Barrett Business Services, Inc. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript

Oct.29.08 | About: Barrett Business (BBSI)

Barrett Business Services, Inc. (NASDAQ:BBSI)

Q3 2008 Earnings Call

October 29, 2008 12:00 pm ET

Executives

James D. Miller - CFO, Vice President - Finance, Principal Accounting Officer, Treasurer, Secretary

William W. Sherertz - Chairman of the Board, President, Chief Executive Officer

Michael L. Elich - Chief Operating Officer, Vice President

Analysts

Tobey Sommer - SunTrust Robinson Humphrey

Timothy Brown - Roth Capital Partners

Kvane A. Wong - JMP Securities

Ruthanne Roussel - The Robins Group

[Bill Nescovitz]

Jerry Heffernan – Lord Abbett

Timothy Brown – Roth Capital Partners

Operator

My name is Jennifer and I will be your conference operator today. At this time I’d like to welcome everyone to the Barrett Business Services investors’ third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions)

Mr. Miller you may begin your conference.

James D. Miller

This is Jim Miller with Bill Sherertz and Mike Elich. Today we will provide you with our comments regarding the company’s operating results for the third quarter ended September 30 and our outlook for the fourth quarter of 2008. At the conclusion of our comments we will respond to your questions.

Our remarks during today’s conference call may include forward-looking statements. These statements along with other information presented that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Page 1 of yesterday’s earnings release reflecting our operating results summarizes the company’s revenues and cost of revenues on a net revenue basis as required by Generally Accepted Accounting Principles. Most of our comments today however will be based upon gross revenues and various relationships to gross revenues because management believes such information is: One, more informative as to the level of our business activity; two, more useful in managing and analyzing our operations; and three, adds more transparency to the trends within our business. Comments related to gross revenues as compared to a net revenue basis of reporting have no affect on gross margin dollars, SG&A expenses or net income.

Turing now to the third quarter results. As reported yesterday the company earned $0.06 per diluted share in the third quarter as compared to $0.54 for the third quarter of 2007. The decline in earnings on a quarter-over-quarter basis was primarily due to three factors: First, the impairment charge of $3.5 million or $0.32 per share taken on foreclosed and bonds fund investments; two, a 2.8% decline in gross revenues; and three, a $3.9 million decline in gross margin dollars.

Total gross revenues for the third quarter of $288.4 million decreased $8.4 million from the 2007 third quarter. Excluding the benefit from the company’s two acquisitions made since the third quarter of 2007, the internal growth rate for the company on a quarter-over-quarter basis represented a decline of 3.6% which continues to reflect the overall economic conditions in our markets. California, which comprised approximately 75% of our overall third quarter gross revenues, declined 4.4% owing to small declines in both staffing and PEO revenues.

Staffing revenues for the third quarter of 2008 increased 1.3% over the third quarter of 2007 owing primarily to the Phillips Temps and First Employment Services acquisitions made since December 2007. On an internal growth or comparable branch office basis, staffing revenues declined about 3.9%. PEO gross revenues declined 3.5% on a quarter-over-quarter basis as the two acquisitions made since December 2007 were exclusively staffing. These acquisitions had no affect on the PEO rate of change.

Gross margin percent on a gross revenue basis for the 2008 third quarter declined from 6.3% to 5.2% from the prior year.

Direct payroll costs increased 51 basis points over the 2007 third quarter primarily due to a decrease in the overall markup on our PEO payroll. This is largely due to slightly lower billing markups related to our workers’ comp component of that overall markup.

Payroll taxes and benefits for the 2008 third quarter as a percentage of gross revenue remain nearly the same at 7.35% as compared to 2007 and that is simply due to similar effective payroll taxes for the third quarters of both years.

Workers’ compensation expense for the third quarter of 2008 increased over the same 2007 quarter in terms of total dollars and as a percentage of gross revenues from 2.76% to 3.43%. This increase was primarily due to higher estimates for new claim costs and to increases in estimates for existing claims in states where the company is self insured.

2008 third quarter SG&A expenses of $10 million increased $477,000 or 5% over the 2007 third quarter. The increase was primarily due to incremental SG&A expenses of the non-comparable branch offices from the two acquisitions completed since December of 2007. On a comparable branch office basis SG&A expenses for the 2008 third quarter experienced an increase of 1.9% as compared to the 2007 third quarter.

The income tax rate for the 2008 third quarter was 56.6% which increased from the 2008 second quarter rate of 36.2% as a result of the company’s non-capped effective impairment charge to investments offset in part by some one-time state tax benefits attributable to ASO, our wholly-owned captive insurance company recognized upon completion and filing of our 2007 income tax returns during the third quarter of 2008.

Turning now to the balance sheet at September 30, cash and current marketable securities totaled $51.3 million at September 30 compared to $60.1 million at December 31, 2007. The decrease was primarily due to $6.4 million used to repurchase 514,000 shares of the company’s common stock, $3.8 million used for the First Employment Services acquisition, and $2.6 million used to pay quarterly cash dividends partially offset by a net income of $4 million for the nine months of 2008.

Trade accounts receivable at September 30 of $47.9 million were up $11.2 million over December 31, 2007 due in part to an increase in days sales outstanding and accounts receivable or DSO from 12 to 15 days and also to an increase in the amount of accrued receivables at September 30 quarter end compared to December 31, 2007. We continue to closely monitor collections and credit terms in light of the continued challenging economic environment.

The increase in goodwill of $5.8 million at September 30, 2008 represents the $3.8 million use to acquire First Employment Services in February and the $2.0 million of contingent consideration paid in September 2008 to the selling shareholders of Strategic Staffing which represented the final payment of the purchase price on this acquisition made in July 2007.

Turning now to our outlook for the 2008 fourth quarter, as reported yesterday we are expecting gross revenues to range from $274 million to $278 million for the fourth quarter. This projection represents a likely midpoint decline of 6.1% from the $293.8 million in fourth quarter 2007 gross revenues. The projected decline of 2008 fourth quarter revenues is based upon our October revenue trends and largely reflects the continued difficult economic climate.

Based upon the foregoing estimates for gross revenues we anticipate diluted earnings per share for the 2008 fourth quarter to range from $0.30 to $0.34 as compared to $0.34 per share for the 2007 fourth quarter.

At this time Bill Sherertz and Mike Elich will comment further on the recently completed third quarter and our outlook for the fourth quarter. We will then open the call up for questions.

William W. Sherertz

This is Bill Sherertz. I’m alive and I think well. I haven’t worked much during the quarter as far as being in the office due to the operation I had but I think I’m on the path to recover and plan on spending more time this week and more time as I continue to get better.

I’m very pleased with the company without me being there has run extremely well. A very challenging time period as I’m sure you’re all aware with the market gyrating 800, 900 and 500 points a day and people guessing at whether or not we’re in a recession, depression or somewhere in between.

My best call is that while we’re probably in a recession and have been for a longer period of time than the markets were in the rest of the country, we’re stable. We’re not seeing any cliffs and we haven’t experienced sharp declines in our customer base and/or their revenues. They still tend to be very tentative and it certainly has an effect on us because the less people that work, the less revenue we get.

During the quarter we signed 89 new PEO customers which again is very strong for that quarter in particular. During the same quarter we had 50 canceled which is certainly more than I would like but that breaks down as 22 were sold or closed, four were canceled for non-AR, nine were canceled as a result of AR issues, and 15 decided to leave on their own.

I thought I’d break out kind of why people leave on their own because it’s an open category. 11 of the 15 took it back in-house to try to save money, one started a captive, one couldn’t live with our social security verification policy which means they wanted to use illegals, and two said our pricing was too high.

Overall when I look at the performance of the company in terms of how we’re managing and keeping our customers, again I’m very pleased with knowing that we’re in a very difficult economic time and that if we maintain this when the economic climate turns the other way, we should do really well.

For the year we’ve been working on being self insured in Colorado. Mike, when do you think that will be?

Michael L. Elich

We’re actually scheduled to be effective November 1.

William W. Sherertz

November 1 we have a new state and I think that will really give us a sparkplug on the PEO business in Colorado.

We are also well on our way to forming an insurance subsidiary in Arizona as it was extremely difficult and we didn’t have the background in Arizona to become self insured so we decided to form our own workman’s comp subsidiary. I think we’re looking at a January 1 kick-off date for us to be our own insurance company in the State of Arizona which will have longer term impact I believe on the company and give us greater flexibility in states where certainly the insurance part of the world having comp can be very, very onerous.

I’ll turn it over to Mike. Mike has a few comments and then we‘ll open it up for questions.

Michael L. Elich

I would add that overall we continue to run very solid as a company. All of our operations are running very well. Currently all of our managers are in place. We don’t see on the horizon where really there’s a need to change much and we are focused on building width in our client space.

Going back to a few of our markets, we’ve seen in California where the base seems to be flat. As we add business we’re backfilling either clients that are laying off employees or going out of business as indicated from Bill. But for the most part we seem to be backfilling at a positive rate and ultimately we seem to be gaining ground and feel that we might be further through the carnage that you’re hearing about on CNN at least in California than one would indicate. What we have seen though is that California has begun to heal and that other states to the east have maybe picked up a little bit more of the bug.

Arizona seems to be getting hit a little bit harder but at the same time we continue to backfill business which is offsetting what is declining. Again the difference between Phoenix as a market and Tucson, in Tucson we see a seasonality where business is now coming back. In Phoenix where you have much more manufacturing going on that’s where you’re seeing a bit of a decline.

Utah as a state seems to be very resilient. It seems that one week you might see business drop off a tiny bit. The next week it seems to recover. That could be due to a little bit of our diversification away from mainstream manufacturing and that we do do a lot of work in the vitamin manufacturing and food processing side which seems to be offsetting any declines.

Equally on the East Coast as we would expect from everything that’s gone on to see a decline and we really are not. We continue to see new clients in our pipeline and an opportunity to grow there.

William W. Sherertz

Why don’t we open it up for questions and see what’s on your mind this quarter?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tobey Sommer - SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson

I wanted Bill to get your perspective on workers’ comp looking out into 2009 and 2010 and maybe get your perspective on how you see the market hardening and when that may start to act you think as a stimulant to sales?

William W. Sherertz

California’s going to raise their recommended rates by 5% January 1. There was a lot of talk of 16% and 17% increases but the final guru down there limited it to 5%. They’re holding back the floodgates a little bit. We’ve seen claim costs start to move higher. Other insurers now are starting to see a pinch and I doubt that they’ll follow the recommendations. They don’t have to follow these recommendations. We don’t. We use them as a benchmark on pricing but we typically are lagging those rates unless they’re favorable to us.

I think you’re going to see over the next few years maybe not in the range that they once were of up 25% but you’re going to see a creep in certainly California and other states. As recessions and the unemployment rate goes higher more people file claims because that’s the way they survive. It’s going to be to our advantage I believe. It won’t be a strong wind but it will be a wind that will be at our back instead of our face for a while.

Tobey Sommer - SunTrust Robinson Humphrey

I apologize if I missed this detail on the call. Of the million share repurchase authorization you previously had, how much have you executed and specifically what did you execute in the quarter? I’m just trying to get at what the new authorization implies for the remaining bit.

William W. Sherertz

Jim can give you the real numbers here but we’ve used about 800,000, right Jim?

James D. Miller

We’ve used about 800,000 over the two-year period that the program’s been in place. Third quarter specifically we bought back 178,000 shares. With the 2 million increase we have about 2.2 million now that are available.

Tobey Sommer - SunTrust Robinson Humphrey

How’s your experience in the captive and how are you treating that relative to guidance? Is that something we’re still waiting for your experience to develop and we’ll hear about it in February when you report the fourth quarter?

William W. Sherertz

As you notice the comp numbers were up percentage wise and that’s where it’s at. I doubt that we’ll see any big benefit in the fourth quarter from the captive but we don’t have any claims in it either. I don’t think it’s prudent at this point in time to be pulling that money back down if we don’t have to.

Tobey Sommer - SunTrust Robinson Humphrey

So the guidance itself does not contemplate any benefit from that?

William W. Sherertz

That’s correct. That’s just straight operation comparable year-over-year.

Operator

Our next question comes from Timothy Brown - Roth Capital Partners.

Timothy Brown - Roth Capital Partners

Bill, just a quick follow up on the workers’ comp costs rising. How much do you think you’ll be able to push up rates for BBSI in ’09?

William W. Sherertz

These contracts expire on January 1 so it’s a rolling deal but it certainly takes the pressure off of lowering rates and I think we’ll get a lion’s share of it; 3% or 4% by the time the year’s out and then if pertains good things grow for ’10 and we’ll see which way those rates go. The same way that a rate decrease doesn’t impact us on January 1 but it does have a longer term as you’ve seen in our payroll percentage where it shows up, the decrease in comp rates. Now with the increase it won’t be dramatic but slowly but surely we should see our numbers start to improve.

Timothy Brown - Roth Capital Partners

Do you expect the costs to continue to move upward?

William W. Sherertz

I would say yes. Probably not from this quarter. We’ve been pretty conservative all year long on the comp side of the world but there is pressure underneath from lawyers and a lot more of our claims are going litigated than we’ve seen. I think we’re pretty representative of what’s going on in the real world out there. I think the pressure on rates again is not going to be that dramatic. But if the original recommendations were 16% and 17% and they did 5%, the next go around will be higher I would think.

Timothy Brown - Roth Capital Partners

In terms of the costs rising, is that really because the cost per claim is rising or is it off of the number of the incident rate going up as well?

William W. Sherertz

The cost of the claims are going higher; not so much frequency although you get some of that but what you probably see if you looked at the state numbers would be the frequency on an absolute basis would be the same but as a percentage of payrolls or a percentage of hours worked would be going up some. Again, not real dramatic but the pressure is there.

Timothy Brown - Roth Capital Partners

In terms of insurance players in the market, specifically we heard that AIG is obviously having issues. Are you seeing some benefits in terms of pipeline because of the other issues?

William W. Sherertz

Yes. There’ve been a couple PEOs that have pulled out and several insurance companies. These rate increases may bring them back but some have just flat pulled out of California because the rates were too low for the risks involved which means that they’re blindly signing customers is all that means. If you go out and cherry pick and take good customers at decent rates, you can do just fine because in California [inaudible] you can charge anything you want. It’s whether or not somebody will pay it.

Timothy Brown - Roth Capital Partners

On the guidance for Q4, I think at the midpoint implies about a $12 million decrease in revenues from Q3. I’m just curious. I know certainly staffing is seasonal and I expect $6 million or $7 million down there, but it seems like it implies that the PEO business will be down sequentially too. I was just wondering if you could give us some color on that?

William W. Sherertz

The whole fourth quarter is kind of a guessing game. It’ll depend on how many new customers we sign during the quarter. We took in October the first couple weeks and kind of ran it out. Does that imply the number that you’re seeing? It seems low to me to be real frank about it. I won’t be a bit surprised if we aren’t towards the higher end by the end of the fourth quarter. But yes, the staffing business particularly. Our agricultural business simply goes away. Staffing I must say has held up extremely well in this downturn compared to what I’ve seen in past recessions. For us to be down 4% or 5% or 6% in staffing is really a positive for me.

Timothy Brown - Roth Capital Partners

Obviously there’s still a lot of uncertainty for 2009 but are you seeing this most recent credit market issue start to flow through your customers?

William W. Sherertz

No question. Number one issue facing us. We have a full-time credit manager and have had for a long time but Greg Vaughn who is the VP with the company and me too, we’re watching it very carefully because credit has been a difficult issue for a lot of our small business customers where they simply cannot get loans to maintain their business. The good news is that our customer base because of the way we operate is financially very strong; they have to be because nobody’s willing to loan money.

Timothy Brown - Roth Capital Partners

Is it accelerating now, the credit issues or is it flat?

William W. Sherertz

No, actually I feel like it’s maybe waning a bit. It’s not as bad as I’ve seen it in the first two quarters.

Timothy Brown - Roth Capital Partners

That’s good to hear.

William W. Sherertz

Yes it is. Mike Elich is the road warrior and we were talking before the call, and he feels like maybe that California’s turned a corner. I don’t know what you’re seeing down there but it’s the little anecdotal stuff. That’s all you can pick up on. You don’t see it necessarily in the numbers yet but I think California led us into this thing and I think California will lead us out of it. That’d be my call. You guys are always a little bit ahead of the world.

Operator

Our next question comes from Kvane A. Wong - JMP Securities.

Kvane A. Wong - JMP Securities

Talking about the environment, the interest in what I’m looking at the unemployment rate where your offices are. Actually July and August seemed to have a marked uptick from second quarter levels. Is there something you guys are doing different that you’re sort of experiencing more of a stable environment in California or is it maybe just the California numbers have something to be questioned as far as how accurate they have been?

William W. Sherertz

Mike’s in those offices a lot so I’ll let him answer that question as to what he sees.

Michael L. Elich

I would say that if we’re fighting the trend of that, it would be two-fold. One would be because of the clients that we have. We have a pretty solid of base of clients and as you see especially on the PEO side you start running into a tougher economy, you have a draw down in your overall employment base but it reaches a floor at some point. I think that in most of our markets and in most of our current clients that floor we hope has been met.

One of the things that we’ve noticed in the last five weeks with the credit crunch is that where projects were ready to get going actually that they’ve been pulled back or held off for a period of time. We actually had seen where a lot of our clients were beginning to hire new employees. That has been interrupted a little bit.

Secondly I think with the addition of new clients, we’re really working with the best of the best in many cases, so good companies are going to get the business first and good companies are going to recover first. That seems to be the offset of what might be happening in the data.

Kvane A. Wong - JMP Securities

Workers’ comp experience. As far as your own specific experience, it sounds like you’re talking a little bit that it might be picking up but is there any marked change or is it just really subtle slight and really no particular difference as far as your own workers’ comp experience?

William W. Sherertz

Claims remain exceptionally low but the cost of claims has some creep in them.

Kvane A. Wong - JMP Securities

Is that something because of legal changes that have allowed more lawsuits, etc.?

William W. Sherertz

Yes. Remember I said that a lot more are going litigated. That’ll drive your costs up fairly quickly. I would think our legal bills in terms of comps year-over-year, I don’t really track it that specific, but I would think they’re up 10% to 15% on relatively more claims that we’ve sent to them. Our attorneys have more claims than they’ve ever had and there’s kind of like a minimum. Every time you send a claim over there, it’s going to be $2,500 to $5,000. That’s what we’re seeing anyway. Not a lot more claims but those that we do have tend to be more towards the litigated side of the world.

Kvane A. Wong - JMP Securities

Given that, one of the things you did in the fourth quarter last year was sort of a catch up on the workers’ comp in order to essentially fill up the captive and expense levels at a percent of payroll has also been higher at the 3.1% to 3.4% level. Is there a sense that that should simply stay where it is rather than having the bathtub filled up and then being able to turn off the spigot or reduce the amount that you’re saving there?

William W. Sherertz

I think it’ll just stay where it’s at. I learned my lesson last year. The bond funds taught me a $3.5 million lesson. I’ve been investing in the market for 40 years and I’d never seen a diversified AA bond fund of hundreds and hundreds of issues simply disappear. The bugaboo and the worry’s always been that you don’t have enough. To pull money out of that, and I know Administaff and [Jevity] played that game for a long time. I think it is very dangerous and we choose to be a lot closer to what we think the real numbers are. Obviously last year we missed it. We won’t make that same mistake this year.

Kvane A. Wong - JMP Securities

As far as staffing having held up better than you have in past down cycles, sort of a similar thing. Is there a particular thing that you’re doing that’s different that’s holding that up? Is t here any sort of risk that maybe things have held up and you might come to a down draft there or is something markedly changed?

William W. Sherertz

Again I’m going to defer that to Mike. Certainly our big staffing’s in Utah.

Michael L. Elich

I would say it’s two-fold. This is a little bit of a reach but one of the things that we’re seeing a lot of is, and we do a lot of work in the food industry, but at the moment ConAgra, I know TreeTop just did a big acquisition, they’re going up. The better bigger companies of which we do a lot of business with are acquiring a lot of the smaller maybe not as well run companies and I think that’s where we’ve been positioned to be in front of success.

Operator

Our next question comes from Ruthanne Roussel - The Robins Group.

Ruthanne Roussel - The Robins Group

I have a housekeeping question and then a bigger picture question. We had four clients cancel this quarter for non-AR reasons. Is that the same as risk management reasons as it’s been in the past?

William W. Sherertz

Yes.

Ruthanne Roussel - The Robins Group

The second one is kind of a longer-term thought. I’d like to hear your thoughts Bill on what might happen to BBSI in a hypothetical environment that might be a few years down the road where employee health insurance is decoupled to some extent from employment and employers are not as required to provide it as they were. It was a scenario that came up somewhat during the elections at one point and while it doesn’t look like anything is going to happen in the next year or two, it’s something that I believe people may be thinking about.

William W. Sherertz

As you may or may not know, we don’t “sponsor” plans. We take them out and get the best plan for them in the market and then we administer it. So really our role in the medical side of the world is more of an administrator; paying the bills, giving them choices as to good clients. We do act like a broker and advise our clients on what we think would fit their situation. If the government were to nationalize medical healthcare, I don’t think it would have any significant impact on us unless there was a way that they carved us out somehow. But I don’t see any impact coming from a big change in medical health care.

Ruthanne Roussel - The Robins Group

So you don’t see the fees that you receive for administering it or the benefit that’s provided to the small company especially employer by taking the administration off their hands as being the be-all and end-all of your business?

William W. Sherertz

No, I don’t. Our fees are not a clear item breakout to a customer. Most of our customers have group health insurance. Some don’t. But they don’t necessarily get a break. We simply allocate the dollars that we would have spent there on some other part of HR.

Operator

Our next question comes from [Bill Nescovitz].

[Bill Nescovitz]

Business wise here, what’s your biggest concern going forward over this next year or year and two months?

William W. Sherertz

When people throw around the 10% unemployment number that makes me squirm a little bit. I don’t see that but certainly if we get there we’re closer to a depression than a recession. I worry about what the government’s doing. They’re meddling in the business world and they’re not allowing a lot of people to go out of business that maybe should. So that’s more of a political statement than it is anything else but I think those are the issues.

In terms of the company itself, I really like where we’re at. We’ve got some great players and we’re executing extremely well. We just need an environment to take advantage of it and the environment so far is okay. But I’m not very interested in seeing 10% and higher unemployment.

Operator

Our next question comes from Tobey Sommer - SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson Humphrey

I was hoping to see if you could give us any color on changes in the demographics of your new customers or perceivable trends that you have in the customers that are leaving you by size or geography, anything that stands out.

William W. Sherertz

The customers in general are smaller and certainly the ones that are leaving us, of the 50 I would think that more than 45 of them and this is just a guess do less than $1 million in payroll and the ones we’re signing, we do have some pretty good sized stuff that we’re looking at but in general you’re talking about the average new customer being in that $1 million to $1.5 million, $2 million dollar range. We still, while we do sign smaller ones, generally that’s not where our time is spent and, on trying to get new business so we’re getting good results where we’re putting our efforts.

Tobey Sommer - SunTrust Robinson Humphrey

This is a challenging time and you’re going to be buying back some of your stock but you will have additional cash beyond that most likely so could you tell us what the acquisition environment is like and have private multiples tracked at all, the public ones? I know that would be a challenging concept for a lot of private owners but wanted to get your perspective.

William W. Sheretz

I don’t think the multiples have gotten smaller but the size has gotten smaller. Given that we’re going to be self-insured in Colorado, forming an insurance company in Arizona, priority wise acquisitions are going to have to be pretty outstanding for us to make a move. We’re still seeing a few but most of them are not very good and in fact all of them are not very good or we’d be moving on those fronts.

We don’t have anything keyed up at the moment; I would tell you if we did but, or in the markets you want to be in. We’d love to find something in Nevada and New Mexico but we certainly have accomplished getting our footprint in the right places over the last couple of years and now we’re going to try and develop those opportunities into something much, much, much larger. While we’re there with a footprint, it’s a baby footprint and we’d like our footprint to be much bigger.

Operator

Your next question comes from Jerry Heffernan – Lord Abbett.

Jerry Heffernan – Lord Abbett

If we could, you answered a little bit in the last question. I apologize for being repetitive. I just wanted to be a little bit more clear. The 90 new PEO customers, over the last several quarters has the size of the PEO new account, has that been stable? Has the type of business that those accounts represent, is that stable? Are the new companies that you’re picking up as customers, is this all relatively the same? Are we seeing any shift in that?

William W. Sheretz

I would say it’s pretty much business as usual. There’s nothing that stands out to me. In the beginning, lots of new customers certainly related to construction. We still signed new construction people but they tend to be smaller. By small I would mean 15 people, 20 people; those kinds of things.

And in general though we’re still looking for good companies. We don’t really target industries so I think I have a list here in front of me of new customers. Let me see. I’ll just read you a few and you can figure it out what they do. Custom interiors, senior care, lawn care, wine and spirits, closets, boats, they build boats, espresso shop, market and deli, court clinic, a property management company, a couple more doctors. Here’s a small construction company; it looks like they do about $1.5 million. So does that give you some idea?

Jerry Heffernan – Lord Abbett

Yes, yes that’s good.

William W. Sheretz

I think that’s very typical of, they all tend to be the kind of blue/grey collar if you will, not heavy construction or certainly we haven’t signed truck drivers in quite a while and that’s fine with me. If we can get a good one that’s great but they tend to be, some guys are more trouble than they’re worth. It’s really we’re just across the board.

Michael L. Elich

I would say we’re glad about the, if you take how long we may have really been muffling through this, at least in California, go back even a year to 18 months, a lot of the clients that are leaving are the ones that have really found their way down another road. They’re not going to make it; they haven’t made it and clients that we’re bring on today, we’re putting them through a pretty rigid scrutiny before they’re coming on.

So they’re much healthier and they probably have a much more upside and they are more than likely at their lowest point.

Jerry Heffernan – Lord Abbett

So a little bit of a study in Darwinism?

William W. Sheretz

Yes.

Jerry Heffernan – Lord Abbett

I’m looking at notes of last quarter and you’d mentioned that seeing some insurers and workers’ comp leaving California, believe the trend will be to leave and mentioned Berkshire Hathaway, workers’ comp carrier has announced that they will be out of the market and canceling all policies in August. We still look at that as a positive even for Barrett, correct?

William W. Sheretz

Yes. It causes people to look at alternatives. They don’t run out and a lot of those people, because I think Berkshire had about 10,000 customers. That’s what I was told and the name of their insurance subsidiary was Redwood, one of them and applied with another one but they, a lot of them are going to go more towards the traditional insurer. I’m sure that the insurance companies have [inaudible] to other insurance companies but a lot of them are willing to take a look at alternatives which is us and others so that is a positive for us, yes, as long as we don’t get caught up in what caused them to leave, which is accepted claims and bad customers.

Jerry Heffernan – Lord Abbett

Absolutely. I’m sorry, this is a bit of a housekeeping question and I must have some poor notes here. The total amount of shares that you’ve purchased year-to-date and the amount that you purchased in the quarter. I know that you said that already but I see two different things I’ve written down and so obviously I’ve goofed up.

James D. Miller

On a year-to-date basis through a couple of days ago we had repurchased about 646,000 shares for about $7.8 million. In the third quarter alone we had repurchases of 178,000 shares at a little over $2 million.

Jerry Heffernan – Lord Abbett

Again, going back to last quarter and certainly we were at a much different level there but we were asking about, how aggressive do you want to be in buying back the shares? You thought that you had seen a little bit of stability in the market at that time. My question though, how aggressive do you want to be in this and it was, you know what we’re not going to go in debt to buy back shares. Certainly the price per share is significantly lower today.

You are still showing a nice stability if you will in your business and you announced a $2 million share repurchase now. Is it just as simple as hey, at this price we should be more aggressive and additionally we have the Colorado workers’ comp, the Arizona workers’ comp, those set up so the acquisitions we’re taking a different view on that?

William W. Sheretz

There’s only so much we can do unless we, I suppose we could do a Dutch auction or something but we’re in the market every day. We’re in there on the bid side of the market subject to the rules of repurchasing our shares so, and we’re willing to buy blocks and so we’re happy to sit here and generate cash flow to buy our shares back.

I think our cash flow probably is greater than the shares we bought back so far and I look on that a long term basis. I’ll continue, if the stock stays where it’s at we’ll be happy to sit here for the next few years and take them back. We’ll end up with just me standing there I guess. By default I’m not selling so that’s how it works out.

And as far as, I think we have enough flexibility. At the $51 million which is a net/net number to buy both back our shares and do acquisitions should they come along and we certainly have bank lines of credit if we ever needed them and we could extend those out as opposed to using very current assets to make acquisitions. However, I’m certainly happy to be in the position we’re in of cash in a very significant downturn.

Operator

Your last question comes from Timothy Brown – Roth Capital Partners.

Timothy Brown – Roth Capital Partners

Just a quick follow up question. On the Colorado and Arizona, now that you’re going to be self-insured here pretty soon, can you just give us an idea of what kind of business you think you can do on the PEO side say maybe in 2009 and then maybe longer term too? Is it $100 million in ’09 and give us a little color?

William W. Sheretz

Well, that would be fun. I’ll let Mike answer that question. I’m starting to run out of voice.

Michael L. Elich

We built our performance relatively conservative. We have three locations in Colorado: Grand Junction, Denver and Colorado Springs; all very, very solid markets for us. Within Colorado, it’s hard to speculate how much momentum we’ll get out of the gate because we are going to take it slow. Even within a few of the clients that we already have, we’re going to be careful as to how we bring them into self-insurance because we want to make sure that they are as clean as we need them to be.

But just out of the gate in Grand Junction we’re adding three clients just to get started and we recognize that the rates that are being charged in California or excuse me, Colorado, are very comparable to what are being charged in California. And the claims don’t seem to be, at least at this point, to be, the cost to run the program doesn’t seem to be out of whack so I would suspect that we’re going to have very strong competitive advantage. Most of the market in Colorado is owned by Pinnacle and feedback in the market is that if people had an option they would take it.

As far as Arizona, that will be a little slower go. We’re going to take it careful. We’re going to be careful as we get things rolling but again we’re going to support our existing base of business and then we’ll expand it as the market is there and the companies see the advantage.

William W. Sheretz

It’s not so much the volume; it’s the amount of new customers. So let’s just that we did 20 new customers which is not an unrealistic expectation in Colorado next year. That should mean $30 million or so, so you can figure it out, out of three offices that each office is picking up seven new customers and that doesn’t seem very insurmountable to me. I would expect that each of those offices should be able to pick up somewhere between 10 to 20 new customers which would put us up in the $60 million, $70 million range in ’09, again assuming the economy is relatively sanguine as compared to down, down, down, down, down every day.

So that would be, I think that’s the pro-forma that I would look at. Let’s just hope it’s that way; part of it is that we have a good infrastructure in Colorado. We don’t have the infrastructure totally built in Arizona yet and that’s something given, when people ask me about acquisitions we have internal stuff that we’re working on that isn’t complete. But once it’s complete we should do really well with it.

Operator

There are no further questions.

William W. Sheretz

Thank you for participating and we continue to operate very effectively in the company and I think those of you who can stand the price long enough to stick around long enough, that you’ll be well rewarded because the company is in a great position. The only thing that we need to really rock and roll is going to be a little help from the economy overall and actually being home for quite a bit and getting the lessons of the talking heads on CNBC, it appears that maybe we’re not headed for a depression; that we may be somewhere near a bottom both in terms of the stock market and in terms of the economy. And that portends very good things. I’m very positive so let’s see how it works out and we’ll talk to you all next quarter. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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