bbsi-10q_20190331.htm

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.

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 May 1, 2019, 7,409,832 shares of the registrant’s common stock ($0.01 par value) were outstanding.

	March 31,			December 31,
	2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	38,223		$	35,371
Trade accounts receivable, net		154,157			151,597
Prepaid expenses and other		16,632			13,880
Investments		569			416
Restricted cash and investments		127,076			120,409
Total current assets		336,657			321,673
Investments		1,549			1,687
Property, equipment and software, net		25,641			24,812
Operating lease right-of-use assets		24,922			—
Restricted cash and investments		370,826			348,165
Goodwill		47,820			47,820
Other assets		3,425			3,474
Deferred income taxes		7,061			8,458
	$	817,901		$	756,089
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	221		$	221
Accounts payable		5,357			4,336
Accrued payroll, payroll taxes and related benefits		189,330			158,683
Income taxes payable		3,560			4,403
Current operating lease liabilities		6,299			—
Other accrued liabilities		17,054			20,566
Workers' compensation claims liabilities		111,156			109,319
Safety incentives liability		26,928			29,210
Total current liabilities		359,905			326,738
Long-term workers' compensation claims liabilities		311,716			304,078
Long-term debt		3,896			3,951
Long-term operating lease liabilities		19,022			—
Customer deposits and other long-term liabilities		3,489			2,285
Total liabilities		698,028			637,052
Commitments and contingencies (Notes 4, 5 and 7)
Stockholders' equity:
Common stock, $.01 par value; 20,500 shares authorized, 7,410 and 7,395 shares issued and outstanding		74			74
Additional paid-in capital		16,768			15,437
Accumulated other comprehensive loss		(1,411	)		(5,068	)
Retained earnings		104,442			108,594
Total stockholders' equity		119,873			119,037
	$	817,901		$	756,089

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

	Three Months Ended
	March 31,
	2019			2018
Revenues:
Professional employer service fees	$	190,527		$	188,961
Staffing services		27,688			35,014
Total revenues		218,215			223,975
Cost of revenues:
Direct payroll costs		20,842			26,404
Payroll taxes and benefits		114,797			124,188
Workers' compensation		54,229			57,121
Total cost of revenues		189,868			207,713
Gross margin		28,347			16,262
Selling, general and administrative expenses		33,160			29,428
Depreciation and amortization		969			1,004
Loss from operations		(5,782	)		(14,170	)
Other income (expense):
Investment income, net		3,072			2,019
Interest expense		(477	)		(42	)
Other, net		12			16
Other income, net		2,607			1,993
Loss before income taxes		(3,175	)		(12,177	)
Benefit from income taxes		(875	)		(3,054	)
Net loss	$	(2,300	)	$	(9,123	)
Basic loss per common share	$	(0.31	)	$	(1.25	)
Weighted average number of basic common shares outstanding		7,407			7,304
Diluted loss per common share	$	(0.31	)	$	(1.25	)
Weighted average number of diluted common shares outstanding		7,407			7,304
Cash dividends per common share	$	0.25		$	0.25

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

									Accumulated
									Other
						Additional			Comprehensive
	Common Stock					Paid-in			(Loss)			Retained
	Shares			Amount		Capital			Income			Earnings			Total
Balance, December 31, 2017		7,301		$	73	$	12,311		$	(1,430	)	$	77,880		$	88,834
Common stock issued on exercise of options and vesting of restricted stock units		7			—		53			—			—			53
Common stock repurchased on vesting of restricted stock units		(1	)		—		(76	)		—			—			(76	)
Share-based compensation expense		—			—		1,542			—			—			1,542
Cash dividends on common stock		—			—		—			—			(1,826	)		(1,826	)
Unrealized loss on investments, net of tax		—			—		—			(3,964	)		—			(3,964	)
Net loss		—			—		—			—			(9,123	)		(9,123	)
Balance, March 31, 2018		7,307		$	73	$	13,830		$	(5,394	)	$	66,931		$	75,440
Balance, December 31, 2018		7,395		$	74	$	15,437		$	(5,068	)	$	108,594		$	119,037
Common stock issued on exercise of options and vesting of restricted stock units and performance awards		17			—		122			—			—			122
Common stock repurchased on vesting of restricted stock units		(2	)		—		(178	)		—			—			(178	)
Share-based compensation expense		—			—		1,387			—			—			1,387
Cash dividends on common stock		—			—		—			—			(1,852	)		(1,852	)
Unrealized gain on investments, net of tax		—			—		—			3,657			—			3,657
Net loss		—			—		—			—			(2,300	)		(2,300	)
Balance, March 31, 2019		7,410		$	74	$	16,768		$	(1,411	)	$	104,442		$	119,873

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

	Three Months Ended
	March 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(2,300	)	$	(9,123	)
Reconciliations of net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		969			1,004
Non-cash lease expense		1,773			—
(Gains) losses recognized on investments		(130	)		35
Share-based compensation		1,387			1,542
Changes in certain operating assets and liabilities:
Trade accounts receivable		(2,560	)		(10,394	)
Income taxes receivable		—			(3,061	)
Prepaid expenses and other		(2,752	)		(3,278	)
Accounts payable		1,021			(1,282	)
Accrued payroll, payroll taxes and related benefits		30,647			9,099
Other accrued liabilities		(3,512	)		(900	)
Income taxes payable		(843	)		—
Workers' compensation claims liabilities		9,508			15,378
Safety incentives liability		(2,282	)		(1,171	)
Operating lease liabilities		(1,374	)		—
Other assets and liabilities, net		1,220			(17	)
Net cash provided by (used in) operating activities		30,772			(2,168	)
Cash flows from investing activities:
Purchase of property and equipment		(1,798	)		(1,163	)
Purchase of investments		(8	)		(773	)
Proceeds from sales and maturities of investments		15			589
Purchase of restricted investments		(2,023	)		(81,289	)
Proceeds from sales and maturities of restricted investments		30,859			21,291
Net cash provided by (used in) investing activities		27,045			(61,345	)
Cash flows from financing activities:
Payments on long-term debt		(55	)		(55	)
Common stock repurchased on vesting of restricted stock units		(178	)		(76	)
Dividends paid		(1,852	)		(1,826	)
Proceeds from exercise of stock options		122			53
Net cash used in financing activities		(1,963	)		(1,904	)
Net increase (decrease) in cash, cash equivalents and restricted cash		55,854			(65,417	)
Cash, cash equivalents and restricted cash, beginning of period		140,702			120,205
Cash, cash equivalents and restricted cash, end of period	$	196,556		$	54,788

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

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The accompanying condensed financial statements are prepared on a consolidated basis. All intercompany account balances and transactions have been eliminated in consolidation. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from such estimates and assumptions. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K at pages F1 – F27. The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Professional employer (“PEO”) services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Staffing revenues relate primarily to short-term staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related revenue is recognized, as services are rendered by our workforce.

Our PEO client service agreements have a minimum term of one year, are renewable on an annual basis, and typically require 30 days’ written notice to cancel or terminate the contract by either party. In addition, our client service agreements provide for immediate termination upon any default of the client regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Staffing customers are invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days. The amount of earned but unbilled revenue is classified as a receivable on the condensed consolidated balance sheets.

We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. We also present revenue net of customer incentives, including safety incentives, because those incentives represent consideration payable to customers.

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”).

We consider non-restricted short-term investments that are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three months, to be cash equivalents for purposes of the condensed consolidated statements of cash flows and condensed consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration.

The Company classifies investments as available-for-sale. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Investments are recorded as current 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.

The Company holds restricted cash and investments primarily for the future payment of workers’ compensation claims. These investments are categorized as available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Restricted cash and investments are classified as current and noncurrent on the condensed consolidated balance sheets based on the nature of the restriction. Management considers available evidence in evaluating potential impairment of restricted investments, including the duration and extent to which fair value is less than cost. Realized gains and losses on sales of restricted investments are included in investment income in our condensed consolidated statements of operations. In the event a loss is determined to be other-than-temporary, the loss will be recognized in the condensed consolidated statements of operations.

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

The Company had an allowance for doubtful accounts of $558,000 and $533,000 at March 31, 2019 and December 31, 2018, respectively. We make estimates of the collectability of our accounts receivable for services provided to our customers. Management analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by our third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, “IBNR”). Workers’ compensation claims liabilities included case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, and unallocated loss adjustment expenses. The estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond one year is included in long-term liabilities on our condensed consolidated balance sheets. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.

The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes.

Our estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves.

A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.

We accrue for and present expected customer incentives as a reduction of revenue. Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe-work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third party administrator. The Company provided $26.9 million and $29.2 million at March 31, 2019 and December 31, 2018, respectively, as an estimate of the liability for unpaid safety incentives. Also, a one-time customer incentive of $9.8 million was declared in December 2018, and is included in other accrued liabilities on the consolidated balance sheets. At March 31, 2019 the remaining balance of this incentive was $9.5 million.

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) 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.

Interest paid during the three months ended March 31, 2019 and 2018 did not materially differ from interest expense. No income taxes were paid during the three months ended March 31, 2019 and 2018.

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):

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):

As a result of the net loss for the three months ended March 31, 2019 and 2018, 250,050 and 336,488 potential common shares have been excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

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.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are used for fair value measurement of investments, allowance for doubtful accounts, deferred income taxes, carrying values for goodwill and property and equipment, accrued workers’ compensation liabilities and customer incentive liabilities. Actual results may or may not differ from such estimates.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases.” The core principle is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases. Under the new guidance, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The amendments in this update were adopted using the optional transition method, effective January 1, 2019. The lease commitments appear on our consolidated balance sheets as operating lease right-of-use assets and current and long-term operating lease liabilities. Such amounts are based on the present value of such commitments using our incremental borrowing rate. We have utilized the transition package of practical expedients permitted within the new standard, which among other things, allows us to carry forward the historical lease classification. See “Note 5 – Leases” for additional information.

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

	March 31, 2019							December 31, 2018
			Gross							Gross
			Unrealized							Unrealized
			Gains			Recorded				Gains			Recorded
	Cost		(Losses)			Basis		Cost		(Losses)			Basis
Current:
Cash equivalents:
Money market funds	$	45	$	—		$	45	$	30	$	—		$	30
Total cash equivalents		45		—			45		30		—			30
Investments:
U.S. treasuries		499		—			499		347		—			347
U.S. government agency securities		50		—			50		50		(1	)		49
Corporate bonds		20		—			20		20		—			20
Total current investments		569		—			569		417		(1	)		416
Long term:
Investments:
U.S. treasuries		645		—			645		794		(3	)		791
Mortgage backed securities		469		(8	)		461		484		(13	)		471
Corporate bonds		422		1			423		422		(7	)		415
Asset backed securities		20		—			20		10		—			10
Total long term investments		1,556		(7	)		1,549		1,710		(23	)		1,687
Restricted cash and investments ⁽¹⁾:
Corporate bonds		178,726		(807	)		177,919		185,116		(3,739	)		181,377
Mortgage backed securities		82,648		(832	)		81,816		89,426		(2,026	)		87,400
U.S. government agency securities		43,076		(137	)		42,939		45,548		(908	)		44,640
U.S. treasuries		37,583		(168	)		37,415		44,304		(283	)		44,021
Money market funds		16,371		—			16,371		419		—			419
Supranational bonds		4,766		—			4,766		4,765		(24	)		4,741
Mutual funds		2,264		—			2,264		1,093		—			1,093
Asset backed securities		130		—			130		75		(1	)		74
Municipal bonds		50		—			50		50		—			50
Total restricted cash and investments		365,614		(1,944	)		363,670		370,796		(6,981	)		363,815
Total investments	$	367,784

Maryland		52-0812977
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification No.)

8100 NE Parkway Drive, Suite 200
Vancouver, Washington		98662
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share	BBSI	The NASDAQ Stock Market LLC

Part I - Financial Information (Unaudited)
		Page
Item 1.	Unaudited Interim Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets - March 31, 2019 and December 31, 2018	3

	Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) - Three Months Ended March 31, 2019 and 2018	5

	Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

Part II - Other Information

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 6.	Exhibits	30

Signature		31

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐