Barrett Business Services CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.27.10 | About: Barrett Business (BBSI)

Barrett Business Services, Inc. (NASDAQ:BBSI)

Q3 2010 Earnings Conference Call

October 27, 2010 12 PM ET

Executives

Jim Miller – CFO, VP - Finance, Treasurer, Secretary

Bill Sherertz – Chairman, President and CEO

Analysts

Josh Vogel – Sidoti & Company

Jeff Martin – Roth Capital Partners

Doug Stoning [ph]

Jerry Harbinger [ph]

Operator

Good afternoon. My name is Cassandra and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Conference Call. (Operator Instructions) Thank you.

And now, I would like to turn the call over to Jim Miller. You may begin.

Jim Miller

Thank you. Good morning, this is Jim Miller with Bill Sherertz. Today, we will provide you with our comments regarding the company’s operating results for the recently completed third quarter ended September 30th and our outlook for the fourth quarter of 2010. At the conclusion of our comments, we will open the call up for 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 & Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ. Page one 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, as 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 effect on gross margin dollars, SG&A expenses or net income.

Turning now to the third quarter results, as reported the company earned $0.36 per diluted share in the 2010 third quarter as compared to a $0.28 loss per share for the third quarter of 2009. Total gross revenues for the 2010 third quarter of $332.9 million increased $59.8 million or 21.9% over the 2009 third quarter.

The $332.9 million represents a new quarterly high for gross revenues. California, which comprised approximately 81% of our overall third quarter gross revenues, increased 27.7% owing to continued growth in PEO revenues.

Staffing revenues for the third quarter of 2010 increased $774,000 or 2.3% over the third quarter of 2009, primarily due to a small increase in demand for our staffing services from existing customers and to a small net new staffing business added during the quarter.

PEO gross revenues increased $59.1 million or 24.6% on a quarter-over-quarter basis primarily due to the addition of new customers. Our new PEO business during the quarter from customers added since October, 1st of 2009, more than double the amount of lost PEO business from the third quarter of 2009 from former customers.

Our PEO revenues from existing customers experienced a small increase on a quarter-over-quarter basis. The increase in PEO revenues from existing customers represents the second consecutive quarter of existing customer growth. Bill will comment further on the growth from new PEO customers in a few minutes.

First margin dollars for the 2010 third quarter of $14.1 million increased approximately $1.9 million over the 2009 third quarter, primarily due to the 21.9% increase in revenues.

Gross margin percent on a gross revenue basis was 4.2% for the 2010 third quarter as compared to 4.4% for the 2009 third quarter, primarily due to higher direct payroll cost.

Direct payroll cost increased 34 basis points over the 2009 third quarter, primarily attributable to an increase in the mix of PEO services, which typically have a much higher direct payroll cost component than staffing services.

Payroll taxes and benefits for the 2010 third quarter as a percentage of gross revenues decreased from 7.5% to 7.4%, primarily resulting from the company changing to client specific state unemployment wage reporting in California for all of our PEO clients effective January 1st, 2010.

The change resulted in a decline in the company’s overall average effective California state unemployment rate. This decrease was partially offset by higher state unemployment rates in various other states the company does business in.

Workers’ compensation expense for the third quarter of 2010 as a percentage of gross revenues was 3.3% or the same rate as for the 2009 third quarter The company experienced similar loss levels for the 2010 third quarter in relationship to business volume as compared to the 2009 third quarter.

Selling, general and administrative or SG&A expenses of $9.2 million increased $740,000 or 8.8% over the 2009 third quarter. This increase was primarily due to the increased profit sharing and related taxes resulting from increased branch profitability.

Other income net for the 2010 third quarter totaled $588,000; primarily due to investment income earned on the company’s cash and marketable securities and to the sale of certain closed in bond funds.

The income tax expense rate for the third quarter of 2010 was 28.4%, which included one, a favorable benefit from additional prior year employment tax credits and two, a reduction intuitive for tax asset allowance as sales of certain closed in bond funds during the quarter generated previously unanticipated gains. We expect our overall tax rate for the fourth quarter of 2010 to be in the low 30% range.

Turning now to the balance sheet at September 30th, cash and marketable securities totaled $42.5 million at September 30th, 2010 compared to $50.4 million at December 31st, 2009. The decrease was primarily due to $6.1 million used to capitalize our new wholly owned fully licensed insurance company in Arizona, $3.4 million in share repurchases of the company’s common stock and payment of quarterly cash dividends of $2.5 million.

Trade accounts receivable at September 30th, 2010 of $56.5 million increased $23.4 million over the December 31st, 2009, primarily due to an increase in business as well as seasonality as reflected in increased accrued revenue at September 30th, 2010. The day sales outstanding and accounts receivable or DSO of 15 days is up from December 2009 of approximately 11 days, due again primarily to seasonality and it’s more consistent with DSO of 15 days at September 30th, 2009.

The decrease in stockholders equity of $1.6 million at September 30th, 2010 from December 31st, 2009, is primarily due to the company’s repurchase of approximately 267,000 shares of its common stock for $3.4 million and to cash dividends paid of $2.5 million, partially offset by net income of $4.3 million for the first nine months of 2010.

Cash flow from operations for the first nine months of 2010 totaled approximately $5.5 million, which was primarily comprised of net income, plus the seasonal increase in accrued payroll and payroll taxes less the seasonal increase in accounts receivable.

Looking now at our outlook for the 2010 fourth quarter, as reported yesterday, we are expecting gross revenues to range from $321 million to $326 million for the fourth quarter of 2010. This projection represents a likely midpoint increase of 19.5% over the $273.1 million in fourth quarter 2009 gross revenues.

This projected increase of 2010 fourth quarter gross revenue is based upon our recent revenue trends and is consistent with historical trends of fourth quarters typically experiencing a small decline from third quarter revenue due to seasonality. Based upon the foregoing estimates for gross revenues, we anticipate diluted earnings per share for the 2010 fourth quarter to range from $0.28 to $0.312 per share as compared to earnings per share of $0.21 for the 2009 fourth quarter.

At this time, Bill Sherertz will comment further on the recently completed third quarter and our outlook for the fourth quarter of 2010. We will then open the call up for questions. Bill?

Bill Sherertz

Thanks, Jim. During the quarter, we added 104 new PEO customers and we lost 40. Of those 40, 19 of them we cancelled, 16 were sold and five decided to leave on their own. Only one went to another service out of all of our customers.

We’ve seen some good progress particularly in the Phoenix market and we’ve made some changes in the other markets that have been struggling, namely one was Denver and so that’s starting to look more positive for us and gain some momentum.

I don’t have much else to say other than I’m very pleased with the growth we’ve seen – actually the growth [ph] we’ve accelerate in the first couple of weeks of October. New customers has been a very strong even though 104 was one of the lower quarters we’ve had. We seem to hit some kind of a low in August, but since then, the new customers have picked back up again in terms of new signing.

All in all we’re doing very well and I’m very pleased with the company. So, with that, questions?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Josh Vogel.

Josh Vogel – Sidoti & Company

Hey, good morning. Thank you, guys, for taking my call. It’s encouraging to see the acceleration in PEO growth and I think you talked about business from new customers’ more than doubling, business that was lost. I was just curious of your existing PEO client base not necessarily new PEO clients brought onboard in the past year.

Are you seeing their payrolls starting to grow is that more or the growth had been in those accounts the more function of increased hours worked or something else?

Bill Sherertz

Jim mentioned that on the call. This was the second quarter in a row in which we’ve seen actual hours and days work go up at our PEO. The same store sales, if you will …

Josh Vogel – Sidoti & Company

Got you. Sorry, I must have missed that comment. Okay, great.

And then, on a different note, I read something recently that worker’s comp claims are down significantly. But it’s really been a function of fewer people in the labor pool, but I was wondering if you were seeing similar claims, rates or trends?

Bill Sherertz

I don’t know where you read that, but that’s bullshit. We see rates going much higher. In fact, we’ve raised our rates.

Now, I don’t know about claims being down, maybe because there is less people in the workforce. But the claims are definitely more expensive and I think if you’ll look most insurance companies are running negative.

Josh Vogel – Sidoti & Company

Right, okay. So, do you think that your worker’s comp expense is going to start trending higher as we get into later this year and into through 2011?

Bill Sherertz

I do and we’ve allowed for that in raising our premium side of the business, yes.

Josh Vogel – Sidoti & Company

Okay and then to last year, you increased the worker’s comp claims reserve. Do you still think that the accrual is ample?

Bill Sherertz

I think for where we are – we do the quarterly accrual study. I think where we are is fine. It will just be on an ongoing basis to stay even with the actual hours.

Josh Vogel – Sidoti & Company

Okay, great. And just lastly, of the cash in mark of a securities on the books at the end of the quarter, is this all cash that is fully available to you today or is any of it restricted.

Jim Miller

No, that would be what is fully available today.

Josh Vogel – Sidoti & Company

Okay.

Bill Sherertz

But …

Josh Vogel – Sidoti & Company

So, that has nothing to do with the claims of – the worker’s comp claims accrual or anything, that money is already put aside?

Jim Miller

The liabilities on the books and of course, that money will be used to payout worker’s comp claims as it always has been overtime. But …

Josh Vogel – Sidoti & Company

Okay.

Jim Miller

But it’s not specifically earmark for that purpose.

Josh Vogel – Sidoti & Company

Okay.

Bill Sherertz

Yes and then I was asked – you know, Josh, I was asked that question at a conference and they said, “Well, you don’t have enough cash to cover your comp claims,” and I didn’t – you know I wasn’t keep enough to respond that you know we’ve got a lot of money in receivables that hasn’t have anything against it either. So, you know, actually the truth is so we do have a lot of cash available to us.

Josh Vogel – Sidoti & Company

Okay, that’s helpful. Thank you very much.

Operator

Your next question from the line of Jeff Martin.

Jeff Martin – Roth Capital Partners

Thanks. Good morning, Bill and Jim.

Bill Sherertz

Good morning.

Jim Miller

Good morning.

Jeff Martin – Roth Capital Partners

Bill, could you give us an update on staffing or the thought you’d have a little stronger seasonal quarter and staffing this quarter.

Bill Sherertz

We haven’t seen it. It’s up 2%, I guess. The PEO is kind of crowded in staffing. Although, certainly we would change our margins if we were to increase the staffing side. A little bit dependent chip [ph] on particular customers that we go after and we have. So, and I don’t know how much we’re focused on it to be real frank about it.

Jeff Martin – Roth Capital Partners

Okay.

Bill Sherertz

Now, I [inaudible] …

Jeff Martin – Roth Capital Partners

You were running for a while there. You were running kind of low teams year-over-year growth, first and second quarter anyway.

Jim Miller

Well, I think it’s reflective of just the overall general economic conditions.

Jeff Martin – Roth Capital Partners

Okay, fair enough. And then in terms of SG&A this quarter, was there anybody bonus accrual in that and actually it’s a bit higher than our model had. Just curious if there was anything behind that $700,000 increase that what should be considered either bonus related or more one-time in nature?

Jim Miller

No, it was a – that was all bonus related and as you may recall, our branch offices are rewarded based on their specific individual performance and throughout the year as you go further into the year and branches reach certain levels of profitability. Their bonus rate increases and so, we’re starting to see that in the third quarter, that was really the primary increase in the overall SG&A structure.

Jeff Martin – Roth Capital Partners

Okay.

Bill Sherertz

Once the branch manager hits a million in profitability, they earn 10% of them. Pre-tax profit, so you know that would typically happen in third or fourth quarter, the bigger branches.

Jeff Martin – Roth Capital Partners

Okay. And then Bill could you comment on upcoming election in California and what could go well for you, what could present a challenge for you as a result of that?

Bill Sherertz

Well, I would certainly like to see California to be solvent again. That would be nice. I don’t see that it can get a lot worse, I suppose unless the state just declares bankruptcy. It’s pretty much a mess and somebody’s got to come in and clean it up.

The courts are overrun and they can’t get anything done to be real frank about it, particularly in the comp area. Comp care as your losing money down there. So, my guess is they’ve either got to raise premiums dramatically or they got to pass significant reform and I don’t think that’s going to happen until after the election no matter who gets elected and unless the state of California just wants to run or hold the employers off.

The good news, I guess is that everybody seems to be focused on small business. If you listen to all the economist and everybody that’s a job creators and they’re doing everything at least that they think they know how to beef up small business and happen to be more successful hire people, of course, which plays right into our hands.

Jeff Martin – Roth Capital Partners

Right, right. And along those lines, are you getting any sense of hiring is on the horizon from your small business customers?

Bill Sherertz

I’ve said this a number of times, Jeff. This election is a big time deal. I think that the Congress gets wrestled away from the Democrats that we’re going to see a fairly significant uptick. If it stays in their hands, and we go socialist, then I don’t what goes from there.

Jeff Martin – Roth Capital Partners

Okay. All right. Well, that’s really all I had. I appreciate your time.

Bill Sherertz

Yes, thank you.

Operator

Your next question comes from the line of Doug Stoning [ph].

Doug Stoning

Hi, Bill. Can you hear me?

Bill Sherertz

Yes, yes, definitely.

Doug Stoning

Great. I think going to drill a little bit more into your semester sales on the PEO side. If my notes are correct, last quarter, you advanced 3% and that was the first time that was a positive number. And this quarter again, you posted a positive number. I’m getting a sense that it was – was it better than 3% this quarter?

Bill Sherertz

All right. Jim, will answer that question for you.

Jim Miller

It was a – it stayed about at that 3% level.

Doug Stoning

Okay, that’s pretty good. In your guidance that for Q4, what kind of semester sales are you looking for?

Bill Sherertz

I think very similar. Revenues have actually kind of increase the first two weeks of October, but I don’t know that we want to build that in to our models yet.

Doug Stoning

Okay.

Bill Sherertz

But we – I think we would anticipate that it would be up in that 3% range and it’s still our ability to add new customers that’s really fueling the growth.

Doug Stoning

So, just diving into a little bit more. Going back to last quarter, and I think on a PEO growth space as you grew on a year-over-year basis by 20% and this quarter, you grew nearly 25% on a gross PEO basis. So, it does seem like your semester sales for Q3 were actually better than last, but you’re saying it was about the same or I’m just looking for a clarity on that.

Bill Sherertz

Semester sales were about the same, but the adding of new customers is what’s fueling the 25% or 20%.

Doug Stoning

I see, okay.

Bill Sherertz

Yes.

Doug Stoning

Well, good. Hopefully, it seems like the trend is in the right direction on the semester sales, which is encouraging. That’s all for my questions, thanks a lot.

Bill Sherertz

No, we’ve got a little wind in our back. That’s what it feels like.

Doug Stoning

Great. Keep up the good work.

Bill Sherertz

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jerry Harbinger [ph].

Jerry Harbinger

Good morning, everybody. Thanks for having the call. Can you hear me?

Bill Sherertz

Yes, yes, we can hear you.

Jerry Harbinger

Actually …

Bill Sherertz

Go ahead.

Jerry Harbinger

If I could just follow-up one with the last question was asking there. Bill, I know that parts of the – your business clients are agriculture-related or should I say it’s more seasonally-related. Anything about the seasons going on out there that would have because of when product was brought in might have happened earlier this year to support the current quarter’s numbers more – and therefore, you get a lag in the next quarter.

Bill Sherertz

There’s always – it’s hard to pick out, but there’s always some weather-related issue whether its drought or it’s too much rain or it’s too cold or whatever and it has an effect on it. But nothing out of the ordinary as to what we would experience almost any year unless it’s truly dramatic. Our deal in the staffing will be to win new customers more so than semester sales. Although, should the economy pick up, our staffing will pick up too.

Jerry Harbinger

Right, right. Though I’m sure that many of the call are thinking, “Boy, semester sales pick up that’s an internal growth engine that will have an amazing rebound [ph] as leveraged to it.

Bill Sherertz

Well, yes, because if the margin is like four times PEO.

Jerry Harbinger

Right, correct.

Bill Sherertz

And yes, I know that has a dramatic effect.

Jerry Harbinger

Bill, in your comments, you’ve mentioned seeing some good progress in different regions particularly Phoenix.

Bill Sherertz

Yes.

Jerry Harbinger

I was wondering if you could comment on that, but then you also said knowing in some areas that have been struggling you’re seeing good progress in getting things back online particularly Denver. So, could you – just give us a little talk about what’s going on in Phoenix, an area that most still consider pretty much down the damps. And then what are your three most struggling areas and what’s going on to pick them up?

Bill Sherertz

Well, Phoenix has definitely picked up speed and started signing new customers and it looks like they’re getting their team in place. So, we’re pretty encouraged with that.

On the struggling side, Denver, we let the manager go. In fact, Mike Elich is sort of overseeing that until we find the right person and they’ve made a little progress there, but nothing that’s going to affect one way or another. Long-term, it may have been not very short-term. we made a change in Tusan and that’s a branch that struggled and not doing very well, you know and the rest of the company, we could talk most of the issues come from very small branches and we address those as we go forward. But they’re the kind of branches that really don’t have much impact on the company unless they’re all in concert going in the same direction.

Jerry Harbinger

Okay. For Tusan, you said you have made a change there. Are you speaking to the manager of that area?

Bill Sherertz

Yes.

Jerry Harbinger

Okay. So, you have – that’s position has been filled?

Bill Sherertz

Pete, who works for here at the corporate, he’s running the Tusan branch so …

Jerry Harbinger

He’s running the Denver branch also right.

Bill Sherertz

No, Mike Elich is running that.

Jerry Harbinger

Mike, okay.

Bill Sherertz

They haven’t assigned me a branch yet. So –

Jerry Harbinger

They’re looking for branches ready for you.

Bill Sherertz

Yes, I think so, yes.

Jerry Harbinger

Okay. And what about August, you comment that things kind of took a – I mean was everyone just too, I don’t know, preoccupied talking about grease, which we don’t talk about anymore in August or did people just finally come back in September and say, “Okay, you know what we’re not falling of the face of the earth. Let’s get back to work.”

Bill Sherertz

I guess that’s what it is. We hit those walls over once in a while then we hit really hot streaks and we just notice that in August was probably one of our lower assignments and then it picked right back up in September. So, I don’t really know what that mean, whether everybody took vacation in August, nobody did anything. It’s hard to put your finger on it.

Jerry Harbinger

Maybe it’s another sign that we’re changing to a European type society.

Bill Sherertz

Well …

Jerry Harbinger

I’m sorry.

Bill Sherertz

Yes, you were [inaudible] …

Jerry Harbinger

I was leading the witness there. Thank you very much for your time.

Bill Sherertz

I appreciate it. Thank you. I only have to work four days a week, right.

Operator

There are no questions.

There are no further …

Bill Sherertz

Well, thank you – go ahead.

Operator

There are no further questions at this time.

Bill Sherertz

Well, thank you all for your participation and we’re certainly are upbeat here and we think the trends are going to continue on our favor. We’re always going to have some issues that we’re working on. I mean that’s just the nature of the beast. But in general, we feel pretty good about what we’re doing. So, we will talk to you all on the next call. Thank you.

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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