May 4, 2008
Barrett Business Services, Inc. (NASDAQ:BBSI) Q1 2008 Earnings Call Transcript April 24, 2008 12:00 pm ET
Executives
Mike Mulholland – VP of Finance, Treasurer and Secretary Bill Sherertz – President and CEO
Analysts
Josh Vogel – Sidoti & Co. Tobey Sommer – SunTrust Robinson Humphrey Ruthanne Roussel – The Robins Group Walter Pyster [ph] Mitch Almy – Mitchell Securities Bruce Ackerman – Sand Hill Equity Research Jim Missoni [ph] Tim Kahne [ph] Shawn Willard [ph]
Operator
Good afternoon. My name is Peekaine, I will be the conference operator today.
At this time, I would like to welcome everyone to the BBSI First Quarter Earnings Conference Call. (Operator instructions) Thank you.
Mr. Mulholland, you may begin.
Mike Mulholland
Thank you, good morning. This is Mike Mulholland with Bill Sherertz.
Today we will provide you with our comments regarding the company's operating results for the first quarter ended March 31, and our outlook for the second 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 different 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.
Most of our comments today 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 our operations, and thirdly, we believe it 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 first quarter results, as reported, the company earned $0.01per diluted share in the first quarter as compared to $0.15 for the same quarter a year ago. On a summary level, the decline in earnings was principally attributable to three factors: One, a modest increase in gross revenues of just eight-tenths of 1%.
Two, a 46 basis point decline in the gross margin percent. And, three, higher branch level SG&A expenses due to three acquisitions since 2Q of '07.
Total gross revenues for the first quarter of $259.6 million increased less than 1% over 1Q ‘07. Excluding the benefit from the three acquisitions, organic growth for the company on a quarter-over-quarter basis was a decline of 3.5%, which reflects overall economic conditions in our markets.
California, which comprises approximately 75% of our overall gross revenues, was flat for 1Q '08, down just three-tenths of 1% owing principally to a decline in staffing as PEO revenues in the state increased 1% over a year ago. Staffing revenues for 1Q '08 increased 27.9% over 1Q '07.
On an organic basis or comparable branch office basis, staffing revenues declined 11.5% in the quarter. PEO gross revenues declined 2.5% on a quarter-over-quarter basis.
Acquisitions did not affect the comparability of this rate. Regionally, the Portland and mid-Atlantic regions demonstrated very strong double-digit growth rates for PEO business.
In view of the economic climate, we attribute this growth to fundamental market share gains. Our gross margin percent on a gross revenues basis for 1Q '08 declined 46 basis points from a year ago.
Direct payroll costs decreased by approximately 20 basis points due to increased staffing business, which has a higher mark-up percent, thus, lower payroll percent. Payroll taxes and benefits for 1Q '08, expressed as a percent of total direct payroll, increased over the same quarter last year primarily due to a 50 basis point increase in our California unemployment tax, or SUTA rate.
This increase contributed approximately $600,000 of incremental SUTA tax as compared to 1Q of '07, or a decrement of approximately $0.034 per share. As you may know, for accounting purposes, we do not utilize a constant annualized estimate throughout the year for our payroll tax burden.
We recognize the actual effective payroll tax rate as incurred each quarter, which is one of the contributing factors as to why our earnings typically stair step up through a calendar year. This method will create the heaviest payroll tax burden in the first calendar quarter of each year.
Workers' compensation expense for 1Q '08 increased over 1Q '07, both in terms of actual dollars and as a percent of gross revenues. This increase was primarily attributable to higher estimates for claim costs.
1Q '08 SG&A expenses of $8.7 million rose $1.3 million, or 17% over 1Q '07. It is important to note that 100% of this increase was due to the non-comparable branch offices from the three acquisitions we completed between July of last year and February of this year.
On a comparable office basis, SG&A expenses for 1Q '08 declined by 2% as compared to 1Q '07. Turning now to the balance sheet, at March 31, cash and marketable securities of $56.8 million at quarter end declined from December 31 due to an initial payment of $3.8 million in connection with the acquisition of First Employment Services in February, the final deferred payment to Phillips Temps, a December 2007 acquisition, and the payment of our 2008 excess workers' compensation premium in the month of January.
The balance of the change in our cash position from year end is simply attributable to fluctuations in working capital requirements. Trade accounts receivable at quarter end of $41.2 million were up over the 12/31 balance due to an increase in days sales outstanding in accounts receivable, or DSO, from 12 to 14 days coupled with the small increase in the amount of accrued receivables at quarter end.
In view of the economic environment, we are monitoring collections and credit terms very closely. The increase in goodwill on our balance sheet simply reflects the acquisition of First Employment Services in February.
Turning now to our outlook for the second quarter of 2008, as recently reported, we are expecting gross revenues to range from $262 million to $267 million for the current quarter. This projection represents a very modest sequential increase over 1Q '08 and a likely small decline of approximately 1% to 2% from 2Q of '07.
As we noted in our last conference call, and Bill will reiterate again in a few minutes, we have very little visibility in the directional trends of our revenue stream. There are numerous cross currents in our customer base, which are mitigating, to some extent, market share gain.
Based upon the foregoing estimates for revenues, we anticipate diluted earnings per share for the second quarter of 2008 to range from $0.24 to $0.28 as compared to $0.42 per share earned in 2Q of '07. The current economic climate warrants a very cautious outlook as we continue into 2008.
At this time, Bill Sherertz will comment further on the recently completed first quarter and our outlook for the second quarter. Bill?
Bill Sherertz
Thanks, Mike. In the quarter, we signed 87 new PEO customers, which is very strong again.
And during that quarter we lost 41. I want to read an excerpt.
I'll give you the breakdown of the 41 that we lost. We canceled for AR issues seven.
We canceled another two for risk issues. Thirteen were sold, closed or no more employees, and 24 – actually it's less than that, left on their own.
And I'll read you a little excerpt from an e-mail that we got from one of our customer that I think kind of sets the stage for why customers would leave to take it back in-house and I quote, "Hi, Beverly. I know you are aware that we have been shopping or workmen's comp with our broker.
We've decided to move our payroll back in-house. I want to emphasize I made the decision for reasons of flexibility, i.e., float time with our workmen's comp schedule and not on BBSI's performance.
We've been very satisfied with the work that BBSI has done for us. At this time, I am forecasting a busy schedule in the near future from our general contractors and will be invaluable to future growth.
I feel our ability to defer many bills is possible to offset the lag time of our receivables from our general contractors will be invaluable for future growth. I know discussing this with you before making the decision would have been a better course of view, but knowing that BBSI would not be able to allow us same float time as a typical carrier made any other reasons for staying irrelevant.
We appreciate all the work your company has done for us and regret to make this change. But at this time, we feel this is a decision we had to make."
So, I mean, that's kind of the underlying theme of when companies decide to leave. They have to pay us all of their taxes and workmen's comp virtually on the end of the week on Friday, we trade checks.
And so those who want to use IRS money and state withholding money and workmen's comp premiums and medical premiums and – to help finance their business, we are not going to participate with them in that. March was not a particularly very good month.
I think you've seen that in other companies. It has not deteriorated.
That is the good news into April from March. It has remained relatively steady.
It has not picked up. Our forecast is based on a continuing run rate of what we've seen in the first three weeks of April.
So I guess I would tell you that if the economy continues to weaken and gets worse, then we'll be below our estimates. If the economy gets a little stronger or at least stays stable, we'll probably be a little bit above our estimates.
But our visibility is not very good in terms of which way the overall economy goes. I remain relatively hopeful that the economic stimulus, the low interest rates, loosening up of the credit markets, will all have an impact on our company at some point.
We continue to sign at a very fast clip [ph] a new business. And so that is a very positive sign for our company.
But if you were to examine our customer base, not only do we have a higher churn of our customer base, but the customers who are staying are much smaller than they were, some of them 50% and 60%. So, the headwinds that we face have to do with the macros of the economy.
The bad news is that when the economy gets weak the unemployment rates go up and the workmen's comp gets a little more challenging. And so those are the things we are facing.
However, I'm really very, very comfortable with the company in terms of the branches, our staff level, our execution level. And there is really not much changes we can make except to nibble at the edges, having to do expenses and run a very tight ship and we will do that.
So, with that, I'll open it up to questions.
Operator
(Operator instructions) Your first question comes from Josh Vogel.
Josh Vogel – Sidoti & Co.
Hey, good morning.
Bill Sherertz
Good morning.
Josh Vogel – Sidoti & Co.
First question is on buyback activity. I was wondering how many shares you bought back last quarter?
Mike Mulholland
1Q is a little over 97,000.
Josh Vogel – Sidoti & Co.
Okay. And how much is left on the current authorization?
Mike Mulholland
Over 700,000 shares.
Josh Vogel – Sidoti & Co.
Okay. Is this going to be a more aggressive strategy of yours given the current stock price that you would want to step up the buyback activity?
Bill Sherertz
Well, if you guys – if we would take it down to six or seven, I think that could be pretty aggressive, yeah.
Josh Vogel – Sidoti & Co.
Okay. What about the dividend policy?
Do you think you are going to keep that in place?
Bill Sherertz
Oh, we are going to slash the dividend. I mean things are so God damn bad around here that we just take it – maybe go native [ph] trying to raise capital.
We'll be like a bank, how about that?
Josh Vogel – Sidoti & Co.
Okay. All right.
Well, let's shift the gears a little–
Mike Mulholland
That's a no.
Josh Vogel – Sidoti & Co.
What's that?
Mike Mulholland
Josh, that was a no.
Josh Vogel – Sidoti & Co.
I know, I got that, thank you. The staffing business, I was wondering if you could maybe give us some macro and company-specific trends you are seeing across the light industrial and construction markets?
Bill Sherertz
Non-existent in the construction market. At – our legacy staffing, which is mostly California has done exactly what we thought it would do and that is goes to zero.
But our Utah and Denver and Phoenix markets have remained very strong. Those look to be pockets of relative strength in the United – as far as markets go.
The big 800 pound gorillas is what's going on in California. The rest of the markets appear to be, so far appear to be very, very mild.
I mean, they have been somewhat affected, but nothing close to California. The California unemployment rate is probably 7.5% than a lot of the markets we are in.
Josh Vogel – Sidoti & Co.
Can you remind me what percent of your staffing business is in California?
Bill Sherertz
Mike.
Mike Mulholland
It's approximately 23%. But I guess I would just add the caveat is that our overall, to reiterate a point I made in my prepared remarks that overall revenues in the state of California on a quarter-over-quarter basis were flat compared to a year ago.
Josh Vogel – Sidoti & Co.
Okay. And then for your guidance for Q2 are you pretty much assuming flat Q1 versus Q2?
Bill Sherertz
Yes.
Josh Vogel – Sidoti & Co.
In California?
Bill Sherertz
Yes. Yes.
Flat revenues, period.
Josh Vogel – Sidoti & Co.
Okay. Now on the acquisition front, do you plan to pursue – continue to pursue acquisitions?
And which markets and which business lines do you think that would be the course of action?
Bill Sherertz
Well, the Nevada markets, specifically, Las Vegas and Reno and New Mexico, Albuquerque, those would be three markets we'd love to be in as well as the Phoenix and the Denver weren't very big acquisitions and if something came along that was – would tie those to a bigger market, we'd be happy to do that. So, I – we'll continue to look at acquisitions.
I think we are deep enough now into a recession – there's not many sellers out there. They tend not to want to sell on the down side.
They want to sell on the upside or at the top or when things are looking better. It is hard.
Unless you want to pick up just absolutely a horrendous business, and I am not interested in doing that, a lot of acquisitions are pretty tainted.
Josh Vogel – Sidoti & Co.
Okay. And just lastly, of the 20-something, about 20 clients that left on their own volition, I think you had 22 that left last quarter under the same terms.
Are they most – the ones from last quarter, were they mostly bringing it in-house or were they going to a competitor? I meant from Q4 versus Q1.
Bill Sherertz
I just have not heard of anybody going to a competitor, Josh. I mean I think I would hear that.
It's – we are not being undercut on price and I'd be surprised if the competitors in California are doing any better than we are.
Josh Vogel – Sidoti & Co.
Okay. Thank you.
Bill Sherertz
Yeah.
Operator
Your next question comes from the line of Tobey Sommer.
Tobey Sommer – SunTrust Robinson Humphrey
Thank you. Just want to followup on one question to start off.
On the buyback activity you said about 100,000 shares in the quarter. And then at these levels, let's say before we get to $6 or $7 as share, would you anticipate a little bit more activity in that regard?
Bill Sherertz
Well, remember we're limited by what we can do. We are active in the market.
So, we are limited to 25% of average daily volume. We can't be in, in the first trade of the day and we can't be in the last half hour.
Tobey Sommer – SunTrust Robinson Humphrey
Right.
Bill Sherertz
They got 8,000 rules on what we can and can't do, but we are in there. So if it comes our way, we'll take it.
Tobey Sommer – SunTrust Robinson Humphrey
I was just curious, have you evaluated the possibility of a preplanned repurchase program that would enable you to buy during black-out periods, et cetera?
Mike Mulholland
That's already in place.
Tobey Sommer – SunTrust Robinson Humphrey
Okay. And then the – do you have the number of actual PEO customers in the quarter?
Couple of details like that and I was wondering just why you are looking for that, if you do have it, Bill. What kind of average-sized customer do you think you are serving now versus a year ago or two years ago?
Bill Sherertz
I would say the average size is 15% less in terms of numbers partly not because that's a choice, that's because of the economy. So all things being equal, would they be the same size as they have always been in that 30, 35 range, but given the level of the economy now, you are probably talking about 20 to 25.
Tobey Sommer – SunTrust Robinson Humphrey
Okay.
Bill Sherertz
So, you got to – you got to sign more of them. When you start looking and saying well how much did those customers do in '07 that left versus how many did you sign in '08, They did more business in '07 just because they were bigger.
Tobey Sommer – SunTrust Robinson Humphrey
Right. Okay.
And, then, looking at the branches, specifically, are there some branches that slid into negative territory in terms of losses or any tweaks that you plan to do either in terms of the number of branches or in your compensation structure at the branch level?
Bill Sherertz
Nothing – I mean one of the things you saw was the SG&A decline and that's primarily due to bonus structure. So, there is a big flexibility component having to do with wages, given our bonus structure and that will be obviously cut just on the lack of profitability at the branches.
We don't have any plans to close any branches. There are some – particularly in the first quarter is a bad time to look at branches in terms of profitability.
You have got to almost have them on a year-over-year basis, a full year to really kind of look back and just make your decisions based on that. But, in general, I am relatively happy with the level of management at the branch level.
And as long as you don't start bleeding red ink, the branches – you are positioning yourself for the recovery on the other side whether that's this year or next year. I mean that's really – and when you get into these kind of recessions, what you have to do, at least my experience is you just position yourself well, you end up taking market share and then participate rather handsomely on the other side.
And that's exactly what we are doing.
Tobey Sommer – SunTrust Robinson Humphrey
Okay. And, then, I wanted to ask a question about your methodology for forecasting.
Typically speaking, you looked at the available weeks at the beginning of the quarter before you report earnings and then forecast it from there. Given the way the economy has faltered somewhat and continues to do so, do you think you might re-evaluate that methodology and maybe take a look at your first bunch of weeks in a quarter and then give that a somewhat discount the future weeks?
Bill Sherertz
We did that. I mean part of that – if we take the first three weeks of April, which is what we did, normally there is a pretty big pickup in May and June.
Mike Mulholland
Seasonal pickup.
Bill Sherertz
Seasonal pickup. And that's what happened to us in the first quarter.
We got nothing out of March. Normally you would have a really big March and a kind of kick-off to the second quarter.
And so we are doing that. We just said it's not going to get any better than it did in the first three weeks of April.
Tobey Sommer – SunTrust Robinson Humphrey
Okay. So, you think you have effectively done that then?
Bill Sherertz
Yes.
Tobey Sommer – SunTrust Robinson Humphrey
Okay.
Bill Sherertz
So, and the caveat will be that if the economy slides, gets a lot worse in May and June. I mean that's something I don't know.
I mean, I don't see it as I sit here today. But that's what we are going to be subject to.
Tobey Sommer – SunTrust Robinson Humphrey
Okay. And, I wanted to ask another question about your new customers, and I'll get back in the queue.
So, thank you for being generous.
Bill Sherertz
Sure.
Tobey Sommer – SunTrust Robinson Humphrey
Is there any discernible pattern, geography, or kind of customer that are turning your direction at this stage in a softening economy that strikes you as interesting?
Bill Sherertz
No, not really. There are more branches participating that are not necessarily in California.
But I wouldn't – I wouldn't say that there is any particular vertical that is kind of coming our way. And again, remember that we are really looking for good companies, not necessarily trying to penetrate verticals in the market.
So, it's a pretty widespread diverse base that we attract on the PEO front. Obviously, a lot of the canceled customers or the customers that leave, some of those are in the construction business and are related to that.
We still have a fairly wide base of construction-related. It's not necessarily construction in and of itself.
But housing, housing is not getting any better. I'll just – that's just my take on the whole thing.
It is not – we have not seen any upticks in the housing market.
Tobey Sommer – SunTrust Robinson Humphrey
Thank you very much.
Bill Sherertz
Yes.
Operator
Your next question comes from the line of Ruthanne Roussel.
Ruthanne Roussel – The Robins Group
Good morning. It is Ruthanne Roussel speaking.
Bill Sherertz
Yes.
Ruthanne Roussel – The Robins Group
Most of my questions have already been addressed. I did want to ask one more about if we can beat the horse here of the first quarter seasonal pickup that did not come.
Is that also adjusting for the fact that Easter came in March this year rather than in April as last year?
Bill Sherertz
I don't think we have much related to Easter that I am aware of. I think it's – some of it's weather-related, I know that.
And it's just activity related. You get into the spring, start getting into the spring and a lot of our canaries start to pick up sometimes early.
This year or not so much because it has been a really wet year, particularly up here in the northwest. I mean, we're – most of the people in the – well, not most but a lot of the people are starting to build arks [ph] up here.
Ruthanne Roussel – The Robins Group
Well, I know I am.
Bill Sherertz
Yeah.
Ruthanne Roussel – The Robins Group
And also, if you have already mentioned this then I apologize for making you repeat yourself, but I've got a note here about the percentage of staffing revenues that are rising from California. What percentage of PEO revenues arise from California?
Mike Mulholland
Approximately 85%. That's on a gross revenues basis.
Ruthanne Roussel – The Robins Group
All right. Thanks.
I'll hop back in the queue.
Bill Sherertz
All right.
Operator
Your next question comes from the line of Walter Pyster [ph].
Walter Pyster
Good morning, Bill.
Bill Sherertz
Good morning.
Walter Pyster
Have you set a date for the annual meeting?
Mike Mulholland
We have, May 14th.
Walter Pyster
May 14th, okay. All right.
And is that going to be in the bank club or where?
Mike Mulholland
It's going to be over here at the same hotel as we held it last year, in Vancouver.
Walter Pyster
Okay.
Mike Mulholland
Proxy statements were mailed on Monday, April 14th.
Walter Pyster
Okay. I have been traveling, so I just haven't seen the material.
Thank you.
Bill Sherertz
Yeah.
Operator
Your next question from the line of Mitch Almy.
Mitch Almy – Mitchell Securities
Good morning.
Bill Sherertz
Good morning.
Mitch Almy – Mitchell Securities
A couple quarters back there was some mention of taking in company private and we are just looking at the share price here and I think at that time the shares were just a little bit below $20 a share. And subsequent to that have traded in a pretty narrow range.
With the slide that's occurred in the last couple of days, particularly today, can you give us any sort of update on your thoughts that way? I mean, not asking for non-public information, but just some thoughts on the valuation and outlook for the shareholder?
Bill Sherertz
Well, I am very comfortable with the company. So I'm perfectly willing to have the company buy as many shares, particularly down here as it can garner over the next months in front of us and – because I know what's on the other side of this.
I mean, either, one, you got an Armageddon for the United States economy or, two, we are going to improve. And if things level out and the economy improves, we are going to do really well.
So, if – and I am more than patient. I've been doing this a long time.
I've been through four or five recessions and they are all the same. They look bleak and revenues go down and sometimes they are worse than others and profits are less than, but if you run a tight ship and you survive and you take market share, you come out the other side and everybody thinks you are brilliant.
Well, it is not brilliance, it's just what it is. Just we are in a business subject to the economy.
Given the opportunity for me to own all of the company, I would be very comfortable with that.
Mitch Almy – Mitchell Securities
And, and, my last question. With all appreciation of your statement on the lack of visibility, it seems that this quarter was comfortably below the guidance and the expectations of those analysts that I listened to.
And so stemming particularly from the workmen's comp business, I just didn't know if there was anything extraordinary in the quarter or if there was some deterioration above and beyond what you thought was going to be temporary. Because it is a pretty healthy rebound to the following quarter with business sort of basing at the level it was at in March.
Bill Sherertz
What happens when we go into recessions is unemployment goes up and workmen's comp goes up. I mean it's counterintuitive to what you would think but that's exactly what happens.
And we did experience a little uptick in the cost of our claims during the quarter. Nothing that I am very alarmed about and nothing I can do about the unemployment rate.
I mean that's just something that we are subject to. And part of – part of weeding out of customers will be those people who cause us some pain, particularly on the workmen's comp front.
Some of it is related to immigration in which we have really tightened down on our customers about hiring illegals and there have been some retaliatory claims from illegals filing claims once they've been asked to produce a valid Social Security number. But from my perspective, I don't know exactly what the government is going to do but there's enough scare tactics out there to make you take notice.
And I don't really relish going to jail over hiring illegals. So–
Mitch Almy – Mitchell Securities
Sure.
Bill Sherertz
So there's some of that's going on.
Mitch Almy – Mitchell Securities
Thank you very much.
Bill Sherertz
Yes.
Operator
Your next question comes from the line of Bruce Ackerman.
Bruce Ackerman – Sand Hill Equity Research
Good morning, gentlemen. I just wanted to ask you about the big acquisition in Utah, if that was still meeting your expectations.
Bill Sherertz
Well, thank God or we'd be upside down on the earnings per share. Our acquisitions are actually very positive for us.
And I think we are probably a little ahead of schedule on Salt Lake.
Mike Mulholland
We are very pleased with their performance thus far and as we said in February that all of the transition issues are well behind us. And, again, we are very pleased with the new markets for us.
Bill Sherertz
And we really started to work on PEO in the Salt Lake market. And I think that will – I spent a little time with them and Mike has and I think that will bear some fruit in the future here.
Bruce Ackerman – Sand Hill Equity Research
Okay. Very good.
Thanks. That's all I had to ask.
Bill Sherertz
All right.
Operator
Your next comes from the line of Jim Missoni [ph]
Jim Missoni
Good morning, folks. Just a question if you could help me tie together the margins.
I know you guys are saying your gross margin was down 40 basis points or so, you are using the non-GAAP piece. On a GAAP basis, it's dropped a little bit more.
And looking at the staffing statistics that I see reported by some of the industry watch groups where staffing has been essentially flat for this quarter, where's the give here and the gross margin and I have seen the decline? Is it pricing or what's causing this?
Bill Sherertz
I think it's two issues, it's unemployment and comp. And that's kind of the end of that story.
Jim Missoni
Okay. And could you just tie together the difference between the two?
The – maybe that's an offline question then for Mike, but the non-GAAP versus the GAAP here?
Mike Mulholland
Well, margin on a net revenue or a GAAP basis declined from 16% to just under 13%. The biggest pickup or increases in the elements of cost of revenues were direct payroll costs as well as workers' comp.
Direct payroll cost on a GAAP basis increased about 500 basis points or 5% over a year ago. And workers' comp was up a little over 50 basis points from 9.7 to 10.3 expressed as a percentage of net revenues.
I would probably think it might be more appropriate to handle the details of that analysis offline. There is a lot of interplay in between the relationships as you net PEO revenues out of there.
But, certain other items remain on the GAAP P&L. So I would be glad to take your call later this morning.
Jim Missoni
Okay. Thanks, Mike.
Another question. These customers that we see that have left and they have taken the responsibility back in-house, historically now going forward when times turn and things get better, do these customers come back in or are they generally gone?
Is there a point of inflection where they come back to you folks and take the service on again?
Bill Sherertz
I think they'll – we've seen – well, and it's been a long time since we've gone through a recession, 2000, 2001. But my inclination will be that when things improve that we'll have a pretty good shot at coming back assuming that just like the e-mail I read you, I mean I think that customer when they are doing a little better will come back.
I think what you have to think about in terms of small customers, this is survival stuff for them. Our margin may be $1,000 a year per person or $750, but that's still money that effectively they look at being able to save or do for themselves as well as manage their cash flow better and that's – when the economy slows like that, I see it over and over again, they don't get paid, somebody slows down them, and then they've got to not pay somebody.
And I mean that's just kind of the way it works.
Mike Mulholland
It gets into a working capital management priority for them and we would be one of the vendors who they can't stretch. So they've got to find – manage their payables in a method in which they can get vendor provided free financing if you will.
Bill Sherertz
And it's the classic way that small business goes broke because if anything gets out of line when they are doing that, they are upside down; they are done. They will close their doors.
So they are walking right on an edge and they know it.
Jim Missoni
Okay. Great.
Thank you.
Operator
We have a follow-up question from Tobey Sommer.
Tobey Sommer – SunTrust Robinson Humphrey
Thank you. Wanted to ask you a question about the departures, PEO departures you gave us some detail on.
Were they predominantly in California or were they dispersed among your branches kind of like the sales were?
Bill Sherertz
I am just looking at the list here and I would say 90% were California.
Tobey Sommer – SunTrust Robinson Humphrey
Okay.
Bill Sherertz
Yeah.
Tobey Sommer – SunTrust Robinson Humphrey
And then, I guess not to belabor the point, but on the workers' comp side, was it a function of increased number of claims or more on the severity side? How would you parse that in general terms?
Bill Sherertz
I would say more on the number. A lot of them are just medical-onlys but nonetheless.
Yeah, I'd say it's more – and it's being fairly conservative. Claims are going to get a little more difficult, I think.
Tobey Sommer – SunTrust Robinson Humphrey
Right. And, then my last question is could you give us an update on the captive and how that's going.
Thanks.
Bill Sherertz
Well, the captive, there are no claims on the captive. So, we were able to set aside during the quarter what we would have normally brought into income.
And so, no, the captive is doing what it's doing. And no news is good news on that front.
No big claims.
Tobey Sommer – SunTrust Robinson Humphrey
Right. And if we made the assumption that no big claims, then in the fourth quarter what would hit the P&L?
Bill Sherertz
Well, the potential exists as much as 3 million, although we would have to see when we get there what that, why, if and why we would want to do that. I don't view that that we'd get a lot of credit that would be kind of like what I've seen my competitors do and they bring a whole bunch of money back into income and nobody cares.
Tobey Sommer – SunTrust Robinson Humphrey
Right.
Bill Sherertz
So.
Tobey Sommer – SunTrust Robinson Humphrey
Okay. Thank you very much.
Bill Sherertz
Then you set it up, Tobey, you set it up for a comparable for the following year. So, we'll just see when we get there.
I mean we got to get through the rest of the year first.
Tobey Sommer – SunTrust Robinson Humphrey
Good enough. Thank you.
Operator
Your next question comes from the line of Tim Kahne [ph].
Tim Kahne
Hi, guys. Just a quick question.
You mentioned, Bill, that you have been through a number of these downturns. I just was wondering what kind of specific things have you guys implemented or you think is different now in terms of your business makeup?
And I am talking about maybe business mix, the way that you guys choose and call your clients, maybe your balance sheet, other things that may be different now that hopefully you'll weather the storm better versus last time.
Bill Sherertz
Well, the big one is $54 million in cash.
Tim Kahne
That certainly helps.
Bill Sherertz
It does. I mean, to have a bank breathing down our neck about monthly statements and covenants, very distracting.
And so I think so far I am going to give us a very high grade in a very difficult environment. I am very pleased with the way the company is operating in a very difficult environment.
As compared to in the past we were substantially more involved in the staffing world. And California staffing is doing exactly what it has always done when you go into a recession, it just goes away.
So, I am actually very optimistic that if we get through this slightly upper flat, I'll be bringing home some Dom Perignon. I mean I've been through them and very seldom you get out of this thing unscathed.
But right now I am looking at it, and if it doesn't get a lot worse from here, we are going to do really well. I am very pleased.
Tim Kahne
Yeah, I guess then you are saying basically the PEO business is a little bit less cyclical?
Bill Sherertz
Well, it's easier to get customers. What happens in the staffing world is your customers cut, cut, cut, cut.
And nobody wants – you can't get a new customer. So, it's a one-way street.
In the PEO world you – there's hundreds and thousands of little smaller companies out there. And if you have a good marketing structure, you can continue to replace what you lose.
I mean, it would be as though I said well, during the quarter we got no new customers and we lost 41. Well, I mean that – if this were all staffing that's what you would be hearing from me.
Tim Kahne
Right, right. I guess just kind of a little bit more of the same point.
What does your captive workers' – workmen's comp business do relative to your last downturns do you think? I mean it sounds like obviously in a difficult environment where higher unemployment is kind of the norm that you'll have more claims.
Does that translate to higher losses and a more sensitivity to the downturn? Or how does that work in terms of that versus pricing, etc.?
Bill Sherertz
Yeah, I think in a downtown two things are going to happen. One, your unemployment rate is going to go up and your workmen's comp is also going to increase some.
And what you want to avoid, if you can, is the very large claims. And so far we've done a wonderful job of that in the last couple of years.
So things do happen out there, but it's going to take a pretty big claim to get to the captive. And that's kind of a little bit of a throw of the dice but we have not seen that.
You tend to get more of the fraud. More people know if they're about to get laid off that they've got to survive somehow so they file a claim and then you end up spending more money on attorneys and investigators to prove that it is not legitimate any longer.
So that's really kind of where your costs come from.
Mike Mulholland
I guess I would add to that is since the last major downturn, the risk profile of our customer base, the quality of our customers, our underwriting standards have improved markedly over the last several years. So that should help mitigate some of the socioeconomic dynamics that Bill is referring to.
Bill Sherertz
The big danger here is if you try to run for revenue, if you feel like that you need to increase your business and you let your standards down, you are sowing the seeds for a very bad weed to grow in your garden. And so as long as I am sitting here, I am not going to back off on the underwriting side of the world.
Tim Kahne
Great. Thanks, guys.
Bill Sherertz
Yeah.
Operator
(Operator instructions) Your next question comes from the line of Shawn Willard [ph].
Shawn Willard
Good morning.
Bill Sherertz
Good morning.
Mike Mulholland
Good morning, Shawn.
Shawn Willard
Just – everything has been covered pretty well, but a couple of real quick questions. The SG&A level for the quarter, you mentioned that it was down in the existing business and the net incremental change to that was largely due to the acquisitions.
Is that currently at the level that you think is going to run at though? I mean you had a couple of these that are fairly new.
And I know you like to centralize all of the processing as much as you can and try to make sure you are not adding any excess staff. Is that completed or is there still room there to bring that in a little bit?
Granted, it is not going to be a huge number, but just curious if that's done or if there's still more to be had?
Bill Sherertz
Well, I – I don't think there's anything major, Shawn. I think it is what I said earlier, we'll kind of nibble at the edges where we think branches are over staffed or there isn't enough in the pipeline to justify the number of people they have.
We continue to look at that almost weekly with branches. But there's really not a major initiative that we can go in and carve anything out.
I mean, I think we are fairly tight in terms of our size without really hurting ourselves. And so you have to kind of walk a fine line between cutting too much and then you lose more customers as a result of it.
Shawn Willard
Okay. And then you mentioned the weather and the fact that we've had more rain than normal and we've been very unseasonably cold so far this whole spring, I mean having snow and seaside at the end of April is amazing.
Do you think that could have artificially made your comparisons and pushed business out? Because last year we had a warm spring and things actually seemed to start a little earlier than normal.
Bill Sherertz
I hope so. I can't believe that the amount of cold weather we've had in the northwest has been positive for us.
I mean, people work outside. And just the level of business activity and the morale of people up here in the northwest is just awful.
So, I don't know that I can put my finger on it, but intuitively you would say probably it's had an effect on you.
Shawn Willard
So maybe pushed out your normal startup cycle for agricultural and landscaping and all of that kind of stuff maybe six weeks, eight weeks, something like that?
Bill Sherertz
Well, I don't know about that and It ain't done yet. We just had snow this last weekend.
Shawn Willard
Right.
Bill Sherertz
Maybe it's the Fourth of July when we get our last snow storm up here. I don't know.
I think well certainly from an agriculture point of view, if you can't get in the fields, you can't plant, you can't harvest. So, I know that's going on.
Shawn Willard
Okay. And then the last question is you said you have been through a number of recessions and I'm curious on this go around, when you get to the other side of the recession, whenever that happens, what does your business look like from a mix?
I mean it would seem that staffing would be the part that would pick up first and quickest, and what kind of impact would you think that would have on your margins or am I wrong and it would be PEO?
Bill Sherertz
It depends on how it comes about, Shawn. The last time, out of the 2000-2001, it was the PEO that just was on fire because customers were looking for help in attracting people and they were growing fast and they really needed a lot of an HR support.
Staffing tended to come later. In fact, I can make the case, and I think those who follow the staffing industry would say that really staffing never really recovered from 2000-2001 because it was so heavily tech-based.
Given the customers that I know that are down on the staffing side of the world, worst that we have so few of them that I don't know that I would attribute – I don't know that I'm going to keep my eye on that as much. I mean, Salt Lake and Denver and Phoenix, which are all three into staffing, really have not declined.
I mean they haven't declined from the run rates. So would they get a lot better if the economy started to improve?
Well, those three markets seem to be doing pretty well. Would our northwest market and our California markets get better?
I would assume so. But I don't know that I'm going to sit around and wait for the staffing side of the world in California to get better.
I think we continue to take advantage of what's in front of us, which is the PEO world, and build our base and take market share. And what will happen on the other side of this is everybody – all of the customers will add one or two employees.
And so when you do that, it will just be kind of boom.
Shawn Willard
Okay. Thank you.
Bill Sherertz
Yes.
Operator
Your next question from the line of Tobey Sommer.
Tobey Sommer – SunTrust Robinson Humphrey
My question has been answered, thank you.
Bill Sherertz
Okay.
Operator
There are no further questions at this time. Sir, do you have any closing remarks?
Bill Sherertz
No. I just – I tell people that hang in there.
The economy is not very good. I don't think it's going to last forever.
I don't think this is the end of the U.S. economy.
And we will do really well on the other side of this. And it is just a matter when it turns and we are really (inaudible) one company.
I am very pleased with the level of management talent we have in the company and I am really pleased with the execution. So hopefully we have better news next quarter.
Thank you.
Operator
This concludes today's conference call. You may now disconnect.
Again, this concludes today's conference call. You may now disconnect.