was in compliance with all covenants.
The Company maintains a mortgage loan with the Bank with a balance of approximately $4.1 million and $4.2 million at June 30, 2019 and December 31, 2018, respectively, secured by the Company’s corporate office building in Vancouver, Washington. This loan requires payment of monthly installments of $18,375, bearing interest at the
one month LIBOR plus 2.0%, with the unpaid principal balance due July 1, 2022.
18
Note 5 –
Leases
Effective January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 “Leases” using the optional transition method. Under this method of adoption, the prior period comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance. Additionally, we elected the package of practical expedients permitted under the transition guidance, which included the carry-forward of historical lease classification.
The Company primarily leases office buildings under operating leases which are included in Operating lease right-of-use (“ROU”) assets, Current operating lease liabilities, and Long-term operating lease liabilities on the condensed consolidated balance sheets. The Company’s leases have remaining terms of 1 to 7 years and often include one or more options to renew. The Company evaluates renewal options at lease inception and on an ongoing basis, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring liabilities. Leases with initial terms of 12 months or less are considered short-term lease costs and are not recorded as ROU assets on the condensed consolidated balance sheets. The Company has elected the practical expedient not to separate non-lease components from lease components for all classes of assets. Our lease agreements contain $3.7 million of residual value guarantees, and generally do not contain material variable lease payments or restrictive covenants.
Information related to the Company's total lease costs were as follows (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
Operating lease cost
|
$
|
1,646
|
|
|
$
|
3,602
|
|
Variable lease cost
|
|
143
|
|
|
|
250
|
|
Short-term lease cost
|
|
185
|
|
|
|
244
|
|
Total lease cost
|
$
|
1,974
|
|
|
$
|
4,096
|
|
Information related to the Company's ROU assets and related lease liabilities were as follows (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Cash paid for operating lease liabilities
|
$
|
1,914
|
|
|
$
|
3,644
|
|
|
Right-of-use assets obtained in exchange for new operating lease obligations
(1)
|
|
1,819
|
|
|
|
28,514
|
|
|
|
|
|
|
|
|
|
|
|
(1) Six-months ended balance includes $25.8 million for operating leases existing on January 1, 2019 and $2.7 million for operating leases that commenced in the first six months of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
2019
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
4.2 years
|
|
|
Weighted-average discount rate
|
|
|
|
|
4.4
|
|
%
|
19
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancellable operating leases with terms of more than one year to the total operating lease liabilities recognized on the condensed c
onsolidated balance sheets as of
June 30, 2019
(in thousands):
July 1, 2019 through December 31, 2019
|
$
|
3,767
|
|
2020
|
|
7,076
|
|
2021
|
|
6,450
|
|
2022
|
|
4,976
|
|
2023
|
|
3,672
|
|
Thereafter
|
|
2,087
|
|
Total undiscounted future minimum lease payments
|
|
28,028
|
|
Less: Difference between undiscounted lease payments and discounted operating lease liabilities
|
|
2,546
|
|
Total operating lease liabilities
|
$
|
25,482
|
|
Current operating lease liabilities
|
$
|
6,381
|
|
Long-term operating lease liabilities
|
|
19,101
|
|
Total operating lease liabilities
|
$
|
25,482
|
|
As previously disclosed in our 2018 Annual Report on Form 10-K, under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year would have been as follows (in thousands):
Year Ending
|
|
|
|
December 31,
|
|
|
|
2019
|
$
|
7,135
|
|
2020
|
|
6,198
|
|
2021
|
|
5,673
|
|
2022
|
|
4,125
|
|
2023
|
|
2,642
|
|
Thereafter
|
|
1,474
|
|
|
$
|
27,247
|
|
20
Note
6
–
Income Taxes
The Company’s realization of a portion of net deferred tax assets is based in part on our estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals.
Under Accounting Standards Codification (“ASC”) 740, “Income Taxes,” management evaluates the realizability of the deferred tax assets on a quarterly basis under a “more-likely than not” standard. As part of this evaluation, management reviews all evidence both positive and negative to determine if a valuation allowance is needed. One component of this analysis is to determine whether the Company was in a cumulative loss position for the most recent 12 quarters. The Company was in a cumulative income position for the 12 quarters ended June 30, 2019.
The Company is subject to income taxes in U.S. federal and multiple state and local tax jurisdictions. The Internal Revenue Service is examining the Company’s federal tax returns for the years ended December 31, 2011, 2012, 2013 and 2014. In the major jurisdictions where it operates, the Company is generally no longer subject to income tax examinations by tax authorities for years before 2011.
A portion of the consolidated income the Company generates is not subject to state income tax. Depending on the percentage of this income as compared to total consolidated income, the Company's state effective rate could fluctuate from expectations.
Note 7 – Litigation
On November 21, 2012, David Kaanaana (“Kaanaana”), a former staffing employee, filed a California wage and hour violations lawsuit against BBSI. On May 19, 2016, the court entered a ruling in favor of BBSI, which was subsequently appealed by the plaintiffs. On November 30, 2018, the California Court of Appeal for the Second Appellate District returned its decision in Kaanaana v. Barrett Business Services, Inc., overruling the trial court's decision to dismiss plaintiffs' claims and holding that prevailing wage requirements applicable to “public works” apply to certain types of districts. On January 9, 2019, BBSI filed a petition of review to the California Supreme Court. An amicus letter in support of the petition was filed by the Sanitation Districts of Los Angeles County, joined in by numerous other "special districts" in California. On February 27, 2019, the California Supreme Court granted the petition to review the appellate court’s decision.
BBSI is subject to other legal proceedings and claims that arise in the ordinary course of our business.
Given the uncertainties surrounding litigation, management is unable to estimate a potential range of loss arising from these actions.
Note 8 – Subsequent Events
We have evaluated events and transactions occurring after the balance sheet date through our filing date and noted no events that are subject to recognition or disclosure.
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