Barrett Business Services, Inc. ( BBSI) Q3 2011 Earnings Conference Call October 26, 2011 12:00 PM ET Executives Michael Elich – CEO Jim Miller – CFO Analysts Josh Vogel – Sidoti & Company Jeff Martin – Roth Capital Partners Michael Prouting – 10K Capital Nancy Sherertz – BBSI Operator
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Now, I would like to turn the call over to the Chief Financial Officer of BBSI, Mr. Jim Miller. Sir, please go ahead.James Miller Thank you and good afternoon, everyone. As you saw the close of market yesterday, we issued a press release announcing our financial results for the third quarter ended September 30, 2011. Before I get into the financial results for the quarter, I would like to mention that yesterday’s earnings release summarizes our revenues and cost to revenues on a net revenue 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 that’s compared with 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, total gross revenues increased 22% to $406 million compared to the third quarter of 2010. California which comprised approximately 83% of our overall third quarter gross revenues increased 25% primarily due to continued growth in new PEO business. PEO gross revenues increased 24% to $371 million compared to the third quarter of last year principally due to the addition of new customers. Our PEO revenues from existing customers experienced a 5.1% or $13.6 million increase compared to the year ago quarter. The increase in PEO revenues from existing customers represents the sixth consecutive quarter of existing customer growth. This increase is primarily driven by an increase in hours worked versus increases in headcount. Staffing revenues for the third quarter of 2011 increased 2% to $34.6 million compared to the third quarter of 2010 primarily due to a small net gain in new business as revenues from existing customers remain nearly flat. Gross margin dollars for the third quarter increased 15% to $16.2 million compared to the same quarter a year ago primarily due to the increase in revenues.
On a percentage basis, gross margin declined to 4% for the third quarter of 2011 compared to 4.2% in the same quarter a year ago principally due to higher workers compensation expenses and higher payroll taxes and benefits, offset in part by lower direct payroll cost as a percentage of revenues.Direct payroll costs as a percentage of gross revenues declined to 84.9% compared to 85.1% in the same quarter year ago due to an increase in the PEO mark-up rates resulting from our ability to pass on price increases to customers following a period where markups remain relatively flat through the recession despite cost increases absorbed by the company. Payroll taxes and benefits for the third quarter as a percentage of gross revenues was 7.5% versus 7.4% for the same quarter a year ago. The slight increase is due to higher state of unemployment taxes in the majority of states the company operates in. This trend is similar to the increases experienced in the first and second quarters of 2011. Workers’ compensation expense as a percentage of gross revenues was 3.6% which is up from 3.3% for the same quarter a year ago primarily due to an increase in the provision for prior year claim costs, higher safety incentive expenses which provide a hedge against the current year claim costs and higher insurance broker commissions. Selling, general and administrative expenses increased 7.9% over the 2010 third quarter. This increase is primarily due to increases in profit sharing, management payroll and stock options compensation expenses. The income tax rate for the third quarter of 2011 was 13.7%, which included a favorable benefit from the effect of the $10 million life insurance proceeds on the annual effective tax rate for the company and also to a California State income tax refund related to tax years 2003 through 2006. Read the rest of this transcript for free on seekingalpha.com