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.
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 preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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 Companys 2015 Annual Report on Form 10-K at pages F1 F62. The results of operations for an interim
period are not necessarily indicative of the results of operations for a full year.
Revenue recognition
We recognize professional employer (PEO) service and staffing service revenue as services are rendered by our workforce. 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. Our client services
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 services agreements provide for immediate
termination upon any default of the client regardless of when notice is given.
We report PEO revenues on a net basis because we are not
the primary obligor for the services provided by our clients to their customers pursuant to our client services agreements. We reduce these service fee revenues by the amounts invoiced to our clients for direct payroll expenses such as salaries,
wages, health insurance, employee out-of-pocket expenses incurred incidental to employment, and safety incentives. Safety incentives represent cash incentives paid to certain client companies for maintaining safe-work practices and minimizing
workplace injuries. The safety incentive is based on a percentage of annual payroll and is paid annually to clients who meet predetermined workers compensation claims cost objectives.
Cost of revenues
Our cost of revenues
for staffing services includes direct payroll costs, employer payroll related taxes, employee benefits, and workers compensation costs. Our cost of revenues for PEO services includes only employer payroll related taxes 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 employers 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
9
Note 1 - Basis of Presentation of Interim Period Statements (Continued)
of the costs associated with our workers compensation program, including claims reserves, claims administration fees, legal fees, medical cost containment (MCC) expense, state
administrative agency fees, third-party broker commissions, risk manager payroll, and excess insurance premiums for catastrophic injuries. We maintain separate workers compensation insurance policies for employees working in states where the
Company is not self-insured, including California.
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
As of September 30, 2016, the Companys investments consisted of municipal bonds and corporate bonds. We classify our investments as
trading or available-for-sale. The Company had no trading securities at September 30, 2016 and December 31, 2015. The Company classifies money market funds, municipal bonds, and corporate bonds 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 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 other income (expense) as other, net 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
At September 30, 2016, restricted cash and investments consisted of money market funds, certificates of deposit, U.S.
Treasuries, corporate bonds, and municipal bonds with maturities generally from 180 days to two years. At September 30, 2016, the approximate fair value of restricted cash and investments equaled their approximate amortized cost. 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 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 other income
(expense) as other, net 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 $195,000 and $268,000 at September 30, 2016 and December 31, 2015, 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.
10
Note 1 - Basis of Presentation of Interim Period Statements (Continued)
Workers compensation claims liabilities
Our workers compensation claims liabilities do not represent an exact calculation of liability but rather managements 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 internal claims adjusters
and our third-party administrators for workers compensation claims, coupled with an actuarial estimate of future adverse cost development with respect to reported claims and incurred but not reported claims (together,
IBNR). At September 30, 2016 and December 31, 2015, workers compensation claims liabilities included case reserve estimates for reported losses, plus additional amounts for estimated future adverse cost development of
IBNR claims, MCC and legal costs, and unallocated loss adjustment expenses, including future administrative fees to be paid to third-party service providers. 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, changes in individuals involved in the
reserve estimation process, 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 Companys 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 actuarys best estimate of payments the Company will make related to
workers compensation claims over the ensuing twelve months. The Company will also pay out a portion of claims first incurred in the ensuing twelve months during that twelve-month period. The long-term portion represents the independent
actuarys best estimate of payments the Company will make related to workers compensation claims more than twelve months in the future.
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.
11
Note 1 - Basis of Presentation of Interim Period Statements (Continued)
Safety incentives liability
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 customers 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
customers estimated workers compensation claims reserves as established by us and our third-party administrator and the expected payout as determined by historical incentive payment trends. The Company provided $25.0 million and $21.3
million at September 30, 2016 and December 31, 2015, respectively, as an estimate of the liability for unpaid safety incentives. Safety incentive costs are netted against PEO service revenue in our condensed consolidated statements of
operations.
Statements of cash flows
Interest paid during the nine months ended September 30, 2016 and 2015 did not materially differ from interest expense. Income taxes received
during the nine months ended September 30, 2016 and 2015 totaled $1.1 million and $9.2 million, respectively.
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 stock options and the payment of stock awards from other share-based compensation plans that are outstanding at the end of each period
presented. Basic and diluted shares outstanding are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average number of basic shares outstanding
|
|
|
7,243
|
|
|
|
7,201
|
|
|
|
7,220
|
|
|
|
7,163
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
162
|
|
|
|
161
|
|
|
|
130
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding
|
|
|
7,405
|
|
|
|
7,362
|
|
|
|
7,350
|
|
|
|
7,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Note 1 - Basis of Presentation of Interim Period Statements (Continued)
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 all 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 differ from such estimates.
Recent accounting pronouncements
In May
2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The amendments in ASU 2014-09 provide for a single,
principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is discussed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2015. In March and April 2016, the FASB issued ASU 2016-08 Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Identifying Performance
Obligations and Licensing, ASU 2016-11 Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF
Meeting, and ASU 2016-12 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which all provide further clarification to be considered when implementing ASU 2014-09. The new guidance is effective for
interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the date of the original effective date, for interim and annual reporting periods beginning after December 15, 2016. The Company
plans to adopt this ASU on January 1, 2018 and is in the process of evaluating its planned transition method and the impact to its consolidated financial statements and disclosures of the adoption of ASU 2014-09.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, InterestImputation of Interest (ASU 2015-03) to
simplify the presentation of debt issuance costs. ASU 2015-03 requires debt issuance costs be presented on the balance sheet as a direct reduction from the carrying amount of the related debt liability. The amendments in this accounting standard
update are to be applied retrospectively and are effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect the adoption of this accounting standard update to have a material impact on our
consolidated financial statements and disclosures.
13
Note 1 - Basis of Presentation of Interim Period Statements (Continued)
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07). ASU 2015-07 provides that investments for which the practical expedient is used to measure fair value at net asset value per share (NAV) must be
removed from the fair value hierarchy. Instead, those investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. ASU 2015-07 also
includes disclosure requirements for investments for which the NAV practical expedient was used to determine fair value. The adoption of this guidance in the third quarter of 2016 did not impact our financial condition or results of operations.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU
2015-17). ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance becomes effective for the Company beginning with our annual
report for the year ending December 31, 2017 with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Companys consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires a lessee to record a right of use asset
and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A
modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Companys consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, CompensationStock Compensation (ASU 2016-09). ASU 2016-09 simplifies the
accounting for the taxes related to stock-based compensation, including adjustments to how excess tax benefits and a companys payments for tax withholdings should be classified. This guidance will be effective for fiscal years beginning after
December 15, 2016. The Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash
Payments. ASU No. 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by current GAAP, thereby reducing the current diversity in practice. ASU No. 2016-15 is effective
for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Companys fiscal year beginning
January 1, 2018. The Company is in the process of evaluating the impact of adoption of ASU 2016-15 to the presentation of consolidated cash flows.
14
Note 2 - Fair Value Measurement
The following table summarizes the Companys investments at September 30, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
(Losses)
|
|
|
Recorded
Basis
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
(Losses)
|
|
|
Recorded
Basis
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
176
|
|
|
$
|
0
|
|
|
$
|
176
|
|
|
$
|
21,312
|
|
|
$
|
0
|
|
|
$
|
21,312
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
|
838
|
|
|
|
0
|
|
|
|
838
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Corporate Bonds
|
|
|
175
|
|
|
|
0
|
|
|
|
175
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
Restricted cash and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
51,959
|
|
|
|
0
|
|
|
|
51,959
|
|
|
|
76,023
|
|
|
|
0
|
|
|
|
76,023
|
|
Certificate of Deposit
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,000
|
|
|
|
0
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Investments
|
|
|
53,148
|
|
|
|
0
|
|
|
|
53,148
|
|
|
|
107,335
|
|
|
|
0
|
|
|
|
107,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
|
624
|
|
|
|
1
|
|
|
|
625
|
|
|
|
2,970
|
|
|
|
(24
|
)
|
|
|
2,946
|
|
Municipal Bonds
|
|
|
238
|
|
|
|
0
|
|
|
|
238
|
|
|
|
3,135
|
|
|
|
(3
|
)
|
|
|
3,132
|
|
Money Market Funds
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
|
|
4
|
|
|
|
|
|
|
|
Restricted cash and investments
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
221,901
|
|
|
|
0
|
|
|
|
221,901
|
|
|
|
175,869
|
|
|
|
0
|
|
|
|
175,869
|
|
Certificates of Deposit
|
|
|
11,776
|
|
|
|
0
|
|
|
|
11,776
|
|
|
|
496
|
|
|
|
(1
|
)
|
|
|
495
|
|
U.S. Treasuries
|
|
|
5,258
|
|
|
|
23
|
|
|
|
5,281
|
|
|
|
4,752
|
|
|
|
1
|
|
|
|
4,753
|
|
Corporate Bonds
|
|
|
3,191
|
|
|
|
14
|
|
|
|
3,205
|
|
|
|
2,996
|
|
|
|
(24
|
)
|
|
|
2,972
|
|
Municipal Bonds
|
|
|
2,547
|
|
|
|
4
|
|
|
|
2,551
|
|
|
|
3,613
|
|
|
|
(1
|
)
|
|
|
3,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Investments
|
|
|
245,535
|
|
|
|
42
|
|
|
|
245,577
|
|
|
|
193,835
|
|
|
|
(52
|
)
|
|
|
193,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
298,683
|
|
|
$
|
42
|
|
|
$
|
298,725
|
|
|
$
|
301,170
|
|
|
$
|
(52
|
)
|
|
$
|
301,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restricted cash and investments also includes $306,000 of workers compensation deposits.
|
15
Note 2 - Fair Value Measurement (Continued)
The following table summarizes the Companys investments at September 30, 2016 and
December 31, 2015 measured at fair value on a recurring basis by fair value hierarchy level (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Total
Recorded
Basis
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Other
(1)
|
|
|
Total
Recorded
Basis
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Other
(1)
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
176
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
176
|
|
|
$
|
21,312
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
21,312
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
|
1,076
|
|
|
|
50
|
|
|
|
1,026
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,132
|
|
|
|
241
|
|
|
|
2,891
|
|
|
|
0
|
|
|
|
0
|
|
Corporate Bonds
|
|
|
800
|
|
|
|
502
|
|
|
|
298
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,946
|
|
|
|
2,291
|
|
|
|
655
|
|
|
|
0
|
|
|
|
0
|
|
Money Market Funds
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
273,860
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
273,860
|
|
|
|
251,892
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
251,892
|
|
Certificates of Deposit
|
|
|
11,776
|
|
|
|
0
|
|
|
|
11,776
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,495
|
|
|
|
0
|
|
|
|
10,495
|
|
|
|
0
|
|
|
|
0
|
|
U.S. Treasuries
|
|
|
5,281
|
|
|
|
5,281
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,753
|
|
|
|
4,753
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Corporate Bonds
|
|
|
3,205
|
|
|
|
2,163
|
|
|
|
1,042
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,972
|
|
|
|
2,285
|
|
|
|
687
|
|
|
|
0
|
|
|
|
0
|
|
Municipal Bonds
|
|
|
2,551
|
|
|
|
214
|
|
|
|
2,337
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,612
|
|
|
|
389
|
|
|
|
3,223
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
298,725
|
|
|
$
|
8,210
|
|
|
$
|
16,479
|
|
|
$
|
0
|
|
|
$
|
274,036
|
|
|
$
|
301,118
|
|
|
$
|
9,959
|
|
|
$
|
17,951
|
|
|
$
|
0
|
|
|
$
|
273,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In accordance with ASU 2015-07 (see Note 1), investments in money market funds measured at fair value using the NAV 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.
|
16
Note 3 - Workers Compensation Claims
The following table summarizes the aggregate workers compensation reserve activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers compensation claims liabilities
|
|
$
|
277,050
|
|
|
$
|
239,245
|
|
|
$
|
255,675
|
|
|
$
|
225,278
|
|
|
|
|
|
|
Add: claims expense accrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
38,094
|
|
|
|
29,723
|
|
|
|
103,875
|
|
|
|
84,943
|
|
Prior periods
|
|
|
(999
|
)
|
|
|
(2,424
|
)
|
|
|
(1,547
|
)
|
|
|
(9,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,095
|
|
|
|
27,299
|
|
|
|
102,328
|
|
|
|
75,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: claim payments related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
5,596
|
|
|
|
4,974
|
|
|
|
10,565
|
|
|
|
8,730
|
|
Prior periods
|
|
|
16,618
|
|
|
|
13,799
|
|
|
|
55,507
|
|
|
|
44,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,214
|
|
|
|
18,773
|
|
|
|
66,072
|
|
|
|
52,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers compensation claims liabilities
|
|
$
|
291,931
|
|
|
$
|
247,771
|
|
|
$
|
291,931
|
|
|
$
|
247,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred but not reported (IBNR)
|
|
$
|
145,722
|
|
|
$
|
125,574
|
|
|
$
|
145,722
|
|
|
$
|
125,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The states of California, Maryland, Oregon, Washington, Colorado and Delaware required us to maintain
specified investment balances or other financial instruments totaling $159.0 million at September 30, 2016 to cover potential workers compensation claims losses related to the Companys current and former status as a self-insured
employer. In addition to restricted cash and investments held to satisfy these requirements at September 30, 2016, we have provided surety bonds and standby letters of credit totaling $152.9 million, including a California requirement of $147.2
million.
The Company also operates a wholly owned insurance company, Ecole Insurance Company (Ecole). Ecole is a fully
licensed insurance company holding a certificate of authority from the Arizona Department of Insurance. Ecole provides workers compensation coverage to the Companys employees working in Arizona, Utah and Nevada. The surplus of Ecole was
$10.8 million and $9.5 million at September 30, 2016 and December 31, 2015, respectively, and is included in long-term restricted cash and investments in our condensed consolidated balance sheets.
As part of its fronted workers compensation insurance program with Chubb Limited (Chubb, formerly ACE Group) in the states
of California, Delaware, Virginia, Pennsylvania, North Carolina, New Jersey, West Virginia and the District of Columbia, the Company makes payments into a trust account (the Chubb trust account) to be used for the payment of future
claims. The balance in the Chubb trust account was $235.2 million and $166.6 million at September 30, 2016 and December 31, 2015, respectively. The Chubb trust account balances are included as a component of the current and long-term restricted cash
and investments in the Companys condensed consolidated balance sheets.
17
Note 3 - Workers Compensation Claims (Continued)
At September 30, 2016 the Company recorded an asset of $13.2 million related to a payment remitted to Chubb on September 29, 2016 but not
deposited into the Chubb trust account until October 2016. This amount is included in other assets in the condensed consolidated balance sheet.
Note 4
- Revolving Credit Facility and Long-Term Debt
The Company maintains a credit agreement (the Agreement) with its principal
bank, Wells Fargo Bank, National Association (the Bank). The Agreement provided for a $40.0 million term loan maturing December 31, 2016, as well as a $14.0 million revolving credit line, with a $6.0 million sublimit for unsecured
standby letters of credit. As of September 30, 2016, the term loan has been paid off completely, compared to an outstanding balance of $15.0 million at December 31, 2015.
The Agreement also included $42.3 million in cash-secured letters of credit at September 30, 2016 to satisfy collateral requirements
associated with the Companys former status as a self-insured employer in California. In conjunction with these letters of credit, the Company posted with the Bank as collateral $44.1 million in restricted money market funds and restricted
certificates of deposit.
Advances under the revolving credit facility bear interest as selected by the Company of either (a) a daily
floating rate of one month LIBOR plus 2.0% or (b) a fixed rate of LIBOR plus 2.0%. The Agreement also provides for an unused commitment fee of 0.35% per year on the average daily unused amount of the revolving credit facility, and a fee of
1.75% of the face amount of each letter of credit. The Company had no outstanding borrowings on its revolving credit line at September 30, 2016 and December 31, 2015. The revolving credit line expires on October 1, 2017.
The credit facility is collateralized by the Companys accounts receivable and other rights to receive payment, general intangibles and
equipment.
The Agreement requires the satisfaction of certain financial covenants as follows:
|
|
|
minimum Fixed Charge Coverage ratio of no less than 2.25:1.0, measured quarterly on a rolling four-quarter basis, with Fixed Charge Coverage Ratio defined as (i) EBITDA (net profit before taxes plus interest expense,
net of capitalized interest expense, depreciation expense and amortization expense) minus distributions, dividends and cash taxes paid, divided by (ii) $9,425,000. Prior to September 30, 2016, the minimum Fixed Charge Coverage ratio was no less than
1.50:1.0, measured quarterly on a rolling four-quarter basis.
|
|
|
|
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:
|
|
|
capital expenditures may not exceed a total of $4.0 million in 2016 without the Banks prior approval;
|
18
Note 4 - Revolving Credit Facility and Long-Term Debt (Continued)
|
|
|
incurring additional indebtedness is prohibited without the prior approval of the Bank, other than up to $200,000 per year in purchase money financing and the aggregate of all purchase money indebtedness may not exceed
$400,000 at any time;
|
|
|
|
repurchases of the Companys common stock are prohibited.
|
|
|
|
quarterly cash dividends up to $0.22 per share may be paid so long as there is no default by the Company and payment would not cause a default; and
|
|
|
|
delisting of the Companys common stock by The Nasdaq Stock Market (Nasdaq) is an event of default.
|
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 September 30, 2016, the Company was in
violation of the capital expenditure restriction. The Bank agreed to waive this covenant violation.
The Company maintains a mortgage loan
with the Bank with a balance of approximately $4.7 million and $4.8 million at September 30, 2016 and December 31, 2015, respectively, secured by the Companys corporate office building in Vancouver, Washington. This loan requires payment
of monthly principal payments of $18,375 plus interest at a rate of one month LIBOR plus 2.25%, with the unpaid principal balance due November 1, 2017.
Note 5 - Income Taxes
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 September 30, 2016. Based on managements analysis, no valuation allowance of deferred tax assets was recorded at September 30, 2016.
The Internal Revenue Service is examining the Companys federal tax returns for the years ended December 31, 2011, 2012, 2013 and 2014.
19
Note 6 - Litigation
On November 6, 2014, plaintiffs in
Michael Arciaga, et al. v. Barrett Business Services, Inc., et al.
, filed an action in the United
States District Court for the Western District of Washington against BBSI, Michael L. Elich, BBSIs Chief Executive Officer, and James D. Miller, BBSIs then Chief Financial Officer. The action purported to be a class action brought
on behalf of all BBSI shareholders alleging violations of the federal securities laws. The claims arose from the decline in the market price for BBSI common stock following announcement of a charge for increased workers compensation
reserves expense. The lawsuit sought compensatory damages, plus interest, and costs and expenses (including attorney fees and expert fees).
On November 13, 2014, a second purported shareholder class action was filed in the United States District Court for the Western District
of Washington, entitled
Christopher
P. Carnes, et al. v. Barrett Business Services, Inc., et al
. The
Carnes
complaint named the same defendants as the
Arciaga
case and asserted similar claims for relief.
Similarly, on November 17, 2014, a third purported shareholder class action was filed in the United States District Court for the
Western District of Washington, entitled
Shiva Stein, et al. v. Barrett Business Services, Inc., et al.
The
Stein
complaint named the same defendants as the
Arciaga
and
Carnes
cases and asserted similar claims for
relief.
On February 25, 2015, the court ordered consolidation of the three cases, and any new or other cases involving the same subject
matter, into a single action for pretrial purposes. The consolidated cases were recaptioned as
In re Barrett Business Services Securities Litigation.
The court also appointed the Painters & Allied Trades District Council No. 35
Pension and Annuity Funds as the lead plaintiff.
On March 21, 2016, before the court had ruled on the defendants motion to dismiss
the plaintiffs first amended consolidated complaint, the plaintiffs filed a second amended consolidated complaint, naming the same defendants. The second amended consolidated complaint dropped certain allegations from the first amended
complaint and added new allegations relating to disclosures in BBSIs Current Report on Form 8-K filed on March 9, 2016. The defendants filed a motion to dismiss the second amended consolidated complaint on May 23, 2016.
On October 26, 2016, before the court ruled on the motion to dismiss, the parties entered into a Stipulation and Agreement of Settlement dated
as of October 26, 2016 (the Settlement), to settle the litigation. The settlement class includes all persons and entities who purchased or otherwise acquired BBSI common stock in the period beginning February 12, 2013, through March
9, 2016, and were damaged thereby, with certain exclusions.
The Settlement is intended to fully, finally and forever compromise, settle,
release, resolve, and dismiss with prejudice the purported class action and all claims asserted therein against the named defendants. In the Settlement, the defendants have denied all allegations of wrongdoing and the plaintiffs have not
conceded any infirmities in their positions.
20
Note 6 Litigation (Continued)
The Settlement calls for the payment in cash of $12.0 million (the Settlement
Fund) into escrow by November 29, 2016, which is 15 business days after the court entered an order preliminarily approving the Settlement. Of this amount, approximately $8.7 million will be paid by BBSIs insurance carriers and
approximately $3.3 million will be paid by BBSI. The amount to be paid by BBSI has been accrued at September 30, 2016 and is included in other accrued liabilities in our condensed consolidated balance sheet. The fees of counsel for the plaintiffs
will be paid out of the Settlement Fund following approval by the court.
The Settlement is subject to approval by the court and to other
customary terms and conditions, including the right of BBSI to terminate the Settlement under specified circumstances. All potential class members will be notified of the Settlement in November 2016. The court has scheduled a hearing for
February 22, 2017, to consider final approval of the Settlement. If the Settlement is not approved by the court, or is otherwise terminated before it is finalized, BBSI is unable to predict the final outcome of the litigation or to estimate its
effect on BBSI, which may be material and adverse.
BBSI received a subpoena from the San Francisco office of the Division of Enforcement
of the Securities and Exchange Commission (the SEC) in May 2015 in connection with the SECs investigation of BBSIs accounting practices with regard to its workers compensation reserves. In April 2016, the SEC
issued a second subpoena to BBSI for documents relating to the disclosures made by BBSI following Mr. Millers termination. BBSI was also advised by the United States Department of Justice in mid-June 2016 that it has commenced an
investigation. BBSI is cooperating fully with the investigations.
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 enrichment and other violations of law and seeks
recovery of various damages, including the costs and expenses incurred in connection with BBSIs reserve strengthening process, reserve study and consultants, the cost of stock repurchases by BBSI in October 2014, compensation paid to
BBSIs officers, and costs of negotiating BBSIs credit facility with its principal lender, as well as the proceeds of sales of stock by certain of BBSIs officers and directors during 2013 and 2014. On September 28, 2015, BBSI
and the individual defendants filed motions to dismiss the derivative suit and a motion to stay pending resolution of
In re Barrett Business Services Securities Litigation
. On December 4, 2015, Salinas filed an opposition to each
motion. On January 27, 2016, 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.
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, which arise in the ordinary course of our business. In the opinion of management,
the amount of ultimate liability with respect to other currently pending or threatened actions is not expected to materially affect BBSIs consolidated financial position or results of operations.
21