Barrett Business' CEO Discuss Share Repurchase of Outstanding Common Shares Conference Call (Transcript)

Mar.23.12 | About: Barrett Business (BBSI)

Barrett Business Services, Inc. (NASDAQ:BBSI)

Share Repurchase of Outstanding Common Shares Call

March 12, 2012 10:00 am ET

Executives

Michael L. Elich – Interim President and Chief Executive Officer, Chief Operating Officer, Director

James D. Miller – Chief Financial Officer, PAO, Vice President - Finance, Treasurer, Secretary

Analysts

Jeff Martin – ROTH Capital Partners LLC

Josh Vogel – Sidoti & Company, LLC

Operator

Good morning, everyone, and thank you for participating in today’s conference call to discuss BBSI Share Repurchase Transaction. Joining us today are BBSI’s President and CEO, Mr. Michael Elich; and the company’s CFO, Mr. Jim Miller. Following their remarks, we’ll open the call for your questions.

Before we go further, I’d like to take a moment to read the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. That provides important cautions regarding forward-looking statements.

The company’s 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 material from those implied by these forward-looking statements.

Please refer to today’s press release and the company’s recent earnings release and to the company’s quarterly and annual reports filed within the Securities and Exchange Commission for more information about the risks and uncertainties that actual results to differ.

I would like to remind everyone that this call will be available for replay through April 1, 2012, starting at 1 P.M. Eastern Time this afternoon. A webcast replay will also be available via the link provided in today’s press release, as well as available on the company’s website at www.barrettbusiness.com.

I would now like to turn the conference call over to the Chief Financial Officer of BBSI, Mr. Jim Miller. Please go ahead, sir.

James D. Miller

Thank you, Erin, and good morning, everyone. As you saw this morning we issued a press release announcing our agreement to repurchase approximately 3 million common share or roughly 30% of our outstanding common shares for $59.7 million.

As a result of this transaction, we will acquire approximately 2.5 million shares from the Estate of William W. Sherertz, which represents all of the shares held by the Estate, and 500,000 shares from Nancy Sherertz. We intend to purchase these shares due to a combination of $24.9 million of cash and the remainder in nonconvertible, non-voting, redeemable preferred stock for an aggregate purchase price of approximately $59.7 million or $20 per share.

Following the completion of the transactions, we expect to have approximately 7 million common shares outstanding, $56.9 million in cash and investments and 34,800 shares of nonconvertible, non-voting, redeemable preferred stock outstanding with a liquidation value of $34.8 million.

The nonconvertible, non-voting, redeemable preferred stock will not have a trading market. The initial preferred dividend rate of 5% per year and is payable at the company’s option in cash or additional preferred shares. The dividend rate has an escalation cost or by the rate increases by 2% each given in April 1, 2013. So for example in the first year, the dividend is 5%, which escalates to 7% in the second year and 9% in the third year and so forth, and solely preferred stock is redeemed by the company.

During the year one, the dividend equates to approximately 1.7 million annually or 435,000 per quarter through March of 2013. The preferred stock dividend will have similar characteristics of non-tax deductible interest expense. The escalation in the dividend rate encouraged the company to explore other potential sources of financing, which we intend to pursue.

Following the transaction, our total debt-to-EBITDA using a normalized 2011 EBITDA will equate to a ratio of approximately 2.3. Our current ratio is approximately 1.3x and our debt-to-equity ratio is approximately 0.8x.

Now, I would like to turn the call over to the CEO of BBSI, Mike Elich, who will comment further on the share repurchase transaction and I believe that we’re well positioned to drive shareholder value throughout 2012 and beyond. Mike?

Michael L. Elich

Good morning and thank you, Jim. I wanted to thank all of you for getting on the call this morning. I know it’s a quick turn. I wanted to take time this morning to just expand a little bit on the detailed comments that Jim made by asking a couple of questions that I’ve had to answer for myself over the last few weeks or months.

One of them would be why do we do the purchase? When we look at the current market valuation, the available strategic options for the company, and the level of capital and existing cash flow and we believe that this purchase of shares the majority of which have been basically out of the public float was an attractive investment for all shareholders.

Now, the second question for me was why did you pay a premium? This was not a transaction that could be accomplished empowered or for a company of our size and daily volume. Based upon our internal operating plan, extreme analysis that we did, projected cash flows at a cash balance, the board and management believe the $20 is a good price and transaction will be accretive to all shareholders.

The third was, how does the proxy fight play into this decision. And I’d like to say that the proxy fight itself did not quite drive our decision to repurchase the shares. If anything, it was a mirror catalyst to bring all parties together to reach a mutually agreed upon outcome, which I think is best for all shareholders.

Our overall company is in great shape. The combination of the cash flow and/or balance sheet will allow us to continue to run the company on a go forward basis while investing back into our infrastructure and we look forward to future and where we are going.

With that we’ll open up to questions, and thank you.

Question-and-Answer Session

Operator

Thank you, sir. We will now being the question-and-answer session. (Operator Instructions) And our first question comes from the line of Jeff Martin with Roth Capital Partners. Please go ahead.

Jeff Martin – ROTH Capital Partners LLC

Thanks, good morning guys.

James D. Miller

(Inaudible)

Jeff Martin – ROTH Capital Partners LLC

Good morning. I’m just curious what your calculation of the accretion from the transaction on a 2012 basis?

James D. Miller

Yeah as we work through some of the calculations, recognizing the reduced shares and potential increased essentially dividend costs or another interest costs. We are probably looking at the nine months, rest of the year, probably somewhere in the neighborhood of maybe 12% to perhaps 15% accretion, and as we look out the future years we would see on an annualized basis an increase in accretion rate.

Jeff Martin – ROTH Capital Partners LLC

Okay and then you mentioned that other sources, you are speaking other sources of financing potentially does that essentially mean you're looking for some sort of credit facility? Or if you could expand on that, that would be great.

James D. Miller

Yeah I think that is certainly one option that’s we are looking at given the interest rate market, we fell we can get a very competitive bid and one of the things we will be looking at here in the very key terms the year closes is to explore that options.

Michael L. Elich

I like to just expand too on that. One of the things that structure of the transaction has put as in a great position to have lots of options. And so we are not in a position where we have to do anything. As it stands right now we've got the option to exercise a repurchase on the preferred that we used for the transaction as well as pay the dividend on a go forward basis and then depending on what makes the most sense for the company we will continue to align our balance sheet and by the means of the financing towards the best interest of the business overall.

Jeff Martin – ROTH Capital Partners LLC

Okay, great. And then in terms of the cash generation of the business can you help give us a ballpark idea of the minimum level of free cash flow you expect to generate based on the current run rate of the business?

James D. Miller

Yeah, I think that free cash flow will continue to be strong and we are probably talking in the neighborhood of for 2012 probably in the neighborhood of about close to $10 million and that would be after the preferred dividend would be paid.

Jeff Martin – ROTH Capital Partners LLC

Okay. And then in terms of you typically share a lot of cash on the balance sheet, but a lot of that typically used to run the business What do you believe your current freely available cash is excess of running the business today after this transaction is done?

James D. Miller

You know, we’re probably looking at close to, I would say, between about 5 million and 10 million.

Jeff Martin – ROTH Capital Partners LLC

Okay. Great, thanks, guys. Congratulations.

Michael L. Elich

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Josh Vogel with Sidoti & Company. Please go ahead.

Josh Vogel – Sidoti & Company, LLC

Thank you. Good morning, guys.

Michael L. Elich

Good morning, Josh.

Josh Vogel – Sidoti & Company, LLC

You did a good job covering most of my questions, but is there, I guess I was just curious, is there a chance that or what is the likelihood that you would redeem the preferred shares before the five-year mandatory redemption date?

Michael L. Elich

You know, Josh, I think, like I mentioned, we structured the deal so it allowed us to have runway to work with and to make decisions as the business environment continues to expand and evolve. But I think that we look down the path to redeem the shares at some point, and we’ll make that decision as it makes the most sense for the company overall. And I see it is a fairly straightforward for us when we look at where we are going and we’re taking the company in the future.

Josh Vogel – Sidoti & Company, LLC

Okay. And I don’t know if I’m reading this right, but Jim, is it dividend on the preferred stock payable on April 1st of every year?

James D. Miller

It’s actually payables semi-annually, provided the company declares a dividend, but yes, it would be semi-annually September 30th and April 1st.

Josh Vogel – Sidoti & Company, LLC

Okay, great. All right, that’s all I have right now. I’ll follow up offline. Thank you.

Michael L. Elich

Thank you.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Elich for any closing remarks.

Michael L. Elich

I want to thank all of you for being on the call. Again I know there was a quick turn. We are very excited about that. I think it really supports where we’re trying to get to in the future. It think it’s a very accretive investment for all shareholders and on a go-forward basis, we’re looking forward to expanding and continuing to reinvest back into the organization and taking it to the next level. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect.

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