10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 7, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2018
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 0-21886
BARRETT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland |
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52-0812977 |
(State or other jurisdiction of |
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(IRS Employer |
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8100 NE Parkway Drive, Suite 200 |
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Vancouver, Washington |
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98662 |
(Address of principal executive offices) |
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(Zip Code) |
(360) 828-0700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
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Accelerated filer |
☒ |
Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
Emerging growth company |
☐ |
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|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2018, 7,381,099 shares of the registrant’s common stock ($0.01 par value) were outstanding.
BARRETT BUSINESS SERVICES, INC.
INDEX TO FORM 10-Q
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Page |
Item 1. |
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Unaudited Interim Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets - September 30, 2018 and December 31, 2017 |
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3 |
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4 |
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5 |
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6 |
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Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2018 and 2017 |
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7 |
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8 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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18 |
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Item 3. |
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25 |
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Item 4. |
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25 |
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Item 1. |
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26 |
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Item 1A. |
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26 |
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Item 6. |
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27 |
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28 |
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2
PART I – FINANCIAL INFORMATION
Barrett Business Services, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Par Value)
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September 30, |
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December 31, |
|
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2018 |
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2017 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
34,975 |
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$ |
59,835 |
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Trade accounts receivable, net |
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162,574 |
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|
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136,664 |
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Income taxes receivable |
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— |
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|
|
1,686 |
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Prepaid expenses and other |
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12,444 |
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5,724 |
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Investments |
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395 |
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|
|
674 |
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Restricted cash and investments |
|
|
112,385 |
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|
103,652 |
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Total current assets |
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|
322,773 |
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|
|
308,235 |
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Investments |
|
|
1,649 |
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|
|
1,199 |
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Property, equipment and software, net |
|
|
26,731 |
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24,909 |
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Restricted cash and investments |
|
|
333,062 |
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|
291,273 |
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Goodwill |
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|
47,820 |
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47,820 |
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Other assets |
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|
3,148 |
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|
|
3,215 |
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Deferred income taxes |
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8,158 |
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5,834 |
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$ |
743,341 |
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$ |
682,485 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
221 |
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$ |
221 |
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Accounts payable |
|
|
4,464 |
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|
5,166 |
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Accrued payroll, payroll taxes and related benefits |
|
|
194,718 |
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|
181,639 |
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Income taxes payable |
|
|
2,429 |
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|
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— |
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Other accrued liabilities |
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|
8,860 |
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|
|
9,024 |
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Workers' compensation claims liabilities |
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|
103,527 |
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|
97,673 |
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Safety incentives liability |
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28,600 |
|
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|
28,532 |
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Total current liabilities |
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342,819 |
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|
322,255 |
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Long-term workers' compensation claims liabilities |
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|
295,311 |
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|
265,844 |
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Long-term debt |
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|
4,006 |
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|
|
4,171 |
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Customer deposits and other long-term liabilities |
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1,276 |
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|
1,381 |
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Total liabilities |
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643,412 |
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|
593,651 |
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Commitments and contingencies (Notes 4 and 6) |
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Stockholders' equity: |
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Common stock, $.01 par value; 20,500 shares authorized, 7,381 and 7,301 shares issued and outstanding |
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74 |
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73 |
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Additional paid-in capital |
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13,674 |
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12,311 |
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Accumulated other comprehensive loss |
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(7,406 |
) |
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(1,430 |
) |
Retained earnings |
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93,587 |
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|
77,880 |
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Total stockholders' equity |
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99,929 |
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|
|
88,834 |
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$ |
743,341 |
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$ |
682,485 |
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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)
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Three Months Ended |
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Nine Months Ended |
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||||||||||
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September 30, |
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September 30, |
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||||||||||
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2018 |
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2017 |
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2018 |
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2017 |
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Revenues: |
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Professional employer service fees |
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$ |
206,320 |
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$ |
197,388 |
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$ |
592,559 |
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$ |
557,315 |
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Staffing services |
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40,967 |
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42,747 |
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110,307 |
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118,391 |
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Total revenues |
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247,287 |
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240,135 |
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702,866 |
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675,706 |
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Cost of revenues: |
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Direct payroll costs |
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30,842 |
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31,986 |
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83,265 |
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89,182 |
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Payroll taxes and benefits |
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100,348 |
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94,922 |
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322,784 |
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304,268 |
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Workers' compensation |
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56,412 |
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58,310 |
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|
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172,388 |
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172,675 |
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Total cost of revenues |
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187,602 |
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185,218 |
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578,437 |
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566,125 |
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Gross margin |
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59,685 |
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54,917 |
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124,429 |
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109,581 |
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Selling, general and administrative expenses |
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36,670 |
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33,925 |
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101,713 |
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|
88,595 |
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Depreciation and amortization |
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|
949 |
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1,062 |
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|
|
3,228 |
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|
2,989 |
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Income from operations |
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22,066 |
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19,930 |
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19,488 |
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|
17,997 |
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Other income (expense): |
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Investment income, net |
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2,235 |
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|
|
1,534 |
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|
6,455 |
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|
3,084 |
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Interest expense |
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(465 |
) |
|
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(52 |
) |
|
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(574 |
) |
|
|
(197 |
) |
Other, net |
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|
10 |
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|
|
32 |
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|
|
15 |
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|
|
28 |
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Other income, net |
|
|
1,780 |
|
|
|
1,514 |
|
|
|
5,896 |
|
|
|
2,915 |
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Income before income taxes |
|
|
23,846 |
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|
21,444 |
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|
|
25,384 |
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|
|
20,912 |
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Provision for income taxes |
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|
4,759 |
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|
|
6,659 |
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|
4,178 |
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|
6,228 |
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Net income |
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$ |
19,087 |
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$ |
14,785 |
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$ |
21,206 |
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$ |
14,684 |
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Basic income per common share |
|
$ |
2.59 |
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$ |
2.03 |
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$ |
2.89 |
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$ |
2.02 |
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Weighted average number of basic common shares outstanding |
|
|
7,369 |
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|
|
7,296 |
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|
|
7,327 |
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|
|
7,266 |
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Diluted income per common share |
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$ |
2.50 |
|
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$ |
1.96 |
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$ |
2.77 |
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$ |
1.95 |
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Weighted average number of diluted common shares outstanding |
|
|
7,643 |
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|
|
7,527 |
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|
|
7,652 |
|
|
|
7,539 |
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Cash dividends per common share |
|
$ |
0.25 |
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$ |
0.25 |
|
|
$ |
0.75 |
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$ |
0.75 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Barrett Business Services, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In Thousands)
|
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Three Months Ended |
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September 30, |
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|||||
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2018 |
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2017 |
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Net income |
|
$ |
19,087 |
|
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$ |
14,785 |
|
Unrealized gains (losses) on investments, net of tax of ($396) and $51 in 2018 and 2017, respectively |
|
|
(1,037 |
) |
|
|
75 |
|
Comprehensive income |
|
$ |
18,050 |
|
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$ |
14,860 |
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|
|
|
|
|
|
|
|
|
|
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Nine Months Ended |
|
|||||
|
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September 30, |
|
|||||
|
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2018 |
|
|
2017 |
|
||
Net income |
|
$ |
21,206 |
|
|
$ |
14,684 |
|
Unrealized gains (losses) on investments, net of tax of ($2,325) and $128 in 2018 and 2017, respectively |
|
|
(5,976 |
) |
|
|
188 |
|
Comprehensive income |
|
$ |
15,230 |
|
|
$ |
14,872 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Barrett Business Services, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2018 and 2017
(Unaudited)
(In Thousands)
|
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|
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|
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|
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|
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|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Additional |
|
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Comprehensive |
|
|
|
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Common Stock |
|
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Paid-in |
|
|
(Loss) |
|
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Retained |
|
|
|
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|
||||||||
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Shares |
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Amount |
|
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Capital |
|
|
Income |
|
|
Earnings |
|
|
Total |
|
||||||
Balance, December 31, 2016 |
|
7,244 |
|
|
$ |
72 |
|
|
$ |
9,638 |
|
|
$ |
(3 |
) |
|
$ |
59,986 |
|
|
$ |
69,693 |
|
Common stock issued on exercise of options and vesting of restricted stock units |
|
85 |
|
|
|
1 |
|
|
|
147 |
|
|
|
— |
|
|
|
— |
|
|
|
148 |
|
Common stock repurchased on vesting of restricted stock units |
|
(29 |
) |
|
|
— |
|
|
|
(1,666 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,666 |
) |
Share-based compensation expense |
|
— |
|
|
|
— |
|
|
|
3,064 |
|
|
|
— |
|
|
|
— |
|
|
|
3,064 |
|
Cash dividends on common stock |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,449 |
) |
|
|
(5,449 |
) |
Unrealized gain on investments, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
188 |
|
|
|
— |
|
|
|
188 |
|
Net Income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,684 |
|
|
|
14,684 |
|
Balance, September 30, 2017 |
|
7,300 |
|
|
$ |
73 |
|
|
$ |
11,183 |
|
|
$ |
185 |
|
|
$ |
69,221 |
|
|
$ |
80,662 |
|
Balance, December 31, 2017 |
|
7,301 |
|
|
$ |
73 |
|
|
$ |
12,311 |
|
|
$ |
(1,430 |
) |
|
$ |
77,880 |
|
|
$ |
88,834 |
|
Common stock issued on exercise of options and vesting of restricted stock units |
|
112 |
|
|
|
1 |
|
|
|
323 |
|
|
|
— |
|
|
|
— |
|
|
|
324 |
|
Common stock repurchased on vesting of restricted stock units |
|
(32 |
) |
|
|
— |
|
|
|
(2,952 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,952 |
) |
Share-based compensation expense |
|
— |
|
|
|
— |
|
|
|
3,992 |
|
|
|
— |
|
|
|
— |
|
|
|
3,992 |
|
Cash dividends on common stock |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,499 |
) |
|
|
(5,499 |
) |
Unrealized gain on investments, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,976 |
) |
|
|
— |
|
|
|
(5,976 |
) |
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,206 |
|
|
|
21,206 |
|
Balance, September 30, 2018 |
|
7,381 |
|
|
$ |
74 |
|
|
$ |
13,674 |
|
|
$ |
(7,406 |
) |
|
$ |
93,587 |
|
|
$ |
99,929 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Barrett Business Services, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,206 |
|
|
$ |
14,684 |
|
Reconciliations of net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,228 |
|
|
|
2,989 |
|
Losses (gains) recognized on investments |
|
|
36 |
|
|
|
(76 |
) |
Share-based compensation |
|
|
3,992 |
|
|
|
3,064 |
|
Changes in certain operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(25,910 |
) |
|
|
(29,884 |
) |
Income taxes receivable |
|
|
1,686 |
|
|
|
— |
|
Prepaid expenses and other |
|
|
(6,720 |
) |
|
|
(2,706 |
) |
Accounts payable |
|
|
(702 |
) |
|
|
(911 |
) |
Accrued payroll, payroll taxes and related benefits |
|
|
13,079 |
|
|
|
29,157 |
|
Other accrued liabilities |
|
|
(772 |
) |
|
|
(267 |
) |
Income taxes payable |
|
|
2,429 |
|
|
|
3,740 |
|
Workers' compensation claims liabilities |
|
|
35,391 |
|
|
|
38,163 |
|
Safety incentives liability |
|
|
68 |
|
|
|
2,724 |
|
Customer deposits, long-term liabilities and other assets, net |
|
|
(109 |
) |
|
|
(150 |
) |
Net cash provided by operating activities |
|
|
46,902 |
|
|
|
60,527 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(4,442 |
) |
|
|
(2,612 |
) |
Purchase of investments |
|
|
(1,688 |
) |
|
|
(3,559 |
) |
Proceeds from sales and maturities of investments |
|
|
1,481 |
|
|
|
7,889 |
|
Purchase of restricted investments |
|
|
(103,861 |
) |
|
|
(363,680 |
) |
Proceeds from sales and maturities of restricted investments |
|
|
54,819 |
|
|
|
53,039 |
|
Net cash used in investing activities |
|
|
(53,691 |
) |
|
|
(308,923 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from credit-line borrowings |
|
|
8,500 |
|
|
|
24,899 |
|
Payments on credit-line borrowings |
|
|
(8,500 |
) |
|
|
(24,899 |
) |
Payments on long-term debt |
|
|
(165 |
) |
|
|
(166 |
) |
Common stock repurchased on vesting of restricted stock units |
|
|
(2,952 |
) |
|
|
(1,666 |
) |
Dividends paid |
|
|
(5,499 |
) |
|
|
(5,449 |
) |
Proceeds from exercise of stock options and vesting of restricted stock units |
|
|
324 |
|
|
|
148 |
|
Net cash used in financing activities |
|
|
(8,292 |
) |
|
|
(7,133 |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
(15,081 |
) |
|
|
(255,529 |
) |
Cash, cash equivalents and restricted cash, beginning of period |
|
|
120,205 |
|
|
|
341,330 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
105,124 |
|
|
$ |
85,801 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Barrett Business Services, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation of Interim Period Statements
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The accompanying condensed financial statements are prepared on a consolidated basis. All intercompany account balances and transactions have been eliminated in consolidation. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from such estimates and assumptions. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report on Form 10-K at pages F1 – F27. The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.
Revenue recognition
Professional employer (“PEO”) services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Staffing revenues relate primarily to short-term staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related revenue is recognized, as services are rendered by our workforce.
Our PEO client service agreements have a minimum term of one year, are renewable on an annual basis, and typically require 30 days’ written notice to cancel or terminate the contract by either party. In addition, our client service agreements provide for immediate termination upon any default of the client regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Staffing customers are invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days. The amount of earned but unbilled revenue is classified as a receivable on the condensed consolidated balance sheets.
We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. Safety incentives represent consideration payable to PEO customers, and therefore safety incentive costs are also netted against PEO revenue.
Cost of revenues
Our cost of revenues for PEO services includes employer payroll-related taxes and workers’ compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers’ compensation costs consist primarily of claims reserves, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, and the fronted insurance program, as well as costs associated with operating our two wholly owned insurance companies, Associated Insurance Company for Excess (“AICE”) and Ecole Insurance Company (“Ecole”).
8
Cash and cash equivalents
We consider non-restricted short-term investments, which are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three months, to be cash equivalents for purposes of the condensed consolidated statements of cash flows and condensed consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration.
Investments
The Company classifies investments as trading or available-for-sale. We had no trading securities at September 30, 2018 and December 31, 2017. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Investments are recorded as current and noncurrent on the condensed consolidated balance sheets based on maturity date. Management considers available evidence in evaluating potential impairment of investments, including the duration and extent to which fair value is less than cost. Realized gains and losses on sales of investments are included in investment income in our condensed consolidated statements of operations. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the condensed consolidated statements of operations.
Restricted cash and investments
The Company holds restricted cash and investments primarily for the future payment of workers’ compensation claims. Restricted investments have been categorized as available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Restricted cash and investments are classified as current and noncurrent on the condensed consolidated balance sheets based on the nature of the restriction. Management considers available evidence in evaluating potential impairment of restricted investments, including the duration and extent to which fair value is less than cost. Realized gains and losses on sales of restricted investments are included in investment income in our condensed consolidated statements of operations. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the condensed consolidated statements of operations.
Allowance for doubtful accounts
The Company had an allowance for doubtful accounts of $482,000 and $265,000 at September 30, 2018 and December 31, 2017, respectively. We make estimates of the collectability of our accounts receivable for services provided to our customers. Management analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.
Workers’ compensation claims liabilities
Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by our third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, “IBNR”). Workers’ compensation claims liabilities included case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, and unallocated loss adjustment expenses. The estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond one year is included in long-term liabilities on our condensed consolidated balance sheets. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.
9
The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes.
Our estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves.
A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.
Safety incentives
Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe-work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by our third party administrator. The Company provided $28.6 million and $28.5 million at September 30, 2018 and December 31, 2017, respectively, as an estimate of the liability for unpaid safety incentives.
Customer deposits
We require deposits from certain PEO customers to cover a portion of our accounts receivable due from such customers in the event of default of payment.
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders.
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principles (“GAAP”) are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive income (loss) comprises unrealized holding gains and losses on our available-for-sale investments.
10
Statements of cash flows
Interest paid during the nine months ended September 30, 2018 totaled $1.8 million, and primarily related to prepaid fees for the Company’s letter of credit. Interest paid during the nine months ended September 30, 2017 did not materially differ from interest expense. Income taxes paid during the nine months ended September 30, 2018 totaled $0.1 million. Income taxes paid during the nine months ended September 30, 2017 totaled $2.5 million.
Bank deposits and other cash equivalents that are restricted for use are classified as restricted cash. The table below reconciles the cash, cash equivalents and restricted cash balances from our condensed consolidated balance sheets to the amounts reported on the condensed consolidated statements of cash flows (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2018 |
|
|
2017 |
|
||
Cash and cash equivalents |
|
$ |
34,975 |
|
|
$ |
59,835 |
|
Restricted cash, included in restricted cash and investments |
|
|
70,149 |
|
|
|
60,370 |
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows |
|
$ |
105,124 |
|
|
$ |
120,205 |
|
Basic and diluted earnings per share
Basic earnings per share are computed based on the weighted average number of common shares outstanding for each year using the treasury method. Diluted earnings per share reflect the potential effects of the exercise of outstanding stock options and the issuance of stock associated with outstanding restricted stock units. Basic and diluted shares outstanding are summarized as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Weighted average number of basic shares outstanding |
|
|
7,369 |
|
|
|
7,296 |
|
|
|
7,327 |
|
|
|
7,266 |
|
Effect of dilutive securities |
|
|
274 |
|
|
|
231 |
|
|
|
325 |
|
|
|
273 |
|
Weighted average number of diluted shares outstanding |
|
|
7,643 |
|
|
|
7,527 |
|
|
|
7,652 |
|
|
|
7,539 |
|
Reclassifications
Due to the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash,” prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the Company’s financial condition, operating results, cash flows or stockholders’ equity.
Accounting estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are used for fair value measurement of investments, allowance for doubtful accounts, deferred income taxes, carrying values for goodwill and property and equipment, accrued workers’ compensation liabilities and safety incentive liabilities. Actual results may or may not differ from such estimates.
11
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The core principle of the update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The update also requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We have adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective method. We have determined that there are no material changes to our revenue recognition policies or to our consolidated financial statements as a result of adopting the standard.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The core principle is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases. Under the new guidance, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company is currently evaluating the standard but expects it to have an impact on the Company’s assets and liabilities on the condensed consolidated balance sheets.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows: Restricted Cash.” The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We have retrospectively adopted this standard effective January 1, 2018. The Company’s balance of restricted cash and restricted cash equivalents was $70.1 million, $60.4 million, $50.2 million and $290.6 million for the periods ended September 30, 2018, December 31, 2017, September 30, 2017 and December 31, 2016, respectively. The adoption of the guidance also requires us to reconcile our cash balance on the condensed consolidated statements of cash flows to the cash balance presented on the condensed consolidated balance sheets. See “Statements of cash flows” within “Note 1 - Basis of Presentation of Interim Period Statements” for these disclosures.
12
Note 2 - Fair Value Measurement
The following table summarizes the Company’s investments at September 30, 2018 and December 31, 2017 measured at fair value on a recurring basis (in thousands):
|
|
September 30, 2018 |
|
|
December 31, 2017 |
|
||||||||||||||||||
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
||
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
||
|
|
|
|
|
|
Gains |
|
|
Recorded |
|
|
|
|
|
|
Gains |
|
|
Recorded |
|
||||
|
|
Cost |
|
|
(Losses) |
|
|
Basis |
|
|
Cost |
|
|
(Losses) |
|
|
Basis |
|
||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
61 |
|
|
$ |
— |
|
|
$ |
61 |
|
|
$ |
121 |
|
|
$ |
— |
|
|
$ |
121 |
|
U.S. treasuries |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
100 |
|
|
|
— |
|
|
|
100 |
|
Total cash equivalents |
|
|
61 |
|
|
|
— |
|
|
|
61 |
|
|
|
221 |
|
|
|
— |
|
|
|
221 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
|
346 |
|
|
|
(1 |
) |
|
|
345 |
|
|
|
199 |
|
|
|
— |
|
|
|
199 |
|
Corporate bonds |
|
|
45 |
|
|
|
— |
|
|
|
45 |
|
|
|
400 |
|
|
|
— |
|
|
|
400 |
|
U.S. government agency securities |
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
|
|
65 |
|
|
|
— |
|
|
|
65 |
|
Municipal bonds |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
Total current investments |
|
|
396 |
|
|
|
(1 |
) |
|
|
395 |
|
|
|
674 |
|
|
|
— |
|
|
|
674 |
|
Long term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
|
745 |
|
|
|
(10 |
) |
|
|
735 |
|
|
|
202 |
|
|
|
(2 |
) |
|
|
200 |
|
Mortgage backed securities |
|
|
501 |
|
|
|
(18 |
) |
|
|
483 |
|
|
|
577 |
|
|
|
(5 |
) |
|
|
572 |
|
Corporate bonds |
|
|
383 |
|
|
|
(11 |
) |
|
|
372 |
|
|
|
419 |
|
|
|
(2 |
) |
|
|
417 |
|
U.S. government agency securities |
|
|
50 |
|
|
|
(1 |
) |
|
|
49 |
|
|
|
— |
|
|
|