Good morning everyone and thank you for participating in today’s conference call to discuss BBSI’s financial results for the third quarter ended September 30, 2014. 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 questions. Before we go further, I would 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 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 the company's recent earnings release and the company's 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. I would like to remind everyone that this call will be available for replay through November 29, 2014, starting at 3:00 PM Eastern 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. Now, I would like to turn the call over to the Chief Financial Officer of BBSI, Mr. Jim Miller. Please go ahead.

Thank you, and depending upon where you are dialing in from good morning or afternoon everyone. As you saw at the close of the market yesterday, we issued a press release announcing our financial results for the third quarter ended September 30, 2014. Our third quarter results continued to be balanced by new client additions and strong growth from our existing client base. At 8% same store sales were at the upper end of our high single digit expectations where we added net new 182 clients. These results reflect our continued focus on delivering a management platform that supports well-run companies over the long term, as well as a maturation of BBSI’s brand in the marketplace. Before taking you through our financial results I would like to mention that yesterday's earnings release summarizes our revenues and cost of revenues on a net revenue basis as required by Generally Accepted Accounting Principles or GAAP. Most of our comments today however will be based upon gross revenues and various relationships to gross revenues, because we believe 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 with 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. Now turning to the third quarter results, as disclosed in yesterday’s press release of the company’s recording an additional charge to the workers comp claims liabilities of $80 million. The net funding needed for that charge will be on an after tax basis, which equates to approximately $48 million. I will discuss the charge in greater detail momentarily. In some cases however I will discuss our…

Good morning and thank you for being on the call. Before we get into discussing the company’s performance in the quarter, I’d like to take a moment to comment on the efforts and the effects of any of the workers compensation expense and changes. First a little bit of history in terms to discuss the claim strengthening process. Looking back, after taking a charge in 2012, for fourth quarter 2011, we started to look at how we could gain a better understanding of what our ultimate expensed liability was, as we were continuing to be affected by a tail factor of older claims continuing to develop. Even though we had taken changes in 2001, 2009, 2011, we were neither solving problem nor getting any closer to an answer. In 2012 we started a process of understanding what the ultimate level of liability would be if we stressed each claim. We continued the process in 2013 as we realized that it made no difference to the actuarial process, unless those dollars moved from IBNR to case reserves as incurred. In July of 2013 we initiated a reserve study process on claims 2012 and prior. The process was intended to strengthen the reserves of all claims 2012 and prior, to a level of probable ultimate expected. As the process remained a work in process completed this quarter, we have seen year-to-date closers in 2014 of 344 claims or 26% of claims strengthened. We have generated a credit of $3.4 million or 20% credit of incurred dollars on those claims. In conjunction with the reserve strengthening process, we initiated a reserve study and engaged the Willis Claims Audit Team in reviewing a target sample of claims we believe to have the highest. We took a sample of the highest probability claims with complexity.…

Thank you. (Operator Instructions) And we’ll take our first question from Jeff Martin with Roth Capital Partners.

Thanks. Good morning Mike and Jim.

Good morning Jeff.

Good morning.

Mike, could you go into some detail about the loss development factor specifically. How is that shifting around with this $80 million reserve charge and where ultimately does it settle in do you think?

So what happens with your LDF as you move your triangles over time and the triangles are the actuaries model of looking at development in dollars from a couple of different angles by year, as those years develop over time. So you have a factor of incurred, which is how dollars are put up on claims, and then you have a factor of paid, which is how those dollars that are incurred are paid out, that move within those triangles. Each year as you have a new claim, you have a basis that’s built, that over time says that if you had a claim today or you have a block of claims today, it may take three years, five years, 10 years to get to a full development on those claims. Well, as you come into to – and if I go back and I look at old practice, we tended to put up dollars and then we kind of late (ph) wait and see what would happen and then we put up dollars and this was prior to even 2011 where we would kind of spread that tail out a little bit more where it would take us longer to get to the ultimate incurred, which means that your LDF, it creeps, it moves from three to four to five to six, meaning that ultimately it will take longer for you to realize those same dollars. So it gives you less credit for what you did, because it still says that you have a multiplier on how long it will take you to get to your ultimate expected. When you step back and you start to step into the process of accelerating that process, you get no credit that says that its going to take you less time to…

So help us understand the timeline for getting more of a clear picture of how those ultimate claim costs are going to play out. I mean is it a matter of quarters or is it a matter of a couple of years?

You’ll get different opinions from different people. The actuary will tell you its going to take you five years, but we feel that with the results that we’ve seen already in the quarter and then even what we’ve seen in October moving forward, that we’ll have a better feel and a much better idea, even by the end of this year of what that trend is. We’ve already seen where that trend is starting to move down and how I think things from different angles. But I would say that by the end of this year you’ll see some movement I would say in the first six months or to the next three quarters. Taking us to mid-June or end of second quarter, we’ll start seeing that movement and then now will allow for a more accurate basis I think within the actuarial models.

Okay, assuming that claims, payments and the cost of claims and the frequency doesn’t change much from here, what kind of scenario are we looking at a year or two down the road in terms of this $80 million increase in reserves? I mean is it a situation where that will need to be un-winded and what kind of scenario is required for that to play out?

Well, I would say two things. One is, is that once you’ve gone through this processing you get on the other side of the tail and you feel that you’re in a very conservative position. I’m going to be very reluctant to take dollars back to earnings and hopefully we will be able to put ourselves at a higher confidence level and ultimately allow ourselves to maintain a level of adequacy based on the charge that we had and normalize and smooth out the whole business model. The challenge though, and this is where we were even as much as the last two days, is looking at further out. If you take data today that you know is skewed, then at some point your going to find that you could be on the other side of that curve, where in a quarter just as we’ve had charges that went up by $10 million, they could go down that much as well, but I think you have a better… Again, we did this because it was in the best interest of the company. We did this because it gave us a better visibility and one of the things you can’t do and this is one of the thing that we probably could have done going back to ’13 and ’14 or even to the claim strengthening processes, we could have managed the process a little bit to get to a number that didn’t disrupt the data. The problem I had with that is that until you step in to the ring and get your past taken care of and know where your at, its hard to move forward and so that was really the process that we used. It was to just go in and just say, lets look at 100% and higher probable expected amount and that will let us as we are even seeing in the closed claims to maybe overshooting and at least in some pockets as much as 120% of what was the actual closed out amount, leaving us to a point where we can say, we feel very comfortable that we are at least to an adequate level and that we are not under reserved. The run off coming back, I think that we’ll be watching that very closely quarter-to-quarter to not allow for choppiness coming the other direction over time.

Okay. And then diving into the P&L a little bit, SG&A was up pretty dramatically as a percent of gross revenue. Just curious if there were any unusual items in that, I mean maybe quantifying the cost of working with Willis. I mean that might explain some of that. Just curious what kind of SG&A level to expect in the model going forward.

Jeff, this is Jim. Probably the biggest component that we saw move up, and we saw this in the second quarter too, and probably just incremental cost. We had about $1 million in just IT expense and that again is for the various IT projects we’ve been working on during 2014 and I think we are probably near the peak on those costs and we should see those costs, at least level off and probably start to come down a little bit once we get into 2015, but that’s probably the single biggest driver of the increase in SG&A.

I would add to Jeff that in the last couple of years we have been building a lot of infrastructure. We really had to get out in front of our growth rate and retooling a lot and we basically had reengineered the whole company over the last three years. And in doing that we had to reinvest back a significant amount of dollars to get us to a point where the basis at where we are running today is actually a good solid base and we don’t see stress in how we are running the company today. One of the things that you compare that over last year or even a couple of years and you see that acceleration in SG&A growth, we’ve had to reinvest quite a bit, but even in the last, and sequentially even in the last couple of quarters, and I’ll refer more to like just our management payroll infrastructure, its really started to normalize where we are not seeing the big jumps quarter-to-quarter that we were seeing going back six months ago or even a year 18 months ago.

Okay. And then just wanted to touch on funding the captive, I think you said about $46 million would actually needed to be funded. Is that taking anticipated tax credits or tax savings….

Yes, so that net of $48 million, we will realize about 32,000 in tax. Less cash paid in 2014, we’ll have a carry back to ’13 and ’12 and then that will take care of most of that $32 million and maybe some carry forward into that we’ll use as a credit against 2015 to access when we get into ’15, but yes, that’s kind of the tax piece of that that reduces really the net funding down to a $48 million level.

Okay. And is that something that could be funded with a surety bond or do you have to put up all cash?

No, we actually have to post that cash. So in looking at operations, we do have like I said on my prepared statements about $15 million in unencumbered cash and we can certainly use a good portion of that, as well as the variable credit line that we have with our bank and as we mentioned, we are in discussions with the bank to increase that as well. And you know just cash flow from operations over the next few years should quite comfortably be adequate to fund that level.

Jeff, I’ll also comment. I want to also comment on just the fact that we’ve been asked over a long period of time, what are we going to do with the cash. Your balance sheet, why do you look at your balance sheet the way you do and the reality of it is that it was hard to say where this whole process would land, but when I was even back as far as three years ago when we were buying shares back and doing some different things, we were always very careful not to extend our balance sheet or lever ourselves to the point that we couldn’t be able to address a situation like this and that’s one of the reasons why we have no debt coming into the quarter.

Okay, and then I’m asking this question, because I’ve been asked it a lot and I think people would like to hear your response on, if you went back over the course of the last five years and worked in this accrual adjustment, what do you think the earnings of the business historically would look like?

I think you have to look at it from two perspectives. One of the things that gets missed a little bit is in 2012 we realized that we had to bring our picks up or bring our accrual rate up and if you go back even ’11 over ’12, and then even maybe ’11 over ’15 – excuse me, ’13 and ’14, we’ve increased our accrual rate through increase in pricing and different things, by roughly 100 to maybe 120 basis points, while continuing to earn and grow. So I guess you could go back as far as even 2011 and maybe back or even 2012 and back and say if you were to have accrued another 100 to 120 basis points, where would have you been. The one thing that we are comfortable with is that we’ve been going through that change over the last couple of years and that’s why we don’t see our accrual rate or our pick going into out of ’14 and into ’15, being that much disrupted by this ultimate new number. So Jim, do you want to…

Yes, so its again we are having – I guess we would call it better information as a result of the reserve strengthening process we went through and really know now where ’12 and prior really landed with the passage of time. If you went back into some of those earlier years, they could have been understated by say $5 million to $6 million in some cases and as we’ve seen in our financial results over the last couple of years, there’s been some adverse development of those prior years and that’s what really led us to wanting to get in and view the reserve strengthening program that we did.

Okay, great. Let me close the line for others to ask questions. Thanks guys.

We’ll go next to Matt Blazei with Lake Street Capital Markets. Your line is open. Please go ahead.

Hello guys. Jeff covered a lot of ground there, so I have more than a couple of more questions just to clarify. You said that the $80 million charge was very, very conservative and yet I think you also said that even if the trends proved to be better than that conservative number, that you don’t see any part of that $80 million coming back. Is that correct?

Well, what I said was that line, it will take a little bit for that. We are using evidence of what we are seeing to-date where on the strengthening process to give us confidence that that number is conservative. As we move into future quarters, we’ll know more, one. Two, given that the data was skewed, that’s what also makes us believe that the report itself puts us to a conservative level. I’m not saying that it won’t come back. What I don’t want to do is have one quarter where we are doing something to go get out in front of this situation and putting ourselves in a position where this becomes really a non-issue. We go back in our own history and we look at just AR, where back in 1998 we used to deal with AR issues every quarter and today it doesn’t even come up. Its been locked down and we are very solid that way. And my view and my hope is that in the next year or so that this becomes, that workers comp is a footnote and it doesn’t consume the topic of conversation. If the report, the future actuarial review had that number coming down, we’ll be forced to have to take dollars back to earnings. It’s just that we’ll follow the model and follow the process. The one thing that we did in this quarter is we’ve set a new basis for ourselves.

And the other queue I have is that given that you’ve taken a very conservative posture on the reserves, why do you then also need to increase your accruals by 30 more basis points going forward?

Well, I think we have mentioned that the accrual rate couldn’t needed to be bumped by 20 basis points in future quarters. But the other piece of that is still we are transitioning into the new ACE fronted program and that could be where you’re getting the 30 basis points increase.

I’d assume that that was involved in the increase in this year. That was the assumption that that ACE transition was part of the 20 or 30 basis point accrual for this year.

Correct, yes. And so the adjustment to the accrual rate for claims, obviously we’ll be watching that growth in 4Q, but that comment was I guess maybe more for 2015 as we analyze that accrual rate for the year.

Yes, well I guess I’m confused that is – I mean taken what you said as a very conservative reserve charge here. If that was the case, why would the accrual need to pick up rates even more?

Well, because the charge itself sets the benchmark for where you’ve been in the past and where you are at even in ’13 and ’14. So to-date your sure of that, but then you – and until your given more credit, you start to accrue going into 2015 at a level that’s going to support the new basis that’s being created by the charge. So its good, its smart business to make sure that you are not disrupting your overall accrual rate. 20 basis points in the grander scheme of it all is – we’ll capture that. We’re capturing that actually just through price increases right now. But that’s just it could be we’re not – I mean once I’m on the right side of this curve, I don’t want to get on the wrong side of the curve again.

And against that I would say that also we believe that the improvements that we made on our processes will potentially bring that accrual rate down over time, but again until that data settles out, we just we’ll get started now and we need to plan on maintaining that conservatism.

All right, thank you.

Thank you.

Lets take our next questions from Dan Mendoza with Prospect.

Hi. I have a couple of questions guys. One of them, I still don’t really understand the 20 basis point accrual rate that gets discussed. You also mentioned in that same sense in the press release that its 5% of total workers comp on a go forward basis. So if its 4.6% now, should we be using 4.8% or 5% for next year?

I think as you model that out its probably going to be in that range, 4.8% to possibly as high as 5%. I think that would be the upper end. (Cross Talk) Dan Mendoza – Prospect: Okay. I mean, the difference?

Well, but that would represent the full inclusion of the ACE fronted costs as well.

Okay, that’s helpful. One last question on kind of, you talked about the deposit with the ACE increasing as you bring more of your customers or clients onto the program. Do you envision there being an increase, kind of an overall increase associated with the reserve charge as we kind of move into next year’s agreement?

No, the accrual rate again is what your feeding that collateral agreement, that’s why you want to get your picks right, because those dollars are funding that collateral agreement, which then those dollars are used to ultimately payoff claims. So again, we haven’t felt like our pick is that far out of line. So we don’t see where that’s going to change and we haven’t had indication from ACE that that will significantly… This actually helps the relationship and that it gets us trued up to a point where we at least are working off a basis of being more out in front of the process, at least we believe it will be. We’ll be having conversations around that, but we are not seeing from an earnings basis that will have that much of a change, it might, so…

Right. I understand that it provides them with sort of the opportunity or comments, they look – your reserves are volatile or unknown and we need a little bit more collateral to get comfortable. But I guess kind of the related question around that just in terms of timing, you mentioned there was not a kind of a hard date to get your captive funded, but I assume you’d want to be – get that funded in front of renewing your ACE agreement at the beginning of next year.

Well, the funding into an ACE agreement is really a separate matter and that’s done monthly and…

No, no, not in terms of the deposit, but just in terms of getting the captive fully capitalized before your renegotiate the 2015 fronting agreement.

Right. Yes, I think that timing will – it will be an event (ph) of that.

Yes, we’ll be putting attention to that, we already are. So its not going to be a delay. We are just going to make sure we have take enough time with the process to be on the right side of the curve as well.

Okay. And how far back do these reserve true-ups go. I’m just trying to, kind of getting back to the question from Roth about sort of pro forming out. You talked about free cash flow and net income being equal, which is great, but we are going to have to pro forma at this reserve, but wondering over kind of what period of time we should be doing that?

We went all the way back. We don’t have that many claims prior to – most of the things are closed out prior to roughly 2003, 2004, other than maybe one or two claims that are just sitting out there and that’s just processed. But for the most part, we went back to every claim that’s ever been opened.

Okay. So we are going back along ways.

A long time. Yes, end of the 90’s.

You guys have been good returning capital to shareholders, but ultimately if you look at that kind of $109 million, you could argue that $80 million of that that you used to return to shareholders should have been, in hindsight should have gone into reserves.

Yes, yes and that’s why its been very important for me over the last couple of years to get this right. So on a go forward basis we can have confidence that all the pieces in the model, if the model had to grow up, are working as they should be and that the future itself doesn’t pin us back into another corner.

Okay. Well obviously a lot of questions about this, but I’ll let some other people hop on and ask them as well. Thanks.

Thanks.

We’ll take our next question from Scott Redmond with Redmond Asset Management.

Hey, good morning or afternoon. Could you all be charging more and should you be exiting the PEO services in certain businesses?

We are very, very ridged about how we underwrite and there are sectors of business that we don’t do business with, today that we did business back with in 2006, 2007. We look at today, we have no business that’s, no client that’s more than I think 0.5% of our total book and we have, concentration wise I think our largest industry might be 1%, 2% tops. In fact our largest fee code or code that designates where employees are working is 8810, which is office clerical and that’s over 22%, 23%. So we continue to look at our book and look at where we are taking risks that we shouldn’t be or where we shouldn’t be doing business and keep moving the model to get to a better place there. As far as being able to increase pricing and do different things, one of the things that – one of the advantages we have in the market is that, if you were to go back 2008, 2009 and maybe even as early as 2010, we were seeing much more as a workers comp company. I think in the market today if you were to go back, more and more of our clients – in fact I would almost guess to say as much as 50% to 60% of our clients would say that workers comp is a portion of the value proposition, but the real value proposition is through the consultative offering that we have. And our job over the next several years and actually over the next year things continue to, as we continue to mature, what we are doing is to dilute that value proposition away from being workers comp specific and make sure that we are doing business with well run companies for the sake of the true value proposition, which is more the consultative interface that we have with our clients.

Yes, and I’d just say that many areas that we do business in California, those businesses are much better than California as a whole. And its really not, its not about bad business or pricing.

Okay and then one other things we’ve noted is that the – you have your cost associated with claims, but then there is also a loss cost multiplier relating to serving those claims and getting those closed, and that from what we have seen is going up 30% in the last, since 2010. Is that a meaningful portion of your increase?

That’s increased some of the workers comp expense and a lot of that is just in growing our claim management teams as we have continued to grow and to make sure that they are right sized and that we remain in front of the curve with that structure.

One of the things related to those costs is just as we’ve scaled infrastructure to support a bigger company, we’ve gotten out in front of that and that creates an acceleration to those cost structures. But over time as we are gaining more efficiency with technology and just reaching a point of critical mass, we’ll find whether those costs and expenses will start to lever themselves a little more effectively as well.

Thank you very much.

Thank you.

And we will take our last question from Charles Bellows with White Pine Capital.

Yes, I guess just to make it simple for me is are you going to able, or how much can you raise your rates on workers comp and get that going? And then where do you sit competitively, especially in California for that?

We were looking at – that’s a good question. Since 2011 just looking at where we were then relative to where we are now and mark-up percentage in whether it’s a comp or whether is the full value of the offering, we’ve increased our market percentage on an aggregate of approximately about 100 to 125 basis points. We’ve been going through a process of making adjustments where its appropriate with our clients in the most recent quarters and that’s to accommodate the ACE transition and because of the value proposition that we are offering, we’ve not seen headwind. In fact I don’t know that we’ve – there’s a few clients that you are going to loose and that’s okay. That means you are at least getting closer to the market and you are stressing it a little bit that that number is not accelerating, the number of clients that we loosing, and we are capturing that and then in fact we are not seeing headwinds as it relates to increasing pricing recently. Right now our target is to pick up another 20 to 30 basis points over the next year.

Okay thanks. That helps.

Thank you.

Thank you. That concludes our question-and-answer session. I would like to turn the call back over to Mr. Elich for closing remarks.

Again, thank you for being on the call. I know we’ve been on quite a while and I appreciate everybody’s interest and continue to understand and learn more about what we are doing. I wish with hindsight that we never have to have any disruption as we’ve had to grow up as an organization and unfortunately that’s a lot of times not the case when you are doing something that’s not been done before, and with each turn of the wheel though the model gets better and we are committed to making it better. I do feel that we’ve turned a corner. This in particular when I look back over the last four years as we’ve been realigning the entire organization in all aspects and retooling the business model, we had a lot of areas that we had to address and with this latest move today, I do feel that we’ve cleared the desk and that we are in pretty good shape. We are not going to be perfect moving forward. We are going to make mistakes, but we have a real strong infrastructure, great people, great teams that are committed to where we are going and I have a lot of confidence from where I sit today, that we are going to continue on and the model looks really good. So I appreciate your time. I look forward to seeing you in the street and I’ll talk to you next quarter. Thank you.

Thank you everyone. That does conclude today’s conference. We thank you for your participation.