Barrett Business Services(BBSI) - 2019 Q1 - Quarterly Report

FORM 10-Q Filing Information Details the filing type, registrant, and stock information for the quarterly report ended March 31, 2019 - Filing Type: Quarterly Report (Form 10-Q) for the period ended March 31, 2019[1] - Registrant: BARRETT BUSINESS SERVICES, INC[1] Common Stock Information | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Common Stock | BBSI | The NASDAQ Stock Market LLC | | Shares Outstanding (as of May 1, 2019) | 7,409,832 | | Index to Form 10-Q Outlines the report's structure, dividing it into financial information and other disclosures - The report is structured into two main parts: Part I - Financial Information (Unaudited) and Part II - Other Information[4][5] Part I – Financial Information Encompasses the unaudited interim condensed consolidated financial statements and management's discussion and analysis Item 1. Unaudited Interim Condensed Consolidated Financial Statements This section presents the unaudited interim condensed consolidated financial statements, including the balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, fair value measurements, workers' compensation claims, debt, leases, income taxes, and litigation Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and stockholders' equity at specific dates Assets and Liabilities (In Thousands) | ASSETS (In Thousands) | March 31, 2019 | December 31, 2018 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $38,223 | $35,371 | | Total current assets | $336,657 | $321,673 | | Total assets | $817,901 | $756,089 | | LIABILITIES AND STOCKHOLDERS' EQUITY (In Thousands) | | | | Total current liabilities | $359,905 | $326,738 | | Total liabilities | $698,028 | $637,052 | | Total stockholders' equity | $119,873 | $119,037 | | Total liabilities and stockholders' equity | $817,901 | $756,089 | Condensed Consolidated Statements of Operations Details the company's revenues, costs, gross margin, and net loss for the reporting periods Statements of Operations (In Thousands, Except Per Share Amounts) | (In Thousands, Except Per Share Amounts) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $218,215 | $223,975 | | Total cost of revenues | $189,868 | $207,713 | | Gross margin | $28,347 | $16,262 | | Loss from operations | $(5,782) | $(14,170) | | Net loss | $(2,300) | $(9,123) | | Basic loss per common share | $(0.31) | $(1.25) | | Diluted loss per common share | $(0.31) | $(1.25) | | Cash dividends per common share | $0.25 | $0.25 | Condensed Consolidated Statements of Comprehensive Income (Loss) Reports the net loss and other comprehensive income (loss) components, such as unrealized gains on investments Statements of Comprehensive Income (Loss) (In Thousands) | (In Thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(2,300) | $(9,123) | | Unrealized gains (losses) on investments, net of tax | $3,657 | $(3,964) | | Comprehensive income (loss) | $1,357 | $(13,087) | Condensed Consolidated Statements of Stockholders' Equity Shows changes in stockholders' equity, including common stock, paid-in capital, and retained earnings Stockholders' Equity Changes (In Thousands) | (In Thousands) | Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total | | :------------- | :------------------ | :------------------ | :------------------------- | :-------------------------------------------- | :---------------- | :---- | | Balance, December 31, 2018 | 7,395 | $74 | $15,437 | $(5,068) | $108,594 | $119,037 | | Balance, March 31, 2019 | 7,410 | $74 | $16,768 | $(1,411) | $104,442 | $119,873 | Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Statements of Cash Flows (In Thousands) | (In Thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $30,772 | $(2,168) | | Net cash provided by (used in) investing activities | $27,045 | $(61,345) | | 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, end of period | $196,556 | $54,788 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the interim condensed consolidated financial statements Note 1 - Basis of Presentation of Interim Period Statements Outlines the basis for preparing the unaudited interim financial statements, including adherence to SEC rules and GAAP, the use of management estimates, and specific policies for revenue recognition, cost of revenues, cash, investments, workers' compensation liabilities, and the adoption of new lease accounting standards - The accompanying condensed consolidated financial statements are unaudited and prepared by management in accordance with SEC rules and GAAP, involving estimates and assumptions[18] - PEO revenues are reported net of direct payroll costs because the Company is not the primary obligor for wage payments to clients' employees[19] - Cost of revenues for PEO services includes employer payroll-related taxes and workers' compensation costs; for staffing services, it includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers' compensation costs[21] - Investments are classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of taxes, recognized in accumulated other comprehensive income (loss)[23] - Restricted cash and investments are primarily held for future workers' compensation claims payments, classified as available-for-sale, and reported at fair value[24] - Allowance for doubtful accounts was $558,000 at March 31, 2019, and $533,000 at December 31, 2018, based on management's estimates[26] - Workers' compensation claims liabilities are management's best estimate, utilizing actuarial expertise, for reported and incurred but not reported (IBNR) claims[27] - Safety incentives, paid to PEO clients for maintaining safe-work practices, are accrued as a reduction of revenue, with a liability of $26.9 million at March 31, 2019[29] Cash, Cash Equivalents and Restricted Cash (In Thousands) | (In Thousands) | March 31, 2019 | December 31, 2018 | March 31, 2018 | December 31, 2017 | | :------------- | :------------- | :---------------- | :------------- | :---------------- | | Cash and cash equivalents | $38,223 | $35,371 | $24,000 | $59,835 | | Restricted cash, included in restricted cash and investments | $158,333 | $105,331 | $30,788 | $60,370 | | Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $196,556 | $140,702 | $54,788 | $120,205 | Weighted Average Shares Outstanding (In Thousands) | (In Thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------- | :-------------------------------- | :-------------------------------- | | Weighted average number of basic shares outstanding | 7,407 | 7,304 | | Weighted average number of diluted shares outstanding | 7,407 | 7,304 | - The Company adopted ASU No. 2016-02, 'Leases,' effective January 1, 2019, recognizing right-of-use assets and lease liabilities for operating leases[38] Note 2 - Fair Value Measurement Provides a detailed breakdown of the Company's investments measured at fair value, categorized by type and fair value hierarchy levels, along with their contractual maturities Investment Portfolio Cost and Recorded Basis (In Thousands) | (In Thousands) | Cost (March 31, 2019) | Recorded Basis (March 31, 2019) | Cost (December 31, 2018) | Recorded Basis (December 31, 2018) | | :------------- | :-------------------- | :------------------------------ | :----------------------- | :--------------------------------- | | Total current investments | $569 | $569 | $417 | $416 | | Total long term investments | $1,556 | $1,549 | $1,710 | $1,687 | | Total restricted cash and investments | $365,614 | $363,670 | $370,796 | $363,815 | | Total investments | $367,784 | $365,833 | $372,953 | $365,948 | Fair Value Measurement Hierarchy (In Thousands) | (In Thousands) | Total Recorded Basis (March 31, 2019) | Level 1 (March 31, 2019) | Level 2 (March 31, 2019) | Other (1) (March 31, 2019) | | :------------- | :------------------------------------ | :----------------------- | :----------------------- | :------------------------- | | Total investments | $365,833 | $2,264 | $347,153 | $16,416 | | Total Recorded Basis (December 31, 2018) | $365,948 | $1,093 | $364,406 | $449 | Investment Contractual Maturities (In Thousands) | (In Thousands) | Less than 1 Year (March 31, 2019) | Between 1 to 5 Years (March 31, 2019) | Between 5 to 10 Years (March 31, 2019) | Total (March 31, 2019) | | :------------- | :-------------------------------- | :------------------------------------ | :------------------------------------- | :--------------------- | | Corporate bonds | $8,986 | $145,521 | $23,855 | $178,362 | | U.S. government agency securities | $6,924 | $6,762 | $29,303 | $42,989 | | U.S. treasuries | $21,351 | $17,208 | — | $38,559 | | Money market funds | $16,416 | — | — | $16,416 | | Total | $53,727 | $174,407 | $53,158 | $281,292 | Note 3 - Workers' Compensation Claims Details the Company's workers' compensation programs, including self-insurance, fronted insurance arrangements, claims liabilities, and collateral requirements Workers' Compensation Claims Liabilities Rollforward (In Thousands) | (In Thousands) | March 31, 2019 | March 31, 2018 | | :------------- | :------------- | :------------- | | Beginning balance Workers' compensation claims liabilities | $413,397 | $363,517 | | Add: claims expense accrual - Current period | $40,385 | $39,052 | | Add: claims expense accrual - Prior periods | $(1,700) | $(6) | | Less: claim payments related to Current period | $1,459 | $1,133 | | Less: claim payments related to Prior periods | $27,716 | $22,535 | | Ending balance Workers' compensation claims liabilities | $422,872 | $378,874 | | Incurred but not reported (IBNR) | $268,291 | $217,492 | - The Company is self-insured for workers' compensation in Colorado, Maryland, Oregon, and for staffing/internal employees in Washington[48] - A fronted program with Chubb covers clients in CA, DE, VA, PA, NC, NJ, WV, ID, NV, and DC, with BBSI retaining the first $5.0 million of loss per occurrence[48] - The fronted program with Chubb was restructured effective July 1, 2018, requiring collateral, including a $30.0 million surety bond and a $63.7 million letter of credit[48] - The balance in Chubb trust accounts for future claims was $462.2 million at March 31, 2019, up from $451.0 million at December 31, 2018[50] - Estimated future liability for unsettled workers' compensation claims was $422.9 million at March 31, 2019, compared to $413.4 million at December 31, 2018[50] Note 4 - Revolving Credit Facility and Long-Term Debt Details the Company's credit agreement, including a revolving credit line and standby letter of credit, outlining collateral, interest rates, covenants, and restrictions - The Company maintains a $28.0 million revolving credit line, expiring July 1, 2020, with a $7.5 million sublimit for standby letters of credit ($5.9 million used at March 31, 2019)[51] - A $63.7 million standby letter of credit (Chubb Letter of Credit) is in place for the workers' compensation program, collateralized by blocked securities accounts[51] - Financial covenants include a minimum EBITDA of $30 million (rolling four-quarter basis), a ratio of restricted/unrestricted cash and investments to workers' compensation/safety incentive liabilities of at least 1.0:1.0, and workers' compensation liabilities not less than actuarial estimates[53] - Restrictions include prohibitions on additional indebtedness (with minor exceptions), dividends exceeding $0.25 per share quarterly (subject to 10% annual increase), common stock repurchases, and termination of AICE policies without bank consent[54] - The Company was in compliance with all covenants at March 31, 2019[54] - A mortgage loan with the Bank had a balance of approximately $4.1 million at March 31, 2019, secured by the corporate office building[54] Note 5 - Leases Details the Company's adoption of ASC Topic 842 'Leases', recognizing Right-of-Use assets and operating lease liabilities for office building leases - The Company adopted ASU No. 2016-02, 'Leases,' effective January 1, 2019, using the optional transition method[56] - Operating lease right-of-use (ROU) assets and current/long-term operating lease liabilities are recognized on the balance sheets for office building leases[56] Lease Cost Components (In Thousands) | (In Thousands) | Three Months Ended March 31, 2019 | | :------------- | :-------------------------------- | | Operating lease cost | $1,956 | | Variable lease cost | $107 | | Short-term lease cost | $59 | | Total lease cost | $2,122 | - Right-of-use assets obtained in exchange for new operating lease obligations totaled $26.695 million[58] - The weighted-average remaining lease term is 4.3 years, and the weighted-average discount rate is 4.4%[58] Operating Lease Liabilities (In Thousands) | (In Thousands) | March 31, 2019 | | :------------- | :------------- | | Total undiscounted future minimum lease payments | $27,891 | | Total operating lease liabilities | $25,321 | | Current operating lease liabilities | $6,299 | | Long-term operating lease liabilities | $19,022 | Note 6 – Income Taxes Addresses the Company's deferred tax assets, emphasizing their realization depends on estimates of temporary difference reversals and future taxable income, and mentions ongoing IRS examination - Realization of deferred tax assets is based on estimates of timing of temporary difference reversals and generation of taxable income[63] - Management evaluates the realizability of deferred tax assets quarterly under a 'more-likely than not' standard[63] - The Company was in a cumulative income position for the 12 quarters ended March 31, 2019[63] - The IRS is examining the Company's federal tax returns for the years ended December 31, 2011, 2012, 2013, and 2014[63] Note 7 – Litigation Provides an update on a significant wage and hour violations lawsuit, Kaanaana v. Barrett Business Services, Inc., where the California Supreme Court granted a petition to review an appellate court's decision - A California wage and hour violations lawsuit, Kaanaana v. Barrett Business Services, Inc., filed November 21, 2012, is ongoing[64] - On February 27, 2019, the California Supreme Court granted a petition to review the appellate court's decision in the Kaanaana case[64] - Management is unable to estimate a potential range of loss for this and other legal proceedings due to inherent uncertainties[65] Note 8 – Subsequent Events Confirms that the Company has evaluated events and transactions occurring after the balance sheet date through the filing date and found no events requiring recognition or disclosure - No events subject to recognition or disclosure were noted after the balance sheet date through the filing date[66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on the Company's financial condition and results of operations, including an overview of its business, strategy, and organizational structure General Describes the company's business model, strategic approach, and decentralized operational structure for client engagement - Barrett Business Services, Inc. (BBSI) is a leading provider of business management solutions for small and mid-sized companies, integrating management consulting with human resource outsourcing[68] - BBSI's strategy focuses on partnering with business owners to leverage human capital, bring predictability through a three-tiered management platform, and enable focus on core business by reducing complexity[68] - The Company operates a decentralized delivery model with 62 branch locations across 23 states and the District of Columbia, providing strategic leadership and expert consultation[68] - Client relationships progress through three stages: Tier 1 (Tactical Alignment), Tier 2 (Dynamic Relationship), and Tier 3 (Strategic Counsel), focusing on assessment, organizational development, and advocacy[69][71][72] - BBSI also provides workers' compensation coverage and claims management services to meet statutory requirements and protect clients from employment-related injury claims[72] Results of Operations Analyzes the company's financial performance, including revenue, gross margin, and net loss for the reporting periods Revenue and Profitability Percentages | Revenues: | Percentage of Total Revenues (March 31, 2019) | Percentage of Total Revenues (March 31, 2018) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Professional employer service fees | 87.3% | 84.4% | | Staffing services | 12.7% | 15.6% | | Total revenues | 100.0% | 100.0% | | Gross margin | 12.9% | 7.2% | | Loss from operations | (2.7)% | (6.4)% | | Net loss | (1.1)% | (4.2)% | Gross Billings and Wages (In Thousands) | (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------- | :-------------------------------- | :-------------------------------- | | Gross billings | $1,360,244 | $1,319,844 | | PEO and staffing wages | $1,156,371 | $1,114,707 | Workers' Compensation and Safety Incentive Costs (In Thousands) | (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------- | :-------------------------------- | :-------------------------------- | | Workers' compensation | $54,229 | $57,121 | | Safety incentive costs | $6,703 | $7,565 | | Non-GAAP gross workers' compensation | $60,932 | $64,686 | Cost Components as Percentage of Gross Billings | Percentage of Gross Billings | March 31, 2019 | March 31, 2018 | | :--------------------------- | :------------- | :------------- | | PEO and staffing wages | 85.0% | 84.5% | | Payroll taxes and benefits | 8.4% | 9.4% | | Non-GAAP gross workers' compensation | 4.5% | 4.9% | - Net loss for Q1 2019 was $2.3 million, a significant improvement from $9.1 million in Q1 2018[78] - Diluted loss per share for Q1 2019 was $0.31, down from $1.25 in Q1 2018[78] - Total revenues decreased by 2.6% to $218.2 million in Q1 2019, primarily due to one less business day compared to Q1 2018[78] - Gross margin increased to 12.9% of revenue ($28.3 million) in Q1 2019 from 7.2% ($16.3 million) in Q1 2018, driven by decreases in payroll taxes and workers' compensation expense as a percentage of revenues[80] - Workers' compensation expense decreased to $54.2 million (24.9% of revenue) in Q1 2019, partly due to a $1.7 million favorable adjustment related to prior period claims[80] - Selling, general and administrative (SG&A) expenses increased to $33.2 million (15.2% of revenue) in Q1 2019, primarily due to higher employee-related expenses[80] Fluctuations in Quarterly Operating Results Explains the seasonal and other factors contributing to variations in the company's quarterly financial performance - The Company historically experiences significant fluctuations in quarterly operating results, including losses in the first quarter of each year[81] - Factors influencing fluctuations include seasonality, wage limits on statutory payroll taxes (which decline throughout the year), workers' compensation claims experience, demand for services, and competition[81] - Revenues may be higher in the third quarter due to increased business activity in agriculture, food processing, and forest products-related industries, while fourth-quarter revenues may be reduced by holiday-shortened schedules[81] Liquidity and Capital Resources Assesses the company's cash position, cash flow activities, and ability to meet short-term and long-term financial obligations - The Company's cash balance (including cash, cash equivalents, and restricted cash) increased by $55.9 million to $196.6 million for the three months ended March 31, 2019[82] - Net cash provided by operating activities was $30.8 million in Q1 2019, a significant improvement from net cash used of $2.2 million in Q1 2018[84] - Net cash provided by investing activities was $27.0 million in Q1 2019, primarily from sales and maturities of restricted investments, contrasting with $61.3 million used in Q1 2018[84] - Net cash used in financing activities was $2.0 million in Q1 2019, mainly for dividend payments[84] - The Company maintains a $28.0 million revolving credit line and a $63.7 million standby letter of credit for its workers' compensation program, with $16.0 million deposited into Collateral Accounts in Q1 2019 to satisfy 2018 requirements[84][85] - Management expects current liquid assets, funds from operations, and the revolving credit facility to be sufficient to meet working capital needs for the next twelve months[88] Inflation Discusses the limited impact of inflation on operations, noting its consideration in workers' compensation reserves - Inflation has generally not been a significant factor in the Company's operations[89] - The Company considers escalating medical and other costs when establishing reserves for future workers' compensation claims payments[89] Forward-Looking Information Highlights the forward-looking statements within the report and the inherent risks and uncertainties involved - The report contains forward-looking statements regarding economic conditions, revenue, gross margin, labor markets, workers' compensation reserves, tax effects, and litigation[91] - Known and unknown risks and uncertainties include client retention, integration difficulties, economic trends, workers' compensation claims experience, regulatory environment, security breaches, and capital availability[91] - The Company disclaims any obligation to publicly announce revisions to forward-looking statements[91] Part II - Other Information Covers market risk disclosures, internal controls, legal proceedings, risk factors, and a list of exhibits Item 3. Quantitative and Qualitative Disclosures About Market Risk Details the Company's exposure to market risk, primarily from interest rate fluctuations affecting its investment portfolio and outstanding debt, and quantifies potential impact - The Company's market risk exposure primarily relates to changes in interest rates affecting its investment portfolio and outstanding borrowings[93] - At March 31, 2019, the investment portfolio included $178 million in corporate bonds, $82 million in mortgage-backed securities, $43 million in U.S. government agency securities, $39 million in U.S. treasuries, $16 million in money market funds, $5 million in supranational bonds, and $2 million in mutual funds[93] - Outstanding debt totaled approximately $4.1 million at March 31, 2019[93] - A 50 basis point increase in market interest rates would result in a $5.1 million effect on the fair value of the Company's investment portfolio[93] Item 4. Controls and Procedures Addresses the Company's disclosure controls and procedures, confirming their effectiveness and stating no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of the company's disclosure controls and procedures as evaluated by senior management - Management is responsible for establishing and maintaining adequate internal control over financial reporting (ICFR)[94] - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019[94] - Disclosure controls and procedures are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[94] Changes in Internal Control over Financial Reporting States that no material changes occurred in internal control over financial reporting during the reporting quarter - There have been no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2019[95] Inherent Limitations Acknowledges that all control systems have inherent limitations, providing reasonable rather than absolute assurance - Control systems, regardless of design, can only provide reasonable, not absolute, assurance due to inherent limitations such as faulty judgment, errors, circumvention by individuals or collusion, and management override[97] Item 1. Legal Proceedings Refers to the detailed disclosures on legal proceedings provided in Note 7 of the financial statements - Information on legal proceedings is incorporated by reference from Note 7 to the condensed consolidated financial statements[98] Item 1A. Risk Factors Confirms no material changes to the risk factors previously outlined in the company's latest annual report - No material changes in the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2018[99] Item 6. Exhibits Lists all supplementary documents and certifications filed as part of the quarterly report Exhibits List | Exhibit Number | Description | | :------------- | :---------- | | 10.1 | First and Second Amendments to the Barrett Business Services, Inc., Nonqualified Deferred Compensation Plan | | 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) | | 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) | | 32 | Certification pursuant to 18 U.S.C. Section 1350 | | 101 | INS XBRL Instance Document, SCH XBRL Taxonomy Extension Schema Document, CAL XBRL Taxonomy Extension Calculation Linkbase Document, DEF XBRL Taxonomy Extension Definition Linkbase Document, LAB XBRL Taxonomy Extension Label Linkbase Document, PRE XBRL Taxonomy Extension Presentation Linkbase Document | Signatures Authenticates the report with the signature of a duly authorized corporate officer - The report was signed by Gary E. Kramer, Vice President-Finance, Treasurer and Secretary, on May 7, 2019[101]