Oct 27, 2009
Executives
James Miller – Chief Financial Officer William Sherertz – Chief Executive Officer Mike Elich – Chief Operating Officer
Analysts
Josh Vogel – Sidoti & Company Jeff Martin – Roth Capital Partners Frank Magdlen – Robins Group Shawn Willard – Sigmus Capital
Operator
Welcome to the Barrett Business Service Earning Release. (Operator Instructions) Mr.
Miller, you may begin your conference.
James Miller
This Jim Miller with Bill Sherertz and Mike Elich. Today we will provide you with our comments regarding the company's operating results for the third quarter ended September 30 and our outlook for the fourth quarter of 2009.
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 differ materially from those implied by these forward-looking statements.
Please refer to our recent earning 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. Page 1 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 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 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 affect on gross margin dollars, SG&A expenses or net income.
Turning now to the third quarter results, as reported the company earned $0.28 per diluted share in the 2009 third quarter as compared to earnings per share of $0.06 for the third quarter of 2008. Included in the 2009 third quarter earnings was a pre-tax gain of $572,000 or approximately $0.04 per share from the sale of certain corporate bonds.
The increase in earnings on a quarter-over-quarter basis was primarily due to one, the 2008 third quarter mark-to-market impairment charge of approximately $3.5 million taken on the company's investment in foreclosed and bond funds, and two the 2009 third quarter experienced a $1.6 million decrease in selling general and administrative expenses from 2008. These comparative benefits were partially offset by a 5.3% decline in gross revenues and a $2.8 million decline in gross margin dollars for 2008.
Total gross revenues for the third quarter of $273.1 million decreased $15.3 million or 5.3% from the 2008 third quarter. California, which comprised approximately 77% of our overall third quarter gross revenues, declined 2.9% owing to a decrease in staffing revenues and a small decline in PEO revenues.
Staffing revenues for the third quarter of 2009 decreased $11.3 million or 25.3% from the third quarter of 2008 primarily due to a decline in demand for our staffing services from existing customers in the majority of our markets. PEO gross revenues declined $4.1 million or 1.7% on a quarter-over-quarter basis.
We have continued to see a positive trend of the decline narrowing in year-over-year PEO revenues as we go further into 2009 primarily due to the addition of new business. Our new PEO business during the quarter from customers added since October 1, 2008, nearly equaled the sum of our lost PEO business from the third quarter of 2008 from former customers and the decline in hours worked at existing customer worksites.
Gross margin dollars for the 2009 third quarter decline $2.8 million primarily due to the 5.3% decline in revenues and a decrease in our gross margin percentage. The gross margin percent on a gross revenue basis was 4.5% compared to 5.2% for the 2008 third quarter primarily due to an increase in direct payroll costs.
Direct payroll cost increased 74 basis points over the 2008 third quarter primarily due to a decline in our mix of staffing services, which typically have a much lower payroll cost component than PEO services. Payroll taxes and benefits for the 2009 third quarter as a percentage of gross revenues increased from 7.4% to 7.5% due to increased state unemployment tax rates in a majority of the states we do business in as compared to 2008.
The rate of increase for the 2009 third quarter compared to the prior year has declined compared to the first two quarters of 2009 as statutory tax '08 ceilings have been reached for many employees, therefore reducing the overall effective payroll tax rates. Worker's compensation expense for the third quarter of 2009 as a percentage of gross revenues decreased from 3.4% to 3.3% due primarily to a decline in the number of injury claims reported during the quarter compared to the 2008 third quarter.
The 2009 third quarter selling general and administrative, or SG&A, expenses of $8.4 million decreased $1.6 million or 15.9% from the 2008 third quarter. The decrease was primarily due to lower profit sharing and commissions due to the decline in business activity and profitability and also to lower branch management payroll.
Other income net for the 2009 third quarter totaled $965,000 or an increase of $500,000 over the 2008 third quarter primarily due to the sale of certain corporate bonds. Cash in marketable securities totaled $47.4 million at September 30, 2009 compared to $60.1 million at December 31, 2008.
The decrease was primarily due to $3.1 million used in net purchases of long-term corporate bonds in an attempt to improve the company's investment yield, $2.5 million used to pay quarterly cash dividends, and $2.4 million in cash used to repurchase 252,000 shares of the company's common stock. Trade accounts receivable at September 30 of $46.2 million increased $11.8 million over December 31, 2008, primarily due to an increase in accrued revenue at September 30, 2009.
The days sales outstanding in accounts receivable, or DSO, of 15 days is up from December 2008 of approximately 12 days, but similar to the 15 days outstanding on a seasonal basis compared to September 30, 2008. We continue to monitor our customer credit terms and closely track collections in light of the challenging economic environment.
The increase in the current long-term portion of worker's compensation claims liabilities compared to December of 2008 primarily represent the impact of the $11.8 million worker's compensation adjustment taken during the second quarter of 2009. The decrease in stockholders equity of $11.3 million at September 30, 2009 compared to December 31, 2008, is primarily due to the net loss of $7 million for the first nine months of 2009, cash dividends paid of $2.5 million, and the company's share repurchases of $2.4 million.
Turning now to our outlook for the 2009 fourth quarter, as reported yesterday we are expecting gross revenues to range from $265 million to $270 million for the fourth quarter of 2009. This projection represents a likely midpoint increase of 1.7% over the $263.1 million in fourth quarter 2008 gross revenues.
The projected increase of 2009 fourth quarter gross revenue is based upon a recent revenue trend and is consistent with historical trends of fourth quarters typically experiencing a mild decline from third quarter revenue due to seasonality. Based upon the forgoing estimates for gross revenues, we anticipate diluted earnings per share for the 2009 fourth quarter to range from $0.19 to $0.22 per share as compared to a diluted earnings per share of $0.21 for the 2008 fourth quarter.
At this time, Bill Sherertz and Mike Elich will comment further on the recently completed third quarter, and our outlook for the fourth quarter of 2009. We will then open the call up for questions.
Bill Sherertz
During the quarter, we signed 101 new PEO customers and we lost 44. Of the 44 that left, 12 we asked to leave on A/R which is probably the single most thorny issue we have with customers is their ability to pay.
Eight left for non-A/R and those typically would be safety-related issues. Eleven businesses were sold, closed or no more employees.
Four customers decided to leave for reasons unknown. Five customers decided to leave due to pricing.
One customer decided to take payroll in house. Three customers decided to leave to use another service.
Overall the ratio between signing new customers and those who leave for various reasons remain extremely positive. Revenues from PEO's in the quarter same store sales would have been down 15%.
We lost about $34 million from PEOs who are no longer here. We picked up $60 million from new PEO's this spread continues to trend in our favor.
We used to breakeven each quarter last quarter was a $17 million gain. Overall staffing is down about $11 million or 25%, same store sales staffing down about 22% or $7 million.
We picked up about $7 million in new staffing business but lost about $11.8 for third quarter staffing customers who didn't use us in 3009. All in all I'm very pleased with what the company has done in a very difficult situation particularly having to do with credit and high unemployment.
Just in the last few weeks our revenues have turned positive year-over-year and we think we have a lot of momentum in the company and we certainly have a lot of capacity. So if the economy will simply stay where it's at or get a little better we should do really well.
If we enter a double dipper session I don't quite know what to make of that and we will survive and at some point the bet is that things will get better. Mike, you got anything to add?
Michael Elich
Well, I think overall we continue to see that our operations continue to gain strength both in maturing and internally we've done a lot of right sizing within branches to match them to the business as well build capacity internally to ensure that we're handling the new business that we have coming on. And overall we're seeing a trend towards optimism in the market where business are starting to make forward-looking decisions and ultimately making decisions to come on board.
So we're seeing an uptick in our pipeline.
William Sherertz
With that we'll take your questions.
Operator
Your first question comes from Josh Vogel – Sidoti and Company
Josh Vogel – Sidoti & Company
I guess my first question is more from a macro standpoint. I was wondering if you were seeing with your client base, are they starting to add employees to their payrolls?
William Sherertz
Josh, no. The first step you're going to see is the average work week is 33 hours now, and the first step is not going to e add employees it's going to work those people longer hours.
Then they get into overtime they start working them at over time and then they'll add so it's actually a three step process. What we're seeing right now is a fairly consistent work week which would imply the good news is that it's not getting worse but we don't see any strong uptick at this point either.
Josh Vogel – Sidoti & Company
Okay and as the work week increases I guess I just want to have a better idea of the leverage here that you have with each client. Are you going to be more profitable with an increasing work week or with them having more employees on the pay roll?
William Sherertz
Both affect us. Our margins are determined by wages so the more wages a company pays the more gross margin we get, so we have it both ways.
Josh Vogel – Sidoti & Company
Now shifting to the staffing business, I know the year-over-year comps are tough but we have seen some nice sequential improvement two quarters in a row here. Can you remind us, what are the seasonal factors in this business?
William Sherertz
We do an awful lot of canning which is a spring, summer, fall business where we're running canneries we do some of the wine business down in Napa where we're stocking the shelves and packaging and helping out with the storage and those kinds of things, those are seasonal. And then beyond that a big part of our staffing is out of Utah and [inaudible] Utah [circles] our staffing and they do a lot of manufacturing, packaging those kinds of things particularly the vitamins and others.
But typically staffing will fall off in December and January and February.
Josh Vogel – Sidoti & Company
What about the margin profile in that business I know it has a lower payroll component. I know you're consolidating gross margins are about 4.5%.
I'm just curios what the staffing gross margins are.
William Sherertz
I haven't looked at them in a while but they're usual in the 13%, 14%.
Josh Vogel – Sidoti & Company
Just two more quick ones obviously you guys are sitting on a nice amount of cash and I was curious if you wanted to maintain that position for the time being or would you maybe explore some acquisitions. What are your near-term priorities for that cash?
William Sherertz
Right now we're working on a couple acquisitions. They're relatively small but strategically they could work in our favor.
As far as much larger ones go I don't know that I'd have the appetite to do that. Not knowing what's coming at us.
I'd rather see the economy really stabilize and the government get off the spinning binge it's on before I would make the kind of decision to peal out $10 million or $20 million. I kind of like having it in the bank it makes me feel good.
Josh Vogel – Sidoti & Company
Well there's [neesh] acquisitions were these mostly PEO?
William Sherertz
Both PEO, yes. I don't know we're getting sometimes one or two a day.
It looks like people don't want to be in this starting next year. And then some of them are pretty poor I mean that's the old Alaskan story you know the odds are good and the goods are odd, so we look at them and if they fit strategically then we'll pursue it.
The ones that are severely overpriced and there are some that are located in the middle of no place we just kind of move on. We've got a lot of internal stuff that we're working on.
You know preferred payrolls starting to do well it's the fastest growing part of our company. And we really want to – we just hired a new sales person in Denver and we want to see that market pickup in Phoenix so we've got plenty to do here.
Josh Vogel – Sidoti & Company
Lastly just do you have the cash flow from operations number for the quarter?
James Miller
Yes, and I'm speaking more on a GAAP cash flow basis and that was essentially approximately about $3 million for the quarter.
Operator
You're next question comes from Jeff Martin – Roth Capital.
Jeff Martin – Roth Capital Partners
Bill, could you give us some update on workers comp in California if it continues to be a big driver for new clients signings and what to expect I the future?
William Sherertz
It's still a little bit up in the air down there. I mean there is a big political fight going on in Sacramento but it looks like they're going to raise comp rates 22% or 23% first of the year.
If they do that it will be a huge influx of business for us.
Jeff Martin – Roth Capital Partners
And when will that be determined? What kinds of things can we follow to stay up on that?
William Sherertz
Well there's a WCIB bulletin, executive bulletin comes out weekly that would be probably the best unless you have a contact somewhere at the halls down there. But it still has to get past the director I think that's where it's hung up.
It's a political fight at the moment.
Jeff Martin – Roth Capital Partners
Okay and are you seeing any change in competition from private insurers in California?
William Sherertz
Some of them left early and I have not lately gotten any feedback from people going away, but if the rates go up because of the cost of claims go up my guess is more will leave they get frustrated with it.
Jeff Martin – Roth Capital Partners
So it makes that PEO proposition that a much more compelling.
William Sherertz
I think so yes. I think the PEO proposition is becoming more compelling beyond workman's comp.
In a sever downturn like this where people have to focus on their core competency and they don't have the time to do the administrative work and still survive. So I think that message is getting pretty clear out there.
Jeff Martin – Roth Capital Partners
Okay and then onto the client ads and subtractions with 12 accounts terminated for A/R reasons, was there a quantifiable bad debt associated with those 12 accounts or is really nonmaterial?
William Sherertz
Well we wrote off $200,000 in the quarter. I don't know what is the number for the year that we've written off so far?
James Miller
Probably about 300
William Sherertz
About 300 and we would like to think that we couldn't get stuck, but we do. You know the state holds us to the payroll.
If the company bounces a check off us and that's typically either we get a NSF back on a wire or a check or cashier's check that does never arrive and that's the stuff that goes on. And we're seeing that continue into this quarter.
We're getting a lot tougher though. I mean we're getting a lot faster and you know part of that is the sales process up front that if you don't pay us, you're gone.
Jeff Martin – Roth Capital Partners
Then on the acquisition front, are you looking at PEOs that are kind of in lockstep with what you've done historically or are these possibly white collar oriented PEOs. I guess the question is, is it white collar or blue collar oriented?
William Sherertz
More towards the white collar, Jim.
Jeff Martin – Roth Capital Partners
I'm sorry, what did you say? Blue collar?
William Sherertz
White.
Jeff Martin – Roth Capital Partners
White collar, okay. And then are you seeing much of a mix in the type of new clients that you're adding, basically by industry category?
William Sherertz
It's all over the board. I can read to you a few electric company, crane service, firearms and ammunition, a dental studio, communities services, insurance company, a kitchen - somebody's kitchen - so that kind of stuff.
There's a few more construction companies in there, but very few.
Jeff Martin – Roth Capital Partners
Then to, I think Jim's comment about turning to positive year-over-year growth in the past few weeks, does that mean you're seeing an acceleration in the business recently or are you just equipped some lower numbers?
William Sherertz
When we look at week over week we're maintaining that level and a little bit up. But, your right, we're coming up against fourth quarter last year was the start of a pretty big downturn.
So we're going to look good just because we're up against not very good by numbers. But week over week, we're also heading up higher.
Jeff Martin – Roth Capital Partners
Final question on more of a macro level, give us a sense of how quickly the business turn in front of a labor market recovery, or in lockstep with, or trailing a labor market recovery and what specific metric is, is it unemployment, is it non front payrolls, what kind of things to you leave lag or run coincident with?
William Sherertz
Well, as I said earlier, the first thing that will turn up is the hours worked by employees, and then you'll start to see more overtime and then eventually companies start to hire, so those are the three steps in the process. And when you're looking at those components, what you don't want to see is the average work week going down on a macro level.
So, going from 33 to 29 would not be a good sign. We're seeing it very stable at this point.
Operator
Your next question comes from Frank Magdlen – Robins Group.
Frank Magdlen - Robins Group
The preferred payroll, the preference payroll, how well is that going and do you ever see that becoming a separate line item?
William Sherertz
I suppose if it got big enough. It's all margin, so, yes, it could be.
It could at some point. Right now we're focused on the brand here in Vancouver and Portland and that's a pretty good market for us here.
Frank Magdlen - Robins Group
Where are you booking it now, revenue line wise?
James Miller
It's going into the PEO Service revenues.
Frank Magdlen - Robins Group
Okay, it's in the PEO and that's got to be substantially – can you give some guidance to what the margin you expect on that kind of business?
William Sherertz
What are we doing right now? Do you know?
Biweekly? About 15 or 18,000 or something.
That's pretty small. It's about 13,000, 14,000 every two weeks.
Six seven a week.
Frank Magdlen - Robins Group
Okay and then the percentage on that, the gross margin percentage?
William Sherertz
Its 100%.
Frank Magdlen - Robins Group
Okay.
William Sherertz
There's no cost or revenues to arrive in margin. The only thing that's in it would be management payroll.
Frank Magdlen - Robins Group
Okay. And then coming into the fourth quarter, a little help if we cold on the tax rate.
Is that stabilized or what should we expect there?
James Miller
Are you talking about the corporate income tax rate?
Frank Magdlen - Robins Group
Yes.
James Miller
That should remain in the low 30s anywhere from 31 to 32, 33%. It was higher during the second quarter because of the worker's compensation charge.
Frank Magdlen - Robins Group
And was it a little bit lower? On the bonds did you get a long-term gain on that?
James Miller
Yes. Part of the reason for selling the bonds and taking that gain was for tax benefits.
We have a 2005 loss carry-forward of about $250,000 that's due to expire in 2010, so this gain will help us be able to utilize that loss carry-forward.
Frank Magdlen - Robins Group
All right. And then what should we expect for next year's tax rate?
James Miller
You know, again I would say in the low 30s, I would say in a range 31% to 33%.
Frank Magdlen - Robins Group
Okay and then one other question. For the fourth quarter, should we expect any types of bonuses in that SG&A number?
Should that trend up a little bit?
William Sherertz
No.
Frank Magdlen - Robins Group
No. It's not going to be that good?
James Miller
Well, it could trend up a little bit. I wouldn't think significantly.
William Sherertz
Bonuses for who? Management?
Frank Magdlen - Robins Group
We don't have any reversals or anything coming like that?
William Sherertz
No.
Operator
Your next question is a follow-up from Jeff Martin.
Jeff Martin – Roth Capital Partners
Bill, I wanted to ask you a little bit about the first quarter because I'm thinking back three, four years ago when we had couple consecutive quarters of guidance being below consensus and just to kind of set an expectation for first quarter when we're three months out from now. Based on the current level of business, do you think you would be somewhere to breakeven for the first quarter assuming the economy stays kind of stable from where it is today?
William Sherertz
What would need to really happen in the first quarter is staffing business pick up because the PEO business related to state unemployment runs mostly negative in that first quarter. So I would anticipate a small loss in the first quarter.
Operator
Your next question comes from Shawn Willard – Sigmus Capital.
Shawn Willard - Sigmus Capital
Just two quick questions for you. One, you mentioned that the work week you're averaging about 33 hours now.
What was the low point ballpark and what would be normal before you would start the second leg up of people hiring. I mean, I'm assuming they don't get to 50 hours or anything like that.
And then secondly, I realize they're not in your market, but any thoughts on [Deco] buying MPS and Evaluations?
William Sherertz
Well I think the work weeks when you get down to the very low unemployment levels, you're going to be seeing average work weeks in the high 30s and you're going to be seeing a lot of overtime. So, and I don't know Shawn.
When was that worst case? That was what I was looking at.
I think I was looking at First Interstate at eight and Barrett at ten and every other stock in the world that looked like it was going to zero. But I would think at the low point it would probably be in the 20s somewhere.
So it's probably bounced a little bit, but it's nothing substantial. I think it's more stabilized at this point now than anything else.
It's just kind of stabilized where people are not letting people go. They're not working them more hours.
They're not working them more overtime, or overtime other than in selective cases. But the good news is it's no longer going down for almost 12 months we saw the average work week go down and companies laying off.
And as we said earlier in ours, our customer base in and of itself was down 15% in terms of the number of people they employed. The valuation on MPS?
I guess I don't know enough about MPS to make that call. I mean it certainly looked like a rich offer and the [Deco], they bought a lot of companies over the years.
They don't seem to have much of a culture there, but I guess more power to them.
Shawn Willard - Sigmus Capital
Well, it's just the first large acquisition of this space that there's been for a while. So, I was just curious.
William Sherertz
Well, there's some others out there, Comforce and Spherion and they are fairly cheap and have a lot of locations. I have chosen not to run small branches and so somebody has an infrastructure to run small branches those would be a couple targets someone could look at, I would think.
Operator
There are no audio questions at this time.
William Sherertz
Well, thank you for joining us and we anticipate, if the economy holds, that we're going to do very well for as far as I can see. I like the momentum we have behind us.
We're beefing up the sales side a little bit. We think it's a great opportune time to establish a bigger market share than we already have and we hope that will prove out in the quarters ahead.
So, we'll see you all at the end of the fourth quarter. Thank you very much.
Operator
This concludes today's conference call. You may now disconnect.