Barrett Business Services Inc (BBSI) 2014 Q4 法說會逐字稿

Good morning, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the fourth-quarter and full-year ended December 31, 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 will open the call for your 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 to 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 March 4, 2015, starting at 3:00 p.m. Eastern Time this afternoon, and a webcast replay will also be available during -- 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, sir.

Thank you, Vicki. 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 fourth-quarter ended December 31, 2014.

The 19% gross revenue growth we experienced in the fourth quarter of 2014 reflects the positive influence our management platform has had on our clients' businesses, as well as the continued development of our brand name in a growing number of our markets. Complemented by healthy organic growth from our existing client base and strong referral channels, we ended the quarter at the upper end of our expectations.

Over the course of the last year, we've continued to strengthen our operations while maturing our entire organization. We have taken significant steps to strengthen our Workers' Compensation reserves and increase our financial capacities to support the Company and our growing client base. These steps, along with the momentum we experienced in the fourth quarter, positions BBSI for a strong 2015.

Before taking you through our financial results, I would like to mention that yesterday's earning release summarizes our revenues and costs 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 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.

Now turning to the fourth-quarter results, total gross revenues increased 19% to $931.1 million over the fourth quarter of 2013, primarily due to the continued build in the Company's co-employed client count and same-store sales growth, coupled with a 22% increase in staffing revenues. Overall, PEO gross revenues increased 19% over the fourth quarter of last year to $885.8 million, due primarily to the continued built in our co-employed client count and same-store sales.

Our PEO's revenues from existing customers increased approximately 9% year-over-year, due to increases in both headcount and hours worked. This compares to a 10% increase in the fourth quarter of 2013 and a sequential 8% increase experienced during the third quarter of 2014.

Staffing revenues for the fourth quarter of 2014 increased 22% to $45.3 million, primarily due to an increase in new business. On a percentage basis, gross margin in the fourth quarter was 3.7% as compared to 3.1% the year-ago quarter.

The key drivers of this quarter's gross margin are as follows. Direct payroll cost as a percentage of gross revenues declined 9 basis points from 84.4% from the year-ago quarter, which reflects an increase in the overall average customer market percentage on a year-over-year basis. For the fourth quarter, payroll taxes and benefits as a percentage of gross revenues was 7.3% compared to 7.5% in the year-ago quarter.

The lower effective payroll tax rate resulted from the Company's ability to optimize the use of prior wages against the taxable wage basis, as new customers are brought onboard, and to arise in the overall average wage rates, which allowed the tax ceilings to be reached sooner in the year 2014 as compared to 2013. And this continues the trend that we've experienced in the second and third quarters of 2014.

As disclosed on prior quarterly calls during the first quarter of 2014, we announced and began implementing an arrangement with Ace Insurance that provides Workers' Compensation coverage to BBSI clients and their employees in California. The arrangement, typically known as a fronted program, provides BBSI with the use of a licensed admitted insurance carrier in California to issue policies on behalf of BBSI, without the intention of transferring any of the Workers' Compensation risk for the first $5 million per claim. The risk of a loss up to the first $5 million per claim is retained by BBSI.

BBSI implemented this strategy as a means of continuing operations in California. Under California Senate Bill 863, BBSI is no longer able to be self-insured for Workers' Compensation in California as of January 1, 2015. The full transfer of our clients to the new program was completed during the 2014 fourth quarter. As we announced two weeks ago, this arrangement was renewed through January 2016, with a potential for continued annual renewals thereafter.

The terms of the renewal are similar to the first year of the arrangement. Workers' Compensation expense as a percentage of gross revenues was 4.7% for the fourth quarter of 2014, which compares to 4.9% in the same quarter a year ago. I should mention the fourth quarter of 2013 included an incremental $5.1 million Workers' Comp claim charge.

Looking ahead to 2015, we anticipate the level of Workers' Comp expense to increase to between about 4.8% to 5% of gross revenues. This projected percentage increase is due to the increased cost for the surety bonds and letters of credit related to satisfying the security requirements for the Company's California self-insurance program, which expired December 31, 2014 and, to a lesser extent, the full incremental expense associated with the transition of California customers into the Ace fronted program, as the first quarter of 2015 represents the first full quarter of coverage under the program for all employees.

We have continued to offset these incremental expenses through price increases to the market. During the fourth quarter, we closed an additional 148 claims from the years 2012 and prior, yielding $2.4 million of credits. This follows the progress we reported at September 30, and also supports the trend of 2012 and prior-year claims closing for less than the amount put up on these specific claims as a result of our claims-strengthening process initiated by the Company.

For all of 2014, this brings closure to 492 claims or 38% of the total strength in claims from 2012 and prior, resulting in $5.8 million in total credits. And just to reiterate, credits represent actual savings on specific claim reserves cost. The significance of the 2012 and older claims is that they are now well-seasoned, and having been fully strengthened, provide us with a solid basis for analyzing the development of claim years 2013 and 2014.

SG&A expenses increased 20% to $20.3 million compared to $16.9 million in the fourth quarter of 2013, primarily due to higher management payroll, increased IT spend, and other variable expense components within SG&A to support continued business growth. Consistent with the third quarter, the increased IT expense relates to projects designed to enhance access and delivery of the information in the field, as well as improve efficiencies over time.

The provision for income taxes in the fourth quarter was $6.2 million, which represented a tax rate of approximately 46.6%, primarily due to the effect of a higher annual income tax rate as a result of the pretax loss for the full year. We expect the tax rate to return to a more historical range in 2015 to the mid to upper-30s.

Net income for the fourth quarter of 2014 increased 26.5% to $7 million compared to net income of $5.6 million for the fourth quarter of 2013. Diluted earnings per share for the fourth quarter of 2014 were $0.97 compared to $0.74 for the fourth quarter of last year -- or I should say 2013. Net income and diluted earnings per share for the fourth quarter of 2014 were negatively impacted by the effect of the higher annual income tax rate, again primarily due to the Company's pretax loss for the full year of 2014.

Without the effect of the higher 2014 fourth-quarter income tax rate, and using a more historical average tax rate, net income would have increased 52% to $8.4 million or approximately $1.17 per diluted share. This is based on a provision for income taxes of $4.8 million rather than the $6.2 million.

During the fourth quarter, we realized -- we finalized our agreement for a new credit facility with Wells Fargo, our principal bank. Under the terms of the agreement, the credit facility includes a $40 million term loan maturing December 31, 2016, as well as a $14 million revolving credit line with a $5 million sub-limit for unsecured standby letters of credit maturing October 1, 2017.

The term loan bears interest at LIBOR plus 4%, while the interest rate on the advances under the revolving credit line is LIBOR plus 2%. We obtained this additional capacity to address the increase in our Workers' Compensation liability and claims expense accrual recognized during the 2014 third quarter. In December, we used a combination of cash on-hand and proceeds from the term loan to satisfy our Workers' Compensation reserve funding requirements at December 31, 2014.

The agreement also provides for an increase to a total of $114.3 million in cash secured letters of credit to satisfy collateral requirements associated with surety deposits for Workers' Compensation purposes in the state of California, related to our expired self-insurance program. These funds are reflected as restricted Certificates of Deposit within long-term assets on our balance sheet.

We expect the level of these restricted Certificates of Deposit to decrease by approximately $25 million by late 2015, as the outstanding California self-insured liability that these deposits helped secure, is now in a run-off mode. Upon reduction, an increased portion will revert to an unrestricted status and become a current asset.

Our cash, cash equivalents, marketable securities, as well as restricted securities, totaled $239.1 million compared to $143.2 million at December 31, 2013. Although free cash on-hand was significantly depleted at December 31 following the Worker's Compensation funding, we had no outstanding borrowings on our revolving credit line. During the fourth quarter, we funded approximately $19 million of cash net the Ace trust account to supplement our $31.1 million of deposits at September 30 for our Workers' Comp insurance fronted arrangement with Ace.

These funds are included as a component of restricted markable securities and Worker's Compensation deposits within long-term assets, with a small portion representing an estimate of 2014 injury claims to be paid out in 2015, which are included in current assets on our balance sheet. The balance in the Ace trust account is expected to build throughout 2015. We project that most of the funding will come from the expense we accrue, except for some incremental build in that trust account, which will come from free cash and could be as much as $10 million.

I think it is important to note that, while the OpEx of the Company's current ratio do not appear opulent at 12/31/14, the cash generated from the operations of the business is sufficient to fund the daily needs of the Company. Additionally, most of the current portion of long-term debt does not come due until the end of 2015, which will be funded primarily by income tax refunds and cash flow generated during 2015.

We generated approximately $69 million in our operating cash flow during 2014. As we've mentioned in prior calls, much of our cash generated from operations during the year is in the form of free cash flow, except for the build in the Worker's Compensation and safety incentive liabilities, as cash used to fund our insurance subsidiaries is primarily generated from the Workers' Compensation expense we recognize, but may not immediately pay out to third parties.

As we introduced in the third quarter of 2014, in order to provide our investors with a more appropriate forward-looking view of our business, we have initiated a rolling 12-month outlook for gross revenues, which we plan to update on a quarterly basis. As such, we expect gross revenues for the next 12-month period, which coincides with the full year of 2015, to increase approximately 18%. Included in this expectation is a high-single digit contribution from same-store sales growth, as well as growth from new business consistent with current trends.

In addition to quarterly updates to our rolling 12-month gross revenue expectations, we expect to make comments about our net income expectations at the end of each fiscal year. As a result, we expect diluted earnings per share to increase to approximately $3.30 for the full year of 2015.

I look forward to addressing you again on our first-quarter earnings call. Now I would like to turn the call over to the President and CEO of BBSI, Mike Elich, who will comment further on the recently completed fourth-quarter and full-year of 2014, as well as our outlook for 2015. Mike?

Good morning, and thank you for being -- taking time to be on the call. Very pleased with the results of the past three months. We made significant progress in 2014. We saw progress through the growth and maturing of our brand in all markets, through the maturing of our organizational structure and the culture of BBSI; completion of -- and progress in several initiatives undertaken during the past few years.

We'd say that 2014 will not be reflected on as an easy year, but I believe the time will show it as a turning point, with us emerging as a much better company due to the challenges we had to face. With that said, we would like -- we would not be the company we are without partners including our clients, our referral partners, many companies who support our interest, with special thanks to both Wells Fargo and Ace Insurance.

Moving forward, in the quarter, we added 229 new PEO clients. We lost 62 clients -- 7 due to Accounts Receivable, 9 were canceled or left for non-AR issues and a lack of tier progression; 21 businesses sold or closed; and 25 left to price to complete -- to competition or companies having moved away from the outsource model to take payroll in-house. This represents an approximate net build in our quarter of 167 new clients.

With same-store sales, we saw an increase of 9% related to hiring, increase in hours worked, and wage inflation, collectively -- slightly ahead of what we would have expected in the past three months. As a snapshot, we saw sequentially quarter-over-quarter 37% of clients added headcount, 38% of clients reduced headcount, 25% were unchanged. We saw 62% of clients increase payrolls while 30% reduced; 70% of clients increased hours worked while 37% reduced hours worked.

Related to pipeline and regional growth, we saw -- we continue to see strong momentum in markets with broadening contribution from -- to client adds across all regions. In serving the organization as to forward-looking pipeline strengths and general market outlook, we are seeing continued strengths in pipeline and client adds as a result of our continued maturing of brand through our offering and organizational bench.

Related to structure and organizational build, we continue to expand and build business units as needed to support current and future organizational and market demands. Currently, we have 36 business units supporting 52 branches. We currently have two business units being built out, with forecasts for an additional 10 business units to start or build by the end of 2015, for approximate 48 business units.

We also continue to see positive momentum within new markets opened in the past two years, which include Reno, Nevada; San Luis Obispo; Monterey, and Valencia, California. We are currently opening two branches in the quarter, one in San Martin, California and a second in Charlotte, North Carolina, with two additional markets slated for 2015.

Related to Workers' Comp and underwriting of risk, in the quarter, we continue to see a decrease in relative frequency of claims in fourth-quarter 2014 compared to fourth-quarter 2013. This is important in that it is a measure of continued improvement to results related to client risk mitigation. This is also an indicator that new clients underwriting is supporting positive trends.

Also in the quarter, we continue to maintain a positive rate of claim closures resulting in 2013 and 2014 claim closures closing faster. This is a positive, in that claims that closed within the first 24 months of the claim trend year are closing for fewer dollars with greater predictability. Additionally, due to changes in reserve practices established in 2014 affecting 2013 and 2014 claims, we continue to see improvement in paid-to-incur ratios.

In the quarter, we continue to see positive results from the claim closures in 2012 and prior. We continue to support -- this continues to support the basis built through reserve strengthening. Moving forward, we will continue to monitor trends as to maintain a proactive position related to Workers' Compensation, resulting in greater predictability within the model.

Looking to 2015, we will focus on and continue maturing of the organizational bench. We will also continue to focus on integration and adoption of systems developed over the last 18 months to complement our brand, as well as to bring efficiencies to operations. And finally, we will continue to strengthen and produce -- strengthen our product and experience we deliver to our clients, as we mature our brand within markets we serve.

As I look at the Company today, the basis of our business is our organizational structure. Over the past few years, we have worked to strengthen and mature the structure from the ground up. Looking forward, we expect to see more external evidence of this effect with our teams delivering results on behalf of our clients.

As our teams mature and share best practices across markets, we will continue to see more consistency in our brand. Thus, we are poised to capitalize on the expansion -- on the expansive market base on how we position ourselves as a company. I look forward to seeing the Company mature over the next several years.

And with that, I'll open up for questions.

(Operator Instructions). Jeff Martin, ROTH Capital Partners.

Good morning, Mike and Jim. Mike or Jim, could you expand on the Workers' Compensation expectation as a percentage of gross revenue for 2015? I caught that Jim said 4.8% to 5% of gross revenue. And I think, previously, the discussion was 4.8%. Is that tied to the cost for the surety bonds and letters of credit? Or am I misreading that it's not an extension of a higher end to that range?

Yes. No, it's really -- you're right. It's really related to the increased cost for the surety bonds and letters of credit. As the accrual rate for claim losses within that is at a similar rate that we had talked about when we mentioned 4.8%, I think probably at the end of 3Q. So what we should see is --

Is it something that trends down throughout the course of the year? What could -- and what could swing it from one end of the spectrum to the other?

Yes. Certainly, we expect that to start trending down, probably only slightly this year. Obviously, with increased volume, the effect of those costs, which are really fixed, will be diluted somewhat. As we get out into 2016, though, and that California liability continues to be in a run-off mode, we will see those costs significantly decrease in the coming years.

Okay, so those are tied to the BBSI underwritten policies, not the Ace policies?

Correct.

Is that right? Okay. And then can you give some insight into the Workers' Comp claims trends and how that might affect the expense accrual, maybe in 2015 and beyond? And you're tracking better than expected -- or at least trends are starting to emerge with, it sounds like, better reliability. Is that something that you see may come down a year from now?

Yes, I think there's certainly the evidence that we are seeing in discussions that we have with our actuarial consultant as well as our actuary, indicate that there is certainly a much more higher likelihood of costs coming down than going up. So we are optimistic as we go throughout 2015 and into 2016. And as that loss data starts to reach what I would characterize as a new normal, I think we will see the potential benefit of costs coming down on a relative basis.

Okay. And then do you have an expectation on how quickly you will repay the term loan?

Yes. Well, the term loan scheduled payments -- the first one is $3 million at the end of the second quarter of 2015; then there's another $7 million at the end of September and $15 million at the end of 2015. And with the balance of the remaining $15 million paid throughout 2016.

Okay. So $25 million principal reduction in 2015. Is that right?

Correct. Right.

Okay. Great. And then it looked like staffing had a really good quarter. Is that something you are putting more emphasis on at all? I know that's not an area you've spent a lot of resources in trying to grow that. Some insight there would be helpful.

You know, I'll come in on that. We continue to build infrastructure to support both lines of our business. I think it's more -- as branches get bigger, staffing or at least recruiting for staffing customers as well as existing PEO clients is a natural buildout for us. So we continue to invest in those areas. And likewise, we do have a strong staffing presence in the Mountain states; regionally, Northwest; and then also California has continued to emerge in those areas. But we see staffing as a tool to complement the overall offering that we have, and so it grows as our brand grows.

Okay. And then you touched on some branch expansion -- new locations to this year and then two next year -- or two recent and then two next year. And it looks like you're pushing the East Coast a bit more. Is that a fair statement?

Yes. As much as we've seen us expand market presence and branches in the North and the West -- on the West Coast and in California over the last couple of years, our expansion model is really that of a tuck-in, where we'll look where existing markets are starting to pull us to new markets. And then we will add capacity to optimize efficiencies in the existing branch and to capitalize on new markets.

So with the growth that we've really seen on the East Coast, that's where we will probably see a majority of the expansion to physical branches in the next year, with Charlotte being one, a couple in the Northeast that are earmarked, but not necessarily hardwired yet. And then, while in our more mature markets, where we'll continue to see expansion into business units, those are equally additive to capacity of the organization.

Okay, great. Thanks, Mike and Jim.

Thank you.

Thank you.

Matt Blazei, Lake Street Capital Markets.

Hello, Mike and Jim. Nice job on the quarter with all the distractions. Very pleased to see that. I had a question on one of your comments regarding your closure of some pre-2012 claims. Can you walk through what exactly that means again, and talk about what the credits -- how we should think of the credits that you're getting back from the -- where are those credits coming from and where do they go?

Sure. When we started this reserve-strengthening process, the goal in mind was to look at the years that were mature enough when we started this process in 2012, happen to be the newest of those older years. So we focused on 2012 and prior to -- go through that strengthening process with the idea that with the claims being fully strengthened, it would give us a good solid basis to begin to analyze what we might expect for future years, and really give us a good basis to go on.

And the significance of the credits that we are seeing is that I think it indicates that when our claims management teams went through and fully strengthened these 2012 and prior claims, they did it very conservatively. And that's why we are seeing the credits -- meaning that in the cases we've seen so far that have closed, they overshot the mark a bit, which -- when you go through a process like this, you're trying to get it as close to the ultimate settlement as possible.

But in this case, you'd rather be on the high side than the low side. And so that's what we are seeing with these credits coming back.

And does that -- where did the credit go on your balance sheet? I mean, does it shift to an asset? I mean, where did it -- how do we see it as investors?

So it actually -- as it flows through the process, it will decrease the liability, and back into essentially IB&R.

I see, interest. And you said it was 38% of the identified pre-2012 claims?

Yes. So we had about 1,800 open claims when we started the process from those 2012 and older years. And we went through, and I believe there were about 500 claims that did not need any strengthening done. So there was a book of about 1,300 claims that went through the strengthening process. And so what we are seeing is, to date, in the latter half of 2014, we had closed out 492 of those claims (technical difficulty) -- which they came in $5.8 million less than we had originally thought, following that strengthening process.

Your goal in 2015 of moving through that the remainder?

Matt, this is Mike. I would say that, yes, we will continue to be aggressive in how we look those claims, and we will close them as the opportunity presents itself. There's -- it's not a matter of just us deciding it's time to close them; it's the timing of the injured worker deciding that they are willing to settle, or the claim finally closes out, or we can reach settlement with the legal process to get those to close out.

So we will continue to see incrementally an aggressive position on getting those closed out, but we are not going to sell the farm either just to get it done. And we feel pretty good today, based on early evidence that we have, that we are a pretty good spot as it relates to -- as those claims are closing out, that we are not having to add reserves to them, for the most part.

There's a few here and there that we've had to add reserves to, but for the most part, they've been fully strengthened and we are seeing the credits come back. And I would probably say that you've got -- when we say 2012 and prior, you're talking about 2012 and 20 years prior. So, there's -- if there's a claim in 2006, it might still be there two years from now. And we will do what we can to get it done.

But we feel that, at least at this point, that we've estimated that liability to the best of our ability, or with the best knowledge that we have today. And so far, that's proving to be conservative.

All right. Again, nice job in the quarter, you guys. Thank you.

Thank you, Matt.

Bill Dezellem, Titan Capital Management.

-- to have you circle back to your discussion about building your people, your management, et cetera. And I'd like you to talk, if you could, please, about the historical approach that was taken, and how that is different today? And what changes, if any -- or tweaks maybe be the right term -- were made in 2014 specifically? And how long do you think it might take for those to show through?

You know, I would say we always grew up as a very much ground-up, bottom field-based operations, focused on the development of our organizational bench and our structure. But we did. We grew up as an entrepreneurially-run company, and that was great. And it got us to the $1 billion mark.

As we came into 2011, 2012, we realized that we had to mature into an organization that was, in a sense, professionally managed. And as we had to go through those transitions, we had to look at structure completely through the organization. We also used experience of what was working, where we were seeing inflection points and branches to realize, okay, we've got to adapt to this.

So, in the last two years, probably -- it's really been going on for several years, but I would say in the last two years, we've built systems and methods for putting attention towards how we develop individuals specifically as they are coming in; how we train and mentor to establish a consistent bench across the organization; how we continue to develop our leadership bench.

And one of the things that I found myself as I went from having 95 direct reports to five direct reports, is that you can put people in place; but then there's another turn of the wheel or two that you have to look at, that is about transferring wisdom, ensuring the culture and the way you look at the business is consistent.

And so we've put an inordinate amount of time -- in fact, that's where I put probably 90% of my focus is -- how are we building our infrastructure? What's the tone from the top? How is that resonating throughout the organization? And then what are our methods to ensure that we are getting through and that we are having consistency throughout the organization? And we have probably about four tranches of time and windows that we use throughout the organization, throughout the year, to ensure we are impacting that.

The other thing that we did is, is we were probably behind the curve by maybe 5 to 10 years in the area of IT in 2010 and 2011. And so we had to really step back and catch up. There were a lot of initiatives that we had to undergo to move to an organization from changing over our payroll system to looking at how we do much more of what we do paperless; to looking at how we interface with our data platform more effectively, to optimize the effectiveness of our teams.

And within that, I think we had, at one point, 10 separate initiatives, of which, today, we have ongoing adoption of those initiatives and of those systems back into the organization. And we are probably with -- of the 10 that we are working on, maybe six out of the 10 we may be 40% to 60% along. And of the four that are left, we might be 10% to 20% along.

So within the year, one of the focuses is to just lock down our base, to ensure that what we have been working on is fully adopted, and that it builds our bench and strengthens us for the next turn. If we were to double the Company again in the next so many years, who would we have to be by the time we got to that point? And we are really putting the energy today in looking at structure, systems, culture, maturity of the organization, to ensure that when we get there, we are not behind the curve.

That's very helpful. And to take that one step further, will we, over the course of the next year or two, either see expenses increase as a result of these efforts or decrease because you're becoming more efficient? Or do we see revenues -- revenue growth rates accelerate -- which seems unlikely, given the high level you're at -- but is that potentially an outcome? Or how do we see this manifest, other than just being a better-run organization?

I think where you will see the growth rate itself will continue to -- even if it's just normalized to where we are at, will continue to become more predictable and much more sustainable. I think that, equally, we've put -- if you look at just the last three years at the dollars that we poured back into SG&A to build the infrastructure, and more mature ourselves to where we are at, I think you'll start to see that normalize a bit.

So, as we take the next turn and grow to that next level we are getting to, you -- if -- for instance, if we were to double the organization, you will not see SG&A or overheads double in line with that. So we will begin to see some leverage in the organization, probably see it start to happen in 2015. And then in 2016, 2017, we should continue to see it follow through on that if we execute to plan.

Thank you, again.

(Operator Instructions). Bill Nasgovitz, Heartland.

So just a question, I'm sorry I might have missed this. You said 2012, how many claims did you settle in the year -- 148? And that leaves how many left to settle?

Yes, this is Jim. So, during 2014, we settled or closed 492 of a total of 1,800 claims for those prior -- 2012 and prior years. The 148 was the number of claims closed during the fourth quarter.

I see. Okay. So leaving something around 1,300 claims?

Right. Right. And of those 1,300, there was about 500 or so of those claims that needed no reserve strengthening. And so it's really just, I guess, probably the remaining 800 or so claims that went through that reserve strengthening process. And I guess the key delineation there is that the claims that went through that reserve strengthening process were the ones that typically had more unknown component to them, and where they needed to undergo increases to get to full expected value.

Okay. Congratulations on a great quarter.

Thank you, Bill.

And that does conclude our question-and-answer session. I'd like to turn the call back to Mr. Elich for any additional or closing remarks.

I just want to thank everybody for taking time to be on the call. thank you for sticking with us. I would say that as you temper steel, it's never a pretty process. And it's -- but steel that's never tempered is never strong enough to hold up to stress. And one of the things that I would say is a real complement to who we are and what we are about is that we have been tempered over many years.

2014 served as a year to temper us a little bit more. And, today, we are a pretty strong company. And for those that are critics of ours that would say -- whatever they might say, I think they might be surprised over time as to what we are really about, as they learn the story and we execute the plan. So, thank you for taking your time this morning.

And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation.