Barrett Business Services, Inc. ( BBSI)

Q3 2010 Earnings Conference Call

October 27, 2010 12 PM ET


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

Bill Sherertz – Chairman, President and CEO


Josh Vogel – Sidoti & Company

Jeff Martin – Roth Capital Partners

Doug Stoning [ph]

Jerry Harbinger [ph]



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 30 th 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, 1 st 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 1 st, 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 30 th, cash and marketable securities totaled $42.5 million at September 30th, 2010 compared to $50.4 million at December 31 st, 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 30 th, 2010 of $56.5 million increased $23.4 million over the December 31 st, 2009, primarily due to an increase in business as well as seasonality as reflected in increased accrued revenue at September 30 th, 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 30 th, 2009.

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