BARRETT BUSINESS SERVICES INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

Overview

The Company 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.

We report revenues in our financial results in two categories of services:
professional employer services (“PEO”) and staffing.

With our PEO clients, we enter into a co-employment arrangement in which we
become the administrative employer while the client maintains physical care,
custody and control of their workforce. Our PEO services are billed as a
percentage of client payroll; the gross amount invoiced includes direct payroll
costs plus an additional percentage amount to cover employer payroll-related
taxes, workers' compensation coverage (if provided), other service related costs
and a margin. However, actual costs can be higher or lower than anticipated. PEO
customers are invoiced following the end of each payroll processing cycle, with
payment generally due on the invoice date. Revenues for PEO services exclude
direct payroll billings because we are not the primary obligor for those
payments.

We generate staffing services revenues primarily from short-term staffing,
contract staffing, on-site management and direct placement services. For
staffing services other than direct placement, invoiced amounts include direct
payroll, an amount intended to cover employer payroll-related taxes, workers'
compensation coverage, other service related costs and a margin. Staffing
customers are invoiced weekly and typically have payment terms of 30 days.
Direct placement services are billed at agreed fees at the time of a successful
placement.

Our business is concentrated in California, and we expect to continue to derive
a majority of our revenues from this market in the future. Revenues generated in
our California operations accounted for 73% of our total revenues in 2022, 73%
in 2021 and 75% in 2020. Consequently, any weakness in economic conditions,
changes in the regulatory or insurance environment, or natural disasters or
other major events in California could have a material adverse effect on our
financial results.

Our cost of revenues for PEO services includes employer payroll-related taxes
and workers' compensation costs. Our cost of revenues for staffing services
includes direct payroll costs, employer payroll-related taxes, employee
benefits, and workers' compensation costs. Direct payroll costs represent the
gross payroll earned by staffing services employees based on salary or hourly
wages. Payroll taxes and employee benefits consist of the employer's portion of
Social Security and Medicare taxes, federal and state unemployment taxes and
staffing services employee reimbursements for materials, supplies and other
expenses, which are paid by our customer. Workers' compensation costs consist
primarily of the costs associated with our workers' compensation program,
including premiums for the insured program, claims reserves for the self-insured
program, claims administration fees, legal fees, medical cost containment
("MCC") expense, state administrative agency fees, third-party broker
commissions, risk manager payroll, premiums for excess insurance, and costs
associated with operating our two wholly owned insurance companies, AICE and
Ecole.

Selling, general and administrative expenses represent both branch office and
corporate-level operating expenses. Branch operating expenses consist primarily
of branch office staff payroll and personnel related costs, advertising, rent,
office supplies, professional and legal fees and branch incentive compensation.
Corporate-level operating expenses consist primarily of executive and office
staff payroll and personnel related costs, professional and legal fees, travel,
occupancy costs, information systems costs, and executive and corporate staff
incentive compensation.

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Depreciation and amortization represent depreciation of property and equipment,
leasehold improvements, software and internally developed software costs.
Property, equipment, software and internally developed software costs are
depreciated using the straight-line method over their estimated useful lives,
which range from 3 to 39 years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or estimated useful
life.

Critical Accounting Policies and Estimates

We have identified the following accounting estimate as critical to our business
and the understanding of our results of operations. For a detailed discussion of
the application of this and other accounting policies, see "Note 1 - Summary of
Operations and Significant Accounting Policies" to the consolidated financial
statements in Item 8 of Part II of this report. The preparation of this Annual
Report on Form 10-K requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.

Workers’ Compensation Reserves

We recognize our liability for the ultimate payment of incurred claims and
claims adjustment expenses by establishing a reserve that represents our
estimates of future amounts necessary to pay claims and related expenses with
respect to workplace injuries that have occurred. When a claim involving a
probable loss is reported, our independent third-party administrator for
workers' compensation claims ("TPA") establishes a case reserve for the
estimated amount of ultimate loss. The estimate reflects a judgment based on
established case reserving practices and the experience and knowledge of the TPA
regarding the nature and expected amount of the claim, as well as the estimated
expenses of settling the claim, including legal and other fees and expenses of
claims administration. The adequacy of such case reserves depends in part on the
professional judgment of the TPA to evaluate the economic consequences of each
claim properly and comprehensively.

Our reserves include an additional component for potential future increases in
the cost to finally resolve open injury claims and claims incurred in prior
periods but not reported (together, "IBNR") based on actuarial estimates
provided by the Company's independent actuary. IBNR reserves, unlike specific
case reserves, do not apply to a specific claim but rather apply to the entire
population of claims arising from a specific time period. IBNR primarily covers
costs relating to:

•

Future claim payments in excess of case reserves on recorded open claims;

•

Additional claim payments on closed claims; and

•

Claims that have occurred but have not yet been reported to us.

The process of estimating unpaid claims and claims adjustment expense involves a
high degree of judgment and is affected by both internal and external events,
including changes in claims handling practices, modifications in reserve
estimation procedures, changes in individuals involved in the reserve estimation
process, inflation, trends in the litigation and settlement of pending claims,
and legislative changes.

Our estimates are based on actuarial analyses and informed judgment, derived
from individual experiences and expertise applied to multiple sets of data and
analyses. We consider significant facts and circumstances known both at the time
that loss reserves are initially established and as new facts and circumstances
become known. Due to the inherent uncertainty underlying loss reserve estimates,
the expenses incurred through final resolution of our liability for our workers'
compensation claims will likely vary from the related loss reserves at the
reporting date. Therefore, as specific claims are paid out in the future, actual
paid losses may be materially different from our current loss reserves.

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A basic premise in most actuarial analyses is that historical data and past
patterns demonstrated in the incurred and paid historical data form a reasonable
basis upon which to project future outcomes, absent a material change.
Significant structural changes to the available data can materially impact the
reserve estimation process. To the extent a material change affecting the
ultimate claim liability becomes known, such change is quantified to the extent
possible through an analysis of internal company data and, if available and when
appropriate, external data. Actuaries exercise a considerable degree of judgment
in the evaluation of these factors and the need for such actuarial judgment is
more pronounced when faced with material uncertainties.

We believe that the amounts recorded for our estimated liabilities for workers'
compensation claims, which are based on informed judgment, analysis of data,
actuarial estimates, and analysis of other trends associated with the Company's
historical universe of claims data, are reasonable. Nevertheless, adjustments to
such estimates will be required in future periods if the development of claim
costs varies materially from our estimates, and such future adjustments may be
material to our results of operations.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements and their potential effect
on the Company's results of operations and financial condition, see "Note 1 -
Summary of Operations and Significant Accounting Policies" to the consolidated
financial statements in Item 8 of Part II of this report.

Forward-Looking Information

Statements in this Item or in Items 1, 1A, 3 and 9A of 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, the
availability of certain fully insured medical and other health and welfare
benefits 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.

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All 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 this report. We disclaim any obligation to publicly announce any revisions
to any of the forward-looking statements contained herein to reflect future
events or developments.

Results of Operations

The following table sets forth the percentages of total revenues represented by
selected items in the Company's consolidated statements of operations for the
years ended December 31, 2022, 2021 and 2020, included in Item 8 of Part II of
this report.

                                                     Percentage of Total Net Revenues
($ in thousands)                                         Years Ended December 31,
                                       2022                         2021                        2020
Revenues:
Professional employer
services                      $   937,363        88.9   %   $ 843,815        88.3   %   $ 777,430        88.3   %
Staffing services                 116,963        11.1         111,351        11.7       $ 103,394        11.7
Total revenues                  1,054,326       100.0         955,166       100.0         880,824       100.0
Cost of revenues:
Direct payroll costs               87,944         8.3          83,821         8.8          78,380         8.9
Payroll taxes and benefits        522,392        49.5         469,888        49.2         418,793        47.5
Workers' compensation             209,145        19.8         196,949        20.6         200,744        22.8
Total cost of revenues            819,481        77.7         750,658        78.6         697,917        79.2
Gross margin                      234,845        22.3         204,508        21.4         182,907        20.8
Selling, general and
administrative
  expenses                        169,642        16.1         155,259        16.3         141,916        16.1
Depreciation and
amortization                        6,228         0.6           5,326         0.6           4,844         0.5
Income from operations             58,975         5.6          43,923         4.6          36,147         4.1
Other income, net                   6,328         0.6           6,738         0.7           6,449         0.7
Income before income taxes         65,303         6.2          50,661         5.3          42,596         4.8
Provision for income taxes         18,035         1.7          12,582         1.3           8,831         1.0
Net income                    $    47,268         4.5   %   $  38,079         4.0   %   $  33,765         3.8   %




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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 years ended
December 31, 2022, 2021 and 2020.

                                       Year Ended
                                      December 31,
(in thousands)            2022            2021            2020

Gross billings $ 7,393,808 $ 6,569,986 $ 5,924,539
PEO and staffing wages 6,425,286 5,693,903 5,098,604

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.

                                                  Year Ended
                                                 December 31,
(in thousands)                         2022          2021          2020
Workers' compensation                $ 209,145     $ 196,949     $ 200,744
Safety incentive costs                   1,852         2,985        23,544

Non-GAAP gross workers’ compensation $ 210,997 $ 199,934 $ 224,288

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.

                                         Percentage of Gross Billings
                                                  Year Ended
                                                 December 31,
                                       2022            2021          2020
PEO and staffing wages                    86.9 %          86.7 %      86.1 %
Payroll taxes and benefits                 7.0 %           7.2 %       7.1 %
Non-GAAP gross workers' compensation       2.9 %           3.0 %       3.8 %
Gross margin                               3.2 %           3.1 %       3.1 %



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.

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.

                                        Year Ended
                                       December 31,
               2022        % Change        2021        % Change        2020
Average WSEs   122,001           8.0 %     112,928           4.3 %     108,249
Ending WSEs    122,306           5.3 %     116,154           6.3 %     109,292




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Years Ended December 31, 2022 and 2021

Net income for 2022 was $47.3 million compared to net income of $38.1 million
for 2021. Diluted net income per share for 2022 was $6.54 compared to diluted
income per share of $5.00 for 2021.

Revenue for 2022 totaled $1,054.3 million, an increase of $99.2 million or 10.4%
over 2021, which reflects an increase in the Company's PEO service revenue of
$93.5 million or 11.1% and an increase in staffing services revenue of $5.6
million or 5.0%.

The increase in PEO services revenues was primarily attributable to an increase
in average number of WSEs as well as an increase in average billing per WSE.

Gross margin for 2022 totaled $234.8 million or 22.3% of revenue compared to
$204.5 million or 21.4% of revenue for 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 2022 totaled $87.9 million or 8.3% of revenue compared
to $83.8 million or 8.8% of revenue for 2021. The decrease in direct payroll
costs as a percentage of revenues was primarily due to a decrease in staffing
services within the mix of our customer base in 2022 as compared to 2021.

Payroll taxes and benefits for 2022 totaled $522.4 million or 49.5% of revenue
compared to $469.9 million or 49.2% of revenue for 2021. The increase in payroll
taxes and benefits expense as a percentage of revenue was primarily due to the
relative decrease in workers' compensation costs and an increase in federal
payroll tax rates, partially offset by lower average state payroll tax rates in
2022.

Workers' compensation expense for 2022 totaled $209.1 million or 19.8% of
revenue compared to $196.9 million or 20.6% of revenue for 2021. The decrease in
workers' compensation expense as a percentage of revenue was primarily due to
favorable adjustments of $11.3 million related to prior period claims in 2022,
compared to favorable adjustments of $9.2 million in 2021.

Selling, general and administrative ("SG&A") expenses for 2022 totaled $169.6
million or 16.1% of revenue compared to $155.3 million or 16.3% of revenue for
2021. The increase of $14.3 million in SG&A expense in 2022 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 2022 totaled $6.3 million compared to other income of $6.7
million for 2021. The decrease was primarily attributable to a decrease in
investment income in 2022.

Our effective income tax rate for 2022 was 27.6% compared to 24.8% for 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. See "Note
8 - Income Taxes" to the consolidated financial statements included in Item 8 of
Part II of this report for additional information regarding income taxes.

A discussion of our financial condition and results of operations for 2021
compared to 2020 can be found in Part II, Item 7. Management's Discussion and
Analysis in our Annual Report on Form 10-K for the year ended December 31, 2021,
filed with the SEC on March 7, 2022.



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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 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.

Liquidity and Capital Resources

The Company's cash balance of $107.4 million, which includes cash, cash
equivalents, and restricted cash, increased $28.7 million for the twelve months
ended December 31, 2022, compared to a decrease of $155.2 million for the
comparable period of 2021. The increase in cash at December 31, 2022 as compared
to December 31, 2021 was primarily due to proceeds from the sales and maturities
of investments and restricted investments, net income, increased accrued
payroll, payroll taxes and related benefits, and increased other accrued
liabilities, partially offset by decreased workers' compensation claims
liabilities, repurchase of common stock, and purchase of property, equipment and
software.

Net cash provided by operating activities in 2022 amounted to $27.8 million,
compared to net cash used of $15.5 million for the comparable period of 2021. In
2022, net cash provided by operating activities was primarily due to net income
of $47.3 million, increased accrued payroll, payroll taxes and related benefits
of $24.9 million and increased other accrued liabilities of $15.7 million,
partially offset by decreased workers' compensation claims liabilities of $64.2
million and increased trade accounts receivable of $8.1 million.

Net cash provided by investing activities totaled $61.2 million in 2022,
compared to net cash used of $112.9 million for the comparable period of 2021.
In 2022, net cash provided by investing activities consisted primarily of
proceeds from sales and maturities of investments and restricted investments of
$81.5 million, partially offset by purchase of property, equipment and software
of $16.0 million, and purchase of restricted investments of $4.3 million.

Net cash used in financing activities in 2022 was $60.2 million compared to net
cash used of $26.9 million for the comparable period of 2021. In 2022, net cash
used in financing activities primarily consisted of repurchases of common stock
of $47.2 million, dividend payments of $8.5 million and the payoff of the
outstanding mortgage loan balance 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 $188.2 million and $273.6
million at December 31, 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 consolidated balance sheets.

See “Note 5 – Revolving Credit Facility and Long-Term Debt” to the consolidated
financial statements included in Item 8 of Part II of this report for
information regarding the Company’s credit agreement with Wells Fargo Bank, N.A.

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Contractual Obligations

The Company's contractual obligations as of December 31, 2022 are summarized
below:

                                                   As of December 31, 2022
                                                    Payments Due by Period
(in thousands)                                Less than       1 - 3        4 - 5       After
                                 Total         1 Year         Years        Years      5 Years
Operating leases (1)            $ 24,624     $     7,870     $ 10,303     $ 5,221     $  1,230
Total contractual obligations   $ 24,624     $     7,870     $ 10,303     $ 5,221     $  1,230


(1) As of December 31, 2022, the Company has additional operating leases that
have not yet commenced of $1.7 million and remaining balances on short-term
operating leases of $37,301. In January 2022, the Company paid off all of its
long-term debt.

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