BARRETT BUSINESS SERVICES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

General

Company Background Barrett Business Services, Inc. ("BBSI," the "Company," "our"
or "we"), is a leading provider of business management solutions for small and
mid-sized companies. The Company has developed a management platform that
integrates a knowledge-based approach from the management consulting industry
with tools from the human resource outsourcing industry. This platform, through
the effective leveraging of human capital, helps our business owner clients run
their businesses more effectively. We believe this platform, delivered through a
decentralized organizational structure, differentiates BBSI from our
competitors. BBSI was incorporated in Maryland in 1965.

Business Strategy Our strategy is to align local operations teams with the mission of small and medium business owners, creating value for their business. To do this, BBSI:

• partner with business owners to leverage their investment in human resources

capital through a results-oriented and contact-oriented approach;

• brings predictability to each client organization through a three-tiered approach

management platform; and

• allows business leaders to focus on their core business by reducing

organizational complexity and maximizing productivity.


Business Organization We operate a decentralized delivery model using
operationally-focused business teams, typically located within 50 miles of our
client companies. These teams are led by senior level business generalists and
include senior level professionals with expertise in human resources,
organizational development, risk mitigation and workplace safety, and various
types of administration, including payroll. These teams are responsible for
growth and profitability of their operations, and for providing strategic
leadership, guidance and expert consultation to our client companies. The
decentralized structure fosters autonomous decision-making in which business
teams deliver plans that closely align with the objectives of each business
owner client. This structure also provides a means of incubating talent to
support increased growth and capacity. We support clients with a local presence
in 68 markets in Arizona, California, Colorado, Delaware, Idaho, Maryland,
Nevada, North Carolina, Oregon, Pennsylvania, Tennessee, Utah, and Washington.

Services Overview BBSI's core purpose is to advocate for business owners,
particularly in the small and mid-sized business segment. Our evolution from an
entrepreneurially run company to a professionally managed organization has
helped to form our view that all businesses experience inflection points at key
stages of growth. The insights gained through our own growth, along with the
trends we see in working with more than 7,600 companies each day, define our
approach to guiding business owners through the challenges associated with being
an employer. BBSI's business teams align with each business owner client through
a structured three-tiered progression. In doing so, business teams focus on the
objectives of each business owner and deliver planning, guidance and resources
in support of those objectives.

Level 1: Tactical alignment

The first stage focuses on the mutual setting of expectations and is essential
to a successful client relationship. It begins with a process of assessment and
discovery in which the business owner's business objectives, attitudes, and
culture are aligned with BBSI's processes, controls and culture. This stage
includes an implementation process, which addresses the administrative
components of employment.

Level 2: Dynamic relationship

The second stage of the relationship emphasizes organizational development as a means of achieving each client’s business goals. The focus is on process improvement, best practice development, supervisor training and leadership development.

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Level 3: Strategic advice

With an emphasis on advocacy on behalf of the business owner, the third stage of
the relationship is more strategic and forward-looking with a goal of
cultivating an environment in which all efforts are directed by the mission and
long-term objectives of the business owner.

In addition to serving as a resource and guide, BBSI has the ability to provide
workers' compensation coverage as a means of meeting statutory requirements and
protecting our clients from employment-related injury claims. Through our
third-party administrators, we provide claims management services for our
clients. We work to manage and reduce job injury claims, identify fraudulent
claims and structure optimal work programs, including modified duty.

Operating results

The following table sets forth the percentages of total revenues represented by
selected items in the Company's condensed consolidated statements of operations
for the three and six months ended June 30, 2022 and 2021 ($ in thousands):

                                                                            

Percentage of total net income

                                                     Three Months Ended                                       Six Months Ended
                                                          June 30,                                                June 30,
                                              2022                        2021                        2022                        2021
Revenues:

Employer professional services fees $232,174 88.6% $208,496

       89.4   %   $ 449,607        88.4   %   $ 402,315        89.1   %
Staffing services                        30,005        11.4          24,707        10.6          58,947        11.6          49,333        10.9
Total revenues                          262,179       100.0         233,203       100.0         508,554       100.0         451,648       100.0
Cost of revenues:
Direct payroll costs                     22,458         8.6          18,498         7.9          44,379         8.7          36,948         8.2
Payroll taxes and benefits              126,353        48.2         111,719        47.9         262,218        51.6         234,502        51.9
Workers' compensation                    46,483        17.7          45,513        19.5          94,719        18.6          91,860        20.3
Total cost of revenues                  195,294        74.5         175,730        75.3         401,316        78.9         363,310        80.4
Gross margin                             66,885        25.5          57,473

24.7 107,238 21.1 88,338 19.6 Sales, general and administrative

  expenses                               42,272        16.1          35,662        15.3          82,437        16.2          72,769        16.1
Depreciation and amortization             1,523         0.6           1,328         0.6           3,031         0.6           2,625         0.6
Income from operations                   23,090         8.8          20,483         8.8          21,770         4.3          12,944         2.9
Other income, net                         1,554         0.6           1,873         0.8           3,190         0.6           3,343         0.7
Income before income taxes               24,644         9.4          22,356         9.6          24,960         4.9          16,287         3.6
Provision for income taxes                6,630         2.5           5,266         2.3           6,658         1.3           3,751         0.8
Net income                            $  18,014         6.9   %   $  17,090         7.3   %   $  18,302         3.6   %   $  12,536         2.8   %




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We report PEO revenues net of direct payroll costs because we are not the
primary obligor for wage payments to our clients' employees. However, management
believes that gross billings and wages are useful in understanding the volume of
our business activity and serve as an important performance metric in managing
our operations, including the preparation of internal operating forecasts and
establishing executive compensation performance goals. We therefore present for
purposes of analysis gross billings and wage information for the three and six
months ended June 30, 2022 and 2021.

                                 (Unaudited)                     (Unaudited)
                             Three Months Ended               Six Months Ended
                                  June 30,                        June 30,
(in thousands)              2022            2021            2022            2021
Gross billings           $ 1,829,225     $ 1,601,339     $ 3,536,400     $ 3,072,880
PEO and staffing wages   $ 1,588,990     $ 1,384,861     $ 3,071,196     $ 2,656,253



Because safety incentives represent consideration payable to PEO customers,
safety incentive costs are netted against PEO revenue in our consolidated
statements of operations. We therefore present below for purposes of analysis
non-GAAP gross workers' compensation expense, which represents workers'
compensation costs including safety incentive costs. We believe this non-GAAP
measure is useful in evaluating the total costs of our workers' compensation
program. In July 2020, the Company began limiting its safety incentive offering
in certain markets, resulting in a substantial reduction in safety incentive
costs.

                                             (Unaudited)                (Unaudited)
                                         Three Months Ended          Six Months Ended
                                              June 30,                   June 30,
(in thousands)                            2022          2021         2022         2021
Workers' compensation                  $   46,483     $ 45,513     $ 94,719     $ 91,860
Safety incentive costs                        511        1,470        1,027        1,476

Gross compensation of non-GAAP workers $46,994 $46,983 $95,746

$93,336


In monitoring and evaluating the performance of our operations, management also
reviews the following ratios, which represent selected amounts as a percentage
of gross billings. Management believes these ratios are useful in understanding
the efficiency and profitability of our service offerings.

                                            (Unaudited)                            (Unaudited)
                                   Percentage of Gross Billings           Percentage of Gross Billings
                                        Three Months Ended                      Six Months Ended
                                             June 30,                               June 30,
                                     2022                 2021              2022                 2021
PEO and staffing wages              86.9%                86.5%             86.8%                86.4%
Payroll taxes and benefits           6.9%                 7.0%              7.4%                 7.6%
Non-GAAP gross workers'
compensation                         2.6%                 2.9%              2.7%                 3.0%
Gross margin                         3.7%                 3.6%              3.0%                 2.9%


The presentation of revenue on a net basis and the relative contributions of
staffing and PEO services revenue can create volatility in our gross margin as a
percentage of revenue. A relative increase in PEO services revenue will result
in a higher gross margin as a percentage of revenue. Improvement in gross margin
percentage occurs because incremental client services revenue dollars are
reported as revenue net of all related direct payroll and safety incentive
costs.

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We refer to employees of our PEO clients as worksite employees ("WSEs").
Management reviews average and ending WSE growth to monitor and evaluate the
performance of our operations. Average WSEs are calculated by dividing the
number of unique individuals paid in each month by the number of months in the
period. Ending WSEs represents the number of unique individuals paid in the last
month of the period.

                                  (Unaudited)
                              Three Months Ended
                                   June 30,
                 2022        % Change       2021        % Change
Average WSEs     122,234       8.8%         112,363       9.5%
Ending WSEs      123,853       8.4%         114,288       8.0%



                                  (Unaudited)
                               Six Months Ended
                                   June 30,
                 2022        % Change       2021        % Change
Average WSEs     119,216       9.1%         109,311       1.3%
Ending WSEs      123,853       8.4%         114,288       8.0%

Three months completed June 30, 2022 and 2021

Net income for the second quarter of 2022 amounted to $18.0 million compared to
net income of $17.1 million for the second quarter of 2021. Diluted net income
per share for the second quarter of 2022 was $2.48 compared to diluted net
income per share of $2.24 for the second quarter of 2021.

Revenue for the second quarter of 2022 totaled $262.2 million, an increase of
$29.0 million or 12.4% over the second quarter of 2021, which reflects an
increase in the Company's PEO service fee revenue of $23.7 million or 11.4% and
an increase in staffing services revenue of $5.3 million or 21.4%.

The increase in PEO services revenues was primarily attributable to an increase
in the average number of WSEs as well as an increase in average billing per WSE.
The increase in staffing services revenue was due primarily to the expanding of
business operations after the impacts of COVID-19 during the prior year period.

Gross margin for the second quarter of 2022 totaled $66.9 million or 25.5% of
revenue compared to $57.5 million or 24.7% of revenue for the second quarter of
2021. The increase in gross margin as a percentage of revenues is primarily a
result of the factors discussed within the separate components of gross margin
below.

Direct payroll costs for the second quarter of 2022 totaled $22.5 million or
8.6% of revenue compared to $18.5 million or 7.9% of revenue for the second
quarter of 2021. The increase in direct payroll costs percentage was primarily
due to an increase in staffing services within the mix of our customer base
compared to the second quarter of 2021.

Payroll taxes and benefits for the second quarter of 2022 totaled $126.4 million
or 48.2% of revenue compared to $111.7 million or 47.9% of revenue for the
second quarter of 2021. The increase in payroll taxes and benefits as a
percentage of revenues is primarily due to an increase in newly hired WSEs,
which increased the amount of payroll subject to payroll taxes in the second
quarter of 2022 as compared to the second quarter of 2021.

Workers' compensation expense for the second quarter of 2022 totaled $46.5
million or 17.7% of revenue compared to $45.5 million or 19.5% of revenue for
the second quarter of 2021. The decrease in workers' compensation expense as a
percentage of revenue was primarily due to favorable claims development as
compared to the second quarter of 2021 as well as a favorable adjustment in the
second quarter of 2022 of $6.5 million related to prior period claims, compared
to a favorable adjustment of $5.5 million in the second quarter of 2021.

Selling, general and administrative ("SG&A") expenses for the second quarter of
2022 totaled $42.3 million or 16.1% of revenue compared to $35.7 million or
15.3% of revenue for the second quarter of 2021. The increase of $6.6 million in
SG&A expense was primarily attributable to increased employee-related costs, as
well as increased travel and marketing expenses due to more in-person meetings
and events.

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Other income, net for the second quarter of 2022 was $1.6 million compared to
other income of $1.9 million for the second quarter of 2021. The decrease was
primarily attributable to a decrease in investment income in the second quarter
of 2022.

Our effective income tax rate for the second quarter of 2022 was 26.9% compared
to 23.6% for the second quarter of 2021. Our income tax rate typically differs
from the federal statutory tax rate of 21% primarily due to state taxes as well
as federal and state tax credits.

Semester completed June 30, 2022 and 2021

Net income for the first six months of 2022 amounted to $18.3 million compared
to net income of $12.5 million for the first six months of 2021. Diluted net
income per share for the first six months of 2022 was $2.48 compared to diluted
net income per share of $1.64 for the first six months of 2021.

Revenues for the first six months of 2022 totaled $508.6 million, an increase of
$56.9 million or 12.6% over the first six months of 2021 which reflects an
increase in the Company's PEO service fee revenue of $47.3 million or 11.8% and
an increase in staffing services revenue of $9.6 million or 19.5%.

The increase in PEO service revenues was primarily attributable to an increase
in the average number of WSEs as well as an increase in average billing per WSE.
The increase in staffing services revenue was due primarily to the expanding of
business operations after the impacts of COVID-19 during the prior year period.

Gross margin for the first six months of 2022 totaled $107.2 million or 21.1% of
revenue compared to $88.3 million or 19.6% of revenue for the first six months
of 2021. The increase in gross margin as a percentage of revenues is primarily a
result of the factors discussed within the separate components of gross margin
below.

Direct payroll costs for the first six months of 2022 totaled $44.4 million or
8.7% of revenue compared to $36.9 million or 8.2% of revenue for the first six
months of 2021. The increase in direct payroll costs percentage was primarily
due to an increase in staffing services within the mix of our customer base
compared to the first six months of 2021.

Payroll taxes and benefits for the first six months of 2022 totaled $262.2
million or 51.6% of revenue compared to $234.5 million or 51.9% of revenue for
the first six months of 2021. The decrease in payroll taxes and benefits as a
percentage of revenues is due primarily to the timing of when payroll tax caps
were reached in the first six months of 2022 as compared to the first six months
of 2021.

Workers' compensation expense for the first six months of 2022 totaled $94.7
million or 18.6% of revenue compared to $91.9 million or 20.3% of revenue for
the first six months of 2021. The decrease in workers' compensation expense as a
percentage of revenue was primarily due to favorable claims development as
compared to the first six months of 2021 as well as a favorable adjustment in
the first six months of 2022 of $9.4 million related to prior period claims,
compared to a favorable adjustment of $6.7 million in the first six months of
2021.

SG&A expenses for the first six months of 2022 totaled $82.4 million or 16.2% of
revenue compared to $72.8 million or 16.1% of revenue. The increase of $9.6
million in SG&A expense was primarily attributable to increased employee-related
costs, as well as increased travel and marketing expenses due to more in-person
meetings and events.

Other income, net for the first six months of 2022 was $3.2 million as compared
to other income, net of $3.3 million for the first six months of 2021. The
decrease was primarily attributable to a decrease in investment income in the
first months of 2022.

Our effective tax rate for the first six months of 2022 was 26.7%, compared to 23.0% for the first six months of 2021. Our income tax rate generally differs from the federal statutory tax rate 21%, primarily due to state taxes and federal taxes and state tax credits.

Fluctuations in Quarterly Operating Results

We have historically experienced significant fluctuations in our quarterly
operating results, including losses or minimal income in the first quarter of
each year, and expect such fluctuations to continue in the future. Our operating
results may fluctuate due to a number of factors such as seasonality, wage
limits on statutory payroll taxes, claims experience for workers' compensation,
demand for our services, and

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competition. Payroll taxes, as a component of cost of revenues, generally
decline throughout a calendar year as the applicable statutory wage bases for
federal and state unemployment taxes and Social Security taxes are exceeded on a
per employee basis. Our revenue levels may be higher in the third quarter due to
the effect of increased business activity of our customers' businesses in the
agriculture, food processing and forest products-related industries. In
addition, revenues in the fourth quarter may be reduced by many customers'
practice of operating on holiday-shortened schedules. Workers' compensation
expense varies with both the frequency and severity of workplace injury claims
reported during a quarter and the estimated future costs of such claims. In
addition, positive or adverse loss development of prior period claims during a
subsequent quarter may also contribute to the volatility in the Company's
estimated workers' compensation expense.

Cash and capital resources

The Company's cash balance of $44.1 million, which includes cash, cash
equivalents, and restricted cash, decreased $34.5 million for the six months
ended June 30, 2022, compared to a decrease of $219.7 million for the comparable
period of 2021. The decrease in cash at June 30, 2022 as compared to
December 31, 2021 was primarily due to increased trade accounts receivable and
decreased workers' compensation claims liabilities, partially offset by
increased accrued payroll, payroll taxes, and related benefits and the proceeds
from the sales and maturities of investments and restricted investments.

Net cash used by operating activities for the six months ended June 30, 2022 was
$37.4 million, compared to net cash provided of $2.6 million for the comparable
period of 2021. For the six months ended June 30, 2022, cash used by operating
activities was primarily due to increased trade accounts receivable of $111.2
million, decreased workers' compensation claims liabilities of $37.9 million,
partially offset by increased accrued payroll, payroll taxes and related
benefits of $83.8 million and net income of $18.3 million.

Net cash provided by investing activities for the six months ended June 30, 2022
was $39.4 million, compared to net cash used of $211.5 million for the
comparable period of 2021. For the six months ended June 30, 2022, net cash
provided by investing activities consisted primarily of proceeds from sales and
maturities of investment and restricted investments of $50.9 million, partially
offset by purchases of property, equipment and software of $8.4 million and the
purchase of restricted investments of $3.1 million.

Net cash used in financing activities for the six months ended June 30, 2022 was
$36.5 million, compared to net cash used of $10.8 million for the comparable
period of 2021. For the six months ended June 30, 2022, cash used in financing
activities primarily consisted of repurchases of common stock of $28.5 million,
dividend payments of $4.4 million and the pay down of the outstanding balance of
the mortgage loan of $3.5 million.

The Company is required to maintain minimum collateral levels for certain
policies issued under the insured program, which is held in a trust account (the
"trust account"). The balance in the trust account was $213.7 million and $273.6
million at June 30, 2022 and December 31, 2021, respectively. The trust account
balance is included as a component of the current and long-term restricted cash
and investments in the Company's condensed consolidated balance sheets.

See "Note 4 - Revolving Credit Facility and Long-Term Debt" to the unaudited
condensed consolidated financial statements included in Item 1 of Part I of this
report for additional information regarding the Company's credit agreement with
Wells Fargo Bank, N.A.



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Forward-looking information

Statements in this report include forward-looking statements which are not
historical in nature and are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, among others, discussion of economic conditions in our
market areas and their effect on revenue levels, the lingering effects of the
COVID-19 pandemic on our business operations, the competitiveness of our service
offerings, our plans to make certain fully insured medical and other health and
welfare benefits available to qualifying worksite employees beginning in 2023,
our ability to attract and retain clients and to achieve revenue growth, the
effect of changes in our mix of services on gross margin, the effect of tight
labor market conditions, the adequacy of our workers' compensation reserves, the
effect of changes in estimates of our future claims liabilities on our workers'
compensation reserves, including the effect of changes in our reserving
practices and claims management process on our actuarial estimates, expected
levels of required surety deposits and letters of credit, our ability to
generate sufficient taxable income in the future to utilize our deferred tax
assets, the effect of our formation and operation of two wholly owned licensed
insurance subsidiaries, the risks of operation and cost of our insured program,
the financial viability of our excess insurance carriers, the effectiveness of
our management information systems, our relationship with our primary bank
lender and the availability of financing and working capital to meet our funding
requirements, litigation costs, the effect of changes in the interest rate
environment on the value of our investment securities, the adequacy of our
allowance for doubtful accounts, and the potential for and effect of
acquisitions.

All of our forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors with respect to the Company include our
ability to retain current clients and attract new clients, the effects of
governmental orders, laws or regulations imposing requirements related to the
COVID-19 pandemic, difficulties associated with integrating clients into our
operations, economic trends in our service areas, the potential for material
deviations from expected future workers' compensation claims experience, changes
in the workers' compensation regulatory environment in our primary markets,
security breaches or failures in the Company's information technology systems,
collectability of accounts receivable, changes in effective payroll tax rates
and federal and state income tax rates, the carrying values of deferred income
tax assets and goodwill (which may be affected by our future operating results),
the effects of inflation on our operating expenses and those of our clients, the
impact of and potential changes to the Patient Protection and Affordable Care
Act, escalating medical costs, and other health care legislative initiatives on
our business, the effect of conditions in the global capital markets on our
investment portfolio, and the availability of capital, borrowing capacity on our
revolving credit facility, or letters of credit necessary to meet state-mandated
surety deposit requirements for maintaining our status as a qualified
self-insured employer for workers' compensation coverage or our insured program.
Additional risk factors affecting our business are discussed in Item 1A of Part
I of our Annual Report on Form 10-K for the year ended December 31, 2021, which
was filed with the SEC on March 7, 2022. We disclaim any obligation to publicly
announce any revisions to any of the forward-looking statements contained herein
to reflect future events or developments.

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