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 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, and costs associated with operating our two wholly owned insurance companies, Associated Insurance Company for Excess (“AICE”) and Ecole Insurance Company (“Ecole”).
8
Cash and cash equivalents
We consider non-restricted short-term investments, which are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three months, to be cash equivalents for purposes of the condensed consolidated statements of cash flows and condensed consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration
.
Investments
The Company classifies investments as trading or available-for-sale. We had no trading securities at June 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. 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. 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 $432,000 and $265,000 at June 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. 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 c
laims 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.
The Company’s independent actuary provides management with an estimate of the current and long-term portions of our total workers’ compensation claims, which is an important factor in our process for estimating workers’ compensation claims liabilities. The current portion represents the independent actuary’s best estimate of payments the Company will make related to workers’ compensation claims over the ensuing twelve months.
A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.
Safety incentives
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 $28.1 million and $28.5 million at June 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 six months ended June 30, 2018 totaled $1.8 million, primarily related to prepaid fees for the Company’s letter of credit. Interest paid during the six months ended June 30, 2017 did not materially differ from interest expense. Income taxes paid during the six months ended June 30, 2018 totaled $0.1 million. Income taxes paid during the six months ended June 30, 2017 totaled $2.4 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,
|
|
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
33,786
|
|
|
$
|
59,835
|
|
Restricted cash, included in restricted cash and investments
|
|
|
24,862
|
|
|
|
60,370
|
|
Total cash, cash equivalents and restricted cash shown in the
statement of cash flows
|
|
$
|
58,648
|
|
|
$
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average number of basic shares outstanding
|
|
|
7,310
|
|
|
|
7,254
|
|
|
|
7,307
|
|
|
|
7,252
|
|
Effect of dilutive securities
|
|
|
365
|
|
|
|
296
|
|
|
|
351
|
|
|
|
—
|
|
Weighted average number of diluted shares outstanding
|
|
|
7,675
|
|
|
|
7,550
|
|
|
|
7,658
|
|
|
|
7,252
|
|
As a result of the net loss for the six months ended June 30, 2017, 294,169 potential common shares have been excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.
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 ac
counting 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 a material 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 $24.9 million, $60.4 million, $95.2 million and $290.6 million for the periods ended June 30, 2018, December 31, 2017, June 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 June 30, 2018 and December 31, 2017 measured at fair value on a recurring basis (in thousands):
|
|
June 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
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
121
|
|
U.S. treasuries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
100
|
|
Total cash equivalents
|
|
|
56
|
|
|
|
—
|
|
|
|
56
|
|
|
|
221
|
|
|
|
—
|
|
|
|
221
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
|
344
|
|
|
|
—
|
|
|
|
344
|
|
|
|
199
|
|
|
|
—
|
|
|
|
199
|
|
Corporate bonds
|
|
|
61
|
|
|
|
(1
|
)
|
|
|
60
|
|
|
|
400
|
|
|
|
—
|
|
|
|
400
|
|
U.S. government agency securities
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
Municipal bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
Total current investments
|
|
|
465
|
|
|
|
(1
|
)
|
|
|
464
|
|
|
|
674
|
|
|
|
—
|
|
|
|
674
|
|
Long term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
|
645
|
|
|
|
(7
|
)
|
|
|
638
|
|
|
|
202
|
|
|
|
(2
|
)
|
|
|
200
|
|
Mortgage backed securities
|
|
|
522
|
|
|
|
(14
|
)
|
|
|
508
|
|
|
|
577
|
|
|
|
(5
|
)
|
|
|
572
|
|
Corporate bonds
|
|
|
384
|
|
|
|
(11
|
)
|
|
|
373
|
|
|
|
419
|
|
|
|
(2
|
)
|
|
|
417
|
|
U.S. government agency securities
|
|
|
49
|
|
|
|
—
|
|
|
|
49
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Asset backed securities
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
Total long term investments
|
|
|
1,610
|
|
|
|
(32
|
)
|
|
|
1,578
|
|
|
|
1,208
|
|
|
|
(9
|
)
|
|
|
1,199
|
|
Restricted cash and investments
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
190,230
|
|
|
|
(4,512
|
)
|
|
|
185,718
|
|
|
|
184,808
|
|
|
|
(953
|
)
|
|
|
183,855
|
|
Mortgage backed securities
|
|
|
97,337
|
|
|
|
(2,610
|
)
|
|
|
94,727
|
|
|
|
86,240
|
|
|
|
(595
|
)
|
|
|
85,645
|
|
U.S. treasuries
|
|
|
72,776
|
|
|
|
(365
|
)
|
|
|
72,411
|
|
|
|
45,833
|
|
|
|
(143
|
)
|
|
|
45,690
|
|
U.S. government agency securities
|
|
|
45,592
|
|
|
|
(1,233
|
)
|
|
|
44,359
|
|
|
|
38,168
|
|
|
|
(222
|
)
|
|
|
37,946
|
|
Supranational bonds
|
|
|
4,763
|
|
|
|
(49
|
)
|
|
|
4,714
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Money market funds
|
|
|
361
|
|
|
|
—
|
|
|
|
361
|
|
|
|
16,018
|
|
|
|
—
|
|
|
|
16,018
|
|
Municipal bonds
|
|
|
185
|
|
|
|
—
|
|
|
|
185
|
|
|
|
472
|
|
|
|
(14
|
)
|
|
|
458
|
|
Asset backed securities
|
|
|
75
|
|
|
|
(1
|
)
|
|
|
74
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial paper
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,973
|
|
|
|
—
|
|
|
|
18,973
|
|
Total restricted cash and investments
|
|
|
411,319
|
|
|
|
(8,770
|
)
|
|
|
402,549
|
|
|
|
390,512
|
|
|
|
(1,927
|
)
|
|
|
388,585
|
|
Total investments
|
|
$
|
413,450
|
|
|
$
|
(8,803
|
)
|
|
$
|
404,647
|
|
|
$
|
392,615
|
|
|
$
|
(1,936
|
)
|
|
$
|
390,679
|
|
(1) Included in restricted cash and investments within the condensed consolidated balance sheet as of June 30, 2018 is restricted cash and long term workers' compensation deposits of $20.5 million, 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, 2018
and
December 31, 2017
measured at fair value on a recurring basis by fair value hierarchy level (in thousands):
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Other
(1)
|
|
|
Basis
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Other
(1)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121
|
|
U.S. treasuries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
|
982
|
|
|
|
—
|
|
|
|
982
|
|
|
|
—
|
|
|
|
—
|
|
|
|
399
|
|
|
|
—
|
|
|
|
399
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage backed securities
|
|
|
508
|
|
|
|
—
|
|
|
|
508
|
|
|
|
—
|
|
|
|
—
|
|
|
|
572
|
|
|
|
—
|
|
|
|
572
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
433
|
|
|
|
—
|
|
|
|
433
|
|
|
|
—
|
|
|
|
—
|
|
|
|
817
|
|
|
|
—
|
|
|
|
817
|
|
|
|
—
|
|
|
|
—
|
|
U.S. government agency securities
|
|
|
109
|
|
|
|
—
|
|
|
|
109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
|
|
—
|
|
|
|
—
|
|
Asset backed securities
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
Municipal bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
Restricted cash and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
185,718
|
|
|
|
—
|
|
|
|
185,718
|
|
|
|
—
|
|
|
|
—
|
|
|
|
183,855
|
|
|
|
—
|
|
|
|
183,855
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage backed securities
|
|
|
94,727
|
|
|
|
—
|
|
|
|
94,727
|
|
|
|
—
|
|
|
|
—
|
|
|
|
85,645
|
|
|
|
—
|
|
|
|
85,645
|
|
|
|
—
|
|
|
|
—
|
|
U.S. treasuries
|
|
|
72,411
|
|
|
|
—
|
|
|
|
72,411
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,690
|
|
|
|
—
|
|
|
|
45,690
|
|
|
|
—
|
|
|
|
—
|
|
U.S. government agency securities
|
|
|
44,359
|
|
|
|
—
|
|
|
|
44,359
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,946
|
|
|
|
—
|
|
|
|
37,946
|
|
|
|
—
|
|
|
|
—
|
|
Supranational bonds
|
|
|
4,714
|
|
|
|
—
|
|
|
|
4,714
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Money market funds
|
|
|
361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
361
|
|
|
|
16,018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,018
|
|
Municipal bonds
|
|
|
185
|
|
|
|
—
|
|
|
|
185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
458
|
|
|
|
—
|
|
|
|
458
|
|
|
|
—
|
|
|
|
—
|
|
Asset backed securities
|
|
|
74
|
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial paper
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,973
|
|
|
|
—
|
|
|
|
18,973
|
|
|
|
—
|
|
|
|
—
|
|
Total investments
|
|
$
|
404,647
|
|
|
$
|
—
|
|
|
$
|
404,230
|
|
|
$
|
—
|
|
|
$
|
417
|
|
|
$
|
390,679
|
|
|
$
|
—
|
|
|
$
|
374,540
|
|
|
$
|
—
|
|
|
$
|
16,139
|
|
(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
Note 3 – Workers’ Compensation Claims
The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
|
2017
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers' compensation claims liabilities
|
|
$
|
378,874
|
|
|
$
|
326,233
|
|
|
$
|
363,517
|
|
|
|
$
|
312,537
|
|
Add: claims expense accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
39,967
|
|
|
|
37,878
|
|
|
|
79,019
|
|
|
|
|
73,153
|
|
Prior periods
|
|
|
—
|
|
|
|
2,350
|
|
|
|
(6
|
)
|
|
|
|
5,264
|
|
|
|
|
39,967
|
|
|
|
40,228
|
|
|
|
79,013
|
|
|
|
|
78,417
|
|
Less: claim payments related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
5,148
|
|
|
|
4,148
|
|
|
|
6,281
|
|
|
|
|
5,280
|
|
Prior periods
|
|
|
22,856
|
|
|
|
25,998
|
|
|
|
45,391
|
|
|
|
|
49,462
|
|
|
|
|
28,004
|
|
|
|
30,146
|
|
|
|
51,672
|
|
|
|
|
54,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Change in claims incurred in excess of retention
limits
|
|
|
(23
|
)
|
|
|
(6,236
|
)
|
|
|
(44
|
)
|
|
|
|
(6,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers' compensation claims liabilities
|
|
$
|
390,814
|
|
|
$
|
330,079
|
|
|
$
|
390,814
|
|
|
|
$
|
330,079
|
|
Incurred but not reported (IBNR)
|
|
$
|
231,702
|
|
|
$
|
167,693
|
|
|
$
|
231,702
|
|
|
|
$
|
167,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of IBNR to workers' compensation claims
liabilities
|
|
|
59
|
%
|
|
|
51
|
%
|
|
|
59
|
%
|
|
|
|
51
|
%
|
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, except as described below. 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 California-based clients along with clients in Delaware, Virginia, Pennsylvania, North Carolina, New Jersey, West Virginia, Idaho 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.
As part of its fronted workers’ compensation insurance program with Chubb, the Company makes monthly payments into trust accounts (the “Chubb trust accounts”) to be used for the payment of future claims. The balance in the Chubb trust accounts was $408.1 million and $380.6 million at June 30, 2018 and December 31, 2017, respectively. The Chubb trust accounts’ 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 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”).
The states of California, Maryland, Oregon, Washington, Colorado and Delaware required us to maintain specified investment balances or other financial instruments totaling $85.1 million and $96.8 million at June 30, 2018 and December 31, 2017, 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, 2018, the Company provided surety bonds and standby letters of credit totaling $85.1 million, including a California requirement of $70.6 million.
15
The Company provided a total of $
390.8
million and $3
63.5
million at
June 30, 2018
and
December 31, 2017
, respectively, as an estimated future liability for unsettled workers' compensation claims liabili
ties. Of this amount, $
2.9
million and $
3.0
million at
June 30, 2018
and
December 31, 2017
, respectively, 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 $
2.9
million and $
3.0
million at
June 30, 2018
and
December 31, 2017
, respectively, included
in
other assets
o
n the condensed consolidated balance sheets.
Note 4 - Revolving Credit Facility and Long-Term Debt
The Company maintains a credit agreement (the “Agreement”) with the Bank. The Agreement provided for a revolving credit line in the amount of $40.0 million from March 15, 2018 through June 15, 2018, and $25.0 million thereafter, increasing to $28.0 million effective July 1, 2018. The revolving line of credit expires on July 1, 2020. The Agreement also provided a $6.0 million sublimit for standby letters of credit at June 30, 2018, increasing to $7.5 million effective July 1, 2018. Of the $6.0 million sublimit for standby letters of credit, $5.9 million was used at June 30, 2018.
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 and 0.95% on standalone, fully secured letters of credit. The Company had no outstanding borrowings on its revolving credit line at June 30, 2018 and December 31, 2017. The credit facility is collateralized by the Company’s accounts receivable and other rights to receive payment.
In late June 2018, as part of the Company’s workers’ compensation insurance program restructure with Chubb, the Agreement was amended to provide 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, 2019, 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 31 each year so that the deposits in the Collateral Accounts for the prior year total at least $16 million.
The initial fee payable under the Chubb Letter of Credit 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 1.25% 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.
The Agreement requires the satisfaction of certain financial covenants as follows:
|
•
|
EBITDA [net profit 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;
|
|
•
|
ratio of restricted and unrestricted cash and marketable securities to workers’ compensation and safety incentive liabilities of at least 1.0;1.0, measured quarterly; and
|
|
•
|
total workers’ compensation liabilities of not less than the estimate of required reserves reflected in the third-party actuarial report issued to the Company quarterly.
|
16
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;
|
|
•
|
the Company may not declare or pay any dividend in excess of $0.25 per share in total each fiscal quarter, subject to increase by no more than 10% each year beginning June 30, 2019, compared to the prior fiscal year; and
|
|
•
|
the Company may not terminate or cancel any of the AICE policies without the Bank’s prior written consent.
|
The Agreement as amended in late June 2018 added an event of default as follows:
|
•
|
specified cross-defaults under the Company's workers' compensation insurance arrangements.
|
The Agreement also contains customary events of default. 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, 2018, the Company was in compliance with all covenants.
The Company maintains a mortgage loan with the Bank with a balance of approximately $4.3 million and $4.4 million at June 30, 2018 and December 31, 2017, 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.
Note 5 – Income Taxes
The Company's interim tax expense is based upon the estimated annual effective tax rate for the respective year. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Pursuant to Staff Accounting Bulletin No. 118, the Company recorded certain provisional amounts for estimated income tax effects of the Tax Act on deferred income taxes. The Company made no adjustments to the provisional amounts recorded during the six months ended June 30, 2018. We will recognize any changes to provisional amounts as we continue to analyze the existing statute or as additional guidance becomes available. We expect to complete our analysis of the provisional amounts by the end of 2018.
Under 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, 2018.
The Internal Revenue Service is examining the Company’s federal tax returns for the years ended December 31, 2011, 2012, 2013 and 2014.
Note 6 – Litigation
BBSI received a subpoena from the San Francisco office of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) in April 2016 in connection with the SEC’s inquiry into reported errors in our financial statements. The Company previously received a subpoena from the SEC in May 2015 in connection with the SEC’s investigation of the Company’s accounting policies with regard to its workers’ compensation reserves. In July 2018, BBSI reached an agreement in principle with the Division of Enforcement staff for a full resolution of this matter that includes a civil penalty in the amount of $1.5 million, to be paid after final regulatory approval, expected during the third quarter of 2018. An accrual for this amount has been recorded as of June 30, 2018 and is included within other accrued liabilities on the condensed consolidated balance sheets.
In June 2016, BBSI was advised by the United States Department of Justice that it had commenced an investigation. The Company continues to cooperate with the investigation.
17
On June 17, 2015, Daniel Salinas (“Salinas”) filed a shareholder derivative lawsuit against BBSI and certain of its officers and directors in the Circuit Court for Baltimore City, Maryland. The complaint alleges breaches of fiduciary duty, unjust enrichmen
t and other violations of law and seeks recovery of various damages, including the costs and expenses incurred in connection with BBSI’s reserve strengthening process, reserve study and consultants, the cost of stock repurchases by BBSI in October 2014, co
mpensation paid to BBSI’s officers, and costs of negotiating BBSI’s credit facility with its principal lender, as well as the proceeds of sales of stock by certain of BBSI’s officers and directors during 2013 and 2014. On September 28, 2015, BBSI and the i
ndividual defendants filed motions to dismiss the derivative suit and a motion to stay pending resolution of another lawsuit which was settled in the fourth quarter of 2016. On December 4, 2015, Salinas filed an opposition to each motion. On January 27, 20
16, the defendants filed a reply to the opposition brief. On February 11, 2016, Judge Michel Pierson heard oral argument on the motions. A decision has not been issued.
Other than for the preliminary settlement agreement described above, management is unable to estimate the probability or the potential range of loss arising from the legal actions described above.
BBSI is subject to other legal proceedings and claims that arise in the ordinary course of our business. Management does not expect the amount of ultimate liability with respect to other currently pending or threatened actions to materially affect BBSI’s consolidated financial position or results of operations.
Note 7 – Subsequent Events
We have evaluated events and transactions occurring after the balance sheet date through our filing date and determined that subsequent events are properly reflected in the Company’s consolidated financial statements and notes as required by GAAP.